Cheap Energy Threats and Opportunities

The United States, largely due to fracking, has become reliant on cheap energy. While this has brought many social and economic benefits, including a relatively easy recovery from the 2008 recession, is it really sustainable for the U.S. to maintain its position as one of the world’s largest oil & gas producers?

Innovation in the oil industry, such as tight oil hydraulic fracking, has changed oil supply dramatically. With smaller, more flexible projects and shorter lead times, fracking has enabled greater adaptability to volatile market conditions. While the growth in fracking internationally, and even to some degree in North America, is less advanced than often expected (due to factors such as regional differences in geology, regulation and incentives to land owners), in many cases bringing new technologies to mature fields will continue to help keep supply up and dampen the increase in oil prices, which longer term may slow down further developments.

Many other countries that do not enjoy the same access to cheap hydrocarbons, such as China and other Asian countries that are seeing natural gas prices (in the form of LNG) at around 4X those in the U.S., have started to aggressively innovate and develop cheap renewables. Later this decade or early next, North America will “wake up” and realize that while they focused on short term energy advantages, Asia has built massive new clean energy industries for the future over which they have control. They stand a good chance to dominate the new energy industry for many years to come. China already has thriving markets for solar (on its way to dominate the new power industry with 4cts/kwhr), wind, electric vehicles and LED lights, while in Japan fuel cell vehicles will be front and center at the Tokyo Olympics. Asia will own essential industries in cleantech and sustainable innovation, unless we see a quick and dramatic innovation change in North America.

The financial community is a powerful driver of change in this regard. We have already seen a huge divestment from fossil fuels to the tune of $2.6 trillion, a 50-fold increase from the cumulative total one year ago. In addition, we observe that many financial institutions (including the large California pension funds CalPERS and CalSTRS, and others) have started to communicate that they are getting reluctant to participate in new “traditional” hydrocarbon projects. They fear that capital now committed to such projects could within their rated life time (30-50 years) result in stranded assets, either through innovation or through regulation.

In a recent speech Mark Carney, Governor of the Bank of England, has said: “The need to manage emerging, mega risks is as important as ever. Alongside major technological, demographic and political shifts, our very world is changing. Shifts in our climate bring potentially profound implications for insurers, financial stability and the economy” and the society at large. Stranded assets may sooner rather than later become a huge issue and sustainable innovation may become key to future energy financings and dominance in the new energy industry.

Oil and gas companies should therefore focus on direct applicable incremental sustainable innovations, combined with innovations that may lead to step-change breakthroughs enabling novel sustainable ways to maximize the longer term value of their exploration sites, plus renewable innovations that could become additional core offerings in their portfolio. The innovative capacity of North America is still world leading and those American companies that embrace innovation fully for roll-out at home and to export stand a chance to reap outsized returns and become the true new energy giants, the “Green Elephants” of the future.