Outlook 2023: Balancing the social and environmental impacts of the energy transition

The current supply crunch has brought concerns of a mismanaged energy transition to the fore for both the developing world and Western nations
The energy sector has undergone seismic changes in 2022, with a rapid strengthening of commodity prices resulting from years of underinvestment in the supply side as global energy policy and ESG headwinds curtailed industry investment. This combination has brought the debate around the global energy transition further into the public mindset, with consumers facing significant social challenges as the growing energy crisis has led the cost of energy to spiral.

While some may point to the events in Ukraine as the trigger point for the energy crisis, many in the industry would argue that the world was heading to this juncture due to a failure to address the supply side while demand continued to grow. In any event, there is no doubt the debate around the pace and structure of a responsible energy transition has adopted a more pragmatic tone this year in light of the social impact the energy crisis is having, particularly in the UK and Europe.

4pc – Africa’s share of global emissions
Recognising the negative social impact of a mismanaged energy transition will allow the developed world to appreciate concerns at the forefront of African governments’ debates.

While the West has benefitted from decades of cheap hydrocarbon-fuelled energy, Africa has largely yet to realise the benefits of the abundance of natural resources that exist within the continent. Add to that the fact that Africa contributes only c.4pc of global emissions, then one can understand why the governments, private sector and people of Africa are calling for a just transition that allows them to benefit from the positive socioeconomic impact of hydrocarbon production until there is a more economical and sustainable alternative for their long-term energy requirements.

Alongside the energy transition, an industry transition is taking place where, as previously transpired in the Gulf of Mexico and the North Sea, smaller independent operators are acquiring mid-to-later-life assets from IOCs and NOCs. This transition is already underway in Africa and will only accelerate as IOCs and NOCs enact their transition strategies based on divesting assets in order to reach net-zero targets. However, divesting companies have a responsibility to ensure they transact with credible counterparties that can assume the operating responsibilities of these assets and maintain the same commitment to ongoing, transparent disclosure of environmental data.

Access to capital
Furthermore, the challenge for smaller independents to access capital remains critical as ESG headwinds reduce or cut off financing for extractive industries. While the void has generally been filled by vendor financing packages and debt facilities provided by the large commodity trading houses, conventional institutional investors are grappling with the conundrum of reducing investment in the oil and gas sector while also maintaining exposure to investments in an industry that many predict to be on the cusp of a further positive cycle.

The ESG agenda has undoubtedly been positive in terms of investors holding companies to account when it comes to disclosures and commitments, especially around the primary point of the sector’s role in accelerating global climate change. It has, however, also negatively impacted the access to capital that the industry requires to match the global supply with the current growth in demand for fossil fuels.

Even in the event where demand is static, there is still a requirement to invest to replace the natural depletion of the assets under production. Ironically, in an effort to encourage positive social impact on a global basis, ESG has played a role in the supply crunch we see today which, when paired with a gloomy economic outlook underscored by rapid inflation and rising interests rates, leaves people in the most-developed parts of the world facing an unthinkable modern-day challenge of how they can afford to heat their homes this winter.

Divesting companies have a responsibility to ensure they transact with credible counterparties
Afentra was established in 2021 to fill the industry void that will enable the responsible transition of assets from divesting IOCs and NOCs to credible counterparties.

The narrative at the time of Afentra’s launch was that a pragmatic debate was required through the energy transition in Africa to protect the social impact on the communities and countries in which the hydrocarbons are produced. As we sit here today, we believe this debate has become just as relevant in the developed world, as the events of the energy crisis have created a greater understanding in the public conscience of the social impact of an over-accelerated energy transition.

The energy transition is happening, and the oil and gas industry has a duty to ensure it is done in a responsible manner. Host governments in Africa—previously courted by the majors—are adapting their policies for the ongoing change and recognise the growing importance of smaller independents in taking on operating responsibilities in order to maintain supply and the associated impact on their economies and the quality of life of their citizens. Those responsible for global energy policies, and the investor community that can support a responsible transition, also have an important role to ensure their rhetoric recognises the requirement to deliver a transition that balances the immediate and longer-term social impact, not just in Africa but the world in general, with the ultimate goal of decarbonisation of human society.

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