Considering the interim approach on route to net-zero

The current spike in energy prices and potential gas shortage are starkly demonstrating some of the dilemmas of the energy transition. In recent years the UK has invested hugely in offshore wind – around 30% of the world’s capacity is in UK waters and we need to quadruple that capacity by 2030. Yet we remain dependent on fossil fuels for our energy system, as we continue to heat our homes, drive our cars, power our industry, and run our farms on oil and gas.

The spike has also demonstrated how our industries are all interlinked. Who would have thought that high gas prices and potential supply shortages would threaten food production, ironically because of a lack of CO2.

Most forecasts predict that oil demand is likely to peak by 2030 before facing a decline, with gas having a longer lifespan. The bp 2020 Energy Outlook considered Rapid, Net Zero and Business-as-usual outcomes and predicted a peak in the mid-2030s in Rapid, compared to the mid-2020s in Net Zero. In Business-as-usual, the oil giant predicts gas demand will increase throughout the next 30 years to be around a third higher by 2050.

Due to an oil price in the doldrums and general sentiment against oil and gas, there has been a lack of investment in new production over recent years. Oil and gas fields generally deplete by 10-15% per year if left to their own devices, so our UK supply is likely to be increasingly constrained.

In the past this would have spurred more exploration, however this isn’t very attractive to the boards of energy companies. Some countries such as Ireland have gone as far as announcing they will not issue any more exploration licenses, but even where reserves have been already discovered, development is clearly a dilemma. Large developments can have a long lifespan often in excess of 25 years. With a limited horizon for oil demand, these investment decisions must be challenging for company boards.

The last few months have seen a debate over development of oilfields to the west of Shetland. On one hand, as we continue with the energy transition, ideally, we wouldn’t need new oil fields. On the other hand despite great progress, we are still dependent on oil and gas. While we would all love to change to 100% renewables overnight, realistically it isn’t going to happen.

Both demand and supply need a managed, and rapid, reduction if we are to avoid further crises and deliver on our imperative to get to net zero by 2045. But in the meantime surely as a country we are better to meet that demand with the oil and gas on our doorstep in as clean a way as possible.

The bulk of activity in the industry is likely to be in making the most of the oil and gas fields we already have in production and making that production as efficient and low in emissions as possible. Looking solely at gas as a fuel source, the Government has already revealed its strategy focusing on hydrogen as a key delivery method for energy. The Acorn project based in Aberdeenshire is a leading example of the innovative thinking we will need, re-using gas pipelines, converting natural gas into hydrogen and sequestrating the carbon dioxide underground. This new industry will not only bring in lots of capital, but also create a large number of jobs.

Within BGF, we’ve seen just how exciting activity in the energy sector can be. There are a lot of interesting companies with strong investment potential who are actively working on products and services to make production more efficient and secure. Most recently, we’ve added some to our portfolio, including Reactive Technologies, which has innovative technology essential to balancing renewable energy on the transmission grid and Aberdeen based oil and gas services firm isol8. isol8 is the only company in the world to use underwater soldering to create metallurgically bonded alloy barriers to seal off oil and gas wells, providing a longer lasting and more environmentally friendly solution to traditional cement filling methods.

BGF is the UK & Ireland's most active and dynamic investor of equity capital in growth economy companies, backing entrepreneurs and innovators. For more information visit www.bgf.co.uk

Read the latest issue of the OGV Energy magazine HERE.