The exit strategy for fossil fuels

(Note: this is a chapter from my 2021 book, ‘Planet Zero Carbon - A Policy Playbook for the Energy Transition’. Obviously, the oil market has changed substantially following Russia’s invasion of Ukraine; notably by reducing oil and gas supplies and therefore causing prices to surge. The trend however remains the same — most oil majors and national producers are still not increasing upstream investment, and are preparing for policy to start phasing out the use of fossil fuels.)

As the world starts to re-evaluate priorities in the wake of the global pandemic, certain facts are becoming inescapable — oil demand is down, and is unlikely to recover even in the medium term as economic impacts take their toll. In fact, some observers — such as the heads of BP, Shell and even those commenting from within OPEC — are now admitting that demand may not ever reach 2019 levels. This has multiple effects, as western oil majors are seeing record profit losses; with associated asset write-downs and forecast revisions. In the longer term, the outlook becomes even less favourable, as BP’s chair, Helge Lund explains that he expects demand for fossil fuels to fall 75% over the next 30 years.

Understanding the state of the industry today, it can be helpful to look at how Big Oil (specifically International Oil Companies or IOCs) have been fairing over the past decade. These companies (including ExxonMobil, Chevron and ConocoPhilips in the US, and BP, Royal Dutch Shell, Total, and Equinor in Europe) have seen an ongoing slide in profitability which started soon after the Financial Crisis in 2009, and has been falling ever since. Losses started to gain momentum between 2012–2017, as declines in profits were experienced across the board — BP’s profits dropped by 68%, Chevron’s by 65%, ExxonMobil’s by 56%, and Shell’s by 50%. As a recent IEEFA report shows, this did not necessarily translate as a reduction in dividends paid to shareholders — collectively, the top five (Exxon, BP, Chevron, Total and Shell) accrued $329 billion in profits (free cash flow) between 2010 and January 2020, while at the same time they awarded shareholders with $526 billion in dividends and share buybacks. So overall, these companies awarded themselves 63% more than they had to spend — a situation that was becoming increasingly difficult for these companies to sustain, even before the coronavirus pandemic. Most of this money was raised from borrowing, and via the sale of existing assets — which in effect meant that either the price of oil would need to rise sharply to accommodate their budget deficits, or demand would need to continue expanding at a significant pace.

However, the effect of the global pandemic has seen potential growth for the industry now lost, amounting to a significant contraction of the industry as a whole. Lockdowns and economic recession have combined to dramatically reduce demand in many global markets, and this has been exacerbated by a sharp reduction in the price of oil to the extent that it reached negative values in April 2020, as tankers and storage around the world filled up on oil sold at historically low prices. In many ways, 2020 could be seen as marking the end of any hope for ongoing expansion for western producers, as an almost perfect storm of factors has laid bare a faltering system of subsidies and financing.

Underlying the fundamentals of the market — the price of oil, and the current demand for oil — various factors have been gaining in momentum and importance concurrently. These include an increasingly stringent regulatory backdrop in Europe, characterised by ESG-criteria scrutiny, and the evolution of Paris Agreement objectives into ‘net zero’ objectives. Initially covering Europe, China has recently announced a firm commitment to reduce its emissions to zero by 2060, and the US under President Biden is likely to follow suit as he re-joins international agreements, and pursues the complete decarbonisation of the US electricity grid by 2035. Japan and South Korea complete the current list, which will then represent 62% of global emissions.

In aggregate, this then translates as severe, ongoing regulatory pressure — it is impossible for these oil companies to justify further investment and funding, when demand reduction is now the focus of government legislation. And this spills over to banks, with loans and other forms of financing increasingly withheld or simply seen as too risky — particularly considering the financial performance of these companies this decade.

Equity markets and shareholder dividends
This is further mirrored by indicators such as equity markets and credit ratings — western oil and gas companies are now the poorest performing stocks within the market, and this year ExxonMobil was ejected from the Dow Jones Industrial Average after more than 90 years. These points underscore the growing lack of investor confidence in these companies, and the underlying difficulties they are going to face in attracting future investment. Representing this fact, dividend cuts are being announced among many other IOCs — with Shell and Equinor announcing a two-thirds cut and ENI by 60%.

