Øyvind's corner
We are full speed ahead into a new season with renewed energy to do our part, grow and continue to create value for our shareholders.

Halfway through 2022 – Macroeconomics underpinning strategic considerations

23. aug. 2022, 10:29

At Aker, we have been on a journey for several years to strengthen and utilize the industrial foundation in our portfolio companies for responsible and sustainable value creation. While the second quarter was marked by market fear from volatile macroeconomic and geopolitical developments, our portfolio companies are showing determination and resilience through uncertain times. While Aker’s share price has not escaped the global sentiment, we are coupling our strong industrial foundation with new technologies, ideas, and partnerships. Halfway through the year, long-term efforts are bearing fruit and new shoots taking root.

Aker’s Net Asset Value decreased by NOK 2.8 billion, or 3.7 per cent, in the second quarter, including NOK 1.1 billion in dividends paid. The share price fell 4.9 per cent, adjusted for dividend, compared to a 7.2 per cent decrease in the benchmark index. Like many other global companies, we are not immune to the increasingly complex macroeconomic environments facing global markets. We are continuously looking to optimally balance energy production, economic and environmental objectives. Short term fluctuations do not delay or impact our endeavour, but rather confirms our long-term strategy to have a comprehensive approach to value creation.

Globally, the macroeconomic picture, though tremendously volatile in recent months, is becoming increasingly clear. The world population is growing by about 80 million people – or a new Germany – every year. Coupled with increased urbanization and a growing middle class, the world is facing an exponential increase in food consumption and energy demand. And it’s happening at a time when 80 per cent of the global energy consumed still originates from fossil fuels. According to a recent report referenced by many policy experts, including the World Economic Forum, the ambitious Net Zero by 2050 Scenario requires a “rapid decline in oil and gas consumption” this decade, including a cut of more than 50 per cent of oil demand. To be on track for this, Europe would have to double its solar and onshore wind capacity the next three years and will need to add another 60-80 per cent on top of that between 2026 and 2030. In a (perhaps more likely) ‘Economic Transition Scenario,’ fossil fuels will continue to make up 60 per cent of Europe’s energy mix by 2050 – a relatively small reduction from 69 per cent in 2022.

The need to decarbonize global energy systems is undeniable. But although its urgency has never been more stated, the issue remains incredibly nuanced. While the world needs enormous investments in new power generation projects, investments are still needed in oil and gas. Both to meet current energy demand and to avoid “unethical” pricing of energy in the future, as price increases will hit the low-income harder than the wealthy and can have an adverse impact on development and growth. Current oil production spare capacity is less than one per cent of global oil demand. The issue is complex but is largely the result of a decade-long problem of under-investment in energy – both upstream and downstream. And while investments are up in the last year, most of the increase in spending is going to cover cost of inflation – not to increase production activity. Aker and our industry peers are tasked with finding the actual solutions that can meet the current, and exponentially increasing, global energy demand while simultaneously speeding up the energy transition.

Russia’s invasion of Ukraine, and the accompanying sanctions on Russian energy exports, further exacerbates the problem. The IEA calls it the first truly global energy crisis in history. But aside from the immediate crisis currently hitting Europe, especially ahead of a cold winter, the dependence on Russian supplies also shows how the energy transition is highly vulnerable to geopolitical tension. Russia is one the world’s leading exporters of critical minerals needed in clean energy production. The surge in prices of minerals has been a major factor in reversing the trajectory of declining costs for several clean energy technologies. In just seven years, the share of material costs of an EV battery has gone from 5 per cent to 20 per cent, and the costs of solar panels and wind turbines are up between 10-20 per cent since 2020. High cost of capital and rising borrowing costs threaten to undercut the economic attractiveness of capital-intensive clean technologies. Higher prices for fossil fuels makes renewable energy more competitive, but nonetheless more expensive.

In Norway, a strong and open public-private partnership has been the bedrock for our successful oil and gas sector and is an enormous competitive advantage as we join the global race to develop new, cleaner industries of the future. Together, we now need to rethink our supply chains to better support the energy transition. This includes building a profitable and global supplier industry by providing powerful incentives for innovation, more flexibility, and rethinking purchasing agreements to eradicate potential choke points for services that are critical to the transition. The current reality is that suppliers to the renewable energy industry need a reasonable return on their investments in capacity, competence, and technology. However, too many of the supplier companies are seeing diminished margins and cost pressure from developers, who themselves need to keep costs down to achieve adequate economic return on renewable projects. Ultimately, the consequence could be failing to utilize Norway’s solid platform to grow green export-oriented industries – or even slowing the speed of the energy transition. Developers will need higher and long- lasting Power Purchasing Agreements (PPAs) to be able to pay a high enough price to keep the suppliers alive.

The energy transition is enormous, complex, costly and will take time. This is why I am such a firm believer in collaboration and digitalization. The need for industrial software companies, like Cognite and Aize, has become even more imminent than when we first established the companies. Digital technologies and software solutions will undoubtably play a critical role in solving the problem of how to more sustainably produce energy from fossil fuels, while also reducing the cost and time it takes to reach scale and meaningfully speed up the transition to clean energy production. Our portfolio companies are leading the way in deploying industrial software to reduce cost and increase efficiency of operations. During the second quarter, we were very pleased to reach a major milestone when Cognite finalized its agreement with Saudi Aramco to establish the joint venture, CNTXT. Partnerships like this is what the world needs to make changes at scale.

Headquartered in Riyadh, CNTXT will be an important vehicle for driving profitability and sustainability of the region’s industries through innovative use of technology, enabled by advanced cloud solutions and leading industrial software. Learnings from this partnership can be applied to other business enterprises, including oil and gas companies, many of which have announced ambitious decarbonization plans. The large publicly traded oil and gas producers, formerly known as International Oil Companies (IOCs) are now branding themselves more as International Energy Companies (IECs). The eight largest of these companies have guided to spend more than USD 100 billion on clean energy investments during the coming five years. Most of them have already joined us on the journey to deploy industrial software to succeed in their efforts.

In addition to deploying digital solutions and industrial software, the complexity of the energy transition calls for innovative models of collaboration. As Henry Ford once put it: “coming together is a beginning, staying together is progress, and working together is success.” Building forward-thinking multilateral and strategic partnerships will substantially impact the ability to reach the shared goals for a clean energy future. Initiatives such as the Clean Energy Transition Partnership (CETP) is one example. It addresses the challenges of the energy transition through coordinating national and regional research, development and innovation strategies, programs, activities and stakeholders. It also fosters challenge-driven research, development and innovation that stimulate the transition and amplifies cooperation by matching procurers and users of solutions. At Aker, we not only fully support such collaborative measures, but have it as a core part of our own strategy for growth and value creation.

Aker’s partnership with Aramco is an example of a strong collaborative relationship over many years where we leverage shared drivers for success and complementary skills to drive growth and value creation. Another example is Aker BP’s acquisition of Lundin Energy’s oil and gas related activities in Norway, with an ambition to lead the way in producing oil with low costs, low carbon, profitable growth, and attractive dividends. The merged company is the second largest operator on the Norwegian Continental Shelf (NCS) and will take the lead to bring about fundamental improvements for oil production, including through an ambitious digitalization strategy. Two very different collaborative efforts, but both examples of how Aker’s strategy is pinned on an increasingly clear – though complex – macroeconomic picture and how we are working to claim a front seat in the race to meet global energy demand in the most technologically advanced, sustainable, and collaborative manner.

We are full speed ahead into a new season with renewed energy to do our part, grow and continue to create value for our shareholders.