Oil & gas: what if we got out now?

Benjamin LOUVET, Commodities Fund Manager - OFI AM
Benjamin LOUVET
Commodities Fund Manager

How much can the energy transition be accelerated? Is an immediate exit from fossil fuels even possible?

An unprecedented energy transition

Throughout history, there has never been an outright energy transition. New sources of energy have always overlapped the old ones while never actually laying the foundation of a profound transformation.
Biomass, one of the first forms of energy that people (mainly wood, to provide heating) gave way to coal and then oil & gas, a fossil fuel that accounts for more than 80% of the world’s primary energy.

An immediate exit from fossil fuels?

Some voices have called for an immediate exit from fossil fuels to save our planet from environmental disaster. Is this even technically possible? And, if so, what impact would that have on our economy and lifestyles, keeping mind that 95% of all mobility (automobiles, lorries, etc.) run on oil & gas?

The focus is on transition, not disruption, but also on the strategy for achieving the transition. Many studies have been released on this topic recently by the World Bank, the International Energy Agency (IEA) and the European Union.
An outright cut-off would bring many sectors of the economy to an immediate halt, including all logistics services. But this is not the choice that is being made today.

Fossil fuel substitutes exist but some have disadvantages, particularly regarding the large amounts of metals necessary for producing renewable energy. There are many concerns today on whether we have sufficient resources to switch from “all oil” to “all renewables”. What’s more, a geostrategic issue that is too often ignored is that we could become dependent on metal producers instead of oil monarchies. For example, the batteries needed for electric mobility contain cobalt, a metal that is produced mainly in the Democratic Republic of Congo in conditions that are not always optimum from a societal view, and 80% of which is then refined in China.

Some often criticise the pollution caused by rare earths, but this is irrelevant, as renewable energies don’t use any (Rhône-Poulenc refined 50% of the world’s rare earths in the 1980s).
So current fossil-fuel substitutes would not take us from dependence on Gulf monarchies (oil) to dependence on metal producers.

Electric vehicles: the solution?

The current global production capacity of batteries for electric vehicles is only enough to equip 4 to 5 million vehicles annually, while 90 to 100 million vehicles are sold annually worldwide. This doesn’t add up, and it will take time to raise production capacity (building battery-production plants).

Coal: a source of energy that should be banned. And yet…

In light of the above, some things should be obvious, but aren’t. We can generate electricity in sufficient quantities without coal, which is the biggest polluter of all the fossil fuels. And yet, even today, more than 170 coal-fired power plans are under construction worldwide, and Japan has just decided to build 22 of them over the next five years to close out its nuclear era.

Phasing out oil

Oil is a more challenging issue, as some sectors of the economy are not yet able to do without it. Even so, it’s time to plan the transition out of oil.
With this in mind, the IEA has drawn up a scenario, the Sustainable Development Scenario (SDS), which defines what trajectory oil consumption must follow to achieve a sustainable world in 2050. The figures are clear: oil consumption must fall by 11% from today to 2030 and by 24% from 2030 to 2040. Some measures can be taken to achieve this objective.
Non-conventional petroleum, such as shale oil and oil sands in Canada, are currently the most “criticisable”, as they pollute the most. It currently accounts for 12% of global oil output. Cutting off financing of it would therefore help meet the IEA’s first-stage goal.

But investments in the oil sector are not sufficient to produce the oil we need, even under the IEA’s scenario. That’s why we cannot cut off oil financing completely.

Just because we can’t do without doesn’t mean we can’t do better.

So the focus of investments should be solely those fields where oil can be extracted as cleanly possible and do the least amount of harm to the planet, i.e., conventionnel oil, in secure conditions and with limited flaring. When oil is extracted, it often rises to the surface, along with natural gas that many companies burn because of the low prices it fetches. This is called “flaring” and produces large quantities of CO2. And yet, that gas could be captured and reinjected into the grid, but this is expensive and, for the moment, choices must be made.

According to the IEA, to make a true transition possible and curtail global warming, oil consumption must be reduced gradually towards meeting a “zero oil” target in 2050. This essential goal will help protect the planet and its biodiversity.
Such a transition will also help limit the risks to investors. For, if oil goes away completely, oil fields will become stranded assets, with a negative impact on investment portfolios.

The transition does offer extraordinary opportunities, in creating new energies and new companies around renewable energies and solutions for switching to a clean economy (based on wind, solar, hydrogen, etc.).

This content was originally published in French on the Boursorama website as part of the program "Ça vaut le coup !"

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