For those companies wishing to maintain traditional dividend payouts, the reality of asset write-downs, job cuts, and huge reductions in upstream investment among other restructuring measures are leading reputable industry commentators such as IEEFA to question the ongoing viability of western oil companies in their current capacity.

In a very recent report, IEEFA’s Australia /South Asia director of energy finance studies argues that the succession of coal exits by global financial institutions underscores what is now likely to occur: investment policy shifts (even outside of particularly ESG-conscious regions) are going to lead to the same thing happening for oil and gas.

Speaking of the 50 global financial institutions that have announced exit policies from high risk investments in tar sands or Arctic drilling so far, he goes on to state:

“To IEEFA, this is a precursor to the whole re-evaluation of the longevity of fossil gas, particularly in light of the new satellite data on methane leakages that shows on a thirty-year view LNG is a higher emissions source of fuel than coal power. Fossil gas has had its VW moment in 2020.”

Even Blackrock, the world’s largest asset manager with $7.8 trillion in AuM (and as a consequence the largest funder of fossil energy sources), made an announcement just before the coronavirus pandemic that represented a complete turnaround for the investment group. Larry Fink, Blackrock’s CEO, made the situation plain for those investors that now stand to lose money:

“The evidence on climate risk is compelling investors to reassess core assumptions about modern finance. Research from a wide range of organizations — including the UN’s Intergovernmental Panel on Climate Change, the BlackRock Investment Institute, and many others, including new studies from McKinsey on the socioeconomic implications of physical climate risk — is deepening our understanding of how climate risk will impact both our physical world and the global system that finances economic growth.

Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage — a key building block of finance — if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?“

Looked at cynically, one might perceive that he is willing investors to just avoid physical risk as well as climate legislation. However, as he goes on to state;

“..because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future — and sooner than most anticipate — there will be a significant reallocation of capital.” [Emphasis original.]

And to summarise the late-2019 mood, investment guru Jim Cramer spelled out an even less prepossessing future for fossil fuels, as he explained on a CNBC money show;

“I’m done with fossil fuels. They’re done. They’re just done. We’re starting to see divestment all over the world. We’re starting to see companies just regard them as, I mean big pension funds saying, listen, we’re not gonna own them anymore. It doesn’t matter how good they are.

The world’s changed.“

The fast-approaching risk of stranded assets
As previously outlined, institutional investor and bank exclusions are being committed to globally; initially by development banks such as the EIB, followed by groups such as the Net Zero Asset Owners Alliance and many others mentioned, and recently by Asian banks and institutions, which paints a very stark picture for all fossil fuels going forward — propelled in most part by the risk of stranded assets. As regulatory pressures become prevalent; carbon pricing systems encompass an ever-larger component of the market; and the volume and frequency of bankruptcies increases, avoiding the massive liability that stranded assets represent will become an ever more urgent necessity.

Before looking in more detail at the concept of asset stranding via policy pressures, it may be useful to revisit the concurrent market pressure imposed by alternative technological developments that are becoming competitive with the incumbent fossil energy industry. As we have seen in previous chapters, coal and even gas power stations are being undercut on price by the relentless cost declines of wind and solar, which together have doubled in market share within the past five years, and can be expected to double again within the next five. As the IEA states, 90% of new electricity generation will be zero carbon in 2020, and following this, wind and solar will overtake gas and then coal in capacity by 2024–25 . However, within the transport market, the scale of legislation as well as record industry investment is only starting to emerge. In total, 115 EV battery megafactories are slated for construction globally by 2029 , representing 39 million cars, or approximately 59.5% of the global passenger vehicle market. Of these 115 megafactories, 69% will be built in China, and 17% in Europe; with EU factories producing a potential 8 million vehicles per year, representing approximately 50% of the entire EU passenger vehicle market by 2030. Recent announcements in Europe for fuel cell heavy transport amount to 100,000 vehicles now committed to by 62 companies, and 1,500 refuelling stations by 2030. This is followed by the complete phase out of diesel truck sales in Europe by 2040 by seven manufacturers including Daimler, Scania, Man, Volvo, Daf, Iveco and Ford, within an investment budget of €50–100 billion. Similar investments have been made in Japan and South Korea as they plan to ramp up production of fuel cell and battery-electric vehicles for export globally, starting with a robust charging/refuelling infrastructure which is currently being rolled out . The scale of investments committed to cannot be overstated, and amount to a fundamental shift in business models that will not be appreciated until the full extent of the changeover is witnessed; with ever-tighter regulation within jurisdictions from the UK to California attesting to this fact.

