There is great uncertainty in the United States and globally when it comes to the future of energy.
Markets have been turned upside down by the global COVID-19 pandemic, with demand destruction and collapsing global crude oil prices having hammered the U.S. oil and gas industry for months.
The ensuing restructuring and consolidations in the form of recent mergers, acquisitions, and bankruptcies, coupled with the upcoming U.S. elections have added to the unpredictable nature of the industry’s future.
Against that backdrop, energy companies, investors, regulators, and politicians continue to grapple with the energy transition riddle. Everyone agrees that a transition to greener forms of energy and greater decarbonization is underway, but what does it actually mean?
How much can we actually decarbonize, and what does the impact of the pandemic and economic crisis have on our ability to shift the large amounts of capital needed to actualize technologies that can facilitate that transition?
While G-20 countries have committed at least ~$160 billion to support fossil energy since the start of the pandemic, billions of dollars are also being funneled into green funds or Environmental, Social, Governance (ESG) funds that channel investments into the energy transition.
The latter trend has actually accelerated since the start of the pandemic. Undoubtedly, pressure is increasing for energy companies to position themselves for inclusion in such funds and attract ESG investors. Such a development would impact behavior and provide a boost to those technological solutions that enhance ESG performance and mitigate environmental and climate risk.
On the geopolitical front, with global demand so badly damaged, it is difficult to tell if assumptions about future markets will hold true. For example, although Saudi Arabia has traditionally had enormous influence over OPEC’s decisions and thus the global price of oil, with demand so weak and uncertain, its ability to impact prices has waned. This makes for interesting posturing between the Saudis and Russia with respect to future production quotas. Moreover, while production has slowed in the U.S. shale plays, it has bounced back faster than anyone expected, adding further pressure to this relationship.
China is an additional source of uncertainty. While the damage to the Chinese economy from the virus and the recent catastrophic regional flooding remains unclear, it would appear that China’s demand for U.S. LNG, crude oil, and other products may be impacted. Deteriorating relations between the U.S. and China further complicate the situation. For its part, China has moved to secure new sources of supply while thumbing its nose at the U.S. and Saudi Arabia, recently announcing that it will invest at least $280 billion in Iran’s oil, gas, and petrochemical sectors as part of a 25-year deal. and offering to invest another $120 billion in the country’s transportation and manufacturing infrastructure.
Natural gas and crude oil are also playing a significant role in the geopolitical struggle between the U.S. and Russia. The U.S. continues its efforts to put pressure on European contractors to abandon the Nord Stream 2 project that would bring Russian natural gas to Europe under the Baltic Sea. At the same time, the U.S. seeks to improve its market for LNG and crude oil exports to Europe. In May, Ukraine approved a memorandum that would allow the importation of 5.5 billion cubic meters of U.S. LNG. For years, Ukraine has been dependent on Russia for its natural gas needs, and Russia has exploited this dependency in its efforts to dominate Ukraine and other eastern countries. Earlier this year, Ukraine took its first shipments of imported U.S. crude oil. Last year, Poland joined the U.S. and Ukraine in signing a trilateral memorandum of cooperation to enhance regional natural gas supply.
The outcome of the upcoming U.S. presidential elections will weigh heavily on the future of this geopolitical struggle and energy transition. Should former vice president Joe Biden be elected, we can expect a shift away from U.S. energy dominance to a global role more focused on climate change, sustainability, and building a lower carbon domestic economy. Biden would likely reverse the Trump stance on Iran and bring back the Iran nuclear deal, as well as back off the trade war with China and seek to reset relations between Washington and Beijing. In addition to being less supportive of Saudi Arabia and less confrontational with Russia, a Biden administration would be less aggressive in its support for exporting our oil, natural gas, and refined products and chemicals to the world.
Under any scenario, however, with world population growth expected to continue and potentially peak at ~11 billion people around the turn of the century, it is clear that increasing amounts of energy will be needed to meet global demand. Ongoing developments and the upcoming U.S. election will help determine exactly how the global energy industry will emerge and meet this critical need.
Jack Belcher is a principal of Cornerstone Government Affairs’ Advisory Services and advises energy, transportation and financial services clients on government relations, regulatory affairs, risk management, ESG management, coalition building and stakeholder relations. He is also managing director of the National Ocean Policy Coalition.
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