The oil and gas industry currently finds itself in a situation which is far from comfortable.
On the one hand, the industry just began to recover from the 2014 downturn.
That said, the industry now faces a perhaps even bigger challenge: the move towards a carbon-free society, also referred to as the energy transition. In light of all this it is interesting to observe how the industry sees itself. An excellent opportunity for this is how Offshore Europe 2019, which took place in Aberdeen beginning of September 2019, has been summed up.
Remarkable is how present terms such as decarbonisation, climate change, and energy transition have been. This awareness of this challenge as such should be seen as a good sign. Even more remarkable, however, is that several observers find that there is “noticeable positive energy”.
It has been highlighted, for instance, that, despite all declared climate emergencies, global oil and gas consumption is predicted to continue to increase in the years to come and that the industry is part of the solution rather than part of the problem.
These predicted increases in global oil and gas consumption should, however, not be a reason to relax for the industry. The sheer fact that the usage of the term “peak” in the context of oil has changed from peak supply to peak demand is an important turning point. It remains to be seen how this affects investments the industry certainly will rely on in the future.
What is more, the sentiment towards climate change and the role of the oil and gas industry in the wider society shifted quite dramatically over the last year. How this sentiment will develop in the near future will be determined by the responses of governments and the industry alike. These responses will also determine how fast the demand peak will arrive and which shape the energy transition will take.
From the perspective of tackling climate change, these responses need to be fast and determined; it is without doubt that urgent action is required. It is likely that delays in taking action will only result in making more radical steps necessary in the future.
A radical transformation in the future, however, poses enormous risks for the industry in specific and the financial system in more general – according to concerns expressed by the governor of the Bank of England, Mark Carney.
The Bank’s mission is to maintain monetary and financial stability. Alongside other central banks, the Bank of England has began to monitor the situation and assess the risk associated with the energy transition.
It is worth highlighting that institutions such as central banks only get involved when it is necessary – and in this case central banks already deem it necessary.
The risk, according to the central banks, is that investors will punish those firms that are insufficiently prepared for this transition, and that, in addition, assets lose dramatically in value and, thus, become “stranded”.
This together poses a threat to the stability of the overall financial system. The consequences of the financial crisis 2008 are hopefully not forgotten yet.
The observation described above that there is “positive energy” in the industry can be seen as a warning sign that the industry underestimates this challenge and is insufficiently prepared.
It is obvious that an energy industry has to be part of the solution, but it is far from certain whether this industry will consist of the current players or if there will be a major overhaul also within the industry – this is another concern Mark Carney addresses.
It should not be forgotten that any major structural change in an economy produces winners, but also losers.
In this case there would be many losers: workers in affected firms, the wider society due to a financial collapse and, in the end, perhaps also the climate if the measures undertaken turn out to come too late.