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Artillery Row

Western governments should blame themselves for the energy crisis

It is a failure of investment more than a product of war

This week Amin Nasser the CEO of Aramco (the world’s largest oil producer) stated that the world was failing to understand the root cause of the global energy crisis: that whilst it might have been exacerbated by Russia’s invasion of Ukraine it was actually a result of an “under-investment in oil and gas; alternatives not ready; and no back-up plan.”

He noted that annual investment in oil and gas had fallen from $700 billion in 2014, to just over $300 billion last year adding the kicker: “But you would not know that from the response so far.”

This is not the first time he has made such a claim. He said the same in October 2021 when he warned there would be a significant supply crunch as economies expanded post Covid shutdown. Both announcements were met with a chorus of attacks. But is he right?  

The chart below produced by Rystad energy (a leading oil and gas data analytics company) demonstrates that there has indeed been a significant collapse in global E&P investments since 2014. But is Amin Nasser right to say that this equates to underinvestment? That it is a lack of global oil & gas supply which is driving the global energy crisis?

Well a good place to find answers is in the work of The International Energy Agency (IEA) the leading global data provider on all forms of energy, which describes itself as “committed to shaping a secure and sustainable energy future for all.” It has published copious analysis on the supply/demand balance for fossil fuels. For example the chart below which outlines exactly what would happen to global oil supply post 2020 without future capital investment and how without it, demand would significantly outstrip supply.

You might argue, however, that this imbalance ignores the rapid shift towards and investment in renewables. However, as we can see from the chart below that simply isn’t true. Even in its predictions of global oil supply/demand in a “sustainable development scenario” the IEA expected a significant supply and demand imbalance without further oil and gas investment.

So despite knowing that a lack of investment in oil and gas supply (even with significant renewables investment) threatened a global energy crisis, Western elites implemented policies intended to make it more and more difficult for companies to raise capital and invest in new oil and gas production. 

For example, there was the implementation of a new corporate reporting requirement ESG (environmental, social and governance) designed to curtail oil and gas investment. This transatlantic legal firm explained in its ESG analysis in 2021 entitled “ESG: How it Applies to the Oil & Gas Industry and Why It Matters” how major oil and gas company shareholders like BlackRock would use their power via ESG to:

… vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.

Or as Forbes explained in this article on the ESG entitled “An ESG Reckoning Has Arrived For The Oil And Gas Industry

Between Shell’s order from a Netherlands court to cut CO2 emissions by 45% in the next nine years and ExxonMobil and Chevron both facing mounting pressure from investors — including newly appointed climate activist board members in Exxon’s case — we’re seeing a clear, historic and game-changing shift in how businesses are being held accountable for the impact they have on the environment.

And even then the western establishment complained that things were not moving fast enough, such as Mark Carney in December 2019, who stated that “the financial sector was cutting back too slowly in investing in oil & gas.”

Not to be outdone, in the USA during the Presidential election campaign, Joe Biden announced he would implement a Federal Drilling and Fracking ban further worsening the supply and demand imbalance considering that 95 percent of natural-gas production in the USA involves hydraulic fracturing.

That is despite the fact that the U.S. Chamber of Commerce’s Global Energy Institute found that a fracking ban would “double gasoline prices as oil prices spike to $130 per barrel, raise the average cost of living by $5,661 per person …quadruple electricity prices, reduce Gross Domestic Product (GDP) by $7.1 trillion, and increase natural gas prices by 324 percent from 2021 to 2025, causing household energy bills to more than quadruple.”

In short, world leaders knew we faced a global energy crisis if we failed to increase investment in oil and gas supply (even with increased investments in renewables), yet proceeded to do everything they could to ensure oil and gas investment would collapse.

As Amin Nasser, the CEO of Aramco states, if we are to get out of this global energy crisis we must learn the right lesson. And that lesson isn’t that Russia is to blame.

The lesson we need to learn (indeed our leaders already knew) is that unless we want this energy crisis to become permanent, the world must increase oil and gas production until other alternatives are ready. 

And how ready are the alternatives? What of Amin Nasser’s other claims that “alternatives are not ready” and there is “no back-up plan.” Is he correct about those also? And did world leaders, who knew curtailing investment in oil and gas could lead to a global energy crisis, also know that the alternatives were not ready and that there was no back up plan?

Let’s start with renewables. 

According to Ren21, in 2021 there was a record increase in global installed renewable power capacity and a record investment in renewables. Solar and wind power provided more than 10% of the world’s electricity for the first time ever.

The International Energy Agency (IEA) estimates that the amount of renewable capacity added over the period 2021-2026 to be 50% higher than from 2015 to 2020; that over the same period renewables are set to account for almost 95% of the increase in global power capacity, with solar PV alone providing more than half.

By 2026 the IEA expects global renewable electricity capacity to rise more than 60% from 2020 levels to over 4 800 GW. This is equivalent to the current total global power capacity of fossil fuels and nuclear combined! 

Yet despite this explosion in capacity, the IEA still finds in its Renewables 2021 report that: 

… even this faster deployment would still fall well short of what would be needed in a global pathway to net zero emissions by mid-century. That would require renewable power capacity additions over the period 2021-26 to average almost double the rate of the report’s main case.”

