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Sustainability shift — Oil's future in the energy transition

The energy markets are beginning to realize how climate risks can be a threat. The debate following energy transitions has switched to concerns about what could be the next threat, when and how it would occur. And if it occurs, how is the industry prepared to cope up with the situation. Oil companies are responding by writing off long-cycle investments and moving into alternatives. Governments, on the other hand, are putting in regulations on transport fuels, lower sulfur products and biofuels blending. As road fuel evolves, other sectors such as aviation will look for other economic alternatives. The shift towards low Sulphur fuel puts oil and petrochemical sectors under competition.

Peak Oil Demand

The debate concerning climate policy largely affect the world's energy markets, and while the drive away from hydrocarbon fuels might lead to a peak in oil demand over the next couple of decades, oil will surely remain a significant share of total energy demand in the future.

Investor scrutiny comes as a whole structure of sustainability risks. As the global demand for oil in the energy sector continues to grow, petrochemical products remain essential to the economy despite a rapid acceleration in the public's ambitions around sustainability

S&P Global Platts Analytics experts say that growth should slow in the years ahead due to efficiency improvements, technological and regulatory change. Platts Analytics still forecasts a global oil demand rise to almost 115 million barrels each day (b/d) by 2030, about 1% a year, slowing from a recent high growth rate of 1.9% in 2017. The fastest demand-growth is speculated to occur in petrochemical feedstocks. This is going to lead a change in the types of chemical refineries. Furthermore, investors will continue to avoid stranded-asset risks, stemming from low-margin oil refineries, which could trigger a "survival of the fittest" race in the world's refining system.

How will aviation be impacted?

Aviation is one of the sectors that will be difficult to decarbonize. It is important to know that this area also is one of the sectors where oil will play a key role. Emissions from aviation make up to 2% of the global greenhouse effect, however, it is the fastest growing sector of transportation. This means that it doubles the contribution of aviation in the total CO2 emissions.

The developing countries will experience massive growth because the rising middle class demand a lot of travel hence the need for policies in this sector that will help curb emissions.

Crops-use for ethanol

Experts forecast that biodiesel and ethanol will rise in 2020 because governments are trying to meet greenhouse gas emissions targets as ethanol rises to 1.4% and biodiesel 6.1%. Many countries especially in Europe, are beginning to keenly look into the effects of crop-based biofuels and encouraging investment in feedstocks that can remove carbon without converting land to agricultural use. According to a report by the S&P Global Platts, the water footprint of biofuel is higher than that fossil-based counterparts. Bioethanol has an average water intensity of 3.3 liters per megajoule, which is 40 times higher than conventional gasoline.

In markets such as California, corn-based ethanol is preferred to ethanol made from molasses. This is only beneficial to volumetric mandates and not a reduction in greenhouse gas. The US will expect less demand for


There will be massive growth in demand and use of hydrocarbon-based diesel, unlike for gasoline which will continue for the next decade at a slower pace. According to S&P Global Platts Analytics, Biomass-based diesel has a larger potential in growth compared to ethanol. Study and analytics will be focused in Western Europe. Other key markets will include the US, Latin America and Southeast Asia.

How will shipping be impacted?

Analysts say that shipping industries might not be well prepared for the transition. Refiners are going to struggle to meet the high demand for cleaner fuel as few ships are fitted with pieces of equipment to reduce Sulphur emissions.

The global shipping fleet can consume over 3.5 million barrels per day (bpd) of high sulfur fuel oil, but only 3 million bpd of that demand will be eliminated, according to the average market forecast calculated by Norway’s SEB Bank

Moving away from oil

Study shows that countries like Saudi Arabia will transition to renewable energy by 2040. The country has been known for its rich oil deposits as well as sunshine that powers solar energy.

It is possible that by 2050, solar power will account for almost 80% of energy demand in the country, supported by enhanced battery and water storage solutions to lower energy system costs.

This clearly shows how energy will play a role in the transition to sustainable production and consumption, to control the intermittent nature of wind and solar resources. This will help provide power regardless of whether there is wind or sunshine.

Energy producers and energy consumers in all sectors are under intense pressure to find lower carbon solutions as the world looks to move closer to net-zero carbon emissions. The world is indeed in need of more energy and fewer carbon emissions. However, renewables simply cannot keep up with the growth in energy demand, and switching to lower-carbon fuels such as coal to gas makes limited progress to achieving the net-zero target. As such, S&P Global Platts Analytics maintains that better ways must be found to include fossil fuels in the world's future energy mix while minimizing their impact on greenhouse gases.

To succeed in the energy transition, there is a need to invest in all energy resources including oil and gas production to meet the global demand needed to fuel economic development. Experts say that society should grow its share of renewable energy to over 70% to achieve an energy transition and approach net-zero emissions

In conclusion, aviation and shipping have the biggest challenges ahead in the global shift to cleaner fuels. Investor concerns about stranded assets and environmental, social and governance (ESG) requirements will lead to the survival of the fittest among producers and refiners in the mid to long term. A sustainable future in the oil industry can only be attained if urgent action is taken by a range of stakeholders including, business leaders and policymakers.

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