One question, three experts: the energy transition

Question: Will COVID-19 accelerate or decelerate the energy transition?

Plummeting oil and stock prices. Lockdowns and social distancing. Increasing financial strain. The coronavirus pandemic, in a matter of months, changed the world as we knew it. As people, places and markets emerge from lockdown, time will only tell how much of the crisis-based change will be permanent. And what might still be in store for us.

Prior to COVID-19, sustainability had emerged as the energy sector’s primary focus. Small and large business sought to invest in people, projects and technologies that would move the energy transition needle forward.

But now what?

We asked three of our experts to weigh in.

Answer: Both... let me explain

Christine Baine, Vice President, Americas

COVID-19 is giving us a view of what a reduced demand world looks like. This view shows that a large part of our economy runs on discretionary demand. It’s incredible to consider a world that could run on 90% fewer airline seats – at least for a short time.

There are three things coming together in this post-pandemic world:
1.   the urgent need for economic stability
2.   public demand for renewables
3.   supply and demand economics 

Post-pandemic government funding

Government policies and incentives have emerged to accelerate vital economic development. Some of these plans are designed to support the energy transition. The problem is, it’s hard to create the same volume of new jobs when investing in newer spaces. So, governments are focusing on re-establishing jobs in sectors where they already existed to get people back to work. 

Adding to that, the economics of switching to renewables has changed. Oil shock and long-term low oil prices have presented a challenge. Renewable energy schemes are less economical compared to fossil fuel energy schemes in the short term.

It frustrates the story, right? It’ll cost you more to make the solar panels now than it would cost to keep using fossil fuels. The incentive to change is harder. 

Power to the people: public demand for an energy new normal

Enter public opinion. People are realizing we need to move ourselves away from an economy that’s so susceptible to these types of volatilities. And they’re demanding we use this as an opportunity to switch our mindset to different energy sources. This bears out in massively reduced demand. 

Pathway to an accelerated energy transition

That brings us to the real issue that the pandemic highlighted. Supply chain. There’s no shortage of toilet paper or food. The issue is distribution – getting the right thing to the right place at the right time. All while minimizing waste. 

The shorter you make your supply chain, the less energy you use. This, in turn, decreases economic dependency on our low natural gas costs, and reduces our overall carbon footprint. So COVID-19 has highlighted not only how critical supply chain is, but its role in the future of energy.

In the end, I think we’re looking at a short-term deceleration. With public scrutiny behind an acceleration. Just not at the same scale… yet. But eventually, the draw will favor acceleration.

Answer: Sustainability and profitability are not opposing concepts. Businesses in the energy sector are finding that focusing on sustainability is a strategy that leads to higher profits.

Lee Dacey, Senior Vice President, Refining 

The pandemic sideswiped businesses with crashing waves of uncertainty. Social. Financial. Regulatory. These are just a few of the dynamic levers that are making it hard for companies to create an effective business continuity plan. One size does not fit all. Adding insult to injury, there’s no clear or guaranteed end in sight to the crisis.

But from the unpredictability, emerged a couple of certainties:

• There’s a cash crisis that’s requiring businesses to reassess their strategies. They’re looking for the path of least resistance to recovery.
• The energy transition is real. There are two main camps likely to emerge in the pandemic’s wake. Those who’ll accelerate their strategies and those who’ll decelerate, not because they want to, but because they must.     

Assessing how energy transition fits into the business survival strategy

Putting it all together, we have cash strapped businesses trying to survive, recover, and remain committed to their pre-COVID-19 energy transition strategies. 

Some major oil and gas companies can and will double down. They’ll be hyper-focused and accelerate into an 'every dollar counts' energy transition strategy. A few may find themselves in survival purgatory. They’ll bide their time until the market stabilizes, and then decide how and when they’ll shift back to focusing on sustainability.

A larger group hangs in the balance. Risk factors include a crisis of funding, unsustainable business models, and/or cascading failures (like dependency on dwindling supply chains). Without some operational resiliency soul-searching, they’ll likely be forced to decelerate their energy transition strategies. 

We need to start thinking about all possible scenarios now. The energy transition is a growing global priority. It’s here to stay. But how about staying in business? 

This is what you call a bonafide stress test. The crisis has put businesses on notice. And, indirectly brought the energy transition to the fore.  Businesses will have to find ways to do more for less. They’ll have to make time to use it, wisely. Free up cash through proper capital expenditure analysis. Shift perspectives, priorities, and portfolios to minimize risks, leverage opportunities, and maximize returns.

If they can do this, they’ll emerge with a more robust, diversified and crisis-resilient strategy that also safeguards their energy transition commitments. Time will only tell. 

Answer: Accelerate. I'm seeing significant and increasing evidence for this. Let me take you through my COVID-19 journey on this question.

Tasman Graham, Senior Vice President, Energy Transition and Sustainability

At the outset of the pandemic, many people assumed that the immediate health threat and the ensuing economic hardship would result in further inaction on climate change. And I, too, was concerned that it might see a major loss of momentum, just as the call for more rapid and effective action had been reaching fever pitch. But I also hoped and wondered whether it may be a great catalyst for change. Then came the oil price rout, which led some to assume that it would draw curtains on more expensive alternative energies. 

Instead, we’ve seen a very different and growing discourse centered on sustainability, one typified by the response of the International Energy Agency (IEA) and its calls to build a more modern, resilient, and clean energy system. So now I’m growing more confident that economic hardship won’t reduce concern for sustainability but might lead to increased policy support for a job-creating energy transition. A low oil price doesn’t necessarily result in fewer renewables but could, together with low interest rates, make it easier for policymakers to introduce a price on carbon that would supercharge the transition. And with that raise revenue to help fund fiscal deficits from the COVID-19 response. 

Positive signs of energy transition acceleration

I think we’re entering a sustained phase of action, when governments and business begin to really work in concert with each other. We’ve recently seen:

• The IEA host a Clean Energy Transitions Summit in early July where many of the world’s energy and environment ministers outlined the significant action underway and the clear momentum that's building
• US presidential candidate Joe Biden announce his election promise of a $2 trillion climate plan
• South Korea committing $95 billion on green projects to boost its economy

The long but vital road to sustainability

Climate change remains a market failure that requires political leadership and action, and people need to find their voices on this. If an adequate portion of the world’s recovery money isn’t directed towards clean energies, then I fear we can kiss goodbye any hope of limiting climate change to 1.5 or even 2°C, as there will be nothing left in the tank. 

Clean energy technologies have come down the cost curve sufficiently for policy makers to be able to apply a carrot or stick to help them get over the line. And investors are now recognizing the scale of the opportunity, so we’re seeing more patient investment (like superannuation funds) and speculative investment (as we see with tech stocks) entering this space. 

From my perspective, COVID-19 is clearly presenting as the once-in-a-lifetime opportunity to shape a sustainable energy future. It’s a long road ahead, but one hell of an opportunity for Worley.

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