Nigeria Times

By Adepoju Omolara Oluwafunke

The European Commission has proposed detailed rules to define what constitutes renewable hydrogen in the EU with the adoption of two Delegated Acts, required under the Renewable Energy Directive, the Commission announced on Monday (13 February).

The two Acts are part of a broad EU regulatory framework for hydrogen which includes energy infrastructure investments and state aid rules, and legislative targets for renewable hydrogen for the industry and transport sectors. They aim to ensure that all renewable fuels of non-biological origin (also known as RFNBOs) are produced from renewable electricity. The Acts are interrelated and necessary for the fuels to be counted towards Member States’ renewable energy target.

The proposed rules would provide regulatory certainty to investors, the Commission said. The bloc aims to reach 10 million tonnes of domestic renewable hydrogen production and 10 million tonnes of imported renewable hydrogen, in line with REPowerEU.

“Renewable hydrogen is a crucial component of our strategy for a cost-effective clean energy transition and to get rid of Russian fossil fuels in some industrial processes. Clear rules and a reliable certification system are key for this emerging market to develop and establish itself in Europe. These delegated acts provide much-needed legal certainty to investors, and would further boost the EU’s industrial leadership in this green sector,” said Kadri Simson, European Commissioner for Energy.

Unpacking the new legislative proposals
The first Delegated Act defines under which conditions hydrogen, hydrogen-based fuels or other energy carriers can be considered an RFNBO. The Act aims to clarify the principle of “additionality” for hydrogen set out in the EU’s Renewable Energy Directive. As part of this, electrolysers used to produce hydrogen would have to be connected to new renewable electricity production.

This principle aims to ensure that the generation of renewable hydrogen incentivises an increase in the volume of renewable energy available to the grid compared to what exists already. In this way, hydrogen production would be supporting decarbonisation and complement electrification efforts, while avoiding pressure on power generation, the Commission said.

While initial electricity demand for hydrogen production would be negligible, it would increase towards 2030 with the mass rollout of large-scale electrolysers, according to the Commission. The Commission estimated that around 500 TWh of renewable electricity is needed to meet the 2030 ambition in REPowerEU of producing 10 million tonnes of RFNBOs. The 10Mt ambition in 2030 corresponds to 14 per cent of total EU electricity consumption, the Commission said.

The Act also sets out different ways in which producers can demonstrate that the renewable electricity used for hydrogen production complies with the “additionality” rules. If adopted, it would introduce introduces further criteria aimed to ensure that renewable hydrogen is only produced when and where sufficient renewable energy is available (known as temporal and geographic correlation).

To take into account existing investment commitments and allow the sector to adapt to the new framework, the rules would be phased in gradually and designed to become more stringent over time. Specifically, the rules foresee a transition phase of the requirements on “additionality” for hydrogen projects that would start operating before 1 January 2028. This transition period corresponds to the period when electrolysers would be scaled up and come onto the market.

In addition, hydrogen producers would be able to match their hydrogen production with their contracted renewables on a monthly basis until 1 January 2030. However, Member States would have the option of introducing stricter rules about temporal correlation as of 1 July 2027.

The requirements for the production of renewable hydrogen would apply to both domestic producers as well as producers from third countries that want to export renewable hydrogen to the EU to count towards the EU renewables targets. A certification scheme relying on voluntary schemes would ensure that producers, whether in the EU or in third countries, can demonstrate in “a simple and easy way,” their compliance with the EU framework and trade renewable hydrogen within the bloc’s single market, according to a press release from the Commission.

The second Delegated Act provides a methodology for calculating life-cycle greenhouse gas emissions for RFNBOs. The methodology takes into account greenhouse gas emissions across the full lifecycle of the fuels, including upstream emissions, emissions associated with taking electricity from the grid, from processing, and those associated with transporting these fuels to the end-consumer. In addition, the methodology clarifies how to calculate the greenhouse gas emissions of renewable hydrogen or its derivatives in case it is co-produced in a facility that produces fossil-based fuels, the Commission said.

