Key points
- The global energy crisis remains dire, creating acute dilemmas for policy and decision-makers – but energy security and energy transition are still achievable.
- Robust oil and natural gas prices have already made for sizeable shareholder returns this year, despite cost pressures. Despite soaring prices, corporates continue to seek renewable power deals – though grid interconnections and capital cost pressures are hindering providers’ progress.
- Clean tech innovations, the lifting of solar tariffs and a productive collaboration among oil sands players are indicators of progress to net zero.
- Utilities players are struggling with cost and supply issues, but adopting new solutions to help ensure future grid security.
Pragmatism in the face of crisis
The severity of the energy crisis was underlined by all three keynote speakers at the conference. The late Mohammad Barkindo, Secretary General of OPEC, noted that all but a handful of countries in the group were already hitting capacity constraints by December. He warned of little spare capacity to mitigate the impact of the supply issues stemming from the Russian invasion of Ukraine.
The oil industry has not recovered from the massive contraction in investment that occurred in 2015-2016, Secretary General Barkindo added. He said the industry needs to be able to attract investment in a predictable and sustainable way, with ESG as a key component.
His concern about the impact of historic underinvestment was echoed by another keynote speaker, Eni CEO Claudio Descalzi. He pointed to opportunities in Africa as a way for Europe to secure supply diversification. He also suggested that price caps for natural gas could serve as an effective tool in place of additional sanctions on Russia, serving to control Russian revenues while limiting the impact on European consumers.
Descalzi called for a pragmatic approach to balancing energy security with the transition to net zero. He said the two initiatives do not need to be in conflict: it was possible to progress towards our 2050 goals, while being strategic about near-term global energy needs.
Amos Hochstein, US Presidential Coordinator for Energy Security and Global Infrastructure, reaffirmed the Biden administration’s focus on global energy security. Noting widespread calls for export controls, he made it clear these were not under current consideration. However, he expressed concern that a major supply outage – such as the one caused by the Colonial Pipeline hack last year – could make it extremely difficult to maintain status quo crude and refined product export flows.
Shareholders set to benefit
Contributions by delegates throughout the conference confirmed our outlook for abundant free cash flow generation among producers, driven by robust prices upstream and downstream, while debt levels plummet.
This makes bigger shareholder returns likely this year. There was little apparent appetite for producers to accelerate growth, however, partly due to inflationary pressures.
Business persists with decarbonization
Corporations remain committed to pursuing their decarbonization goals. Our discussions underlined the continued growth in demand for renewable energy as part of corporate power purchase agreements, despite a year-on-year increase of 25 to 30% in the contracted power price.
Renewable energy operators are also becoming more creative to meet customer needs – for example, by using hydro or battery technology to back up intermittent wind and solar power and ensure round-the-clock supply.
However, interconnection to the grid is a key bottleneck slowing the pace of renewable energy deployment. In some cases, companies may reverse their usual preferences, opting to develop sites close to interconnections with less attractive wind or solar resources. Some may also use M&A as a tool to secure connection rights.
Clean energy breakthroughs
There was enthusiasm for the potential of emerging technologies, including battery storage, green hydrogen, and new innovations to make solar more productive. For now, companies are making small investments in these technologies, positioning themselves for widespread adoption.
There was also news of good progress in the Oil Sands Pathways to Net Zero initiative. The venture has been bolstered by the Canadian government’s rollout of investment tax credits for carbon capture, utilization and storage (CCUS) technologies. This is a rare example globally of senior producers collaborating voluntarily to achieve a carbon reduction project in conjunction with government partners at provincial and federal levels.
Utilities welcomed the Biden administration’s decision to pause tariffs on imports of solar panels from four Southeast Asian countries. However, there is still uncertainty about the continuing investigation by the Commerce Department on those imports. Depending on the outcome, the pace of development of the domestic solar supply chain could change, affecting solar procurement for both regulated and merchant projects.
While deployment of intermittent resources will drive US energy transition, panelists in a session on nuclear energy emphasized its role in providing a “reliable insurance policy” for energy supply.
Recent events, particularly in Europe, have highlighted the benefits of maintaining financially viable nuclear assets. There seems to be bi-partisan support for nuclear production tax credits (PTCs), but passage of a bill is less clear. Small modular reactors are finding some success in Canada; the US is more hesitant to commit at this point.
Utilities push on with wire spend
Utility players spoke of supply problems and inflationary pressures piling on costs; this is resulting in project delays to varying degrees. Challenges with fulfilling transformer orders and labor scheduling appear to be key bottlenecks for wire projects. However, O&M flexibility and management of the supply chain issues offer hope.
Another panel discussion highlighted a range of possibilities for how the electric grid would evolve. While utilities accelerate their wire spending to support the US energy transition, they will adapt to higher levels of distributed solutions. Energy storage has a unique role to play, providing flexibility to both centralized transmission and distributed grids.