With the progress of the energy transition, which sees an increasing share of the energy network taken up by low carbon sources as opposed to traditional fossil fuels, major oil & gas (O&G) companies such as BP, Exxon Mobil, and Shell are faced with a major issue after being dominant in the supply of traditional energy sources. Additionally, due to the emotive topic of climate change, these companies face the prospect of increased criticism and pressure from environmental activists due to their history. In this Industry Insight, Powerstar has summarised how some oil & gas majors aim to negotiate the energy transition despite the energy market decoupling from the specialisms of these companies. Topics that will be summarised in this Industry Insight are:
- The increasing energy needs of the world
- The switch to low carbon energy
- The diversification of O&G majors
The increasing energy needs of the world
As the economies of developing nations improve further, and the economies of those nations in the Organisation for Economic Co-operation and Development (OECD) grows increasingly dependent on a round-the-clock economy driven by the advances in technology categorised as Industry 4.0, the world’s energy needs are likely to increase in proportion to these events. This can be most starkly seen in the energy outlook of ExxonMobil which claims that global energy needs are set to rise by 25% by 2040.
An increase in energy consumption is a necessity at both ends of this equation. Firstly, in order to facilitate the economies and industries that will lead to the rapid growth in economic prosperity, it is vital that energy is provided to develop the infrastructure of these budding industries and then support the industries through their various growth phases.
Traditionally, a cycle such as this would have been viewed as a virtuous circle in the boardrooms of O&G majors as they controlled the sources which take a majority share of the energy mix. However, with the energy transition, this is no longer the case as the dominance of fossil fuels as the most dominant energy source is changing due to the need to switch to low carbon sources in order to battle against climate change.
The switch to low carbon energy
One of the key factors of the energy transition is decarbonisation, which involves ensuring that energy sources are low carbon, a huge departure from the high carbon sources that have been used traditionally and that have fuelled the rise of the O&G majors. This is a fact that is acknowledged by O&G majors, with BP stating in its energy outlook that renewable energy is the fastest growing source of energy, contributing half of the growth in global energy supplies and becoming the largest source of power by 2040. This is a positive statistic in the context of the battle against climate change but not necessarily a surprising one. The energy storage market is growing rapidly, with the market expected to attract an estimated $1.2tr investment by 2040, as it provides a solution to the intermittency issues that concern many potential users of renewable energy. Intermittency is caused by the sudden stop and starting of renewable generators due to their weather dependent nature, which causes a sudden surge of energy exported to or removed from the Grid, disrupting the sensitive balance between supply and demand. Energy storage alleviates such problems by harnessing the energy from renewable generators and storing it for a time when most beneficial instead of exporting it immediately to the Grid.
The growth of energy storage can also be attributed to the Uninterruptible Power Supply (UPS) capabilities that some leading-edge energy storage solutions have integrated into their systems that can provide the vital service of preserving a company’s bottom line due to its protection from energy-related failures. Energy-related failures can already be damaging, costing up to 17% of a medium sized UK company’s annual revenue, and are likely to become more so as the aforementioned increase of energy consumption continues due to larger markets and Industry 4.0. Therefore, the presence of next generation UPS inherent within energy storage solutions such as Powerstar VIRTUE, combined with smoothing the intermittency of renewables, will provide organisations with a tool to combat the potential reliability problems of the energy transition.
The decarbonisation of energy will also largely be achieved through electrification, with around three-quarters of the increase in primary energy absorbed by the power sector. Whilst critics will claim that this does not necessarily equate to less carbon intensity as it is dependent on the source of electricity, ExxonMobil’s outlook should battle these claims as it projects that electricity from solar and wind will increase by approximately 400%1 by 2040. Additionally, it is forecasted that the shift to less carbon-intensive forms of electricity will help reduce the CO2 intensity of delivered electricity by more than 30%.
It is clear that the world is transitioning towards a lower carbon energy network and that the growth of enabling technologies such as energy storage will support this further. However, this poses an issue for O&G majors as to maintain their dominant position in the marketplace, they will need to diversify their portfolios.
The diversification of O&G majors
The approach to the energy transition that the O&G majors are set to take could follow the lead of Shell. It is perhaps no surprise that Shell are leading the way due to it being the largest O&G company in terms of turnover, with the most recently reported figure being approximately $477 Million.Renewable energy is crucial for the transition
Shell’s approach is summarised by the statement in its energy outlook that “We aim to grow our business in areas that will be essential in the energy transition, and where we see growth in demand over the next decade. We expect these will include natural gas, chemicals, electricity, renewable power, and new fuels such as biofuels and hydrogen”.
This desire to reshape its business alongside the energy transition is perhaps best shown by the commitment of between $1billion to $2billion a year, on average until 2020, of capital investment in its New Energies division, with the Executive Vice-President of Shell New Energies, Mark Gainsborough, hinting that this could be higher still by claiming “If we are successful in what we do, we can scale up spending”. This heavy capital investment highlights the importance that Shell attach to the New Energies division and the company’s larger position in the energy transition as Shell defines this division by building on its experience in lower-carbon technology and exploring new commercial models focused on the world’s energy transition.
The level of investment that Shell is directing towards preparing itself for the energy transition shows that it is aware of the benefits that the transition can deliver.
Despite requiring a change to the traditional business models of O&G majors, it seems that in general these organisations are embracing the energy transition. The support and financial backing of such companies is a huge step in the energy transition and should allow technologies which enable decarbonisation, such as energy storage to flourish even further.
15 April 2019