What all of this means is that the scale and pace of industry and policy developments could dramatically increase the possibility of stranded assets further down the line for those investors, banks or oil producing nations that find that the market has contracted to the point that oil infrastructure assets invested in today may not be financially viable in future years. What seems like a stable and otherwise unremarkable market — albeit prone to cyclical volatility — may become an entirely different proposition once regulation and industry advancements start to have a material effect.

Unfortunately, the numbers are difficult to avoid: we cannot burn all existing fossil energy reserves within the next 30 years without missing Paris Agreement objectives, which is likely to send the planet on a rapidly warming pathway which we may not be able to rein in. As many have probably heard before via campaigns such as ‘Keep it in the Ground’ and similar, assets which some financiers may now be depending on are simply not burnable, meaning that the potential for asset write-downs (as is already happening) may be vastly understated. Figures vary regarding the quantity of losses likely to be witnessed overall; with Carbon Tracker estimating a reduction in fossil reserve values of $25 trillion, down from $39 trillion today. IRENA puts the total level of stranded assets at $11 trillion to 2050 if immediate steps are taken, and no further upstream investments are made. Organisations such as the Net Zero Asset Owners Alliance, international banks under the Principals of Responsible Banking and others via various frameworks are all rapidly pulling out of the sector, in order to avoid these losses. In the 2020 report ‘From Zero To 50: Global Finance Is Fleeing Oil and Gas’ IEEFA states that
“as stranded asset risks in fossil fuels continue to rise, and fossil fuel share prices continue to decline, financial institutions are refining their Environmental, Social & Governance (ESG) policy frameworks and increasingly taking a commercial line aimed at avoiding losing even more capital — be it debt, equity or via insurance losses.”

As mentioned in Chapter 6 ‘Conventional energy sources, statistics and scenarios’, many observers (or scenarios such as the PRI’s Inevitable Policy Response) see these risks as becoming relevant in the short term, thus motivating investors to think about these risks now. So the question today is not whether recent asset revaluing and write-offs reflect a short term cash flow problem for IOCs, or a longer term re-evaluation of the industry as a whole: losses incurred throughout 2020 within the oil industry are now almost certain to be a portent of what is to come — potentially in the region of $2–3 trillion by 2030 throughout the fossil energy industry generally, and between $11–22 trillion by 2050 .

Independent oil companies
Within the oil and gas industry, approximately 52% of all oil and gas is produced by National Oil Companies (NOCs), 12% by Oil Majors (IOCs), and the remaining 36% by independent oil and gas companies (Independents), who focus on exploration and production rather than midstream or downstream assets such as pipelines or refineries. What is happening today is that the market for Independents is starting to dry up as upstream investment reduces, and investor sentiment towards risk (which characterises this segment) makes a sharp turn for the worst. As Luke Parker of Wood MacKenzie explains; the journey forward for exploration and production companies is one of ‘consolidation, privatisation and liquidation’ — where the E&P business model of the last 90 years loses relevance and where ‘the number of Independents might halve over the coming decade. And halve again in the decade beyond that.’

All the qualities that investors will increasingly be looking for, such as stable returns, a low cost of capital and ESG-criteria scrutiny are all qualities that Independents often lack, meaning that even before the IOCs start absorbing heavy losses, these companies are the most vulnerable to a market that is in decline, facing the pressures that it now does. What happens to Independents in this way is mirrored by integrated companies further down the line.

National Oil Companies and OPEC
Beyond the dramatic scene unfolding among western oil producers, sits another, arguably more important group of producers — national oil companies (NOCs) who comprise the majority of the Organisation of Petroleum Exporting Countries (OPEC) or what is now called OPEC+, including Russia.

