Oil & gas sector should incorporate energy transition risk in strategy
Kenya’s largest consumer is the transport sector. Liquefied petroleum gas (LPG) is used in households while heavy fuel oil is used in industries and some power plants.
Kenya continues to align with key global energy sector developments by raising climate ambitions and launching policy initiatives to speed up the transition.
Notable ones include the Energy Transition & Investment Plan (ETIP), the E-mobility draft Policy, Green Hydrogen Strategy and Road Map.
ETIP anchors the commitment towards attaining net zero emissions by 2050. It identifies an orderly transition as entailing renewable energy, green hydrogen, e-mobility, energy storage and clean cooking.
Given, population growth will mean an increased demand for energy. Kenya also services in part the regional market needs for imported petroleum products, particularly the landlocked neighboring nations.
The International Energy Agency has in fact predicted demand for oil and gas to peak before 2030.
Thus, while a clean energy transition is inevitable in the long term, its pace is dependent on a myriad of factors that include but not limited to meeting this demand for energy, security, affordability and governments commitment to their climate pledges.
This then invites a discourse for oil and gas sub-sector players and consumers who are at a crossroads. On the one hand is the clean energy transition dictated by rising global temperatures and on the other hand is continuing “business as usual” to meet the growing demand.
Notably, Kenya’s largest consumer is the transport sector. Liquefied petroleum gas (LPG) is used in households while heavy fuel oil is used in industries and some power plants. Kenya’s crude oil is yet to be commercialised.
Incorporating an energy transition risk in strategic decision making should be a paramount consideration informed by several possible realities.
Firstly, while the transition has a long-term projection, a drop-in demand for oil and gas revenues should be expected. It means the businesses becoming less profitable and riskier when the transition accelerates. For instance, a successful e-mobility sector will erode significant revenues from the transport sector.
Secondly, the transition may leave stranded assets. Assets become stranded due to anticipated or premature write-downs, devaluations or conversion liabilities.
These may become underutilised or abandoned altogether. Financing conditions can also instigate stranding. Dispensing facilities, oil extracting assets, refineries, petroleum storage assets may eventually become obsolete assets. This risk of having stranded assets may somewhat be mitigated should some be repurposed for other uses such as hydrogen production.
Thirdly is a workforce who will need to be reskilled and retained or upskilled to take-up emerging green jobs. Some sub-sector players may choose to watch the energy transition discussion from the sidelines.
However, and as guided by the transition risk, the more adaptable players will employ multiple approaches to strategy either concurrently or successively to pursue emerging opportunities.
It shouldn’t be business as usual when informed by policies towards achieving net zero emissions by 2050.
Despite an emphasis for incorporating a transition risk, the preparedness of an accelerated energy transition might be debatable due to the significant financial resources needed. All factors considered, any transition can only be successful if it’s just.