The Acts will now be sent to the European Parliament and the European Council, which both have two months to scrutinise them and to either accept or reject the proposals. At their request, the scrutiny period can be extended by two months. However, there is no possibility for the Parliament or Council to amend the proposals.

By Otegbola Olusegun Sunday

A NURSING student from Redditch has been shortlisted in the annual Student Nursing Times Awards.

Along with her fellow classmates Phillipa Mills, who studies at University at Worcester, has been shortlisted for Nursing Associate Trainee of the Year.

Prior to joining the University’s Nursing Associate FdSc course, Phillipa had spent eight years working as a healthcare assistant supporting patients living with dementia in an older adult mental health inpatient setting.

She said: “I was encouraged and fully supported by my workplace, where I am still based, to apply for the Nursing Associate course.

“As part of the course I’ve been able to gain experience in a variety of nursing placements and develop my overall confidence.

“I am hoping to continue gaining more knowledge and experience to provide high quality care and eventually come back to university to progress into a registered mental health nurse.

“I feel honoured to even be recognised, let alone nominated for such an award.”

Robert Dudley, head of the Three Counties School of Nursing and Midwifery at the university, said he was incredibly proud of them all.

“We are thrilled to have four students shortlisted in these prestigious awards.

“It is testament to their outstanding commitment and the valuable contribution they make to the communities they serve.

“As nursing and midwifery educators, we empower our students to think critically and professionally about the challenges they face, so they themselves can push for transformation and drive improvement in their services in the future.”

The prestigious Student Nursing Times awards pay tribute to student nurses and midwives and the programmes and people committed to providing outstanding training and education opportunities.

The winners will be announced on April 28 at a ceremony in London.

By Adepoju Omolara Oluwafunke

Nationals Member for Coffs Harbour Gurmesh Singh at Coffs Harbour Health Campus with (from left) director of nursing and midwifery Janelle Goodall, nurse graduates Kate Bowles and Rebecca Henry, nurse educator Melissa Tait, clinical nurse educator Louise White and Coffs Harbour Health Campus GM Lydia Dennett

Nationals’ Member for Coffs Harbour Gurmesh Singh said more graduate nurses and midwives are beginning their careers at Coffs Harbour Health Campus this year, in what will be a major boost for our local community.

Mr Singh said the new graduates are among a record 3,600 nurses and midwives set to commence working across 130 NSW public hospitals and health service.

“In January we welcomed 18 nurse and five midwife graduates to the Coffs Clinical Network (this includes Coffs Harbour Health Campus, Bellingen and Macksville) and in further intakes in coming months another 19 nurse graduates are due to begin,” Mr Singh said.

“The work that nurses and midwives do is at the very heart of the public health system, caring for people in our hospitals, at home and in our communities.

“The commitment, compassion and skills they bring to the role make a huge difference and contribute greatly to the health and wellbeing of the people of the Coffs Coast.

“I am incredibly pleased to welcome the new recruits to Coffs Harbour Hospital and I know they will make a big difference to the health and wellbeing of our community.

“These enthusiastic graduates have a unique opportunity to play a vital role in our healthcare system at a time when it continues to adapt and innovate to the changes and challenges brought by the COVID-19 pandemic.”

Nationals Minister for Regional Health Bronnie Taylor said more than a third of the record number of graduates beginning their careers with NSW Health have chosen to work in our rural and regional hospitals.

“It is so wonderful to see so many nurses and midwives either choosing to move to the bush or returning home so they can care for their communities,” Mrs Taylor said.

“As someone who spent the best part of their nursing career at a regional hospital, I know the skills and experience these new nurses will gain will set them up for success into their future nursing career.

“On behalf of our regional communities, I am thrilled to welcome this next generation of nurses and midwives and wish all our new starters the very best of luck as they embark on their new career.”

The latest state-wide intake of graduate nurses and midwives is an 18 per cent increase on last year. It is also the largest intake of any state or territory in Australia.

NSW Health has the largest health system in the country and employs more than 53,000 nurses and midwives, more than ever before.

