Energy Transition and Security
I have just returned from the AIEN’s excellent International Energy Summit (IES) in London, around the theme THE FUTURE OF ENERGY: TRANSITION & SECURITY. Being the first such event since 2019, it finally allowed in-person meetings - not just with old friends but also, one of the great draws of such events, new friends from around the world.
While that networking is, for me at least, a key attribute of the IES, the programme was equally invigorating. When the IES was initially being pulled together, the momentum was all about the energy transition; highlighted also by the “P” to “E” change in the AIEN (or IES). Don’t get me wrong, that was not lost. However, 24 February highgraded security in the energy trilemma of equity (accessibility and affordability), sustainability (decarbonization), and security. I think it is fair to say that in late 2022, while decarbonization and climate change remain a fundamental concern, security of supply … reliability at an affordable price … is today’s immediate issue.
What else caught my eye … or, should I say, my ear … at the conference ? I think three things: communicating the transition, windfall profits tax, and Africa.
The subject of how well (or not) the oil and gas sector communicates about itself is not a new subject. With very little dissent there is no argument about a need to decarbonize our energy sources. However, a cure for an affliction that kills the very (indeed, probably the only) patient that has the knowledge and the skills to carry out that decarbonization is no cure, and a polarized debate is no path to a viable solution. What is needed is much enhanced communication and education by the industry of politicians, the media and society to appreciate that everyone is actually on the same side, and the discussion is (or should be) about how to develop and deploy the technology, approaches and new skills in a manner and at a speed that achieves the desired goal without tearing up our lives along the way. Kudos to Maynard Holt and his team at Veriten for launching their platform aimed at achieving just this debate (if you have not watched or listened to their weekly COBT podcasts, you should); industry can and must do more to follow such a lead.
Perhaps illustrating this point, and highlighting the debate around security and transition, is the societal impact of soaring energy costs. This has led to calls at a political level for windfall taxes and an equal and opposite resistance to the same from much of industry. Clearly there is a large part of society that cannot easily sustain such a massive change in such a short period of time, and some form of direct help is required at least until other changes can be made to address the problem. Help begets cost, and there is a clear argument that as the cost being borne by one part of society is a mirror of a windfall being enjoyed by another, capturing and redeploying that windfall is the answer. The political solution being a windfall tax.
While there is great political appeal in such a seemingly simple solution the devil is, as ever, in the detail. The OED describes “windfall” as “unexpectedly large or unforeseen profit” which, in the context of the oil and gas sector, I would describe as being outside of a range that was ever contemplated and going beyond the highs and lows of the P&L cycle over time. There is, however, no First Law of Windfalls that defines it in a way that can be measured with any sort of precision. Further, even if there are windfalls these do not land evenly over the ground. Indeed, some who might be expected to be recipients get none. However, if natural gas is $9 per MMBtu at Henry Hub, and trades at $60-70 per MMBtu at TTF, it is clear that a lot of money is being made somewhere - in the financial sector as well as the (broader) energy sector. So, designing a windfall tax that truly targets windfalls is anything but straightforward.
It also does not solve the bigger problem. Energy subsidies, even for the short term, might treat certain symptoms but they do not address the underlying structural causes and avert further problems in the future. Which presents industry with an opportunity, of its own volition, to start to address its communication problem while also investing in the transition. It can get with governments and agree to boost investment over and above that which is already acknowledged as being necessary, and deploy “windfall” in this manner. At the same time it would also behove governments to recognize this and remove unnecessary barriers to doing so. Message to all … this can be a win-win. JFDI.
There is a significant component of all this that might be characterized by a large proportion of the world’s population as a “First World Problem”. Which brings me to my third observation from the IES. I have yet to see the results of the survey of conference participants, but anecdotal evidence gives pride of place to the most entertaining (and, in part, provocative) session to the African panel.
While the message is much broader than just Africa, it highlighted that trying to apply the same transition approaches and policies that might be sustainable in developed economies to countries who not only produce but a fraction of global emissions but have masses of people in true (not just relative) energy poverty is simply not acceptable. COP 27 will be with us in just a few short weeks, and this is a subject that needs much more attention. I hope that NJ Ayuk of the African Energy Chamber, who really lit up the discussion, can get a hearing. Not only will he bring a powerful message, those with an open mind who attend will also enjoy listening to him. I also wish AJ the best of luck in his crusade to abolish NOCs !
These are just three sets of thoughts from thirteen great sessions. You can find a broader summary of the IES in the final summing up from Scott Porter, the AIEN’s current President, along with other summaries on the AIEN’s LinkedIn page. And, you can experience more by attending in person the Sustainability conference in Houston on 9-10 November, and by joining us on 31 May - 1 June 2023 in Miami. Hope to see you there.