Why would such huge expansion in renewables capacity (equivalent to the current total global power capacity of fossil fuels and nuclear combined by 2026) not be sufficient to replace fossil fuels for power generation? Why would the IEA still forecast a significant shortfall in oil and gas supplies (without significant new investments), at the same time the global renewables capacity reaches the current total global power capacity of fossil fuels and nuclear combined?

The answer is intermittency. The problem is when the wind doesn’t blow or the sun doesn’t shine, renewables do not produce electricity. Nameplate capacity does not reflect actual production. According to the IEA, Solar PV has an annual average capacity utilisation of 10-21%, onshore wind 23-44% and offshore wind 29-52%. That compares to 93% for nuclear and 54% for gas.

But the problems caused by intermittency are not just limited to the days or even weeks when they don’t’ produce electricity. They also cause issues on the days and weeks they produce too much.

To understand why you have to understand how national electricity grids work. National grids have to provide electricity at a set frequency. In the UK it is 50hz; the USA 60hz. Maintaining a consistent electrical frequency is important because multiple frequencies cannot operate alongside each other without damaging equipment. If the exact amount of electricity being used minute by minute (demand) is not matched by the energy generated minute by minute (supply) it alters the frequency of the electricity on the grid. This is very difficult to control as this excellent explainer from power supplier Drax explains:

For example, if there’s more demand for electricity than there is supply, frequency will fall. If there is too much supply, frequency will rise. To make matters more delicate, there’s a very slim margin of error. In Great Britain, anything just 1% above or below the standard 50Hz risks damaging equipment and infrastructure. 

Neither wind nor solar can be easily controlled. Indeed neither can most existing nuclear power stations which were designed to continuously run at high loads (baseload). And although the next generation of nuclear power stations are designed to provide frequency response services these are more than a decade away from being operational.

As a result, as this article in the Green Age explains:

… one of the issues with renewable power is therefore that the more renewable infrastructure we build, the more gas (or similar) plants we have to construct in order to counter-balance.

There are also significant costs involved in trying to balance the grid as a growing proportion of our electricity is generated by intermittent & difficult to control renewables. Indeed in the UK grid balancing costs have risen from £506m in 2015, to £794m in 2019 and £1.3b in 2020 and are expected to keep rising as the proportion of renewables in our energy mix rises.

The solution to this problem for renewables in clear. Grid level energy storage. An ability to store the electricity generated by renewables when the wind is blowing and the sun is shining and feed it into the grid at the right time to maintain the frequency.

However, whilst we have had some success with short term battery storage solutions, e.g. Hornsdale in South Australia, these only store power for a matter of minutes not days or weeks. So whilst it can help reduce grid balancing costs, it cannot provide a guaranteed supply of electricity for when the sun doesn’t shine and the wind doesn’t blow. 

As the Green Age succinctly puts it, whilst ultimately this could be resolved with grid level energy storage solutions, the “technology simply isn’t there yet”. The technology simply does not exist.

So when it comes to renewables, when Amin Nasser said that the alternatives (to fossil fuels) are not ready, he was clearly correct. But what about nuclear power. Is that the back-up plan?

To answer that we have to look at the existing global fleet of nuclear power stations and unfortunately the picture is not very pretty. As the chart below produced by the World Nuclear Association shows about two-thirds of the world’s existing nuclear power reactors have been in operation for over 30 years and are approaching, or have already reached, the end of their originally envisaged operational lifetime of around 40 years.

Whilst technically many of these nuclear plants can have their lives extended with significant investment (and multiple years of downtime whilst the investment is made), in reality, the issue for the world in the next two decades is maintaining existing nuclear capacity not expanding it to replace oil and gas.

To quote the International Atomic Energy Agency: “Despite the operation of several NPPs having been extended to 60 and even 80 years, significant new nuclear capacity to offset retirements is needed in the long term. Many new power plants will be needed to maintain nuclear power’s current role in the energy mix. Uncertainty remains regarding the replacement of these reactors, particularly in Europe and North America.”

In the UK, even the Government target of installing up to 24GW of total nuclear capacity by 2050 in order to meet 25% of the UK’s projected electricity demand would require the equivalent to opening a new nuclear reactor every year for the next 10 years.

And that ignores the fact for most of that period up until 2050 the new nuclear plants will only be replacing existing nuclear capacity. Six of the UK’s seven nuclear reactor sites are due to go offline by 2030 and the remaining one, Sizewell B, is due to be decommissioned in 2035. Together they account today for c20% of the country’s electricity.

Globally it takes between 7-10 years to commission and build a new nuclear reactor. Even Rolls Royce’s new Small Modular Reactors which, once up and running they believe can be produced and installed at a rate of two a year, won’t be ready until at least 2030.

So, clearly, nuclear power is not the backup plan either.

The reality is Amin Nasser, the CEO of Aramco is correct. In the past decade, world leaders have purposely curtailed investment in oil and gas despite knowing that this would lead to a supply deficit, despite knowing that the existing nuclear capacity was ageing and could not provide backup and despite knowing that grid level energy storage technology for renewables did not yet exist.  

The global energy crisis has been caused by an “under-investment in oil and gas; alternatives not ready; and no back-up plan.” And the only solution, unless we want this energy crisis to become permanent, is to increase oil and gas production until the other alternatives are ready.

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