The underlying argument regarding the different types of oil and gas producer is fundamentally based on cost; ‘unconventional’ oil and gas such as that produced via tar sands, shale hydrofracturing, deep-water and Arctic drilling are far higher cost than oil and gas produced by large, stable reserves found in the Middle East and Russia. This represents a fact that is becoming more pronounced over the course of the coronavirus pandemic; as the CEO of the largest shale oil producer explains — the survival of these oil producers is completely dependent on OPEC (or increasingly OPEC+) not flooding the market and reducing prices;

“In the future, certainly we believe OPEC will be the swing producer — really, totally in control of oil prices.”

Overall, the prospect of either bankruptcy or severe losses for US and European oil companies is almost guaranteed as demand reduction continues, although the picture is less certain for the NOCs, and the remaining market share they wish to supply. Primarily, this demand reduction will stem from Europe, with a rapidly accelerating market for electric vehicles and stringent targets in place as early as 2030 . This will be followed by some American states such as California as well as various legislation now in place globally, as cities ban petrol and diesel vehicles from urban centres. Much of this will occur as soon as equivalently priced zero emissions vehicles are available — and by the 2030s almost no country in the world will wish to continue with the pollution and high energy costs associated with petrol or diesel cars. China is likely to be a substantial driver of change in this regard, representing the largest passenger vehicle market in the world, as well as possessing a relatively stable economy and competitive export market. Knowing that China has now stated it wishes to reach net zero emissions by 2060 — which can almost be guaranteed given the 40-year timeframe (and considering this is the amount of time it has taken China to become a world power) — should motivate manufacturers globally to start to embark on major investment strategies, as many have started to implement already.

Net Zero targets, diversification and the rise of the ‘Renewables Supermajor’
As markets start to consolidate across the board, with upstream investment (representing E&P companies) the first to lose investment, western IOCs are already starting to focus on core assets that don’t represent a liability going forward. Initially, this will mean a series of mergers and acquisitions, and a shedding of poorly performing assets. Some of these, such as refineries, are already being sold off, although in the current market few buyers are coming forward, such that even newly built refineries are unsellable. Understanding which way the market is going, IOCs as well as a growing number of NOCs are starting to look at alternatives.

Looking at the European Oil Majors, the direction of travel — led by Spanish producer Repsol and then BP — is obvious: a reduction in emissions to zero by 2050. Announcements made in December 2019 by Repsol were followed in some degree by every major European oil and gas producer, including BP, Shell, Total, Eni and Equinor. In many ways these announcements are far from ‘true’ net zero, with some aligning themselves more closely with targets than others; however the overall picture is undeniable: it is more and more difficult for western IOCs to maintain profitability in the face of Middle Eastern and Russian competition, and as net zero targets demarcate a hard border for oil production within their respective jurisdictions. What happens to US IOCs remains to be seen, but investment is clearly not forthcoming, and contraction is inevitable.

The question then lies with which specific direction these companies can or should go if they wish to continue operating at their current levels. For example, long before Repsol announced their fossil fuel exit, Danish oil and gas producer DONG had already sensed the change in direction underway and split the company between its new renewables division and its legacy North Sea oil and gas assets, which were sold off to UK chemicals company INEOS in 2017. The ratio of renewables to fossil energy increased from 15% in 2009 to 88% today, and Ørsted is now the global leader in offshore wind. In fact, the renamed and restructured utilities company now plans to diversify further, with a number of green hydrogen pilot projects around Europe, solar plus storage in Texas, and an overall doubling of its offshore wind capacity by 2025; arguably a market set for vast expansion into the future. In this way Ørsted sets a precedent for the first successful transition from an oil and gas company to a renewables-based utility — a pathway that will have to be replicated to some degree by all European oil and gas majors if they are to return any revenue to shareholders in 2050.

Diversification: hydrogen replaces oil
One way in which some existing oil and gas assets may still retain value in a zero carbon world, is if those assets are used to supply gas in conjunction with CCS or another reforming technology (such as pyrolysis) to produce hydrogen. Minimal methane slippage and high carbon capture efficiency will be required in order to meet the strict criteria necessary — but having achieved necessary standards of production (most likely as detailed by the EU Methane Strategy) it seems logical that this will become a focus area for many western IOCs who wish to hold on to the value of at least some of their existing upstream infrastructure and pipelines; as well as refuelling stations. This will be occurring at approximately the same time as green hydrogen production starts to ramp up, and co-benefits exist in this regard . However, much like the petrodollar equation in some way slows down the political will to make a speedy transition directly away from oil, so too does the fact that by investing in hydrogen, oil companies are in effect hollowing out their core market — a world where hydrogen is in ascendancy is a world where oil and thus existing refinery and other assets are equally losing value. This is regrettable, as the fossil energy industry is best placed to oversee the type of large infrastructure projects that are now necessary. These companies would also have the additional expense of upgrading existing infrastructure which may not provide much increase in profits initially; but I think over time it will be obvious that in order to retain any existing asset value at all, oil companies are going to have to focus much more on natural gas supply and infrastructure, and subsequently the conversion of this gas to hydrogen as regulations start to take effect.