Overall, between mid-2012 and mid-2022 NSW Health increased its workforce by an additional 25,700 full time equivalent staff – an increase of 25.2 per cent, including 9,340 more nurses and midwives, 4,140 more doctors, and 2,490 more allied health staff.

The NSW Government announced the largest workforce boost in the nation’s history in the 2022-23 Budget with a $4.5 billion investment over four years for 10,148 full-time equivalent (FTE) staff to hospitals and health services across NSW.

By Otegbola Olusegun Sunday

Renewably produced hydrogen has great potential and some powerful allies. But it’s not a decarbonization panacea.

Green hydrogen produced using renewable energy is increasingly seen as a key asset for grid and transport decarbonization.

Interest in the technology is surging. Shell believes the hydrogen sector deserves the same levels of support that went to solar energy over the years.

But at least in the medium term, the decarbonization potential of hydrogen is limited. In some areas, it’s “just not economical, and it won’t be,” said Wood Mackenzie senior analyst Ben Gallagher.

Green hydrogen remains relatively inefficient and expensive today. It has an end-to-end efficiency of around 30 percent, said Gallagher.

As a result, it’s hard to see it being used for electricity generation in markets such as the U.S., where natural gas prices are expected to remain low for the foreseeable future.

Similar challenges could hamper attempts to make hydrogen a viable alternative to electrification in the automotive sector.

“On the mobility side, you not only have the electrolyzer, you have a large distribution network that you need to build out,” said Gallagher. “Compared to either EVs or gasoline, I don’t understand how it’s going to be cost-competitive in any way, anytime soon.”

Not much “green” today
Gallagher’s views echo the findings of a major report on green hydrogen published by the International Renewable Energy Agency (Irena) in September, which warned that the fuel “should not be considered a panacea.”

“A hydrogen-based energy transition will not happen overnight,” Irena’s report states. “Hydrogen will likely trail other strategies such as electrification of end-use sectors, and its use will target specific applications. The need for a dedicated new supply infrastructure may limit hydrogen use.”

Despite the challenges, many are bullish on green hydrogen’s growth prospects.

In research published last month, Wood Mackenzie said more than 3.2 gigawatts of green hydrogen electrolyzer capacity might be deployed between now and 2025, a 1,272 percent increase on the 253 megawatts installed from 2000 to the end of 2019.

“The large increase in the 2019-2025 period is partially due to the nascency of the market,” Gallagher said. “But aggressive targets in East Asia and increased interest from major international stakeholders will drive deployment in the near term.”

Green hydrogen is produced when renewable power is used in the electrolysis process. The resulting hydrogen can be used later to return electricity to the grid via a fuel cell.

At present, around 99 percent of the roughly 130 million tons of hydrogen a year used for industrial processes — mostly oil refining and ammonia production — is made using coal or lignite gasification processes, or steam methane reformation.

The hydrogen industry is looking to move away from these carbon-intensive production methods, either by pairing steam methane reformation with carbon capture and storage or by using renewable energy to power water electrolysis.

Neither option is cheap, though. And the first one, which yields what’s called “blue” hydrogen, is not inherently carbon-free, Irena noted.

“Development of blue hydrogen as a transition solution also faces challenges in terms of production upscaling and supply logistics,” said the agency.

On the other hand, the cost of green hydrogen looks set to fall as electrolyzer production ramps up and renewable energies get cheaper.

As a result of these changing dynamics, Wood Mackenzie expects green hydrogen production to be competitive with gasification and steam methane reformation by 2030 in Australia, Germany and Japan.

Playing the heating card
Given that current production methods account for around 2.5 percent of all global carbon emissions, once renewable-energy-based electrolysis becomes competitive, “[green] hydrogen will be used to replace [other forms of] hydrogen,” said Gallagher.

Beyond that, green hydrogen’s fortunes will likely be tied to how efficient its production and usage can become.

Neil Crumpton, a U.K. energy consultant and former chair of the green hydrogen advocacy group called Planet Hydrogen, said next-generation electrolyzers might be able to achieve a near 80 percent conversion efficiency.

