The Edge

What’s on the minds of CEOs?

Commodity supercycle, investment, business models and net zero

1 minute read

A host of senior leaders from across the energy and natural resources sectors joined Net Zero and the Future of Energy our virtual Global Energy Summit last week. Here are five of the big themes we discussed.

Commodities and the new supercycle

The prevailing view of our speakers was that surging prices across a broad range of commodity prices today reflect mainly short-term factors – among them resurgent demand in the economic recovery and supply chain disruption (LNG, coal, steel, aluminium) – rather than the supercycle. But there is deepening concern about tightening fundamentals – the price to be paid for prolonged under-investment across energy and mining. Our guests believe the world should expect elevated oil, gas and mined commodity prices for much of this decade. WoodMac shares that outlook.

The world should expect elevated oil, gas and mined commodity prices for much of this decade.

What about the supercycle? It’s coming, said 90% of our audience in a poll. This time, though, our panellists argued it will be different. First, it will be sector-driven, unlike the last one at the start of the century which was all about China and rippled out across all commodities. This time, the driver will be global electrification in the push to net zero. The pathway to a 2 °C or lower world will spur synchronised infrastructure investment everywhere, driving transformational demand growth for key transition metals, including copper, aluminium, nickel, cobalt and lithium and steel – and higher prices to incentivise investment in new supply. China’s increasing control of the supply chains of cobalt, nickel and lithium poses a major challenge to the rest of the world.

Gas will play a key part through the transition. The industry needs to clean up the product, eliminating Scope 1 and 2 emissions. Paired with carbon capture and storage, gas can reduce emissions by displacing coal in the power sector, in Asia, in particular. The multiple energy crunches this year, from Texas to Japan, China to Europe, are a reminder that flexible and reliable supply are critical ingredients to system and price stability – and, here, gas has a vital role to play.

Investment and capital discipline

Energy and mining companies have rarely generated so much cash flow and re-invested so little. Investors have won the battle on capital discipline: surplus cash flow pays down debt or goes to shareholders. ESG compliance is a necessity but will increase costs and slow supply growth.

When will investment pick up? In oil and gas, uncertainty around the trajectory of oil demand will limit IOCs’ appetite to invest; NOCs will take up a bigger share of spend. The demand outlook for metals and mining looks much more assured, but commitment to invest awaits clear evidence of supercycle-led higher demand growth. Long lead times and a very thin pipeline of big, advanced projects are another challenge for miners.

How power goes global

It’s possible now to imagine power companies achieving the global scale and reach that’s never succeeded in past attempts. The investment opportunity in renewables is a gamechanger – competitive wind and solar have opened multiple, previously ‘closed shop’, local and regional markets all round the world to new entrants. Success will come from economies of scale, a pipeline of projects with a range of maturity, and people with on-the-ground nous and know the local market. Solar and onshore wind require a different skillset to oil and gas which excels in complex, giant projects.

Aspiring global players can start with renewables and build out an integrated business in liberalised markets, layering in corporate PPAs, and retail customers. Distributed energy resource management, EV charging, energy efficiency and, in time, hydrogen and other emerging low-carbon technologies will be part of the portfolio.

The investment opportunity in renewables is a gamechanger – competitive wind and solar have opened multiple markets around the world to new entrants.

Digitalisation is a big enabler. Those companies that have gone through the pain of digitisation and put data in the cloud have the platform and can win the huge efficiencies by unifying multiple operating systems in the business. They will be able to roll out innovations to diverse markets with differing rules and regulatory frameworks. For the first time, global power companies may be able to run different networks all round the world from the same digital platform.

Big Oil, Big Energy and customers

Big Oil makes most of its money in upstream. Big Energy’s strategy is to target exponential growth in power demand as the world electrifies. The value proposition is in deep integration and the margin will migrate further down the value chain.

Big Oil sees a competitive advantage over a traditional utility, rightly or wrongly, in the increasing complexity of energy markets. The supply mix is changing: the net zero power market will be dominated by electrons from high-variability renewables, nuclear, and other low-carbon power sources, as well as energy storage; and complemented by molecules, including hydrogen and gas. It’s a golden opportunity for a vertically integrated and global energy trading business.

Renewable power generation, whether solar or wind, is the opposite of upstream – it’s inherently a low-risk, low-return business. The economic case for a power-based strategy is to boost returns using active financial management (including selling down de-risked positions) and a profitable customer proposition, with energy trading as the secret sauce.

Customers across the spectrum – industrial, commercial and retail – will become increasingly sophisticated about when and how they use power whether for manufacturing processes, heating, EV charging, cooking and the rest. Big Oil believes it is well placed to deliver the reliable and secure supply for these changing customer needs.

The business model is already being tested in core, liberalised markets today and the goal is to scale up and go global. The rewards could be sizeable – BP thinks it can double EBITDA from its convenience and mobility business from US$5 billion today to US$10 billion by 2030.

COP26, emerging technologies

If Paris was all about ambition, Glasgow needs to deliver action if the world is to get onto a 2 °C or lower pathway and reduce emissions. Resolving Article 6 is a must – a meaningful carbon price is essential to incentivise change in consumption to low-carbon energy and the investment in the emerging supply-side technologies, notably CCS and hydrogen.

Most observers believe that there’s no credible 2 °C or lower pathway by 2050 without industrial-scale CCS and hydrogen – together, these account for 30% of emissions reduction by 2050 in Wood Mackenzie’s 2 °C scenario. The utility industry, scarred by sinking US$10 billion a decade ago into early CCS projects which didn’t work commercially, may need convincing.