In some ways, a focus on green hydrogen at the expense of blue means that less thought needs to be given in the immediate term to upgrading networks and large industrial users, because the price of green hydrogen is still too high , and certainly will not be available in the quantities required to merit the infrastructure upgrades necessary for a complete changeover.

So really, this should now be the focus area for at least some western international oil companies. Prescient of this fact, Europe’s largest gas network operator Snam is planning for the complete decarbonisation of their fossil assets by 2040. This objective is the same throughout Europe, which is being led by Gas Infrastructure Europe (GIE), representing 69 gas infrastructure operators and covering every aspect of gas transmission within 26 member states. The problem for IOCs in this way is that the market is already under the jurisdiction of existing gas operators, and so where operations may overlap (upstream investments, or those regarding supply), other players may be more active and so a necessity exists to coordinate planning to maximise efficiency. The other area is refuelling infrastructure, although again this predicates some overlap with hydrogen distribution to genuinely reduce costs. In this way the market for IOCs is less well defined, and it will take time for all elements — supply, transmission and refuelling points (in the case of transport) — to be aligned so as to enable an optimal roll-out of hydrogen at least cost.

Today, BP is involved with a number of projects to utilise hydrogen, from wind-based hydrogen production via a collaboration with Ørsted, to projects with German utility Uniper, as well as approaching 100 hydrogen refuelling stations globally — and as recent developments infer, there will be many more on the way. Overall, BP expects 10% of its market to be hydrogen-based by 2030. Likewise, Shell are involved with H2 Mobility Germany to install a nationwide network of 400 refuelling stations , as well as collaborations with Eneco in Holland to produce green hydrogen from wind, among various others. Both are calling for 100% hydrogen heating in the UK. Equinor, Total and Shell are collaborating on CCS infrastructure, which in many ways constitutes the initial piece of the puzzle for blue hydrogen at scale. As net zero targets are announced, hydrogen is essentially the most viable option for oil and gas suppliers globally, which growing interest confirms — DNV GL reports that commitment to hydrogen projects doubled in 2019 alone; as 42% of oil and gas companies globally now plan to invest by 2030; with the Asia-Pacific, MENA and EU regions in the lead.

The threat of utility companies
Despite the huge market growth guaranteed for hydrogen in Europe, Asia and throughout the world, another problem for Oil Majors has arisen — in the form of utility companies. Traditionally operating in the electricity and gas sector, and appreciating the growth in renewables that is now underway, these companies are now positioning themselves as ‘Supermajors’ in their own right; and are on course to take the place of IOCs in terms of scale and reach. The ability of these companies to develop the integrated value chains necessary, from renewables production to electrolysis to gas pipeline infrastructure eclipses the ability of oil companies, who are mostly involved with extraction, refining and refuelling stations. The world’s largest utility companies, such as NextEra, Iberdrola, Enel, EDF and China Energy Investment Corp, are all expanding at exponential rates. Iberdrola alone will outspend all European oil companies on zero carbon projects, pledging €75 billion by 2025 — including a €2 billion investment in green hydrogen which will completely decarbonise Spanish fertilizer production. Enel have also jumped on board, pledging €190 billion by 2030, tripling its renewable energy output, and including €30 billion in joint ventures, in order to more rapidly develop the market. Even Australian mining giant Fortescue Metals have anticipated the vast opportunity that is represented by recent developments, with ambitions for 235GW of renewables with a specific focus on hydrogen. Considering the volumes of renewables now necessary, there is no doubt that the expansion of these companies will only accelerate — and in time may even swallow up oil and gas companies in their wake.

