Soaring fuel prices; rising inflation; supply chain constraints; the urgent need to hasten the energy sector’s transition to net-zero emissions; and the Russian invasion of Ukraine have created a potent mix of challenges and incentives for energy investors.
In the International Energy Agency ’s (IEA) latest investment report, ‘World Energy Investment 2022’, the organisation examines how these challenges have shifted the energy landscape, following previous reports that have pointed out the shortcoming of energy investments and their contribution to the energy crisis we are in today.
‘World Energy Investment 2019’, for example, stated: “The current market and policy signals are not incentivising the major reallocation of capital to low-carbon power and efficiency that would align with a sustainable energy future. In the absence of such a shift, there is a growing possibility that investment in fuel supply will also fall short of what is needed to satisfy growing demand.”
Furthermore, the compounded consequences of the Covid-19 pandemic and the subsequent economic downturn have pushed millions of people towards energy poverty, all of which have caused investment in global energy to slow down even more. We dive into the latest report to assess the state of the market.
What does energy investment look like in 2022?
Despite sky-high fuel prices providing historic profits for suppliers – the IEA expects net revenue for the world’s oil and gas producers to double to an unprecedented $4tn – “investment in oil, gas, coal, and low-carbon fuel supply is the only area that, in aggregate, remains below the levels seen prior to the pandemic in 2019”.
The organisation’s report states that almost half of the additional $200bn in capital investment planned in 2022 is projected to be consumed by higher costs rather than adding energy supply capacity or savings.
Prices are increasing as a result of diverse supply chain challenges, tight labour and service markets, and the influence of higher energy prices on vital construction commodities such as steel and cement. High prices are driving some countries to increase their investment in fossil fuels to secure and diversify their supply sources.
The long-term solutions to today’s dilemma, however, lie in hastening the clean energy transition through more investment in efficiency and a variety of clean fuels.
These components are important to the EU’s REPowerEU strategy to minimise reliance on Russia. In the five years following the signing of the Paris Agreement in 2015, the yearly average growth rate in clean energy investment was just over 2%, according to the IEA. By 2020, the rate had grown to 12%, far short of what is needed to meet international climate objectives.
Clean energy investment
The EU’s Fit for 55 packages and REPowerEU plan demand 20Mt of hydrogen produced from renewable energy sources to be consumed in the EU by 2030, with half of that amount expected to be imported. The IEA estimates that a capital investment of around $600bn would be required globally to supply the additional hydrogen targeted in the REPowerEU plan, with 60% of this going to infrastructure outside the EU.
In 2021, the oil and gas businesses included in the report invested roughly $10bn in clean energy technology, more than doubling 2020 levels but still accounting for less than 4% of overall upstream spending. These firms’ investment is on course to nearly quadruple again in 2022, bringing clean energy to just over 5% of upstream capital investment.
The supermajors (ExxonMobil, Chevron , ConocoPhillips , BP , Shell , Total, and Eni ) and Equinor have spearheaded this expansion, accounting for around 90% of overall clean energy expenditure by the oil and gas industry in 2021 and nearly all of the investment monitored so far in 2022.
Around 130 commercial-scale CO₂ storage projects were announced in 2021, across 20 countries. The idea is to capture CO2 from a variety of applications, including hydrogen and biofuel generation, which account for over half of the newly announced projects.
Six carbon capture, utilisation, and storage (CCUS) projects took final investment decisions last year, increasing investment to roughly $1.8bn in 2021. As net-zero commitments and related policies boost investor confidence, new business models have arisen in the CCUS investment landscape. Santos , the first oil and gas company to include CO2 storage resources in its annual reserves statement, is one of the numerous companies aiming for market expansion in CO2 capture, transport, or storage services.
With an increasing number of projects seeking to be operational by the mid-decade mark, capital spending on CCUS could top $40bn by 2024. Policy support will be critical to sustaining momentum beyond 2024 and converting these announcements to live projects.
Investment after the Russian invasion
Natural gas prices in Europe and coal prices globally have reached all-time highs in 2022, while oil prices have reached levels not seen since 2014. As Europe in particular scrambles to obtain non-Russian supplies, the conventional cyclical investment response to high fossil fuel prices has now been overlaid with critical energy security needs.
While near-term energy security imperatives may act as a catalyst for some aspects of the energy transition, this alignment is far from comprehensive or automatic. This policy effort to diversify supply indicates a near-term investment opportunity for some non-Russian fossil fuel producers, particularly those with the capacity to deliver substantial quantities to market in a short period.
Investment in low-emission fuels, particularly gases, is projected to gain traction as a result of a powerful combination of rising fuel prices and increased governmental assistance.
In 2021, global investment in biogas was around $7bn, a 30% increase over 2020 levels. The majority of this came from new biomethane investment in the EU, and growth is expected to continue through 2022. The European Commission announced a goal of doubling biomethane output by the end of 2022, from the current level of roughly three billion cubic metres (bcm) per year, and aims to eventually reach 35bcm by 2030.
Elsewhere, Russian oil and gas companies had signalled significant year-on-year increases in budget allocation for 2022 leading up to the war, but these are now being reconsidered. Several initiatives to develop LNG liquefaction and construct steam crackers have been postponed or cancelled. Banks based in Europe and North America have withdrawn, reducing the availability of credit, while oilfield service and foreign oil corporations have reduced their activities or indicated that no new investments will be made.
Have investment trends paved the way for clean energy?
Global net income from oil and gas production is expected to nearly double in 2022 to almost $4tn, representing an unparalleled windfall for oil and gas corporations. If the sector spent the additional $2tn received in 2022 on low-emission fuels, this would fund all of the investment required in low-emission fuels under the IEA’s net-zero emissions scenario for the rest of the decade.
Other pressures on the oil and gas industry’s earnings include supporting government spending; returning cash to shareholders; reinvesting capital in oil and gas ventures, and taking near-term initiatives to ensure supply security. Strong policy signals are required to balance these needs with investment in low-emission fuels, particularly when capital-intensive, long-lived infrastructure is required.
Low gasoline prices in 2020 allowed overhauling of fossil fuel subsidies, but the uncertain economic recovery has put policy intervention to a halt. Total oil and gas subsidies actually increased in 2021, in tandem with growing energy costs and recovering energy use.
Much higher costs in 2022, along with adverse threats to global development, have made the chances for subsidy reform even more difficult, despite providing longer-term dividends in the form of increased energy efficiency and additional funds for investment in more productive areas of the economy.