This could bring up green hydrogen’s round-trip efficiency for electricity production to between 45 percent and 50 percent depending on the type of fuel cell, turbine or gas engine used to deliver power to the grid.

The efficiency could be higher if hydrogen were used for heating instead of electricity production. “All the thermal energy could be available for heating,” said Crumpton. “The electrolyzer’s reject heat could also be utilized to heat buildings.”

The wide range of possible uses for green hydrogen means that efficient and cost-effective production could be a boon for countries where high levels of renewable energy generation are already leading to significant amounts of curtailment.

Hydrogen can be transported by ship, so it could release “otherwise stranded renewable energy resources” in places such as Australia, said Crumpton. “In a well-designed system with timely deployment of transmission lines, there would be zero curtailment necessary,” he said.

“All the electricity generated would either meet consumer demand [or be sent] to electrolyzers.”

This is a vision that has seduced countries such as China and Germany, along with companies the size of Shell and BP.

By Otegbola Olusegun Sunday

China is recognized as the undisputable global leader in renewable energy expansion, adding new projects to the grid almost as fast as the rest of the world combined last year.

A massive wave of permits for new coal-fired capacity poses a significant challenge to the country’s climate goals, with Beijing seen as “the glaring exception to the ongoing global decline in coal plant development.”

“Getting China’s emissions to peak has an indispensable role in peaking and declining global emissions — and the success of the overall global effort,” said Lauri Myllyvirta, lead analyst at CREA.

China is recognized as the undisputable global leader in renewable energy expansion.

China is recognized as the undisputable global leader in renewable energy expansion.

China is making rapid progress in scaling up clean energy, tentatively boosting hopes that the world’s largest carbon emitter could soon start to curb greenhouse gas pollution.

A massive wave of permits for new coal-fired capacity poses a significant challenge to the country’s climate goals, with Beijing seen as “the glaring exception to the ongoing global decline in coal plant development,” according to the Global Energy Monitor.

Research from the Center for Research on Energy and Clean Air and GEM published late last month showed China approved the highest number of new coal-fired plants since 2015 last year.

Beijing authorized 106 gigawatts of new coal power capacity in 2022, four times higher than a year earlier and the equivalent of 100 large-fired power plants, the research said.

The extraordinary speed at which China approved the projects was thought to have been driven by energy security considerations, namely electricity shortages following a historic drought and heatwave last summer.

The major additions of new coal-fired capacity may not necessarily mean that carbon emissions from the power sector will increase in China, CREA and GEM analysts said, particularly given the country’s rapid progress in scaling up clean energy.

China was found to have permitted 106 gigawatts of new coal power capacity in 2022, four times higher than a year earlier and the equivalent of 100 large-fired power plants.

China is recognized as the undisputable global leader in renewable energy expansion, adding new projects to the grid almost as fast as the rest of the world combined in 2022.

The build-out comes as part of the government’s strategy to cut its energy intensity and reach peak emissions “in a well-planned and phased way.”

“When we look around the world today, we can firmly see that the energy transition is in progress,” said Mike Hemsley, deputy director at the Energy Transitions Commission think tank.

“China is building renewables at such a staggering rate [that] it is said to outperform the targets they have set themselves,” Hemsley said at International Energy Week in London last week. He added that around 50% of all renewables built every year were built in China.

“To put that into context, we’ve heard the really admirable goal of Masdar to build 100 gigawatts of renewables by 2030 [but] China every year is building around 75 gigawatts of wind and in excess 100 gigawatts of solar every year,” Hemsley said. Masdar is the UAE’s state-owned renewables developer.

On its current trajectory, Hemsley said that Beijing is on track to reach 1,800 gigawatts of total renewables by 2030. That would be 50% higher than Chinese President Xi Jinping’s target of 1,200 gigawatts of total renewables by the end of the decade.

