A constant rush to build as much infrastructure and curate as much talent as possible is a narrative that has long pervaded the fossil fuel boom. But the energy transition – especially its surprising acceleration this year – is changing that.
Now, the push to find project financing for new types of greener energy projects and innovations - notably renewables, nuclear and LNG - is raising a pressing question. How to avoid a potentially financially crippling surge in stranded fossil fuel assets, notably coal and oil?
Red flags all over
The cost of writing off stranded assets could reach $900 billion – or one third of the current value of big oil and gas companies – if governments aggressively tried to meet the limit of 2°C. Consider the financial burden of this figure amid lower oil prices, the economic strain of the pandemic, plus the cost of the energy transition.
Wood Mackenzie expects a minimum of $30 trillion to $40 trillion of investment is needed to put the world on a 2°C or lower pathway.
Of course, the potential financial strain will differ region-to-region. For example, oil and gas will remain a central part of the Middle East’s energy basket up to 2050. This is not a failure, but key to sustaining energy security as the world finds its greener footing.
That the ‘last drop of commercial oil’ will likely be from a Middle Eastern well and reduces the region’s immediate risk of stranded assets. But the risk must still be factored in as the renewable portfolio matures. The combined shares of oil and gas as part of the region’s energy mix will fall from 98 per cent in 2018 to 61 per cent in 2040 with a 'rapid' scenario, 37 per cent in a 'net zero' scenario, and 79 per cent in a 'business as usual' situation, according to BP Outlook.
So, how to mitigate the risk of losing the billions of dollars invested in existing fossil fuel infrastructure, much of it based on multi-decade contracts and multi-decade debt packages? One route is to continue business as usual and risk the hyperbole image of stranded assets – a bleak landscape with rusting infrastructure en masse creaking in the wind – becoming an expensive reality in the next few decades.
Another route is one of proactivity, which sees legacy infrastructure getting a reboot to make it more aligned with the Paris Agreement goals. This means embracing a 'circular carbon economy' (CCE), which in turn, includes bolstering energy efficiency within legacy infrastructure, updating human resources skillsets, and applying the digital tools of the 4th Industrial Revolution (4IR) to help maximise value and relevance.
This is an undeniably vast and complex task, but it is our best chance at stabilising the environmental and economically human-induced elements of climate change. Improving energy efficiency and switching to renewable energy will address 55 per cent of global greenhouse gas (GHG) emissions, detailed the Ellen McArthur Foundation. But by adopting circular practices, the world can reduce a significant proportion of the remaining 45 per cent.
The systems-based approach of a circular carbon economy combines economic opportunity with better environmental and societal outcomes by addressing the facets of energy transition – i.e., water scarcity, loss of biodiversity, packaging pollution and more. All parties in all industries must zoom their lower carbon microscopes on their supply chains to redefine environmental efficiency from production through to the end-user. And back again...
Climate finance plays a vital role in this positive disruption, starting with educating stakeholders about what greener finance means and how to leverage it.
The price tag of this route is far less than that of stranded assets or the catastrophic impact of unmitigated climate change. Payback margins are increasingly appealing in today’s economic environment. For example, the Global Commission on Adaptation (GCA) calculated that every dollar invested in building climate resilience could result in between $2-$10 in net economic benefits.
Let us not forget that the value of a circular carbon economy goes far beyond ticking sustainability boxes in the energy transition. It also directly links to lower resource scarcity and geopolitical tensions. The Ecological Threat Register 2020 results show that 141 countries are exposed to at least one ecological threat between now and 2050.
The 19 countries with the highest number of threats have a population of 2.1 billion. This mean a minimum of 20 per cent of the global population by mid-century would be significantly affected.
The economic fallout alone of this global ricochet of disruption – something the world has already witnessed with COVID-19 – would be life-changing for many more. We have the solution for reducing the risk of stranded assets via a circular carbon economy at our fingertips.
Now we just need to proactively reach for it.
- Badar Chaudhry is Senior Vice-President & Unit Manager - Energy Sector at Mashreq Bank.