The energy transition to renewables - Have things really changed?
Conventional (oil and gas) energy companies have made record profits in recent years. In the midst of a climate emergency and era of net zero emission targets, the profits raise the question; what is the true scope of the energy transition, and are these companies changing their habits?
The “energy transition” describes the global energy sector’s shift from fossil fuel-based systems of energy production and consumption (for example oil, natural gas and coal) to renewable energy sources like solar PV and offshore wind. The International Energy Agency (IEA) is a global organisation who works with countries around the world to shape energy policies and focuses on a secure and sustainable future. The IEA report on World Energy Investment 2022 provides valuable insights into the scope of the energy transition across the globe.
The report indicates that investment in fossil fuels is still on a rising trend, but is almost 30% below where it was when the Paris Agreement was signed. In 2021 the oil and gas companies analysed by the IEA invested around USD 10 billion in clean energy technologies and encouragingly this is estimated to have more than doubled in 2022 again. However, this amounts to 5% of their total spending in 2022. The European oil and gas majors including Equinor led this growth, accounting for about 90% of total clean energy investment by the oil and gas industry in 2021 and almost all of the investment tracked at the point the report was published in 2022.
The major areas for investment are solar PV and offshore wind, which accounted for nearly all of the clean energy technology investment in 2021. Overall, the European companies are leading the diversified spending, with major roles as investors in North Sea offshore wind projects.
A key strategy for oil and gas companies making the energy transition has been using mergers and acquisitions (M&A) to diversify their portfolios with clean energy technologies. The majors, especially in Europe, are repositioning themselves as “energy companies”, developing positions in solar PV, wind, electricity services, bioenergy, low-carbon hydrogen, carbon capture utilization and storage (CCUS), and other CO2 removal technologies. Investment in clean energy accounted for around 10% of the analysed companies’ total M&A in 2021, and this share increased in 2022. Notable large deals facilitated entry into fields such as electricity distribution (e.g. TotalEnergies Electricité et Gaz), electric vehicle charging (e.g. BP with Chargemaster), and solar and wind (e.g. TotalEnergies with Adani Green Energy, BP with Empire Wind & Beacon Wind assets, and Eni with Dogger Bank).
Investment in alternative clean fuels, such as biogases, biofuels and hydrogen is essential for reaching net zero ambitions. A major area of growth noted by the IEA is hydrogen technologies. A strong appetite among investors and technology developers for exposure to hydrogen projects was identified. This is motivated by the rise in near-term expectations of the technology. For example, the IEA assembled a portfolio of 33 publicly traded companies, spanning a range of sectors, whose success depends on the demand for low carbon hydrogen growing. The portfolio is worth around 20 times more than five years ago in nominal terms (USD 40 billion at the time of publication of the report), and four times more than at the end of 2019.
However, spending on clean fuels generally remains significantly below the levels needed to meet the world’s net-zero targets. As discussed, the vast majority of the oil and gas industry’s capital spending on clean energy currently goes towards offshore wind and solar PV. Investment by these companies into hydrogen, bioenergy and CCUS over the last three years is less than 0.2% of their total capital expenditure.
One area where an appetite for change may be further demonstrated is in the R&D budgets. How much are these companies are spending and where is the R&D funding going? Surveys during 2021 of corporate R&D spending intentions for 2022 revealed plans for growth after two years of stagnation and uncertainty brought on by the global pandemic. It appears that while some innovative smaller firms’ R&D plans did not survive, acquisitions have helped others to be realised.
Public funding support for energy innovation is rising, estimated at USD 38 billion, providing a vital guide to priority technology areas and reducing private sector exposure to more costly sources of capital. China has promised a planned increase in energy R&D spending of 7% per year, among the measures to improve Chinese energy innovation performance. If realised, this could lead to China substantially outspending the European Union and United States by 2025.
However, public funding is often subject to governments’ specific expectations and criteria. Additionally, some of these plans are linked to national technology sovereignty and building less globalised value chains, which could be counter-productive for reaching global net-zero targets. The IEA suggest that a more effective solution would be more rapid exchange of ideas through trade, cross-border investment and intergovernmental co-operation.
In the private sector, the report details that spending related to oil and gas fell for the second consecutive year in 2021 to below USD 20 billion, levels comparable with the 2015-2018 period. R&D spending is impacted by a desire in the private sector to minimise risk, in uncertain times R&D spending cannot usually be recovered simply by selling resulting assets. It is proposed that to minimise risks and prepare for diverse technology futures greater collaboration in research alliances and partnerships and by investment in innovative start-ups is needed.
As it stands, and as widely reported, today’s energy investment trends show that globally we are falling short on climate goals and on reliable and affordable energy. However, in just 2017 no oil and gas company had set any targets to reduce the carbon intensity of the energy they supply, so the field is developing rapidly. The oil and gas industry needs to continue to crystallise what it can and will do to accelerate clean energy transitions. It is clear that traditional energy companies will play a key role in achieving Net Zero targets. The landscape of the oil and gas industry is diverse, there is no single strategic response but a variety of approaches depending on each company’s circumstances.
