ENERGY & POWER

The energy and power economic sector endured a tumultuous year in 2021, buffeted by shortages of engineering talent, sporadic shortages of materials and components, and production constraints brought on by years of underinvestment in extraction infrastructure. But for all of the year’s upheaval, energy executives may one day look back on 2021 as the calm before the storm. The new year will likely usher in an era of profound disruption for the sector as governments and investors press ever harder for a turn away from fossil fuels and as the transition to more sustainable forms of energy begins in earnest. Talent shortages will help drive the transition as the cohort of oil and gas engineers ages out and younger engineers shun fossil fuels in favor of work in the renewables subsector.

The fundamentals of the energy and power industry improved markedly in 2021, with every source of energy, from hydrocarbons to nuclear, experiencing increases in consumption as economies around the globe reversed the declines of 2020. Prices strengthened throughout the year as demand ramped up, and Europe, in particular, focused on rebuilding natural gas supplies. The powergeneration sector was the source of much of the demand as governments and industries embarked on projects to electrify more of the world’s economy. Supply bottlenecks also added upward pressure on prices.

Supply constraints were especially apparent in the solar sector, with progress on build-outs of solar capacity slowed by shortages of polysilicon, the main input for solar cell production, and sharply higher shipping costs from China, where most solar-energy panels are manufactured. As a result, more than half of all utility-scale solar projects for 2022, by one estimate, have been delayed or canceled. The slowdown in solar, in combination with the ongoing wave of divestment from coal mining and oil and gas exploration, will keep energy supplies tight and prices high for at least the next year.

Financing for fossil-fuel projects may grow even harder to come by as green investors focus their investments on renewables and energy-saving technology. The COP26 agreement to reduce emissions, although voluntary and without enforcement mechanisms, will further discourage oil exploration and production, as will a non binding agreement among 20 nations, including Canada and the U.S., to cut off investment in foreign oil and gas projects by the end of 2022.

Oil and gas producers are now confronted with a strategic choice that is existential in its dimensions. They can pull out of ongoing oil and gas projects around the world to pursue investments in the energy transition, at the risk of stranding trillions of dollars in assets. Or they can redouble their fossil-fuel extraction efforts while prices remain firm and use the proceeds to finance investments in green (or at least greener) fuels. Though far from a clear-cut choice, energy majors in particular can expect continued pressure to divest from their investors.