The energy transition: oil and gas remain key

For Hans van Cleef, senior energy economist at ABN AMRO, this era couldn’t have been more interesting. Energy, which always has been a strategic issue for the public and private sector, has also come to the forefront because of the environment; climate change and extreme pollution both are effectively public/environmental health issues.

“There is quite a dynamic in the global energy market because of the impact of fossil energy. Most notably in Europe, but also in the US and Asia, there are ongoing efforts to phase in renewable energy – i.e. biomass, wind and solar – to gradually replace the fossil part of the energy pie. Having said this, the demand for fossil energy, both oil and especially natural gas, will also grow in the decades to come. Population growth and the rise of the middle class in emerging economies will drive energy demand. In saturated markets, such as Europe or the US, energy demand stabilizes. One would expect a decrease due to energy saving policies but apparently the advance of electronics and electric cars have nullified this.”

Not a global issue

According to Van Cleef, the urgency of an energy transition is not felt on a global level. Some countries or geographic regions are more geared up than others. “One can expect that people from Botswana or South Africa have other priorities than a Dutch person. Earlier this year, I visited these African countries and asked if (sustainable) energy was on the radar.

For most citizens in Botswana, having food on the table is a matter of daily concern. They are hardly occupied with alternative energy sources.” Given the small impact of Africa on global CO2-emissions, it is probably not even that important that climate change is not high on the agenda yet. China and the US both account for more than 50 per cent of CO2-emissions and have as such a significant role to play in mitigating their CO2-footprint.

Frontrunner China

“China has emerged as one of the global frontrunners in the energy transition”, Van Cleef says. “It is investing in renewable energy – wind, solar, hydro – but also in nuclear energy as integral part of a lowcarbon mix. As the energy demand in China will continue to grow for the foreseeable future, fossil energy will remain crucial to meet this demand. As reported, China has cut drastically in its coal-fired plants and has stepped up in gas-fired plants to shift to ‘cleaner’ fossil energy.”

The energy-agnostic approach from China exemplifies the pragmatic nature of its energy policy. In other countries, for example Germany, more drastic choices have been made to either phase in (solar) or cut (nuclear) certain energy types. In ABN AMRO’s home market, the Netherlands, there are ambitions to wean off natural gas (partly due to earthquakes and resulting damage to housing due to domestic gas exploitation, ed.) in order to meet CO2- emission reduction goals.

Goals hard to meet

For Van Cleef, it remains to be seen whether certain countries would be able to meet their CO2-reduction goals. In the case of the Netherlands, a 80 to 95 per cent CO2- reduction in 2050 (compared to 1990, ed.) has been set by the Dutch government. “This goal will be very hard to meet due to the geographic and demographic nature of the Netherlands. There are hardly any possibilities for hydropower. Wind energy is possible but has its limitations in highly populated areas where nobody wants a wind turbine in his/her back yard.

Offshore wind is also an issue because of the busy shipping lanes in the North Sea and the impact on the environment. In other words, there is an urgency to shift towards renewables but these also have cons which in turn prevent significant or drastic changes. Having said this, it might be better to conduct this transition in a timely manner and not ‘push through’ these changes which in turn could lead to costly changes in the energy infrastructure and rising energy costs for its users.”

Real economy

Ideally, the EU as a political entity should have a concerted and interrelated approach, Van Cleef advocates. “Some countries are better positioned for certain renewable energy types. For example, the Mediterranean would be more suited for solar or the UK for offshore wind energy. What if we would aggregate energy generation over the EU? Then we would be able to meet our goals. However, this approach would require considerable political effort. For the time being, each and every member state has its own policies in place.”

ABN AMRO is also active in investments and giving advice to investors in the (global) energy market. Is the bank one of the front runners in the renewable energy market? According to Van Cleef, ABN AMRO has a sustainable policy in place which means that the bank takes non-financial factors into consideration such as ecological, ethical and social risks. On the other hand, the bank continues to invest in the ‘real economy’, which in the case of the energy market, is predominantly fossil.

Risk minimization

“It is important to realize that we try to minimize the risk profile of our investments. For the foreseeable future, investments in oil and gas are low-risk. This also accounts for solar and wind by the way. One could advocate that we should turn away from fossil completely but that wouldn’t be wise from an investment perspective. We also would shut the door on companies that are active in this market and could play a bigger role in the energy transition. Such a situation would not be productive.” Although this stance is understandable, one could argue that an energy transition should be expedited in order to mitigate climate change and subsequent costs for the environment and economy.

Transparent communication

Van Cleef: “There is a certain sense of urgency needed, I agree. However, this transition cannot take place in a couple of years. It must be clear to all stakeholders, especially citizens, that in some cases drastic changes in the energy infrastructure are needed. These costs ultimately ‘land’ on everybody’s doorstep. At the moment, the communication about this issue, especially on social media, is realistic. 

It will be impossible to turn off fossil and switch to alternative energy sources within a time span of a couple of years. Therefore, a clear and transparent communication is needed to provide a solid foundation for the energy transition. This is one of the main hurdles, along with the political will. In terms of technology development in established renewables such as solar or wind, there are no significant obstacles.”

Daunting task

One of Van Cleef’s tasks is to follow and predict market and price development in energy commodities such as coal, gas and oil. With the current political climate, this task has become ever more daunting, Van Cleef admits. “It has happened that the oil price dropped 7 per cent the day before we published a market update. Markets were already quite volatile, but with uncertainties regarding energy policies, especially coming from the USA, it has become increasingly difficult. 

For the long(er) term, it appears that price development will be relatively stable. As I have indicated before, energy demand will rise in certain geographies. This demand will be met by fossil reserves, most notably in gas exploration and exploitation. As for oil, new project development has been halted for several years. There are signs of recovery, be it hesitantly and carefully. The pressure, both on oil and gas reserves, is expected to be mitigated by the advance of renewables. These forces will more or less create some sort of equilibrium between demand and supply of fossil energy.”