Lets keep the lights on

Over the last few weeks, I’ve been watching and listening to the criticism and controversy caused by the exceptional profits that oil and energy industry announced recently. ?Having been caught between debates with friends outside of the energy industry I thought it only fair to put something out there to counterbalance some of the criticism received and included suggestions on what needs to be done to support climate change initiatives collectively.

?Supply demand dynamics

Ukraine-Russia war had a significant impact on energy prices due to the disruption of gas supplies, fears of further supply disruptions, impacts on financial markets, and broader economic implications.

Companies like Shell and BP have benefitted because of the supply demand dynamics as well as the geo-political events that governed at the time. ?Conversely, when the oil price went into negative numbers during the pandemic this impacted their bottom line too. ?

In the first quarter of 2020, Shell reported a net loss of $24 million due to lower demand for oil and gas and a decline in commodity prices. In the second quarter, the company reported a net loss of $18.1 billion, which included significant write-downs on the value of its assets due to the impact of the pandemic on the global economy.

In the first quarter of 2020, BP reported a net loss of $4.4 billion due to lower oil prices and weaker demand. In the second quarter, the company reported a net loss of $16.8 billion.

What we saw during the Ukraine Russia crisis was volatility risk in the market on key price indicators of energy commodities as supply/ demand dynamics began to shift from the status quo to the new paradigm as consumers and businesses looked at greener alternatives. Therefore, we can see the industry benefits with the market dynamics at the time but also suffers when supply demand dynamics shift!

Investments in renewables

When energy companies announce their results, they are not able to invest their returns immediately.

The energy industry players have been, along with other industries, criticised for their contribution to climate change, whether it be human rights violations, causing pollution through unlawful activities etc. Admittedly they have received numerous fines for breaching what we today known as the “sustainable development goals” set by the UN.

It should be noted the countries and regions of the world the energy companies operate in expose the company’s assets to sabotage and syphoning of oil. In extreme cases this is malicious damage, theft that ultimately causes leaks damaging the surrounding habitat. More needs to be done to protect and reduce the number of incidents reports.

We can see the industry is improving its act and has embraced the transition to Net Zero by 2050 in line with the Paris agreement.

According to the UN and other agencies between $2-4trillion needs to be spent every year on a global scale until 2050 to reach the net zero aspiration. This is a tough feat for any organisation or industry, to put things into perspective.

The Ukraine Russia crisis has brought home the fact that energy security is far more important right now, with priority placed to ensure homes are kept warm and there is enough fuel in the tanks to support the infrastructure of countries impacted.

Challenges to towards achieving NET ZERO goal are.

·??????High investment cost

·??????Return on investments can take 7-10 years to come to fruition.

·??????The aggressive drive towards net zero risks energy security on a global scale- an example of which we have seen with the Russia/Ukraine war which has left western Europe hanging dry.

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Energy transition initiatives take time to plan as well as significant investment. Further to this, it should be noted not all initiatives will be a success – there are some notable failed investments created in the name of sustainability too. The take up of any new energy initiative is dependent on infrastructure and consumer consumption habits. As we have seen with EV’s in the last 5 years.

According to sources, global investment in renewable energy is likely to have reached $400 billion in 2022, with much of that investment coming from energy companies.

For example, BP has pledged to become a net-zero company by 2050, while Shell plans to reduce its carbon emissions by 20% by 2030 and achieve net-zero emissions by 2050. Similarly, TotalEnergies has set a target to achieve net-zero emissions by 2050 or sooner and has committed to investing $60 billion in renewable energy and low-carbon technologies over the next decade.

In addition to investing in renewable energy, energy companies are also focusing on improving energy efficiency, reducing waste, and developing new technologies to help mitigate the impacts of climate change. Many are also partnering with governments, universities, and other organisations to advance sustainability research and development.

Shell spent $64 billion in energy projects around the world last year – about a third of which went on no- or low-carbon opportunities. Essar launched to invest US$3.6 billion in energy transition?in the UK and India. Essar Oil replacing three furnaces currently used at its Stanlow refinery with a hydrogen-ready furnace costing ￡45mn ($54mn).

