The energy transition is transitioning to energy security
What a difference a year makes. Last year’s COP26 message of green energy as a panacea for climate risk has been replaced by a global shift prioritizing energy security and putting hydrocarbons back to front and centre. Absentee leaders from COP27 include: India, China, Japan, South Korea, Australia and even Canada. Meanwhile European and U.S. politicians seem incapable of recognizing the new normal.
The world is caught in a new energy crisis, triggered by Europe’s renewables’ failure in late 2021 and amplified by Russia’s invasion of Ukraine. Runaway natural gas prices have disrupted international supply chains from Asia to North America and now threaten Europe’s industrial base, including key green industries.
The crisis has revealed surprising global hydrocarbon demand, in particular an accelerating transition to coal. But the shift to energy security also includes growing government and private-sector commitments to nuclear power, particularly “small nuclear reactor” technology, on an accelerated schedule.
The International Energy Agency projects a 50 per cent increase in global energy demand by 2050, while OPEC recently increased its global oil forecast for 2030 from 100 to 108 million barrels a day, with its market share expanding because of politically constrained Canadian and U.S. production.
Demand growth throughout the Indo-pacific and Africa, homes to 85 per cent of the world’s population, anchors hydrocarbons as the indispensable, dominant energy source well beyond 2050. Globally, one billion tons/year of new coal mine capacity is under development and over 1,000 state-ofthe-art coal-fired electricity plants are at various stages from planning to completion.
Coal demand across the EU is up 25 per cent since late last year. Germany is accessing dormant domestic resources but in 2023 will become the third-largest importer of Indonesian coal after China and India. Coal is currently keeping the lights on as Europe seeks access to LNG and expands its nuclear infrastructure. European environmentalists and green politicians are quite correct in saying these developments represent 30- to 40-year commitments to hydrocarbons as a core energy source. But fewer people seem bothered by that than would have been just a year ago.
The Obama, Biden and Trudeau governments have generally followed Europe’s green lead, stimulating renewables with subsidies and tax breaks while systematically hobbling hydrocarbon exploration and production, including pipelines and refining infrastructure.
More recently however, these green policies have run into legal and political roadblocks. In the U.S., federal and state regulatory quagmires, ironically often the result of decades of environmentalist lobbying, are making the build-out of the green energy economy difficult, if not impossible. Green visions of interstate power lines networked to link wind and solar farms to the grid or new mines and processing plants to counter China’s stranglehold on the minerals indispensable for batteries today belong in the realm of wishful thinking.
The attorneys-general of nearly 20 U.S. states have put big financial institutions on notice that in adopting “environmental, social and governance” (ESG) investment criteria to structure their portfolios they are running afoul of their fiduciary obligations to investors to maximize returns. It turns out there is a trade-off between prioritizing eco justice and earning a high return on investment. Legal firms have in turn advised their financial clients that pursuing ESG’S green energy component needs to be anchored in the best available science — the subtext being that the UN’S IPCC climate reports likely won’t stand up in court. It’s telling that at recent legislative hearings in the U.S. and U.K. these firms’ CEOS have since expressed their firms’ strong commitment to providing financing to hydrocarbon industries.
UN Special Envoy Mark Carney’s COP26 initiative, the Glasgow Financial Alliance for Net Zero (GFANZ), has also run into legal difficulties. Carney structured this coalition of wealth managers, banks and insurance firms representing $130 trillion in assets to tackle climate change by redirecting international financing away from hydrocarbons in favour of the green energy economy. But leading Wall Street asset-managers, banks and other key institutions have recently backed away from the initiative, following legal advice concerning U.S. Securities and Exchange Commission (SEC) requirements for formal climate risk disclosures covering governance and risk management. Fiduciary obligations, yet again!
Canada is a world leader in hydro and nuclear, with 70 per cent of our electricity coming from these sources. We also have the third largest oil reserves and are a leading source of LNG. But it’s also true that the bulk of Eastern Canada and British Columbia’s gasoline and diesel comes from OPEC countries. We have so far escaped Europe’s and America’s rising energy costs, but the world’s rapid shift to energy security is leading to persistent hydrocarbon price pressures, and our luck is unlikely to hold. This winter’s prices of natural gas, gasoline and in particular diesel will tell us.