This article is an adapted summary of a keynote speech and fireside chat with Daniel Yergin, Vice Chairman of S&P Global, and Author of ‘The New Map: Energy, Climate, and the Clash of Nations’, at GIC Insights 2022 which was held on 15 November 2022 in Singapore.

Moderated by Prakash Kannan, Chief Economist and Head of Total Portfolio Macro & Markets, GIC, the session considered the opportunities and challenges presented by the energy transition and its implications for energy security, the oil and gas market, and supply chains more broadly.

A brewing energy crisis

Contrary to popular belief, the energy crisis did not begin with Russia’s invasion of Ukraine on 24 February 2022, but with the post-pandemic economic recovery in the latter part of 2021. Global economic growth surged to 5.9% in 2021, exacerbating pressure on energy supplies.

US President Joe Biden’s announcement in November 2021 of an additional release of crude oil signalled a burgeoning energy crisis – the stage for which had already been set by “pre-emptive under-investment” in oil and gas. According to estimates, global upstream investment in hydrocarbons remained depressed in 2021 at $341 billion, nearly 25% below pre-pandemic levels. Reasons for this trend include poor returns following two oil price crashes in just seven years and uncertainty about future demand. Regulatory and investor pressure to pivot to cleaner sources of energy have also grown, limiting access to finance for fossil fuel development.

With European gas markets reeling from Russia’s attempt to leverage it as a second front in the Russia-Ukraine war and given insufficient renewable energy supplies to effectively meet global energy needs, the issue of energy security has gained renewed focus.

An unprecedented energy transition ahead

Energy transitions are not new, but prior transitions were not so much transitions as they were additions to the existing energy landscape. The discovery of coke – a form of processed coal – as a more efficient material than wood in the smelting of iron ore in 1709 and the drilling of the first modern oil well in Western Pennsylvania in 1859 signalled a shift from wood to coal and coal to oil respectively. These transitions also took a century or more to unfold.

There is no model for what is being attempted now, which is to change the energy foundations of a world economy worth roughly $100 trillion in slightly more than a quarter century. This monumental task requires urgent action in four key areas:

• Energy security must be prioritised after years of being taken for granted. Geopolitical developments, such as the Russia-Ukraine war, have highlighted the importance of balancing stable energy supplies today with the need to speed up the energy transition for the future.
• The macroeconomic impact of the energy transition requires deeper analysis, addressing the costs and time involved. Experts in Europe warn about potential unintended consequences, including economic disruptions on the scale of the energy crisis and global recession of the 1970s.
• As developing countries demand more funding to enable an inclusive and equitable transition, the need to address the current North-South energy divide has taken centre stage. As more financial institutions pledge to stop financing new fossil fuel projects, emerging markets criticise such decisions for curbing their access to funding to build infrastructure such as natural gas pipelines that would be critical to their energy security in the absence of sufficient renewable energy supplies. It could also limit economic opportunity while exacerbating health issues such as indoor pollution from continued reliance on burning wood – or trash – for power.
• With the rise of mineral-intensive climate solutions, the move from “big oil to big shovels” must involve securing new supply chains to meet rising demand. With policy incentives such as those introduced by the US’ Inflation Reduction Act to promote the adoption of clean energy technologies, demand for minerals such as copper is set to soar. However, operational and geopolitical constraints remain. It can take 16 to 25 years to develop mining projects from discovery to first production, and many of these raw materials are concentrated in high-risk countries that might not be supportive of new investments in the mining industry.

Tech innovation will be key

The European Union’s (EU) ban on the purchase, import, or transfer of crude oil products from Russia to the EU began on 5 December 2022, with an additional ban beginning in February 2023. This has prompted the US to take the lead in imposing price caps on Russian oil to avert an oil crisis arising from shortages, but enforcement difficulties may cause disruptions to markets.

Amidst these uncertainties and in response to stakeholder pressures, oil and gas companies have been increasingly investing in climate tech in order to future-proof their businesses. They have made forays into molecules, such as hydrogen, ammonia and biofuels, and electrons, or electrification. While an electron-based approach is supported by the rapid growth of wind and solar and an uptick in demand for electric vehicles, developing these other molecules will be equally important, especially in heavy transport and residential heating systems where the barriers to electrification are higher. As it is, despite their rapid growth, wind and solar currently comprise about 3% of world energy, while hydrocarbons account for about 80%.

Challenges to deploying these new solutions at scale remain, however. Green hydrogen, for example, enjoys considerable regulatory incentives and offers significant potential, but the technology still faces major obstacles, most notably much higher costs compared to blue hydrogen, challenges of scale, and constrained commercial viability, including market demand.

Potential in nuclear, but obstacles abound

It will be difficult to make the energy transition without nuclear energy as a climate-friendly alternative to fossil fuels that already avoids 1.5 gigatonnes of global emissions and 180 billion cubic metres of global gas demand per year.

One key obstacle to nuclear energy is geopolitics. Russia dominates the nuclear fuel cycle value chain, providing 35% of enriched uranium – necessary for use in nuclear reactors – globally. However, Russia is no longer regarded as a reliable supplier of energy, owing to the Russian-Ukraine war and Russia’s weaponising of natural gas.

The uptake of nuclear energy also faces social, cultural, and operational challenges. Germany abruptly decided in 2011, immediately after the Fukushima disaster, to shut down its nuclear power industry, which at the time provided 25% of the country’s electricity. That is now widely seen as a major mistake, undermining Germany’s energy security and leaving its economy highly vulnerable with the Ukraine war and the cut-off of Russian gas exports to Europe. While the energy crisis has prompted a delay in the mothballing of Germany’s last three nuclear power plants, it is unlikely that the phase-out policy will be reversed.

Meanwhile, ageing nuclear reactors in France and delayed maintenance owing to Covid-19 have put part of France’s nuclear fleet out of operation, although remediation is proceeding and reactors are coming back into operation. With its long-term focus on energy security, Japan currently has seven operational nuclear power plants and the government is seeking to restart a number of other plants.

Despite such challenges, there is a growing view that nuclear energy must play a critical part in the energy transition.

Ultimately, amidst the current energy and geopolitical crisis, it’s increasingly recognised that a multitude of solutions are required to accelerate the energy transition and that such a transition must go hand in hand with greater energy security worldwide.