“The implications of that being [that] they will outperform their Nationally Determined Contribution, and they are likely to peak emissions way before 2030, some say around 2025 [or] 2026,” Hemsley said, describing this as “really positive news.”

‘A hot, still summer evening is the worry’
The International Energy Agency said earlier this month that, while still rising, global carbon emissions may at least be reaching a plateau.

Energy-related carbon emissions added less than 1% in 2022 to a new high of more than 36.8 billion tons. The increase was less than expected, as renewables helped limit the impact of a global rise in coal and oil consumption. Comparatively, global emissions from energy gained by 6% in 2021.

China’s emissions, the IEA said, were broadly flat in 2022, as Covid-19 measures and declining construction activity led to weaker economic growth.

“Getting China’s emissions to peak has an indispensable role in peaking and declining global emissions — and the success of the overall global effort,” said Lauri Myllyvirta, lead analyst at CREA.

In 2020, China’s Xi announced plans for the world’s second-largest economy to strive for peak carbon emissions in 2030 and for carbon neutrality by 2060.

Myllyvirta told CNBC via telephone that, depending on one’s perspective, China’s climate targets could either be seen as flexible or as lacking in ambition, noting it is important to keep in mind that they allow for a “huge range of outcomes.”

“The grid planners believe that there are going to be some hours or days or weeks during the summer [when] they are going to need more coal-fired power plants,” Myllyvirta said.

China’s power system remains dependent on coal, the world’s dirtiest fossil fuel, to meet electricity peak loads and to manage the variability of demand and of clean power supply.

Burning fossil fuels, such as coal, oil and gas, is the chief driver of the climate crisis.

“A hot, still summer evening is the worry. Where are [they] going to get enough power to keep the lights on? That’s why they think they need more coal-fired power plants, because that’s traditionally the way they’ve met the demand in that situation,” Myllyvirta said.

If China is going to meet its climate commitments — as CREA expects — then the think tank says that the country’s new coal power plants will “end up as short-lived and under-utilized malinvestments.”

By Adepoju Omolara Oluwafunke

Today, the global consensus is that the world is in a climate crisis. Consequently, the world needs to transition from fossil fuels to renewable energy sources. Burning of fossil fuels has been confirmed to have largely contributed to global warming and climate change. The world agreed and pledged that emission from fossil fuels had to be reduced and that renewable and clean energy resources shall be promoted as replacement.

As a result of the campaigns against the burning of fossil fuel, some financial institutions decided not to finance new oil and gas projects. Last year for instance, HSBC, Europe’s largest bank, announced it will stop financing new oil and gas projects.

HSBC said it made the decision following consultation with leading scientific and international bodies who had estimated that current oil and gas fields would meet global demand in 2050. However, it went on to say that it will continue to keep its investments which are already in oil gas fields as it “recognizes that fossil fuels, especially natural gas, have a role to play in the transition, even though that role will continue to diminish.”

But, recent developments in Europe and the US are sending mixed messages to the world. It appears that major oil and gas companies, and even countries in these jurisdictions, are reneging on their carbon emission pledges, in which they had the target of 2050 to achieve net zero carbon emissions.

Following the Russian invasion of Ukraine, a visible shift emerged from the horizon. The war triggered a global energy crisis and appeared to have shifted the world’s attention from emphasis on renewable energy sources again towards fossil fuels in the name of energy security. The Russian war has thrown up new challenges leading to green energy policies and plans reversals, albeit temporarily.

The UK and parts of Europe began to open up coal mines, which had been closed years ago. These mines were closed in the quest to reduce the emissions of carbon dioxide and other greenhouse gases. Oil and gas companies also started sending mixed messages.

ExxonMobil is currently increasing oil and gas production in Guyana. Norway’s Equinor, an oil and gas company, has announced its first commercial discovery offshore Norway this year. The US has sold more LNG to Europe in 2022 than most traditional suppliers, including Nigeria. The UK has granted new exploration licenses to oil and gas industry players.