Additionally, we must remember energy assets the industry holds, if not converted to more efficient usage, must be written off (stranded assets) and the investment value lost. At an industry level the cost of converting potential stranded assets exceeds US$2trn. Examples are exploration and development assets drilling, processing terminals and distribution infrastructure, and pipelines

Therefore, whilst the bottom lines of these companies look alarmingly large, the industry has large bills ahead, to meet the sustainability agenda.

Contribution to society.

Overall, while the energy industry has a long way to improve its image, it also plays a critical role in providing essential services and supporting economic development all over the world.

Energy companies provide access to electricity, natural gas, and other forms of energy that are essential for modern society. This enables people to power their homes, businesses, and industries, improving their standard of living and promoting economic growth. The super majors provide energy to parts of the world that require development.

?The energy industry provides employment opportunities across a wide range of professions, including engineers, technicians, and support staff. These jobs can provide stable incomes and benefits, contributing to the economic well-being of individuals and communities. One of the largest employers, jointly the energy industry employs in excess 2.5bln people (Global population 8bln) in the world.

?Energy companies pay taxes on their profits and on the products they sell, which generates revenue for governments at the local, state, and national levels. This revenue can be used to fund essential public services such as healthcare, education, and infrastructure. In 2022-23 the OBR (office for budget responsibility) forecast that oil and gas revenues will raise ￡7.8 billion for the UK government. (Conversely during the pandemic, the numbers were down by 71pct).

Many energy companies invest in the communities where they operate, through programs such as charitable giving, volunteerism, and environmental stewardship. These investments can help to support local economies and improve the quality of life for residents. Oil majors like Shell and BP have been responsible for lifting the living standards of some of the poorest economies and have been providing employment and education in countries where they have notable presence. ?Admittedly, more visibility of and financial impact/improvements would help the images of energy companies worldwide.

Energy companies invest significantly in new technology in research and development to improve the efficiency and sustainability of their operations, as well as to develop new technologies and products. These investments can have broader societal benefits by advancing scientific understanding and promoting innovation. It could be argued that the public would likely to gain more visibility of how technology breakthroughs are being shared with smaller businesses that do not have the financial capacity but could benefit from gaining sight of these innovations.

How do we improve the image of the energy industry?

There is still more that needs to be done by way of:

?·??????Accelerating the manufacture of alternative products to fuel transportation.?

·??????Building better and stronger communication channels with stakeholders, and regulators during the good times as well as the bad times. The energy industry had a strong foot hold in Russia and an employee base to match – efforts have been in place to ensure the safety of its employees and vulnerable communities in surrounding areas. However, there is very little in the public, domain about this.

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·??????Collaborating at different levels within their supply chains could help support innovation driven by sustainability as its core driver. This would inevitably lead to greater market recognition. Expanding innovation outside of supply chains would help the greater good by innovating in partnership with other industries and exploring common synergies. One would add it would be good to see how innovation is shared with small to medium sized companies to create leverage.

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·??????Increase investment with partner organizations, other sustainable businesses, not-for-profits, community groups, schools, politicians and members of the community to provide clean energy cooking solutions to vulnerable community.

·??????Focus on fundamental innovation: through using new scientific methods of measuring potential stranding of its renewable infrastructure.

·??????Measure and manage the exposure of its infrastructure investments to external risks that can lead stranded assets and internalize these risks in their decision-making and in their financial and economic models.

In conclusion the energy industry is an important and influential player in the geopolitical landscape; the numbers alone do not tell the full story of their importance and their ability to make a lasting change in the communities they operate in. Continued focus on reducing the number of oil spills will help the brand reputations of the companies in this sector. In periods of excess profits, the industry should continue to contribute by way of increasing tax contributions. In terms of strategy the industry would benefit from continued focus on; protecting its industrial assets which are subject to sabotage that ultimately lead to spills and environmental damage; innovation and investment in renewables, improving communication thus improving brand reputation via social media posts to drive visibility of ALL the work done. This includes engagement with investors and the larger public alike. This will likely create new business opportunities.; Influence policy makers by investing in net zero solutions, thus encouraging governments to introduce supportive measures (known as the ambitious loop). Operationally, improving supply chains inside and expanding externally by focusing on its business relationships thus impacting economic, social and environmental sustainability (ESG) agendas. By working across sectors the industry could create partnerships with governments and industry players to accelerate growth including sectors that are difficult to decarbonize.