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Transition concerns speed fossil fuel development

A drilling rig flares gas on a blue sea
Drill stem test at Leviathan. Source: Albatross Aerial Perspective, via Delek Drilling

If energy demand is shifting away from fossil fuels, the most economically rational move for governments is to maximise development of resources now.

In order to do so, they may feel the need to offer developers additional incentives in order to secure investment.

“Governments don’t know whether hydrocarbons will be viable, given changes in ESG attitudes and pressure around the world to accelerate the energy transition. Those governments worried about stranded assets are going to take a view of how to incentivise development,” Bracewell partner Ronen Lazarovitch told Energy Voice this week.

Lazarovitch declined to name names. A number of states have taken steps in the last year to secure new investments.

Norway, for instance, instituted exploration incentives in 2020. Rystad Energy has calculated these will reduce breakeven prices for future projects by around 40% on average.

Uganda has found new impetus in the last year to drive progress on its Lake Albert project. As a result, after years of delays, Total declared a final investment decision (FID) in April.

Furthermore, Israel is looking at allowing increased exports from new offshore gas fields. The country has gone from deficit to glut and renewable energy is playing an increasingly important role.

“If you take the view that it will take some time to cut demand, then this is a time for opportunities,” Lazarovitch said. “It’s a time to go to those countries with worries about stranded assets, as there are likely to be incentives up for grabs.”

Countries are likely to have to offer more to secure the investment than they had two years ago, he said.

Stranded risks

It is not all plain sailing for companies, though.

Super majors are under increasing scrutiny about their carbon emissions and transition plans. Selling assets allows these companies to reduce carbon emissions and secure funds for new renewable projects.

Shell, for instance, is considering the sale of its Permian assets in the US, according to reports. This may be worth up to $10 billion.

“When they sell off fields, they are not stopping emitting carbon, they’re being transferred to another company with a different view. There may be an unintended consequence in some cases that standards will be lowered as a result,” Lazarovitch said.

Despite this potential slippage, the Bracewell lawyer did not see regulators stepping in to alter sales on ESG grounds. Such a move would “take people by surprise”, he said. “That might be seen as over regulating. There could also be geopolitical consequences.”

Ultimately, Lazarovitch said, the discussion will shift “from shutting down all developments to trying to operate in the least carbon intensive way. There will be more focus on near-field opportunities and there will inevitably be stranded assets.”

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