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The invasion of Ukraine has shocked the world and, with it, energy markets. Commodity prices have increased sharply, sending consumer prices to politically unpalatable levels. The conflict has also increased the debate around energy security, especially in Europe, where action against the Putin administration has been hobbled by the need to carry on importing Russian gas (and to a certain extent oil).

And an unlikely impact of the war in Ukraine, largely ignored because of the hostilities, was an Intergovernmental Panel on Climate Change (IPCC) report in February, which carried the starkest warning yet that global warming is causing potentially catastrophic damage to the planet. For political leaders, responding to immediate energy independence and national security concerns is likely a much bigger deal than worrying about a transition to net-zero emissions by 2050.

European governments have already called for more domestic exploration and production to curtail the need for imports and reduce the dependence on Russia. Other countries are voicing their support for this strategy, with US President Biden approving more new liquified natural gas (LNG) exports targeting Europe. What should the oil and gas sector make of this?

Options for the oil and gas industry

Non-state-owned (i.e. public or private) oil and gas companies effectively have three choices in how to respond. One is to maintain as low a profile as possible, take the profits from today’s high oil and gas prices and give a big chunk of them to shareholders as a dividend.

Another is to view the current bull market as a signal to fire up new exploration and production activities, especially focusing on advantaged gas resources that are lower down the cost curve and have lower emissions intensity. And the third is to use some of today’s windfall profits to double down on (or place their first) investments in energy transition activities such as clean hydrogen production.

These three options are not mutually exclusive, of course, and it is likely companies will weigh up their direction of travel based on their own specific circumstances. However, we believe most will opt predominantly for the first course of action. In the short term, shareholders would hardly expect them to do otherwise, particularly if they have been holding stocks in assets such as US shale, which has historically refused to produce returns.

However, it may be hard to ignore the temptation to bump up production with oil prices topping $100 a barrel, as rumours (true or not) of Shell looking to dust off plans for its abandoned Cambo oilfield demonstrate. Eni also said it could make 14 trillion cubic feet of its reserves available in the short to medium term, using methods such as infill drilling from its producing fields, as well as supplying LNG cargoes.

But rushing significant new assets into operation will take several years at least, and in the current climate of high volatility it might be hard to justify investments based on a short-term price hike. These companies are economic actors after all, and it will likely take a more sustained high oil price over and above government wishes to respond.

At the same time, insight from our Wildcat suite shows exploration strategies from the top explorers were already being adapted to the long-term realities of a changing energy market. For companies to alter these strategies, shareholders are likely to want a say, and governments would need to put significant incentives in place. It is unclear how willing they will be to do so with a climate crisis looming in the background.

An accelerated energy transition?

While the industry is being asked to do more to help, it is equally being vilified for the profits it is making in today’s environment. In the US the Democrats are pushing to impose windfall taxes on oil company revenues after it was revealed that 25 major industry players generated $205 billion between them in 2021. Similar calls have been made in the UK and windfall taxes have been imposed in several countries across the energy sector in the European Union. Also considering the climate crisis, the United Nations Secretary-General Antonio Guterres said it was “madness” to scramble for new fossil fuel reserves.

Meanwhile, the International Energy Agency has developed a suggested action plan to help nations reduce their need for oil and gas, highlighting the potential for faster-than-expected fossil fuel demand destruction.

Conversely, there are signals that the current crisis will further accelerate investment in clean energy technologies. One indication of this is the optionality being built into Germany’s plans for new LNG terminals.

“An LNG terminal that today receives gas can tomorrow be used to import green hydrogen,” said German Chancellor Olaf Scholz.

Elsewhere, nuclear energy is on the menu in a big way in London and Paris. And rising commodity prices have improved the economic case for green hydrogen above its blue and grey brethren.

But just as with developing oil and gas reserves, speeding up development of these low-carbon resources will not happen overnight. This is because some technologies are still in their infancy and require the right incentives and others, such as offshore wind, can take at least a decade to go from lease award to commissioning.

Tri again

But the big deal now for the energy transition, at least in Europe, is that it is now firmly associated with energy security, as predicted by our recent Energy Transition Now podcast guest Sally Walker. This is perhaps no bad thing.

For too long, the energy trilemma debate has focused on sustainability while potentially ignoring affordability and security. Now government decisions seem more likely to be guided by a mix of net-zero and energy security concerns, with affordability—particularly in the current climate of inflation—also in the mix.

Europe faces some difficult choices in the short term, which will impact the shape of the energy industry—and the energy transition—for years to come. Exactly how this will play out is far from certain, and much will depend on how long the current crisis persists and the permanence of changes to the world order.

But in the longer term, there is a huge opportunity to solve the energy trilemma by accelerating investment in offshore wind, hydrogen, carbon capture and similar technologies. Italy’s Eni summed up the mood in its capital markets day in March. “The war in Ukraine is forcing us to reconsider the world as we know it,” said the company.

“It is a humanitarian tragedy and has created new threats to energy security which we must meet without abandoning our ambitions for a just transition.”

The digest: this month’s key headlines

  • In its latest corporate strategy, the Austrian integrated oil, gas and chemicals company OMV has said it will reduce its oil and gas production by around 20% by 2030 and completely cease oil and gas production for energy use by 2050.
  • The Intergovernmental Panel on Climate Change has delivered its most chilling assessment yet of the capacities and limits of the natural world and human societies to adapt to climate change.
  • Shipping giant A.P. Moller-Maersk has inked partnerships with six green methanol vendors in a bid to source at least 730,000 tonnes a year of the fuel by 2025.
  • Wary investors have pulled out of the European Union emissions trading scheme following Russia’s invasion of Ukraine, leading to a carbon pricing crash.
  • China has announced a target of 200,000 tonnes of green hydrogen a year by 2025.
  • The US and Europe have announced major plans to cut reliance on Russian gas.
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