• Sunday, September 24, 2023
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Energy security outweighed climate change concerns in 2022

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Despite an increasing threat of global warming, energy security concerns took precedence over climate change mitigation goals in 2022, a new study has found, with policymakers focusing on meeting the energy needs of their people.

Analysts say companies and governments have a tightrope to walk to balance their concerns about energy security with meeting their obligations to their people as the world moves towards an energy transition.

According to the latest report by the Gas Exporting Countries Forum (GECF), last year countries facing the challenge of solving the energy trilemma of achieving security, affordability, and sustainability, prioritised energy security as Russia’s war against Ukraine upended the global energy market.

Energy security was the main driver of energy policies last year as concerns about unprecedentedly high energy prices and the global movement to reduce carbon emissions and promote the decarbonisation of the energy industry rocked the sector.

“Countries took action to solve the energy trilemma of achieving energy security, affordability, and sustainability. This, in turn, helped shape both gas supply, which is affected by upstream fiscal regulations and investment policies, and gas demand, which is related to market conditions and policies,” the report noted.

Mohamed Hamel, Secretary-General of GECF, said in 2022, energy security will go back to the top of policymakers’ priorities list.

“The crucial role of natural gas in the production of fertilisers and, thus, for food security, gained renewed prominence. At the same time, progress in energy access has been hampered, as has progress in combating climate change, as many countries switched from gas to coal and even lignite to keep their economies running, lights on, and houses warm,” he said.

In the meantime, the energy crisis could serve as a catalyst for new energy policies and initiatives that focus on the issues of achieving energy security while taking into consideration countries’ environmental pledges.

On the demand side, this has translated into energy regulations that focus on achieving affordability by relieving the burden of high energy prices on consumers.

Meanwhile, on the supply side, high energy prices created an incentive for companies to embark on new investments in the upstream sector to secure supply. Historically high energy prices also saw some governments implement various so-called windfall taxes.

Climate concerns dull on energy supply challenge

In June 2022, the leaders of the G7, which consist of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, as well as the European Union, addressed the global energy crisis with some commitments concerning achieving “the security of energy supply, reducing the burden of high energy prices on consumers, expanding the deployment of renewable energies, renewable hydrogen, and enhancing energy efficiency.”

They agreed to consider imposing price caps on energy prices for the sake of stabilising the energy market and confirm a commitment to end direct international public financing of fossil fuels by the end of 2022, with some exceptions to safeguard national security and geostrategic interests.

On climate issues, the G7 reached a conceptual agreement concerning ambitious climate protection measures, industrial transformation through accelerated decarbonisation, and close cooperation and support beyond the G7, in particular with emerging and developing countries.

Last November, Egypt hosted the 27th UN Climate Change Conference (COP27) under the slogan “Together for Implementation.”

The conference concluded with a historic agreement to establish a “Loss and Damage Fund” to help vulnerable countries deal with the climate crisis. However, the operational modalities of this fund would be determined at COP28, which is to be hosted by the United Arab Emirates.

The UNFCCC Parties reiterated their positions about “the urgent need for deep, rapid, and sustained reductions in global GHG emissions” to limit global warming to 1.5°C above pre-industrial levels, the most ambitious goal of the Paris Agreement. Progress was also made with regard to the financial mechanism related to the implementation of Article 6 of the Paris agreement.

In the same month, the leaders of the G20 countries, meeting in Bali, Indonesia, expressed their concerns about volatility in energy prices and disruptions to energy supply and called to strengthen international cooperation and producer-consumer dialogue.

The G20, or Group of 20, is an intergovernmental forum comprising 19 countries and the European Union (EU). It works to address major issues related to the global economy, such as international financial stability, climate change mitigation, and sustainable development.

The Summit underlined the urgency to rapidly transform and diversify energy systems, advance energy security and resilience, and maintain market stability by accelerating a clean, sustainable, just, and affordable energy transition and the flow of sustainable investments.

However, it should be noted that despite the ongoing environmental pledges, some countries have increased their coal consumption in recent months, as illustrated by an increase in gas-to-coal switching, amidst the current energy crisis.

The investment landscape in the oil and gas industry in 2022 was characterised by extremely high and volatile energy prices, energy security concerns, and escalating geopolitical tensions.

According to the GECF, investment was mainly directed to short-cycle projects that could deliver volumes relatively quickly, through maximising existing capacities and brownfield expansions.

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“In 2023, global oil and gas investment is expected to rise further, largely due to higher investment in the upstream sector as well as a marked increase in liquefied natural gas (LNG) import terminals, particularly in Europe.

“The current shift of government interventions from energy transition to energy security can also provide some opportunities for increased investment in gas and LNG projects,” it said.

However, while investment is expected to remain high this year, there are several looming uncertainties that may deter investment in the industry.

The forum said a deceleration of global economic growth, tight monetary policies, high energy price volatility, and geopolitical tensions may challenge investment decisions.

“In addition, long-term demand uncertainty, changes to environmental policies and government regulations, and competition with renewables and other low-carbon energy sources for capital will add some challenges to securing investment in the longer term.”

The GECF revealed that the landscape for financing oil and gas projects has undergone several changes over the past two years, driven by the effects of major market shocks, with the focus shifting from energy transition to energy security.

It said that the extremely low-price environment in 2020 and the accelerated energy transition put additional pressure on the financing of oil and gas projects as banks and financial institutions opted for more strict conditions.

Meanwhile, the high price environment in 2021 and the energy crisis in Europe in 2022 have put a slightly different spin on considerations for financing oil and gas projects, with the recognition that gas will be an integral part of ensuring energy security.

The report revealed that the fund includes an allocation of €10 billion for the financing of gas infrastructure and up to €2 billion for oil infrastructure.

“However, there are some stipulations for accessing the funds, such as the funding of fossil fuel infrastructure being limited to 30 percent of overall REpowerEU spending.

“In addition, in order to ensure such funding contributes to regional energy security, it is required that gas infrastructure projects be in operation by 2026,” the report showed.

Upstream merger and acquisition activity is likely to remain around 2022 levels or increase this year. According to the GECF, global energy security concerns are likely to drive investment in gas and LNG assets and, more so, increase acquisitions by European majors in Africa and the Middle East to secure production assets.