Third quarter 2022: Reckoning between tomorrow’s climate ambitions and today’s energy needs
Russia’s invasion of Ukraine and the current energy crisis has laid bare some uncomfortable truths about the current state of the world. It goes far beyond a question of energy security. It unveils both deep vulnerabilities and misconceptions about how we got here in the first place. We need to rethink our collective way forward. At Aker, we are committed to being a part of the solution in a way that faces up to realities and reckons between tomorrow’s climate ambitions and today’s energy needs.
Investors across the globe have been jolted from slumber after a rollercoaster third quarter for financial markets. Wall Street posted its third consecutive quarter of losses for the first time since the financial crisis a decade ago. The Oslo Stock Exchange ended down 5.8 percent in the third quarter, while Aker’s share price declined by 6.6 percent. Aker ended the period with a Net Asset Value of NOK 69 billion, a decrease of NOK 2.9 billion, or 4.1 percent from the second quarter. The turbulent times and hazy outlook are a reminder of Aker’s strength to keep a steady course – and also reflect on learnings to grow and make sound strategic decisions.
While the current energy crisis in Europe is partly the result of Russia’s senseless and unprovoked attack on Ukraine, those with their ears to the ground have heard the tremors for nearly a decade. Some experts say that the crisis was long predicted after years of red flags pointing to mounting risk for the energy situation in Europe. More and more of the electricity is from intermittent sources like solar and wind, but still only account for two percent of the global primary energy supply. At the same time, years of poor shareholder returns, and increased climate pressure has reduced investment in oil and gas, resulting in limited supply from conventional sources. Now, despite growing unease regarding underinvestment in E&P, lacking contingency plans, and realizations that energy transition plans were – albeit timely – often flawed and unrealistic, neither governments, policy experts, industry leaders, nor global financial markets, are prepared to withstand the unfolding frenzy.
Soaring natural gas prices have forced governments to subsidize energy bills, credit markets have tightened, and both supply and demand have experienced large shocks. At time of writing, OPEC+ have agreed to cut oil production, countering efforts by the US and Europe to stifle an enormous revenue stream into Russia. The cut of about two million barrels a day, or two percent of global oil production, is not just symbolic – it is a direct attempt to defend a price floor as ‘real barrels’ are now off the market. It’s happening before EU’s sanctions on Russia set in and while China – the major demand driver – has yet to fully open society post COVID. Pre-COVID, annual demand growth in China used to be around 0.6 million barrels a day, while demand growth in 2022 is on track to come in at minus 0.4 million barrels a day. In other words, there is a large potential for oil demand growth if China stops the zero- tolerance COVID-policies they currently enforce.
Never in my nearly fourteen years at the helm of Aker have I witnessed geopolitics so potently impact energy markets or energy security. Amin Nasser, President and CEO of Saudi Aramco, put the current situation this way: “…most damaging of all was the idea that contingency planning could be safely ignored. Because when you shame oil and gas investors, dismantle oil and coal fired power plants, fail to diversify energy supplies, oppose LNG receiving terminals, and reject nuclear power, your transition plan better be right. As this crisis has shown, the plan was just a chain of sandcastles that waves of reality have washed away.”
We are tearing down our house, before the new house has been built. Alternatives are not ready, and we have no backup plan. The result is a world moving towards more disorder, uncertainty and complexity. People in all corners of the world are facing the consequences, many who must now endure an economy dismantled by trade and financial sanctions. The developing world is likely facing the greatest challenges with increasing global food prices, heavy reliance on oil, and significantly less infrastructure for alternative energy sources. In Europe, governments are grappling with how to help consumers and companies cope with soaring costs. Energy policy expert and Co-Founding Dean of the Columbia University Climate School, Jason Bordoff, rightly suggests that the situation demands a re-evaluation about the right balance between government involvement and market intervention.
Over the last 40 years, market forces have made energy more affordable and accessible, increased economic efficiency, and boosted energy security through competitive pricing. The current energy crisis, however, reveals the need for a bigger role for governments to tackle the dual goals of energy security and a just energy transition. To be clear, this should not equate to short-term efforts. A price cap on natural gas, for example, will likely only lead to reduced supply and higher demand, effectively worsening the crisis. Rather, focus should be on long-term policies and public-private cooperation. The private sector needs improved predictability to make investment decisions that move the world in the right direction. One example is how some European governments are now exploring long-term energy contracts to ensure energy security. Long-term contracts would reduce dependence of European countries on authoritarian regimes and provide greater security of supply. Further, they play an important role in enabling companies like Aker BP to monetize asset value and manage market risk. This means Aker, and our industry peers, can better strategize for our long-term role in energy markets and ensure we don’t ‘tear down our house before the next one is built.’
Experts have warned that the energy crisis will lead to stronger protectionism, saying that countries will increasingly look inward and prioritize domestic energy production. This will undoubtably slow down globalization and the path to a just energy transition. Increased government intervention is the right medicine, but only if administered properly with the optimal dosage. Domestic policies should look outward, encourage long-term investments, and strengthen ownership models and industrial development. Fiscal regimes and taxes are a competition between countries where it is most attractive to invest. In Norway, we have an enormous opportunity to be in the front seat of a new industrial era, but we need to leverage our world-class public- private cooperation model to succeed. Through close dialogue and collaboration, we can ensure predictability that makes it possible to invest in conventional energy that is still required over the long term; deploy technology to reduce our carbon footprint and improve efficiency; and lastly, continue to invest in and build technology and infrastructure for clean energy production – first, to complement conventional energy, over time, to have new primary, cheaper sources of energy globally.
With Europe at the front lines of the economic war between Russia and the West, Aker is right in the center of the battlefield. Not only felt through market volatility, but impacting how we work, evaluate new investment opportunities, and plan for the future. It is requiring us to focus our key priorities, including long-term partnerships for growth and industrial digitalization, which we believe will be even more important on the other side of the current crisis. During the quarter, we were very pleased to deepen our collaboration with SLB, both within subsea and for digital solutions for the global energy industry. Old friends, new horizons. For Aker Solutions, the transaction with SLB means the company can both unlock value creation and free up capital for greater investment capacity. Over the next few months and years, Aker Solutions will accelerate its transformation and create a digitally powered engineering and project execution company, enabled by Cognite’s data platform and Aize’s software applications. I am confident that this makes Aker Solutions more competitive for opportunities both in ensuring energy security through its oil and gas business, as well as in the energy transition and renewables. The second partnership with SLB through Cognite brings together two leaders in technology innovation. This is a recognition of Cognite’s global potential as one of the biggest players in the oil and gas sector has chosen Cognite Data Fusion as the architecture for their digital offering for production optimization in the oil and gas industry. The partnership has the potential to transform how digital workflows and applications are developed and deployed across the energy value chain to reduce costs, optimize production, and decrease operational footprint.
It is remarkable to see how far the industry has come in two years – from a green wave washing over us in 2020, to a world trying to navigate the worst global energy crisis in history two years later. At Aker, we are committed to delivering a more secure and sustainable energy future, with our industry still at its heart. It took a global crisis for governments, industry players and markets to wake up to the current energy reality – and realize we need a new consensus to move forward in a credible way. The path is still uncertain, but as we head into the dark, cold months of the year, I am confident we will weather storms, be better prepared for colder days, and anticipate brighter times ahead.