Challenges to the transition

This new edition of our Energy Transition Report paints a generally positive picture of the prospects for energy transition and the expanding role of the O&G majors in that process.

However, there are many challenges to future investment in the energy transition. Some are longstanding; others are a result of the impact of the pandemic on the O&G majors and the wider economy.

We highlight here some of the most important:

  • Changing regulation and higher standards – O&G companies will need to be flexible and continue to adapt quickly to rapid change in the regulatory environment surrounding energy transition. Increasing pressure from wider society and the costs that results from more stringent expectations or compliance regulations could also put strain on companies’ ability to remain competitive.
  • Financial weakness – lower profitability for O&G majors and lower asset valuations of fossil fuel companies as they write down fossil fuel assets on balance sheets could hamper investment in renewables.
  • Competition from incumbents – for example, electricity companies have more expertise in their own sector than O&G entrants, which have to adapt to a different energy model, invest in technology to lower consumer costs, and try to develop a competitive advantage.
  • Uncertainty around technology and returns – the speed of technological change can create uncertainty about which technology to invest in, given questions on the attractiveness of returns. O&G companies need to be convinced that there will be a market for new technologies that are currently still expensive even when proven. But on past experience (for example with solar and offshore wind) there is often a tipping point at which the technology suddenly goes mainstream.
  • Energy utilities challenge – there are challenges in investing in new energy utilities, including the need to deal with retail users, a skill-set that the classic O&G majors lack.
  • Oil and gas will still play a big role – energy transition is a slow process, and oil and gas will continue to be the dominant energy source for some time. Furthermore, as economies recover from the Covid pandemic, demand for oil and gas is likely to recover – at least in the short term – perhaps reducing the attractiveness of renewable energy projects.
  • Delays due to Covid 19 – sustained economic uncertainty due to a prolonged pandemic and (potentially) vaccine ineffectiveness could weigh on renewable energy investment, potentially delaying or stalling new investment in renewables by the O&G majors.
  • Balance sheet stress – Covid has left O&G majors with rising levels of debt, which could also put pressure on plans to invest more in clean energy.

Other external factors could also undermine firms’ energy transition

Source: Capital Economist