Interestingly, the mixed messages cannot be more pronounced than in the UK itself, going by a recent BBC report. The Scottish government has decided that there will be no new oil and gas exploration, thereby reversing their former position; and Scotland’s draft energy strategy supports the fastest possible just transition away from oil and gas.

Meanwhile, the UK government’s position is different. The published strategy has in its plans, a fresh round of oil and gas licensing in which 100 new licenses are to be issued this year. The BBC report points out the contradiction, thus: “These are two different responses to an energy crisis from two different governments in the same jurisdiction, with one leaning into oil and gas and the other leaning away.”

British Petroleum’s (BP) new direction is another case in point. Its Energy Outlook 2023 just published, warned that both governments and industries are behind their targets to reach net zero, and without continued investment in the oil and gas sector over the next three decades, the world faces increased risks of energy price swings and shortages.

They emphasize that recent events leading to social and economic disruptions, have highlighted the need for the transition away from fossil fuels to be orderly. Yet, they forecast that fossil fuels will likely account for about 20% of primary energy even in 2050, the year most countries and companies in the world pledge to achieve net zero emissions.

Considering the depth of the conundrum which seems to tie the hands of the oil giants, the question is whether the major oil companies are hooked on oil and gas development and profits in responding to some shareholders who push for increased returns and payouts as dividends.

Ironically, some shareholders seem to speak from both sides of the mouth, as they also demand that their companies exit from fossil fuel developments..This is why, in my opinion, the world needs to face the harsh realities, and then consciously move towards net zero with eyes wide open and hands ready to work in harmonizing strange bed fellows.

According to the Wall Street Journal, the 4th quarter 2022 financial report of BP, indicated a shift away from renewable energy and a return to its primary focus in oil and gas production.

BP was disappointed with returns on its renewable energy investments and has declared that renewables profit shareholders less than fossil fuels. It now looks to trim future investments in solar and offshore wind, suggesting that the need to sustain shareholder value might slowdown the rate of adoption of renewable and climate change actions.

There is more bad news. The Global Wind Energy Council has repeatedly warned that wind development is falling far short of what is needed to reach net zero in transition from fossil fuels to green energy sources.

A UK Sunday Mail recent news report revealed the case of dozens of giant wind turbines at some Scottish Power wind farm, being powered by diesel generators after a fault developed with their power supply. The firm said it was forced to act in order to keep the turbines warm during very cold weather. This is a contradiction.

This is a glitch in wind turbine performance where a fossil fuel product came to the rescue. Both the above incident and the Global Wind Energy Council report suggest that energy transition should be orderly, as predictions based on present and future renewable technologies remain uncertain.

I hold the view that we in Nigeria must continue to develop our oil resources because we need the revenues just as the IOCs cited above are doing. We need to utilize our long standing skills and existing infrastructure which include multi-billion dollar investments in flow stations, compressor stations, pipelines and crude oil export terminals, yet we must grow renewable energy sources in sufficient scale to face the realities of the long-term danger of climate change.

As I learned more about climate change, I have come to this position. We must pay more attention to climate change issues than we have done so far. We have to invest more on renewable energy sources like solar and wind, which are already the fastest growing renewable sources worldwide.

Meanwhile, some cheering news broke in the last week. The Nigerian Gas Flare Commercialization Programme, which aims to reduce gas flaring, announced two or three years ago is slowly taking off. If successfully implemented, this will certainly reduce our carbon emissions.

The federal government has also announced the award of the multi billion Naira Oloibiri Museum and Research Centre. One hopes that the museum will not only focus on our oil and gas history, but also be a research centre for the development of renewable energy resources and for decarbonisation of our oil and gas operations.

Nigeria cannot afford to create agencies duplicating actions on renewable and climate change. Perhaps the Energy Commission of Nigeria should vigourously coordinate the national effort in energy transition projects.

The Energy Commission of Nigeria is the apex government organ empowered to carry out overall energy sector planning and policy implementation, promote the diversification of the energy resources through the development and optimal utilization of all, including the introduction of new and alternative energy resources like solar, wind, biomass and nuclear energy. Its moment has arrived.