Diversification as a component of NOC/OPEC planning
National oil companies span the globe, from China, Malaysia and Indonesia to Latin America, the Middle East and Russia. Although the generally held view could be that these oil companies might keep producing oil at as high a rate as possible into the future; the outlook in this regard may be less worrying than at first imagined. First of all, net zero targets are expected to cover 62% of global emissions, and developing nations are likely to follow suit as soon as low price battery electric and fuel cell vehicles are available. Coal is already undercut in price by renewables, as 42% of all coal-powered electricity today is not profitable. Hydrogen production for industry in countries such as India is being considered a credible pathway, and once this occurs, hydrogen will be available at scale — for transport as well as other applications. However, battery powered vehicles are likely to represent the vast majority of transport needs in poorer nations (led in many ways by China); which reduces oil imports and expedites the expansion of the electricity grid, via renewables. This should reduce demand for oil production in much the same way as the rest of the world — particularly for two- and three-wheeled vehicles as reports highlight.

Like western nations, the economic pressures facing the oil market are similar for much of the world — national oil companies are not usually able to produce for the extremely low production costs possible in the Middle East, and technological developments will lead to demand reductions. With export markets drying up, this leaves NOCs confined to supplying domestic markets, where EV and fuel cell vehicle costs are continually reducing. As flooding and cyclone damage intensifies, motivation is likely to build for policy to move away from fossil energy subsidies, and grant the concessions necessary for infrastructure to support vehicle charging, or low cost hydrogen production. Some NOCs are already following European oil companies toward net zero targets. Recent announcements by PetroChina, Sinopec and CNOOC — Asia’s largest oil/gas producer, refiner and offshore specialist respectively — have signalled that some kind of net zero target is in planning; with Sinopec moving heavily into hydrogen, and CNOOC moving into offshore wind. These have been followed by other NOCs such as Malaysia’s Petronas and Thailand’s PTTEP.

Solvency issues for oil producing states
The defining issue with regards to NOCs is whether a particular country derives a high percentage of government revenues from oil exports, and this is much more of an issue with Middle Eastern countries such as Iraq, Oman, Saudi Arabia and Kuwait. Some Gulf Cooperation Council members derive as much as 75% of government revenue via oil exports, and any move away from oil will need to be met with strategies in place to replace this revenue with an alternative export. In most cases, this should be hydrogen — gas is far cheaper and easier to produce, and requires very little refining if any. In some countries such as Algeria, natural gas is free; which highlights it’s abundance as a byproduct of the oil extraction process. Replacing refineries with ATR reformers means that gas can be decarbonised and sold to the markets that these countries currently supply. A further option for many countries within oil-dependent states is solar-based hydrogen — which should allow these countries to move away from the limited alternative export opportunities that exist where oil production is the primary economic driver.

This is exactly what richer nations such as Saudi Arabia are now planning; having shipped its first cargo of blue hydrogen as ammonia to Japan, who can be expected to become a major importer. The nation is also investing in a $5 billion green hydrogen production facility that will be operational by 2024; again in the form of ammonia which can be reconverted back into hydrogen for use in transport. The low initial cost of natural gas feedstock means that costs are limited to supply infrastructure and conversion — being easily equivalent to or cheaper than oil products.

Russia similarly has extensive plans to export hydrogen to Europe and Asia, citing a market that will replace not just gas but oil and coal. National plans in this regard are ongoing with blue hydrogen expected to become a major export, starting this decade.

Fossil fuel endgame
As more and more people are realising, the principal components of the energy transition are now in place. First electricity, then transport, and finally industry will all decarbonise, as renewable electricity, electric and fuel cell vehicles, and a low (<$2/kg) cost for hydrogen outcompete their rivals: fossil power plants; inefficient combustion engines and increasingly unprofitable coal in heavy industry.

In addition to these factors is the high cost of imports; domestic renewables production has already started to reduce demand first in the power market and subsequently for oil as the approaching surge of electric vehicles becomes more apparent. Following this, hydrogen is the key to industrial decarbonisation, and at a price below $2/kg — either via domestic production or via imports — the use of hydrogen will spread; eventually replacing the 55% of oil not consumed by passenger vehicles.

