Energy security vs energy transition: where should the money go?

The two camps make each other’s lives more complex but they do not threaten one another

An ethanol plant in Milton, Wisconsin. World leaders continue to wrestle with issues surrounding climate change amid plans to achieve net zero emissions by 2050. EPA

The amalgamation of energy security and the energy transition is an important one to watch out for in the 21st century. One does not trump the other in what will be the toughest balancing act of our generation.

Finance is a cornerstone of achieving this non-negotiable equilibrium and it is fast becoming clear that many roads can lead us to a united destination of net zero by 2050. But have no doubt: the world has only just taken its initial financial steps in this climate marathon.

However, financiers are key in the energy-climate paradigm. Upstream investments in oil and gas must be at near pre-coronavirus levels of $525 billion until 2030 to support energy security, according to the International Energy Agency.

This remains true despite peak oil forecasts creeping closer. The next two years are critical for sanctioning and allocating capital towards new oil and gas projects to ensure adequate supply comes online by 2027, the International Energy Forum says.

Simultaneously, the world must more than triple clean energy investments by 2030, to about $4 trillion, to meet net-zero ambitions by 2050, the IEA says. Efforts are under way globally, including $130tn of private capital allocated by the newly established Glasgow Financial Alliance for net zero. But there is still a long way to go.

Turning this tide will take an enormous effort, considering that energy consumption accounts for 76 per cent of the world’s human-caused greenhouse gas emissions, according to the World Resources Institute. And this is far from a recent trend; it is deeply established in our economic and societal norms.

For one, carbon emissions from energy and industry have climbed 60 per cent since the UN’s Framework Convention on Climate Change was signed 30 years ago. Looking ahead, the current planned fossil fuel production by 2030 is twice the maximum production consistent with the 1.5˚C limit above pre-industrial levels, according to the World Economic Forum.

Clearly, we face an extraordinary balancing act. Think of financiers as one of the strongest threads in the rope that we must use to climb out of the deep, dark climate hole we have dug for decades.

Still, therein lies an entirely new landscape for financiers, both those established in energy markets and those new to the energy sphere.

On one hand, the historically linear and dominating fossil fuel market has become far more complex with increasingly diverse, greener energy basket. Equally, therein lies a great opportunity for financiers to enter new, largely untapped markets and capture a first-mover advantage.

But financiers also need help, especially from governments. They need the reassurance of regulatory clarity, which governments in the GCC are increasingly providing. Overall, the clearer countries’ energy-environmental policies are, the faster investors can figure out the commercial viability of projects.

Having spearheaded the global oil and gas market for decades, producers in the Middle East now have to work harder than ever. The region is being asked to play a big role in sustaining energy security ­– “please keep the lights on and our cars running with fossil fuels” – while also investing heavily in green energy projects and significantly cutting its carbon footprint. To a large extent, the region is now a key orchestrator of energy transition.

The Middle East has a golden opportunity to set an example for the rest of the world in how to manage an even-keeled transition without compromising its energy security. If the region succeeds, the reputational win will be enormous.

Meaningful efforts are already under way. Individual announcements to support clean energy by Saudi Arabia and the UAE – Opec’s linchpin and its third-largest producer, respectively – totalled a staggering $264bn at the end of 2021.

The energy security and energy transition camps make each other’s lives more complex but they do not threaten one another. They are allies who are still pinning down areas of common ground.

But as the decade rolls on, real threats will be amplified, including water scarcity, cyber threats and the availability of critical minerals to build renewable energy projects.

These areas will increasingly need our attention, so we must remain focused and united. Ultimately, we are all looking at the same energy-climate quandary, only through very different lenses. Each country, each company and each investor will find different solutions – a diversity that financiers must embrace in 2022 and beyond.

Badar Chaudhry is senior vice president for the energy sector at Mashreq Bank