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Fossile Energy

From big oil to big energy

Oil and gas exploitation has a long history. However, its future role as an energy source and geopolitical factor has become the subject of controversial debate. Reason enough for the hydrocarbon industry to brace itself for the new age of energy.

17.01.2017

Documented usage of raw petroleum dates back 4,000 years. Early methods of oil refinement were introduced in the Middle Ages. During the industrial revolution in the 19th century, large-scale harnessing of petroleum-based fuel as an alternative to coal gained momentum. With petroleum assuming its role as the pivotal energy source of the 20th century, the first oil conglomerates started to rise. Big oil finally arrived.

Oil in the 20th century – shaped by uncertainty and volatility

With international competition for access to rich oil reserves across the Middle East in the first half of the 20th century, the geopolitical importance of petroleum became clear. Control of oil resources soon took on a major strategic role in regional and international conflicts. 

The establishment of the Organization of Petroleum Exporting Countries (OPEC) in 1960 marked a clear shift in the global power structures controlling the oil market. Events such as the OPEC oil embargo in 1973 and the 1979 Iranian Revolution caused the price of crude oil to soar to unprecedented levels. Instability followed. 

Despite Russia’s entry into the international oil and gas market in the 1990s, and ongoing US efforts to increase its energy independence, control over global supplies and prices has remained strongly influenced by OPEC. In the new millennium, the oil market has seen an entirely unprecedented dimension of volatility driven by political instability, armed conflict and supply concerns. While the price of crude peaked in 2008, only to bottom out about a year later during the global financial and economic crisis, the threat of uncertainty and volatility continues.

Bigger changes loom

Today, after years of consolidation, the global oil and gas market is clearly dominated by a relatively small number of giant players. The first and foremost, generating annual sales of US$ 478bn in 2015, is Saudi Aramco, with almost 20 other oil and gas companies recording annual turnovers in excess of US$ 100bn each in the same period. Having grown and prospered during years of vigorous business, these companies are now facing a crossroads. 

It has often been said that one day, the world’s oil supplies will run out. Yet technological advances and periods of soaring prices have enabled increasingly innovative oil and gas exploration, and new onshore and offshore oilfields have continuously gone into operation. However, the finite nature of fossil fuel sources is undeniable, even if no one can reliably predict when supplies will be depleted. And in the short- and mid-term, new non-fossil energy technologies, and environmental and emissions regulations, will increasingly influence the use of hydrocarbons as a source of energy. Reason enough for the major multinational oil and gas companies to take advantage of their vast resources to prepare for a shift to a greener global economy.

How imminent is the energy revolution?

The rapid spread of renewable energy is a bright spot in the global energy transition towards a low-carbon economy. Despite lower fossil fuel prices, renewable power expanded at its fastest-ever rate in 2015. Furthermore, the proportion of renewables in the energy mix is rising and, according to the International Renewable Energy Agency (IRENA), jobs in clean-energy industries such as solar, wind, geothermal and hydroelectric energy are increasing, while jobs in oil, natural gas, and coal extraction are decreasing worldwide. About 8.1 million people worldwide had jobs in the clean energy in 2015. That is up from 7.7 million in 2014, according to the latest figures from IRENA. Rising regulatory demands and public-opinion pressure will give high-profile companies compelling reasons to enhance their business model and sustainability credentials. 

Fortunately, some pioneering oil and gas companies took their first steps into alternative energy technologies decades ago – for instance, by producing solar panels. Forward-looking players throughout the energy market have recognised the developing potential of renewable energy sources such as wind and water power, alongside solar power. Today, these technologies usually cannot yet offer the historical profitability of oil and gas. But this might only be a matter of time, as in recent years both the costs for solar and wind energy have significantly come down while the same happened with the market prices for oil and gas – narrowing the economic gap between “old” and “new” energies. So the questions are: How can big oil step up to become big energy, and answer the energy needs of tomorrow? Moreover, which new players will have a lasting effect on future energy demand?

Forward looking players investing in alternative technologies

Several of the big oil and gas companies are well on track for the transition to a low-carbon economy, investing heavily in a future in which natural resources become increasingly scarce. These may include floating offshore wind parks, solar energy projects and other low-carbon technologies, or electricity storage solutions and biotech/geothermal advancements. However, some major problems cannot be argued away. Especially variable renewable energy sources such as wind and solar power pose numerous challenges, including reduced operating hours – and hence profitability – of other generators, and the need for adequate infrastructure to integrate the varying output of variable Renewable Energy Systems (RES). Assuming that we would manage to transfer our energy supply to 100% renewables, our need for conventional, costintensive back-ups such as gas- or coal-fired power stations would nevertheless remain – in the event that there is no sun, no wind, and no water. Most Norwegians will still remember the hot summer of 2003, when there was not enough water available to feed the hydropower plants. However, since the electricity sector in Norway relies predominantly on hydroelectricity, and has hardly any back-up systems, the government urgently asked the public to save power. In addition, the lack of energy storage concepts and capabilities persists to this day. 

In spite of these challenges, further investments in energy efficiency and renewables will be aimed at developing zero-emission communities and cities. Innovative technologies and profit opportunities will be the driving forces for projects targeting a zero carbon footprint. And since renewable energies, like other emerging or proven technologies, are not without risk, this is where the insurance industry comes into play.

Risk partnerships to energise the industry’s change

Munich Re, with its deep understanding of risks, is in a strong position to partner with today’s oil and gas companies in transitioning to tomorrow’s energy economy. With special risk-transfer solutions for project- or performance-related risks and natural catastrophe covers, insurers can play a key role as enablers and credit risk enhancers. In addition, the engineering and natural catastrophe knowledge and experience gathered in decades of risk assessment for the energy industry make insurers suitable advisors and consultants for innovative energy projects. 

Although the major multinationals are best equipped to drive change with large-scale renewable energy projects such as offshore wind parks, smaller energy players and start-ups can also contribute significantly – for instance, with distributed, community-based or off-grid solutions. Here, insurers and reinsurers can send a strong signal to potential investors by underwriting renewable projects and even investing directly in renewable energy installations, thus effectively encouraging innovation. This is the path we have already taken, and will continue to pursue. 

The shift to the energy economy of the future, and the transition from big oil to big energy, will not happen overnight. Viable approaches can and must involve energy security by diversifying risks, affordability, environmental issues and acceptance by the public. Accordingly, the process will involve a plurality of stakeholders with expertise in energy, technology and risk. The quality of dialogue and partnership among these groups will shape the change.

Munich Re Experts
Martin Stricker
Underwriter
Wolfgang Ulbrich
Senior Underwriter
Scott Johnson
Underwriter
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