The Energy Transition needs to happen in an orderly fashion

Interview with Lars Eirik Nicolaisen, Senior Partner & Deputy-CEO at Rystad Energy

Rystad Energy is an independent energy research and business intelligence company providing data, tools, analytics and consultancy services to clients exposed to the energy industry across the globe. During Offshore Energy 2019 we welcomed Lars Eirik Nicolaisen, Senior Partner & Deputy-CEO as speaker to the International Energy Outlook session where he offered his views on how the oil and gas industries will develop. Later, we got the chance to speak to him in more detail.

While there are obviously several moving parts in the equation governing oil demand, we find that one of the key ones which exhibit exceptional dynamics these days is the penetration of Electric Vehicles. Transportation as a segment makes up more than 50% of oil demand and transportation by road is the largest sub-segment hereunder. This is a key arena where oil-substitution is happening, and we are for example witnessing a car-manufacturing industry who are aggressively rolling out new EV-models and that all have huge expectations for future sales of EVs. So yes, that would be the single-most important variable where we assume about 20% penetration of new car sales in 2025 to be EVs and correspondingly seeing a peak in oil demand in the late 20s. But there are other dynamics playing out also, e.g. that solar is a very competitive alternative to offsite diesel power generation.

“Natural gas will play a key role in the future”

That is absolutely correct and that is also why our peak-oil-demand scenario isn’t necessarily driven by a pursuit to tackle climate change. I mean, the penetration of EVs is more happening because the electric engine has some superior qualities compared to the ICE and because costs of key technologies (like batteries) have come far down. So, we do need a transformation of the power sector for EVs to be a good climate measure. However, with the anticipation that this will indeed happen (ref. to the fast penetration of renewables in the power sector) it does make sense to ramp up production of EVs also from a climate perspective. I would disagree that EVs are not suitable for cold climates as the current sales of EVs in (the cold country) Norway is surpassing 50% of total car sales – a global record high statistic.

Yes, this is what people oftentimes get wrong. A post-peak world needs to be seen in the light of an oil-supply that would decline some 12-15% absent any investments in upstream oil projects and wells. As such, it is not like a declining oil demand environment would mean the end of the oil value chains. We anticipate oil demand to decline much slower than the natural supply side and we call for oil prices in the ~$60 area in order to ensure enough supply to meet this declining environment.

There is no way around the fact that oil, gas and coal originate more than 80% of CO2 emissions and as such, the use of these products should be scrutinized in the mission of tackling climate change. But this needs to happen in an orderly transition and not in an overnight revolution. As such, while I acknowledge that public opinion has largely turned against the oil and gas industry, I do think that the industry itself has a job to do in order to communicate around its own acceptance of the transition and focusing on its own emission reduction measures. As such, we recognize that oil and gas companies will be key enablers in the transition towards more sustainable energy systems.

No, we cannot, and the Energy Transition needs to happen in an orderly fashion. That said, I think it is always healthy for a debate to have multiple opinions and while I don’t believe in the suggested way forward by some of the more extreme opinions, I think their voice belongs to the debate. Exploration is the most long-cycled investment you can do as an oil company and amid an outlook where oil demand is peaking (for whatever reason), it makes sense to carefully evaluate this activity. And frankly that is what is happening now – we are seeing very low levels of exploration. That said, it doesn’t mean that we should stop exploring altogether; there are still un-discovered accumulations which are more beneficial – from an economic and climate perspective – than those resources that are already found.

Well, while the optimism is certainly there among stakeholders in the renewable value chains, the sobering news about society not being on a 2C-trajectory stems from the continued rise in use of hydrocarbons and associated emissions. So, while renewables are growing rapidly from a small base, it has not been enough to balance an increasing energy demand. That said, there are still viable paths to a 2C world and while renewables are still working off a small base, there are tremendous cost reductions observed which sets the stage for a real S-curve-like takeoff for such electricity production. That, however, doesn’t solve the call for energy storage which renewables comes with. We also have to remember that most energy today is consumed as molecules by the end user and not as electricity, so the penetration of renewables (which is largely carried by electricity) also calls for a new infrastructure and technologies which enable end-users to consume this energy (like EVs).

Natural gas, the cleanest among fossil fuels, will play a key role in the energy transition. Most 2C scenarios out there rely on carbon capture and storage playing a vital role which will effectively be an enabler for natural gas to co-exist with renewables in a 2C world. Furthermore, it will play a key role in backing up the intermittent nature of renewable electricity production. Further, it can play a key role in the Hydrogen value chains which are unfolding as one measure to address the need for energy storage. The most tangible examples we have of quick and significant CO2 reductions in society stems from a substitution of coal to gas, like observed in the US.

“The energy transition is one of the most important topics of our time“

I guess they belong to a category of companies who are somewhat “married” to the offshore oil and gas value chains and have few options to further diversify. That said, while we talk about the energy transition, we also have to remember that there is a cycle unfolding in the oil and gas markets and that the offshore oil and gas value chains are likely set for a recovery during the next 2-5 years. As such, this may not be the worst place to be right now. In the longer term, however – as we have discussed, a peak oil demand scenario doesn’t mean that we will stop drilling. So, the drillers will have a role to play for a long time. A more imminent threat there is the competition against onshore shale oil from the US. In this, the drillers need to innovate in order to make offshore stay competitive.

I think offshore has a big role to play within the oil and gas value chains going forward. Through this downturn, we have seen a drastic reduction in costs – some of which has been real, structural changes. As such, the cost levels offshore is at a level where it is competitive and will be a sound place to deploy capital for oil companies. However, some of the most long-cycled investment options – like frontier exploration – will likely suffer because of the longevity that is needed by the investor (the oil company). I would place my bets on high-quality greenfield developments and on brownfield opportunities like infill and expansion programs which leverage existing infrastructure and have short time-to-market.

Yes, we have acknowledged the Energy Transition as being one of a few key mega-trends that we need to address. Therefore, we are expanding our data / research universe to cover not only the traditional Oil and Gas value chains, but also the renewables and power sectors more broadly. While our heritage is oil and gas, there is a reason we have called ourselves Rystad Energy from day one as we wanted to broaden the focus with age. For us, the time is right now, and we have invested heavily in the past few years in getting the appropriate data foundation. So, you can expect the data driven Rystad Energy approach to find its way into the broader energy discussions including the Energy Transition, emergence and opportunities in renewables, challenges associated with energy storage and the likes. The Energy Transition is among the most complex and important topics of our time: A challenge that requires new solutions and perspectives from society and politicians, the energy industry and from us as an energy knowledge house.