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Energy matters – 2022: The Year of Stabilisation?

23/11/2021

As we hurtle towards year end, that means it is time to dust off the template for the performance contract and start filling in those 2022 targets, KPIs and deliverables. In 2020, management were understanding as everything around you turned upside down and gaping holes appeared in your performance contract. In 2021, they accepted that things were going to be uneven, some pieces might not work out, and that staff were battle-weary and run ragged by the pandemic, anxious and unsure about their future.

But what of 2022? As you stare at the blank spaces on that performance contract, this time you cannot cut and paste what you had put last year. Here is my perspective on what is controlling what you should commit to:

The world is not fully vaccinated. It’s supposed to be a year of stabilisation, and management are looking to you for a solid year of no-fuss delivery. There are still massive overhangs from the pandemic, the world is not fully vaccinated, and local breakouts & reintroduction of restrictions are still to be expected. But there are now proven mechanisms to control and contain the spread of the virus and its impact. The era of daily press conferences, PowerPoint slides, graphs and hygiene recommendations has passed. Virus protection has been built albeit unevenly. There is still lots more to do to quash the pandemic entirely but the times of widespread lengthy lockdowns appears to be over. Local breakouts remain likely, however these can be controlled. Energy companies have all put in place measures to protect their staff and customers. It is important to remain vigilant and relentless. Management anticipate that in some locations big problems will re-emerge, you just don’t want to suddenly become part of those problems! It is not about planning years ahead, it is about getting things right in 2022. No convenient excuses this time, 2022 is a year where 100% delivery is considered the minimum and, better still, some of those stretch targets should be met.

Energy prices appear to have stabilised at high levels. Opec+ has a firm hand on oil & gas supply so expect tight supplies and high prices, despite the pleas from some countries to increase supplies. The cartel is stronger than it was a year ago, not weaker. Demand is building as economies come back to life and international travel and transport picks up. Expect the US shale industry to come back strongly with high prices creating a cash windfall and presenting a rare opportunity for companies to pay off some of their vast borrowings. The Permian Basin of Texas has returned to pre-pandemic levels as the largest component of US production. Oil demand could quite easily spend the whole year above pre-pandemic levels although new lockdowns will impact the oil price, the amount depending on which countries are affected. Market indicators suggest a strong bull run has started and even a very large release of oil stocks would not lead to a collapse in prices. US$ 60/barrel appears sustainable. Consolidation will continue across the energy sector as operators seek cost optimisation. Significant costs have been taken out of the business in the last few years, bringing down the breakeven oil price for many projects to US$ 30-45/barrel. Energy price indices have reached their highest since the short-lived 2008 peak, and are now at their second highest in over 30 years. With energy prices high, many will seek divestments, or partial divestments, looking to capture some of the value created over the last 5-10 years, create liquidity and pump money into developing assets elsewhere in the portfolio. It is a great opportunity to strengthen battered balance sheets too.

Economic problems are still plentiful. Growth will likely be below what most countries would like but GDP in many countries is edging towards pre-pandemic amounts. With COP26 behind us, the pace of trade deals, protocols, and trade continuity agreements will pick up again as a form of economic stimulus. It is an uneven global economic outlook with countries recovering at different speed, some grappling with substantial pandemic-induced issues, and a few launching additional economic stimulus packages. Problems have been building with supply chains and these will continue to stifle a post-economic rebound; the effective supply of transport fuels and natural gas is of particular concern. Rising energy prices and supply chain issues have pushed up manufacturing and agriculture product prices. Inflation will continue building from its previous very low base and is already becoming rampant in some sectors. Expect enormous attention on inflation and interest rates as the past decade or more of low inflation has come to an end. This will put pressure not only on staff pay rises but also those living on pensions. It is going to feel increasingly uncomfortable as many economic stimulus packages that were designed to protect or save economic activity are wound down. It can quickly turn to panic with many staff already having accepted a pay freeze or furlough during the pandemic. Inflation acts like a tax which targets the lower paid and less well off. Younger staff, and quite a few junior managers, have never experienced high inflation and the painful realities of living with high inflation. It will be a rude awakening as they see attractive looking pay rises wiped out by high inflation.

