Energy leaders weigh in on the state of play for the global energy transition

How far have we really come?

A central purpose of this Congress was to facilitate discussion among industry leaders for what is in store, or even possible, in the unfolding energy transition³. With the starting assumption that “decarbonization is necessary”, the participants at the Congress endeavoured to define the current state of decarbonization efforts and develop a better understanding of the challenges and path forward for industry.

One of the reccuring sentiments emerging from panelists was disagreement, not with respect to whether the energy transition needed to happen, but with respect to whether it had started, given the practical reality that worldwide demand for fossil fuels only continues to grow.

And while the International Energy Agency (IEA) stated in September that the global demand for oil, gas and coal will reach its highest level sometime prior to 2030 before starting to decline⁴, the CEOs of Exxon and Aramco, speaking on a panel at the Congress, openly disagreed with the assumptions made by the IEA in such projection, implying the projection was unrealistic and that the timeline for peak oil is, in their view, still uncertain⁵. This view has been echoed by certain energy analysts who argue that any forecast of peak oil this decade fails to adequately account for the increased demand that will arise from developing economies outside of the West, such as Africa, China and India, and the growing worldwide population⁶.

The energy security factor

Other executives also warned that overestimating the pace of the energy transition can jeopardize energy security, particularly in developing nations where clean energy solutions may be too expensive to be feasible⁷. This warning was echoed by African industry representatives who expressed concerns with developing nations being asked to achieve the same clean energy goals as developed nations, pointing out the inherent irony in applying the term “energy transition” to their regions, with one representative stating that “if 800 million Africans do not have access to basic modern energy, what are we transitioning to?”⁸

Energy security discussions also arose in the context of volatility in global energy markets and energy security threats produced by the Russian-Ukrainian war⁹, which may be intensified in the coming weeks by the outbreak of the Israel-Hamas war¹⁰.

The political risk consultancy firm Eurasia Group cautioned that energy security threats may ultimately slow down, or even set back, the energy transition. Their analysts argued that disruption to energy flows caused by energy security threats may cause governments to reallocate capital and alter political priorities in order to protect their own energy supply, leading to incohesive energy investment across global markets. They suggest “a probable consequence is that insufficient investment is deployed to scale transition technologies and projects, and that capital which is deployed ends up in a multitude of sectors that are built on differing premises”¹¹.

New technologies and solutions

While the foregoing industry commentary underscores the complex challenges of defining the path and timeline for the energy transition, the myriad of technologies showcased at the Congress illustrate that this lack of clarity has not stopped innovation of new carbon-combatting technologies.

Pathways Alliance, a coalition of six of Canada’s largest oil sands companies, presented their plan to make their collective operations net zero by 2050. The first phase, to be achieved by 2030, involves a $16.5 billion investment into a proposed carbon capture and storage network, which is stated to have the potential to capture 10-12 million tonnes of CO₂ per year¹². Pathways Alliance is currently one of the 25 potential sequestration hub proposals being actively considered for development by the Alberta government¹³. We have previously discussed existing Canadian CCUS projects, as well as LNG and hydrogen projects, in a prior Torys bulletin.

A chief executive of the Spanish oil major Repsol, when speaking on a panel that included a chief executive of WestJet, highlighted the role of renewable molecules in decarbonizing heavy industry and Repsol’s plan to transform their core production focus from conventional oil to renewable fuels. “People say decarbonizing means electrifying [but] … when it comes to maritime, heavy trucks, steelmakers, paper mills, fertilisers and chemicals plants — these [sectors] are not going to electrify. But we can decarbonise liquids through renewable fuels"¹⁴.

Currently, Repsol produces renewable fuels from waste such as used cooking oil; however, second generation renewable fuels will be produced from raw materials such as agricultural, food industry and industrial waste. They are also developing capacity to produce synthetic liquid fuels (colloquially, “e-fuels”) using refined carbon dioxide and hydrogen¹⁵.

Other examples of innovative technologies featured at the Congress included an artificial intelligence system trained to identify methane leaks, and technology being developed to remove and store sulphur contained in shipping emissions¹⁶.

Sustainable development and investing paradox

We have recently discussed the role that corporate environmental, social and governance (ESG) plays in climate change and profitability, highlighting that companies which score highly in ESG factors that are material to their industry have been found to outperform their peers by a statistical advantage. Recent research now also suggests that the dominant sustainable investing strategy (i.e., investing in companies that are perceived to be “green” (positive environmental impact) and avoiding or divesting investments in companies that are perceived to be “brown” (negative environmental impact)) may actually be counterproductive relative to the energy transition goal, in that directing capital away from brown investments may actually make brown firms more brown without making green firms more green¹⁷.

The authors of this study also argue that exclusion of brown-sector firms from sustainable portfolios may have adverse consequences on meaningful development of green technology, as, while investors acknowledge the potential upside in incentivizing green technology, the bulk of sustainable investment is currently into industries that are already green (such as insurance, healthcare and financial services), which have a much lower likelihood of developing impactful green technology¹⁸.

In speaking at the Congress, Exxon’s CEO reiterated the importance of this technology development: “people underestimate the size of the global energy system and the challenge of moving from what we have today … to a new energy system… [w]e don’t have the technology today to solve this problem in an affordable way”¹⁹. The Exxon CEO also emphasized the importance of government support, whether in the form of financial incentives for technology development, the development of carbon markets, or regulatory improvements to fast-track project construction²⁰.

Overall, the Congress provided a forum to advance the energy discussion among industry leaders and further illustrated the need for a better coordinated approach to decarbonization efforts on a global scale among governments, industry, investors and the public.

In this Torys Quarterly we discuss in greater detail the current regulatory and legal landscape affecting energy industry participants, including an analysis of recent green tax incentives and the Supreme Court of Canada’s recent ruling on federal-provincial government dynamics in environmental approval for projects, including projects in the energy space.