Technology & physical risks

Technology risks: The March 2020 collapse in fossil fuel prices due to an oil price war between Russia and Saudi Arabia was exacerbated by the demand declines caused by the Covid-19 pandemic. However, there are structural factors that threaten a long-term resurgence in demand. There's the risk of a demand tipping point approaching in the industry, with associated declining returns on investment. Fossil fuels are increasingly competing with renewable energy sources. These benefit from steep technology learning curves, which mean that renewables get cheaper every year. Combined with a growing ambition from business and retail customers to reduce the carbon intensity of energy they consume, this spells out longer-term uncertainty over demand for fossil fuels.

Renewable energy transition

- An increase in solar and wind installations by a factor of 13 and 60, respectively, between 2015 and 2050. These already account for more than half of new power generation capacity additions each year.
- Competition from renewable energy technology costs, e.g. the cost of PV modules is down by 90% since 2008.

Metric: Renewable spending targets

Uptake in electric vehicles

- Erosion of demand for petrol and diesel from electric vehicle (EV) uptake.
- EVs reach price parity with internal combustion cars. EV sales are expected to exceed 100 million by 2035.

Metric: EV charging spending

Changing energy use patterns

- Industrial production falls, and total energy consumption declines further due to the uptake of more energy-efficient equipment and processes.
- Fall in fuel demand is accelerated by the electrification of heating, industry and transport.
- Fall in demand for kerosene from electrification of cooking in non-OECD countries

Metric: New refineries & petchem assets capex

Shift to different fuels

- Accelerated uptake of low-emission fuels for marine and aviation sectors, including a blend of biofuels, or a move away from fossil fuels altogether.
- Decarbonization of heating and cooling, as countries try to reach their Paris goals. This will lead to an increased uptake in hydrogen and electric heat pumps.

Metric: Hydrogen & alternative fuel production

Opportunities: Becoming a power utility selling clean power is an opportunity to seek new customers. There is also a chance to sell low emission products, such as petrochemicals and alternative, low-emission fuels or biofuels.

Physical risks: The oil & gas sector is capital-intensive, with many long-life fixed assets, long supply chains and significant water requirements. The sector also often operates in remote high-temperature or sub-zero temperature locations, many of which are exposed to risk of cyclones and flooding. Therefore oil & gas companies are already exposed to many extreme weather and water supply related risks that have historically resulted in sudden production downgrades, project delays or costly liabilities. More intense weather due to climate change may damage oil and gas infrastructure, pipelines, equipment, and staff accommodation. This, in turn, can disrupt operations and performance, and also add to decommissioning costs.

Cyclones

- Damage to assets e.g. increased risk of major spills/leaks, resulting in clean-up costs and potential litigation.
- Loss or disruption of construction and/or production.
- Potential injury to personnel or delays to decommissioning.
- Considerable increase in weather-related insurance and re-insurance costs.

Metric: Weather-related insurance liabilities

Sea level rise/storm surges

- Disruption to production and/or construction, increasing costs.
- Potential injury to personnel or delays to construction, operations or decommissioning.
- Higher costs of building soft (e.g. mangroves) or hard (e.g. sea walls) coastal defense structures.

Metric: Value of assets located in coastal zones

Temperature rise

- Potential threat of bushfires to energy distribution and transmission infrastructure.
- Damage from local bushfire exacerbated by gas leaks, which can ignite embers as methane is highly flammable.
- Extreme temperatures will impact the ability of equipment to operate efficiently e.g. the chillers at LNG plants.

Metric: Weather-related insurance liabilities

Flooding/drought

- Damage to facilities, refineries, loss of production and increasing risks of dispersal of salt and chemicals from coal-seam gas mines onto farming land from flooding.
- Limited drilling activity during those events.
- Drought causing delays or inefficiencies for water-intensive operations.

Metric: Water volume consumed in operations

Opportunities: Adapting to weather risks can lead to fewer delays to construction, operation and decommissioning, as well as less disruption to supply chain management. This all saves costs over the long run.