‘Disorderly’ transition looms | Financial Times

Welcome back.

US oil and gas production fell hard in December, government data showed this week — yet more evidence that the shale patch is losing its mojo (as we discussed on Tuesday).

Today’s newsletter looks at what curtailing fossil fuel supply while demand remains high means for global markets. In a nutshell: big price swings and geopolitical headaches.

In Data Drill, Amanda digs into the US’s soaring imports of Chinese batteries — underlining just how far the country has to go in its push to set up a domestic clean energy supply chain.

Energy Source will be coming to you live from CERAWeek in Houston next week. Stay tuned, and see some of you there.

Thanks for reading — Myles

Avoiding a ‘disorderly’ transition

As the energy transition gains pace, the risk of chaos emanating from it is rising.

Today, investment in new oil and gas supply is well below what it was a decade ago. Investment in clean energy, meanwhile, is not increasing as quickly as it needs to. Fast forward a few years and that could mean a serious mismatch between supply and demand.

Cue wild price swings, affordability issues and a scramble to cut reliance on unstable foreign supply. In other words, more of what we saw last year in the wake of Russia’s full-scale invasion of Ukraine.

A more thoughtful approach to the transition is needed. Policymakers need to look ahead to potential pitfalls and try to pre-empt the imbalances that might ensue. That is the message of a new paper from academics at Columbia University’s Center on Global Energy Policy, entitled Investing in oil and gas transition assets en route to net zero.

“We have to phase oil and gas down — but it has to be done in an orderly way,” Gautam Jain, one of the paper’s co-authors, told the Financial Times.

A ‘supply-led’ transition

Despite record profits last year, oil and gas companies globally invested about $310bn into capital spending, funnelling the rest into share buybacks, dividends and paying down debt — versus $477bn in 2014.

Had they followed the “drill, baby, drill” approach of the past, they could have invested as much as $580bn.

There are a couple of reasons they did not. On the one hand, after years of poor returns investors want money back. But another driver is that markets are responding to policy efforts to cut down future demand — and trying to pre-empt a slide in consumption.

“What we’re looking at is an energy transition not where demand adjusts first — but an energy transition where supply adjusts first,” said Luisa Palacios, the report’s other co-author. “What you’re seeing is that markets and investors are rational and they adjust first.”

Meanwhile, investments in clean energy have not risen fast enough. They currently sit at a ratio of 1.5:1 compared to fossil fuels. This needs to increase to 9:1 by 2030 if net zero goals are to be achieved.

“Because you’re investing in less than current demand trends, there is a risk of additional volatility,” said Jain.

The lack of investment in supply is not going to be reversed soon. “We see no change at all,” Pioneer chief executive Scott Sheffield said this week of the company’s plans to keep returning funds to investors.

The Canadian Association of Petroleum Producers, which represents the upstream oil and gas sector, yesterday said the country’s industry will spend C$40bn ($29bn) this year. That is up about 11 per cent from last year — but still half of what was invested in 2014.

Energy security

Meanwhile, as private western groups cut spending, state-owned oil companies — particularly those in the Middle East — are increasing investment. National oil companies accounted for 48 per cent of spending in the five years to 2021, versus 43 per cent in the previous five.

If state-owned groups fill the void, global energy supply will become less stable, and more subject to the whims of petrostate rulers — making for an uncomfortable geopolitical situation.

The upshot of all of this is that policymakers need to think more carefully about the signals they send out, Palacios and Jain argue, and how the world will fill the void left by dwindling fossil fuel supply.

“Sometimes you have to be careful about the unintended consequences of very good intentions,” said Palacios. “We have to understand the concept of transition assets in a much more assertive way.”

Some might argue that a bit of chaos — and even pain — is inevitable if the transition is to take off at the speed required. A slower pace, runs this argument, just leaves the existing energy system in place. Perhaps shock therapy in the form of high fossil fuel prices — triggered by under-investment — are necessary in the face of an increasingly urgent need to break the global addiction to fossil fuels and decarbonise.

The problem is that politicians, especially in democracies, can’t tolerate that level of disruption — hence why Joe Biden, the climate president, was so keen to keep petrol price inflation at bay. And the high prices themselves might cause such economic turmoil that spending on clean energy could be disrupted too. (Myles McCormick)

Join us on March 15-16 at the FT’s Climate Capital Live, where politicians, business leaders and financiers will discuss how organisations move from climate commitments to real action. Register today and claim 10% off your pass using promo code NEWS10.

Data Drill

The US is increasing battery imports from China. Lithium-ion battery imports from Beijing reached a record 165,000 tonnes last quarter, nearly double compared with last year, according to data from S&P Global Market Intelligence.

Overall, shipments of lithium-ion batteries to the US jumped 99 per cent in 2022 from the previous year, with China’s share of imports growing from 70 to 80 per cent, according to S&P.

The record imports underscore the US’s continued reliance on Chinese clean tech despite billions of dollars in federal stimulus to boost domestic manufacturing. At least half a dozen billion-dollar battery plants have been announced since the landmark Inflation Reduction Act passed in August, but it will take years for sites to be built and production to scale up.

Bolstering domestic clean tech manufacturing has been central to the US plan to compete with China. The new US congressional committee on China held its first hearing on Tuesday, when witnesses cited battery production as a crucial supply chain vulnerability.

Beijing dominates all parts of the battery supply chain, producing 75 per cent of the world’s batteries, 87 per cent of all anodes, and 68 per cent of all cathodes, according to the International Energy Agency.

The move to isolate China from the US supply chain has prompted a backlash against Chinese investors in the country. Last month, Ford announced a controversial $3.5bn plan to build batteries in Michigan using technology from China’s CATL. The plan was initially rejected by Virginia governor Glenn Youngkin, who accused it of being a front for the Chinese Communist party. (Amanda Chu)

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