In concluding, according to a UK Daily Express report, a BP shareholder was quoted as saying that “as we run up the new system of renewables, we do not run down the old system too aggressively. It is a transition, not a step change.” I agree entirely with this view.

The world needs an orderly transition away from fossil fuels, because social and economic disruptions, such as wars and supply chain uncertainties, including demand and supply of rare metals required for renewables, remain unpredictable.

For all these reasons, projections on energy transition remain difficult. We in Nigeria must survive and exist while at the same time dealing with issues of energy transition and climate change.

By Adepoju Omolara Oluwafunke

Amid a backdrop of increasing commodity prices, investors are optimistic that the oil and gas (O&G) industry can continue its recent streak of strong short-term shareholder returns. Yet they also want leadership teams in the industry to think through value creation during the looming energy transition to more environmentally sustainable options.

Those are the key findings from a recent survey of 250 institutional investors in the O&G industry conducted by BCG’s Center for Energy Impact. (A similar analysis was conducted in 2020.)

Survey respondents reflect a range of geographic markets, investment styles, and areas of focus in the O&G value chain.

Strong Optimism in the Near Term
Despite the global energy crisis, energy company stocks are surging—up 50% year to date through late October 2021—on the back of high commodity prices. Our survey results show that investors expect prices to remain robust.

Approximately 70% of respondents expect oil prices to remain above $60 per barrel through 2024. That is significantly higher than reported in last year’s survey, in which the majority of investors projected an oil price between $40 and $60 per barrel.

Notably, investors are just as optimistic about natural gas; 85% agree that it will play a critical role as a bridge fuel between traditional hydrocarbons and renewable energy sources to help the world decarbonize, and 70% want O&G companies to pursue growth in natural gas. For management teams seeking some clarity about how natural gas fits into their portfolios, these results are a clear signal of growing support for continued investment as part of longer-term capital allocation strategies.

The optimism regarding commodity prices translates into total shareholder return (TSR). Roughly 60% of investors expect a continued recovery in TSR over the next two years. Most respondents (68%) believe that to meet that expectation, O&G companies need to maintain strong capital discipline. They also need to focus on profitability over the next three to five years (according to 60% of investors).

And, critically, these firms need to maintain or increase their payouts to investors, primarily through dividends but also through buybacks. Regardless of whether oil and gas prices are high or low, maintaining dividends and growing the top line remain central elements of Big Oil’s value proposition for shareholders. In our findings, more than 80% of investors said that it was “somewhat” or “extremely important” for companies to maintain or grow their investor payouts.

Creating Value in a Low-Carbon Future
If short-term sentiment is positive, the longer-term feeling among investors is decidedly mixed because of increased attention on environmental sustainability.

Nearly two-thirds of investors say that peak oil demand will occur by 2030—a slight increase from last year’s estimates. Only 30% think that O&G stocks will take on an increasing role in their portfolios in the next decade, and nearly 60% feel pressure from their clients to divest their fossil-fuel investments.

In 2020’s survey, we highlighted the potential for increased shareholder activism in the sector. That has only accelerated in 2021. Investors continue to seek clarity regarding emissions reduction in the industry, along with a clear strategy for the energy transition. The pressure on the industry will likely grow; only 39% of respondents currently factor climate risk into their valuations of O&G companies, but another 40% say they plan to follow suit.

Given the growing pressure, investors believe that companies need to take several steps:

Set and meet emissions-reduction targets (cited by 80% of investors).
Invest in clean energy to enhance their long-term value propositions (cited by 82% of investors).

Collaborate beyond the O&G sector to set cross-industry standards regarding emissions targets (cited by 73% of investors).

There is less agreement on the types of targets that should be set, but over 50% of respondents want to see net-zero targets established for Scope 1 and Scope 2 emissions (which reflect a company’s internal operations and the energy it consumes to run those operations, respectively). And 59% think Scope 3 emissions, which encompass the upstream and downstream value chain, should be addressed.

More broadly, 80% of investors want clarity on companies’ plans for the energy transition. Most acknowledge that O&G companies have taken some initial steps to improve their environmental performance.

