Dr. Chijioke Mama is the Managing Director of Meiracopp Nigeria Limited (MNL) and Special Adviser on Strategy & Policy to the Chairman of the Governing Board at Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA). Mama, in an interview with Kunle Aderinokun, takes a deep dive into the issues arising from energy transition, which is a global shift from fossil-based systems of energy production and consumption, including oil, natural gas and coal, to renewable energy. He points out its impact on Nigerian and international oil and gas companies (with productions mainly fossil-based) in the areas regulations and significant, but obscure risks as well as the firms’ preparedness, strategy for portfolio diversification and the future of energy
Does the energy transition currently pose significant risks for oil and gas companies?
The energy transition is certainly a new class of risk that now confronts fossil companies. Thus, oil and gas companies that recognize, understand and properly mitigate the risks will undoubtedly fare better than those who shrug it off. Unlike the other familiar and century-old oil and gas industry risks, such as geological and price risks, energy transition risk is still fluid, poorly understood and sometimes even latent. For this reason, ignoring or mismanaging it could be detrimental for today’s oil companies. You know that the fossil-clean energy debate is now highly polarised, with fossil proponents being tagged “climate denialists” and climate advocates being called “alarmist”. The reality, however, is that, irrespective of one’s position in the debate, the energy transition construct is now posing a significant risk to oil and gas companies, albeit in a way that is complicated and even obscure. So, “indifference” will come at a great cost, especially for the smaller upstream, midstream and downstream companies in developing countries like Nigeria.
Will the transition bury fossil energy and fossil companies?
Conjecturing the demise of fossil energy or fossil companies isn’t the best way to look at the issue of risk. In the real sense of the term “Energy Transition” there hasn’t been a transition yet. What we have had, in the last 20 years, is mostly “energy mix expansion” or better still “energy inclusion”. A realised transition will be evidenced by higher proportions of total energy consumption, coming from non-fossil. But this is not the reality yet and that’s why I said that it’s a bit complicated. The fossil component [coal, oil & natural gas] of the global energy mix has moved from 85per cent in the year 2000 to 80per cent in 2020, according to IEA data. By 2035, that number will become 76per cent according to projections. Available forecasts even suggest continuing fossil energy dominance up until 2050. There is hardly a transition away from fossils in this 35-year period. But if oil and gas companies focus on this data alone, they may wrongly ask “where are the risks”?
That’s why I said that the risk is fluid and obscure. However, when you look at it from the energy inclusion or energy expansion narrative, the risk becomes more evident. The energy transition has the potential to cause significant structural shifts in four key areas that extensively affect oil and gas, namely; regulation, financing, technology and energy demand. Fixating on the persistent dominance of fossil energy will be very misleading. But understanding the potential impacts of the impending “structural shifts” will be beneficial. I believe this is the trap for most oil companies. The data on future fossil demand can make a superficial analyst dismiss the tons of risks inherent in the energy transition, thereby encouraging “business as usual” conduct within oil and gas companies.
What kind of pressure will new energy bring on fossil companies?
You will see pressure across several frontiers; regulation, demand, financing and technology. Take for instance, the impact of oil demand anxiety on Research and Development (R&D) activities within the petroleum industry. Global R & D budget in the fossil industry is declining, which may usher in a decline phase for sector-specific technologies & “know how” in the long run. R & D budget, as a percentage of revenue, is estimated at about 3per cent for the oil and gas industry. I recently read that it’s about 10per cent in the Pharma industry and about 8per cent in the Information Technology Industry, both of which are not facing transition-specific anxiety. From a financing perspective, there was a 50per cent reduction in the reported worth of the assets held by leading oil and gas companies in 2020, while investment in oil and gas supply fell by one third in 2019, according to data from the IEA.
From a regulatory perspective, aggressive climate advocacy could make energy sector regulations to be less fossil-friendly. This has started happening already and could accelerate the energy inclusion or expansion. The demand for oil as a commodity is highly driven by policy & regulations, unlike other commodities such as wheat or sugar. This precipitates two realities, at the domestic level, without an active advocacy on the part of fossil companies; energy transition-related regulations and policies are likely to be detrimental, if not catastrophic for fossil companies. On the global front, we are already seeing policies and regulations from influential countries and global institutions that may be detrimental to “Petrostates” and petroleum companies that operate there. You can equally expect far-reaching transformations in the oil demand/price dynamics occasioned by the transition.
Should oil and gas companies exit fossil investments going forward?
That’s hardly the best strategy, especially if you are a small E & P or Midstream company. Portfolio diversification seems to be the best strategy. But it mustn’t be followed by radical “deprioritisation” of fossil investments, since an abrupt transition will be both economically and socially unsustainable. Thus, growth plans for fossil portfolios shouldn’t be ditched entirely, but denial or business as usual strategies will be equally detrimental. The solution is to build an agile and resilient company, through portfolio diversification. Understanding how the energy transition will transform the fossil industry and appreciating the new pressure points will be critical. Depending on one’s position in the value chain, this diversification may be within the oil and gas industry or outside the industry. Diversifying outside the industry may entail the deliberate acquisition of capabilities in other related sectors, such as chemical and the power sector. For Nigeria, these two areas are near virgin. Diversifying within the petroleum sector will entail building broader capabilities within the oil and gas value chain.
What kind of preparedness is needed in the energy transition era?
The inclusion of new energy sources, driven by climate concerns, will continue to reshape and reinvent the general energy demand landscape. While fossil may remain dominant, alternative energy sources such as Solar, Wind and most recently Hydrogen, New Geothermal and Nuclear are increasingly gaining market share. If the change or the transition becomes fast and soon, how prepared are most fossil organisations? Measuring preparedness will entail asking some questions. Do we understand the energy transition risk as it affects our portfolios and organisation? Do we have an energy transition risk strategy and plan? Available data suggests that it is not the end of the oil and gas era, as many may want to believe, but the place of oil as an energy source would continue to morph. The best approach to producing, processing, transporting and consuming oil and gas will also continue to be challenged. The regulatory, political and financial landscape for fossil energy will also continue to morph. In this context, it is an excellent transition risk preparedness that will create resilient, profitable and impactful companies of tomorrow.