The energy sector will attract massive investments. Global energy investment will approach, and might finally surpass, the US$ 2 trillion level. The deeply slashed capex of 2020 & 2021 has gone. Within this, the power sector and electricity supply will take the largest share with renewables accounting for most of that. Total electricity production is set to grow with offshore wind projects zooming ahead in China, Sweden, UK, USA & Vietnam, and also significant demand from Australia, Germany, Ireland & Taiwan. Attractive borrowing rates for green finance will diverge strongly from more expensive financing of carbon intense developments. Crowdfunding of small green energy projects and innovative technologies has gained a foothold; it is still in its infancy but growing strongly and adds an important new dimension to green finance alternatives. If this is a new topic to you, you can find out more by googling leading renewable energy crowdfunding platforms such as Citizenergy, Energise Africa, Energy 4 Impact, Abundance, or Triodos Crowdfunding. Expect to also see more IPOs of renewables ventures, and a continuing shift in upstream oil & gas investment towards the NOCs. The electric vehicle revolution will continue as one of the most important energy shifts ever. Investment in energy R&D will remain focused in the US, China, EU and a few Far East locations (Japan, South Korea, Australia).

The legacy of COP26 will impact businesses every day. The summit culminated in a new global climate deal; it provided a clear message to energy producers and consumers about the march to Net Zero and low-carbon energy. Nobody was disputing there is a big climate problem, what the sources of that problem are, and the kinds of actions needed; the road-map is clearer. However, many countries have not yet reached peak coal, let alone peak oil, or peak natural gas consumption. But 2050 is now less than 350 months away. Plan for extra focus on emissions reporting month-by-month or even week-by-week. This is needed to help focus on turning the COP agreements and pledges into action. What has been achieved to date is nowhere near enough; plan to ratchet up your response plans and focus on mitigation, adaptation and efficiency. Expect public scepticism and beware of increased climate activism, civil disobedience and demonstrations. The climate challenges remain immense for everyone.

Demonstrating ESG and audience-savvy external communications is essential. If you don’t understand the power of social media, this would be a good moment to look into it. It is yet to be proved that we can make a fast energy transition whilst maintaining secure and affordable energy for all. The storyline which says big oil and gas companies need to make huge profits so as to fund their own energy transition to become low carbon energy suppliers does not really seem to be working. Yes, many of those companies are now making huge profits but large parts are going toward share buybacks and increased dividends, and paying down debt, rather than the promised investment in renewables. Big oil and gas is in an awkward balancing act, trying to keep shareholders happy whilst pivoting to cleaner energy. All this points to an energy transition that will be slower than many would like. Divestments of high carbon assets to meet big oil’s promise to decarbonise will continue. However, the narrative looks increasingly weak as people start to realise those high carbon assets are still producing, it is just that they have not heard of the companies’ names who now do it.

Relationships with national oil & gas companies will come under the spotlight. Strategies among the oil giants are diverging. The IOCs are starting to diversify and switch focus as they embrace the energy transition. Meanwhile there has been relatively little shift amongst many NOCs who are lagging behind in the energy transition and remain focused on their traditional carbon-intensive activities. Partnerships between IOCs and the NOCs were once a cornerstone of world oil & gas production, with the IOCs dispatching staff around the planet to build relationships and develop technical collaboration. But those relationships are changing fast as the IOCs get drawn towards cleaner lower-carbon energy and finding capital for high carbon developments becomes harder. Many NOCs are yet to strengthen their climate ambitions. As alignment between NOCs and IOCs fades, those operating and management committee meetings are going to become increasingly tense!

Managing late life E&P assets will attract a lot of attention. Operators of late life offshore fields are desperate to delay a fast-growing mountain of decommissioning costs as more and more shallow water fields become due for abandonment. High oil & gas prices can help defer some abandonments but the industry has both a fast growing fiscal problem and decommissioning risks related to the more than 12,000 offshore platforms, which are increasingly rusty. Many are present in SE Asia, the North Sea and Gulf Of Mexico, and also off California, Brazil and West Africa. The possibility is real that there will be of orphaned offshore fields simply discarded with no owner willing to fund decommissioning, creating new environmental damage. Opportunities to repurpose offshore (and onshore) oil and gas wells to geothermal to extend their useful life, adding value and new cash flow, will attract increasing attention.