Yet those measures, while noteworthy, will not be enough. Investors also want to see results—hitting emissions reduction targets and showing EBITDA growth from companies’ low-carbon businesses in the next three years.

Among specific types of low-carbon initiatives, investors are more likely to see the value proposition in accessible electricity sector segments like renewable power generation and battery storage. In contrast, emerging technologies—carbon capture, advanced mobility solutions (such as car sharing and rapid-charging stations), and hydrogen production among them—are seen as far less certain in terms of value creation.

As a result, O&G companies upping their investments in these areas may need to communicate more directly with external investors about the business case for making such moves and how the technologies fit into overall portfolios.

Given the level of long-term uncertainty in the industry, the current period of high oil and gas prices and strong TSR gives companies a critical window to make changes. Our survey data gives management teams an indication of what investors believe is the right course for O&G companies today.

By Otegbola Olusegun Sunday

Oil and gas upstream capital expenditures increased by 39% in 2022 to $499 billion, the highest level since 2014 and the largest year-on-year gain in history.

Higher costs primarily drive the increase in investment, but activity has also started to recover. The global rig count is up 22% from a year ago but remains 10% below 2019 levels.

Annual upstream investment will need to increase from $499 billion in 2022 to $640 billion in 2030 to ensure adequate supplies. This estimate for 2030 is 18% higher than we assessed a year ago primarily because of rising costs. A cumulative $4.9 trillion will be needed between 2023 and 2030 to meet market needs and prevent a supply shortfall, even if demand growth slows toward a plateau.

The major constraint on near-term investment levels has shifted from capital availability to capital allocation. Oil and gas E&Ps are experiencing record profits. While companies prioritize returns to shareholders, share buybacks, and debt repayment, they still have ample free cash flow that could jump-start upstream investment. The question is now, will companies re-invest, and if so, where?

Near-term economic headwinds weigh heavily on markets and investors. If the world enters a recession in 2023, depending on the duration and depth, it is possible that oil demand growth could remain below trend in the next couple of years, potentially extending the post-pandemic demand stall to five years.

Once economic activity recovers, it will likely be less oil demand-intensive than it would have been due to fuel switching, EV penetration, efficiency improvements, and accelerated climate policies. The near-term uncertainty of demand and the potential medium-to-long-term consequences add to investment hurdles and deterrents.

However, it also provides a valuable opportunity for upstream investments to catch supply up with demand.

Energy security has re-emerged as a politically strategic imperative. This has led to increased government interventionism and an important shift away from an energy abundance mindset.

Governments and investors can use this as both a warning and an opportunity. The cascading energy crises serve as a warning to the economic turmoil caused by high, volatile energy prices and it is an opportunity to ensure and secure adequate investment for the future.
Russian production is a big wildcard for the medium-term.

There is enormous uncertainty concerning the extent of Russian production losses. Russian production levels depend not only on what sanctions allow and what is technically feasible but also on Russian policy.

This decade’s need for investment and new upstream projects will depend on how much Russia produces and invests. This report assumes Russian production will decline by 1.1 million barrels per day in 2023 to 9.4 million barrels per day and then plateau at this level through the rest of the decade.

The current energy price volatility harms consumers, investors, businesses, and governments. Adequate investment is needed for stable markets now and in the future. If investment falls short, high-prices and high-volatility could become the new standard.

Underinvestment threatens to undermine energy security in the short and medium-term and it can also stall progress on climate goals by increasing reliance on more carbon-intensive options in the short-term. The vicious cycle of volatility and investment remains a key risk in the coming decade, with high price volatility deterring investment and lagging investment potentially fueling volatility.

The energy sector and policymakers can prepare and help mitigate negative impacts by (1) increasing producer-consumer dialogue; (2) bolstering inventories; (3) providing regulatory and policy certainty; (4) supporting long-term contracts; (5) de-risking investments; (6) basing policies on realistic energy demand scenarios; and (7) increasing market transparency.