High prices expose oil firms to $500 Bn investment loss

Europe’s renewable power rises 157% to 547 TWh in 2021 

Sopuruchi Onwuka

Staking huge investments on the back of the soaring oil prices without maintaining steady outlook in energy transition could leave assets worth some $500 billion stranded.

Two environmental groups have in separate reports warned that rising capacity for renewable power generation and wider acceptance of electric vehicles might erode demand for fossil fuel earlier than expected.

Environmental group, Carbon Tracker, stated in a recent report that oil companies could get caught in a stranded asset trap worth $500 billion, if they maintain long term investment decisions based on the prevailing strong energy prices.

The report came as another environmental group, Ember, stated that EU renewable power generation has risen by 157% from 2011 level to a record 547 terawatt-hours in 2021 and accounting for an 11% increase in two years from 2019.

According to Ember’s Europe Electricity Review, gas use declined last year for the second year in a row by 8.1% lower than 2019; and coal use fell just 3.3% in the same period.

In its report Carbon Tracker warned oil firms to take cautious and managed approach to investments in the energy transition phase in order to achieve the double objective of making significant short term profits while achieving climate goals.

Carbon Tracker warned that the current ballooning oil prices would likely be deflated by measures governments are currently taking to discharge their climate commitments. It pointed at possible wider adoption of electric vehicles (EVs) as potential drain on oil demand and pull on prices.

The warning is anchored on rising components of renewables in the European energy mix, as the continent struggles toreduce its dependence on costly natural gas supply crisis which has dealt blows to homes and industries.

Another climate think tank group, London-based Ember, reported that over half of new renewable generation since 2019 has replaced gas power. The rest renewable generations replaced mainly nuclear and coal sources, according to a study by Ember.

Lead author on the study, Charles Moore, stated that renewables are now an opportunity, not a cost; adding that the alternatives to fossil energy are available, cheaper, getting cheaper and more competitive.

The study however pointed out that cost remains a big issue in determining back up fuel for renewable power generation in the continent, a situation they said has retained coal in the mix.

 The high price of gas relative to coal has meant utilities are leaning more on coal as a back-up for renewable generation, which risks the trajectory of Europe’s phase-out of the dirtiest fossil fuel. Last year, the EU’s coal use jumped disproportionately high relative to the rise in power generation as high gas prices boosted the relative profitability of burning coal instead.

EU power generation from renewables reached a record high in 2021 of 547 terawatt-hours last year, accounting for an 11% increase compared to two years before, according to Ember’s Europe Electricity Review. It’s more than doubled in a decade, representing a 157% increase since 2011.

Gas use declined last year for the second year in a row, reaching a level 8.1% lower than 2019. By contrast, coal use fell just 3.3% in the same period. Put simply, wind and solar did a great job of replacing coal during 2011-2019 but since then renewables have mostly been nudging out gas-fired power stations.

Ember’s Moore warned that the slowing phase-out of coal might require legislation to accelerate. The International Energy Agency recommends OECD countries cease using coal by the end of the decade to ensure alignment with the Paris Agreement target of keeping the world’s temperature increase below 1.5 Celsius.

Overall, EU power sector emissions fell at less than half the rate required to hit that target, Ember’s report said. Spain produced the largest emissions reduction in the last two years, with renewables adding about 25 TWh and gas falling 15 TWh. In contrast, heavy use of coal dragged down the bloc’s climate progress in Poland, where coal use rose about 8 TWh and renewables gained only 4 TWh.

The Oracle Today reports that the prediction by Carbon Tracker aligns with the position of other climate activists and economies seeking independence from oil producers who pay blind eye to cost drivers and metal supply gaps that hit the renewable energy industry and slow down energy transition.

Report abound that the mining and commodities industries are raising flags about rising prices for metals and minerals essential for making solar energy, wind turbines, and electric cars.

 At the recent Future Minerals Forum in Saudi Arabia, for instance, Barrick’s CEO Mark Bristow projected that the copper market could swing into a shortage, while a Strategist and Principal at Hallgarten & Company, Christopher Ecclestone, said metals and minerals prices are on an irreversible upward trajectory.

The rising costs of raw materials have already begun to affect the renewable energy and EV industry, making their products costlier and reducing the number of people willing to switch to a lower-carbon alternative to fossil fuels.

It has also jeopardized the progress of the energy transition, according to analysts, raising the price tag substantially.

Despite the concerns in the renewable energy and EV industries, Carbon Tracker insists in the report that companies investing in more supply could face a nightmare scenario if they go ahead with projects which deliver oil around the time that demand starts to decline.

Energy-transition analyst at BloombergNEF, Felicia Aminoff, urged European governments to dump coal faster by building more renewable energy and faster, adding that renewable energy would always be cheaper that fossil fuel in the long run.

“Wind and solar have no fuel costs, so as soon as you have made the initial investments to build wind and solar capacity it will start replacing generation that uses any kind of fuel, whether it is coal or gas,” she stated.

The Oracle Today reports that oil prices opened the week with 17 percent rise, closing January on strongest monthly performance in at least 30 years.

However, while the rising prices primarily reflect rising global demand and post pandemic economic recovery, there is also a price support from geopolitical tensions arising from prevailing spat between Western military allies and Russia over Ukraine.

The West Texas Intermediate (WTI) crude grade was up 0.67% at $87.40 per barrel, and Brent crude grade traded at $91.14, up by 1.16% on the last trading day of January.

The winter storm on the U.S. East Coast pushed fuel demand higher in the month, and geopolitical concerns in key producing countries also continue to support oil prices, traders said.

The Russia-Ukraine crisis is still bringing a risk premium to energy prices amid fears of disruptions of supply in case Russia invades Ukraine, and the West imposes sanctions on Moscow.

The other geopolitical flare-up is in the Middle East, where the United Arab Emirates (UAE) reported a third attack this month, following the deadly attack with drones from the Iran-aligned Houthis two weeks ago and intercepted missiles last week.

On Monday, the UAE again said it had intercepted and destroyed a ballistic missile launched by the Houthi group, with the UAE Defense Ministry saying there were no casualties. The ministry affirmed its “full readiness to deal with any threats,” adding that it will “take all necessary measures to protect the UAE from any attacks,” Emirates news agency WAM reported.