Natural gas demand should remain very healthy and underpin prices. Optimism is returning about new projects in the Middle East, such as the supergiant US$ 100+ billion Jafurah shale gas field in Saudi Arabia – the largest shale gas project outside the US. Also the world’s largest offshore sour gas project at Dalma in UAE. In Argentina, Vaca Muerta shale production – both in liquids and natural gas – is set to show more impressive growth with refurbished infrastructure giving access to liquids markets in Chile. In onshore US, the shale drilling sector is bouncing back responding to both increased demand from the pick-up in economic activity and the higher oil & gas prices. The number of rigs lying idle has declined; in 2021, the active rig count doubled compared to 2020, and 2022 should see further steady growth. Competition for that work will be very high. In LNG, project work will pick up strongly particularly in Australia, Canada, Indonesia, Mozambique, Papua New Guinea, Qatar, Russia and USA.

In the fuels sector, record prices will spur intervention. Many countries are seeing record gasoline and diesel prices. Expect to see government and regulatory intervention with high prices driving inflation, angering customers and crimping economic growth. Supply chain issues will dominate the sector chatter and the possibilities for global disruptions and panic buying persist. The production capacity for renewable diesel and sustainable aviation jet fuel have grown in the last few years, the products gaining popularity; the demand for these ‘green’ fuels is set to soar as global travel recommences. Refining margins should stay buoyant, a strong contrast to the last few years, with oil refiners ramping up output. Transport fuels, particularly diesel and gasoline, have rebounded and product prices are high. Margins will vary globally but the overall outlook suggests US$ 10-15 per barrel throughout the year.

Big energy politics returns. If COP26 was not enough for you, energy will continue to make headlines. The closely watched unstable relationship between the USA and China will resume centre stage; their domestic politics are just so different and their rivalry is growing with the tech sector, pharma and energy all contentious issues. It will reshape the post-Covid world. Energy security issues related to cross-border natural gas pipelines will add to international tensions, particularly those between Russia and the EU. The issue of coal consumption, particularly in India and China, will be a hot topic; both are mining and consuming coal at record levels; together they consume around 2/3rds of all coal produced. Many elections are set to have strong implications for the energy sector in 2022. In Asia & the Far East, these include Australia, India, the Philippines, and South Korea. Meanwhile, in the Americas, the key elections include Brazil, Colombia and the USA. And a Presidential recall referendum in Mexico, promoted by the President himself, remains an intriguing possibility.

Business travel is back. Business trips and face-to-face meetings are increasing as economies reopen. Even so, much business travel is wiped out for good and many teams have not met together for 2 years. Airlines, hotels, and conference centres are desperate to see the return of high-spending business travellers but the tail-end of the pandemic still poses restrictions and complex procedures. The energy conference circuit is back. Big live in-person conferences and exhibitions are returning; there are plenty of hybrid events too, and there will still be vast numbers of virtual events. Everyone I have spoken to who recently attended a live event raves about how good it was. COP26 was the biggest example of all in 2021! No one enjoys large virtual calls and the chance to attend a conference or training program during 2022 will become irresistible. It is where energy professionals meet to exchange ideas, opinions and technical knowledge. So much business gets sorted on the fringes of big conferences, companies will not want to miss out.

What really matters? The energy industry has changed forever, make no mistake. With so much impact in 2020, just getting through 2021 intact was a great achievement. The single word theme of 2022 has to be stabilisation. Getting your 2022 performance contract right, making sure those around you are capable of delivering, understanding the risks to delivery, and continually checking progress can get you through this year of stabilisation. In many ways, 2022 is a fresh start. The challenge is that it is a fresh start into a new normal. Keep it lean and efficient. The worst mistake you can make is to assume we have returned to a pre-pandemic energy sector. Keep your team stable. Keep calm!! The future of home office working, monitoring of remote workers and related issues such as taxation of home offices are still to play out. Keep it simple, easy to measure and clearly attainable. It will be turbulent; stay focussed and don’t get blown off course.

Chris Sladen has a unique global experience having worked in the energy sector in over 40 countries. This is underpinned by extensive knowledge of petroleum systems and where best to find oil and gas, as well as the development of midstream, downstream & renewables investments in many emerging economies. Chris also has extensive experience on the Boards of energy companies, business chambers & institutes. His contributions to the energy and education sectors have been recognised by the UK Government with both an MBE and CBE, and also the Aztec Eagle from the Mexican Government – the first foreigner in the energy sector to achieve this award. Chris’ articles reflect his personal experiences and enthusiasm and are not paid for in any way.

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