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.
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
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?
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
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
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.