Investment in hydrogen is already starting to flow; as more than $150 billion worth of green hydrogen projects have been announced globally just within a nine month period prior to 2021 ; Europe alone plan to spend $558 billion (€470 billion) as outlined within its recently released roadmap . This comes in addition to initiatives such as the ‘Green Hydrogen Catapult’, which will invest $110 billion within 6 years in order to achieve a cost price for renewably-produced hydrogen below $2/kg — thus ensuring its competitiveness across a range of sectors including steel production, power generation and shipping.

The sequence of events will be slow at first, and become successively more rapid. Thermal power stations will come to the end of their productive lifespans, and be replaced with much cheaper solar and wind, connected to efficient grids utilising large amounts of electrolysis to balance supply. In many countries including the US, the time horizon for powering-down existing assets is approximately 15 years, and already emerging economies are banning further coal or fossil thermal construction.

When cars reach the optimal ‘sub-$100/kWh’ price point, the same sequence of events will occur, as resource constraint worries are dispelled by cheaper battery chemistries replacing cobalt and nickel. With the construction of refuelling stations, fuel cell vehicles will enter the same profitability curve as batteries, and trucks, shipping and larger vehicles will erode what is left of the market for oil.

Finally, heavy industries such as steel and cement will start implementing strategies to move away from coal, as carbon pricing and legislation reinforce a diminishing social licence to operate. The carbon pricing revenue accrued by those nations operating emissions trading systems (ETS) provides governments with the opportunity to invest in pipelines and infrastructure, in order to utilise hydrogen and thus reduce costs. At a price of under $2/kg any form of hydrogen is competitive with coal within the steel and cement industries; and with specific strategies in place, costs can be spread evenly and managed by governments to avoid market discrepancies. This spells the final end of coal — while also expediting the role of hydrogen in an array of various other sectors; such as heavy transport, shipping, aviation, grid balancing and building heat.

Hydrogen as a global commodity will become the primary replacement for much of the coal, oil and gas markets — which will then consist of renewable and CCS-based variants; as national and border-trading legislation will ban the flow of unabated natural gas.

These developments may appear to some to be a matter of course — despite residual reluctance from those companies who may perceive hydrogen as a threat to existing asset values; such as oil or coal companies. However, its becoming more and more obvious that discouragement of a BAU progression is being expressed from a variety of other sources — even though many in the energy industry may be interested in determining a least-cost pathway.

For example, as we look back at the global investment required for the decarbonisation strategy outlined within this book; we can see that even if we are to achieve only 730GW of capacity additions per year (up from 180GW in 2018); this would cost $1,200 billion per year at current rates (solar alone is reducing in cost by 18% per year on average). This brings us to an approximately 50% electric/ renewables-based energy system; plus 10% renewable hydrogen. The remainder is made up of natural gas converted to hydrogen (or biomethane in some cases). Out of a total of $1.85 trillion invested annually today, this seems reasonable — even considering the time it may take to shift investments.
In comparison to average global fossil energy revenues of $3.7 trillion per year, there doesn’t appear to be much problem in paying for this renewables capacity, especially if renewables have very low or zero operating costs. Even via existing annual capex investments it is certainly within budget to achieve a completely zero carbon energy system, within a reasonable timeframe.
Via a combination of factors, fossil energy demand is already in decline and soon confidence will exist that all the planning and strategising that has occurred will eventuate. Investment in fossil energy is now starting to be withheld, and instead will be awarded to zero carbon alternatives.

This, finally, brings about the end of fossil fuels in their current form. New companies will operate the production, distribution and marketing of new products and services, and with them a renewed focus on adapting to our changing climate as nation-states start to accept the difficulties that a rapidly warming world will bring about.

At this point — even more so than it is now — a concerted effort to work for the good of humanity is what is genuinely required by our leadership. The temptation to avoid expenditure on flood defences or CO2 pipelines will be ever-present. In this way, knowing what will happen without the necessary investments being made, education and awareness raising are needed to bridge the knowledge gap. More than ever before, humanity will have a collective responsibility to safeguard its own future; and not be guided only by what is immediately profitable or beneficial. Without thinking of others, and furthering existing divisions, we lose sight of a much more motivating purpose — to bring the planet back from the brink of devastation while ensuring prosperity for ourselves; and the many future generations that will follow us.