The advent of the Russia–Ukraine war signalled the beginning of a global energy crisis, but as jurisdictions responded to energy shortages, several silver linings emerged.
With Russia–Ukraine war showing the European Union (EU) can no longer rely on Russia for its energy supply, many nations have been forced to think outside the box to solidify their resources.
While the ongoing energy crisis has compelled some jurisdictions to turn to coal as a stop-gap measure, circumstances have also hastened the renewable energy narrative.
Wood Mackenzie’s ‘The Silver Linings Playbook’ report considers five developments that have established the foundations for more reliable, affordable and sustainable energy supply.
Policymakers accept the world needs energy stability
“Policymakers are finally acknowledging that a diverse range of low-carbon technologies beyond variable renewables is required to achieve deep decarbonisation while maintaining a secure energy supply,” WoodMac said in a note.
WoodMac vice president – multi-commodity research Prakash Sharma said the low-carbon hydrogen and carbon capture, utilisation and storage (CCUS) industry has grown about 25 per cent in the past year.
“About 30 projects have taken final investment decisions and another 170 are aiming to by the end of 2023,” he said.
The importance of US liquefied natural gas
“The disruption to Russian pipeline flows has left a massive supply gap in European gas markets,” WoodMac said.
“With Russia only exporting 25 billion cubic metres (bcm) of gas to the EU, down from 140bcm, Europe has had to look for a new major supplier to fill the shortfall. It is destination-flexible US LNG that has answered the call.”
“It is expected that two-thirds of US LNG cargoes will have landed in Europe in 2022.
“The abundance of low-cost gas reserves, the relatively short time to bring new volume to market and its competitive commercial structure continue to make US LNG attractive,” WoodMac said.
The refining system has been under immense pressure
“The significance of the refining sector to this year’s soaring fuel prices was evident, for example, in the premium of road diesel to Brent crude at the refinery gate in northwest Europe,” WoodMac said in the report.
“That averaged an unprecedented $US35/bbl (barrel) in 2022, 2.5 times the average of the previous 10 years.”
But that situation is set to ease.
“Stress on the refining system is set to ease in 2023 as major new refinery projects in the Middle East, Africa and Asia become fully operational,” WoodMac vice president – refining, chemicals and oil markets Alan Gelder said.
“China’s decision to relax restrictions on the export of refined products will also help, as government policy shifts to support near-term economic activity.”
WoodMac said it expected refining margins to return to normal in the next 12–18 months.
Investors adopt more realistic fossil fuels attitude
“The current energy crisis has prompted investors to rethink finance for fossil fuels,” WoodMac said.
“What has emerged is a more measured approach that reflects the real-world constraints on financial institutions and corporates in making long-term financing and capital allocation decisions.”
WoodMac research director – corporate research Kavita Jadhav said the importance of an orderly energy transition was looming large for investors.
“The shift in approach reflects both the complexity and the necessity of securing an orderly energy transition,” she said. “The past year has made abundantly clear that energy supply and demand need to move in sync for economic stability and minimal price volatility.”
WoodMac said the financial sector has a key role to play in driving tangible emissions reduction and setting the fossil fuel sector on a path that is aligned with the Paris Climate Agreement.
A power-market reset
The EU Commission unveiled its REPowerEU plan in May, laying the foundations for a more secure and diverse European energy supply that is independent from Russia.
“Decarbonised electricity is at the heart of Europe’s energy transition,” WoodMac said. “Consequently, when EU energy policy was rewritten in the aftermath of Russia’s invasion of Ukraine, the sector’s ability to deliver was put firmly in the spotlight.”
The REPowerEU accelerated the deployment of renewables from 40 per cent of the EU’s energy consumption by 2030 to 45 per cent.
“The accelerated deployment of renewables will require substantially higher levels of investment in wind and solar,” WoodMac research director – Europe power Peter Osbaldstone said. “The scaling up of the hydrogen industry and its need for renewable energy supplies will put even greater pressure on the industry to grow faster.”
WoodMac said these five trends provided solid grounds for optimism regarding the outlook for the energy and natural resources sectors in 2023 and beyond.
Read the full report on the WoodMac website.