Fuelling Change: How Low Oil Prices Drive Oil and Gas Players Towards Renewable Energy, with Key Legal Insights

The energy landscape is profoundly transforming, influenced by fluctuating oil prices and increasing pressure to adopt renewable energy sources. On June 17, 2024, the cost of Brent crude oil stood at $84.39 per barrel, WTI oil at $80.33, and the OPEC basket at $83.06 (Statista Research Department, 2024). These prices, though reflective of anticipated higher fuel demand during the summer months, highlight the volatility and unpredictability inherent in the oil market. This volatility has been particularly evident since the coronavirus pandemic 2020, which saw oil prices plummet due to a drastic decline in demand, leading to record hostile prices (Statista Research Department, 2024). As the oil and gas sector grapples with these challenges, the transition to renewable energy is becoming increasingly urgent and strategically significant.

CAPEX Cut and Survival Mode Due to Oil Price Collapse

The collapse of oil prices has forced oil companies worldwide to slash their capital expenditures (CAPEX) drastically. For instance, Shell has cut around 45% of its upstream exploration budget (Parnell, 2020). The figure below illustrates how major oil and gas players, including Exxon, BP, and Total, and independent players and national oil companies (NOCs), have reacted with CAPEX cuts, entering survival mode.

Venturing and Participation in Clean Energy Business

Despite the oil price crash and the disruptions caused by the coronavirus pandemic, major oil companies like BP and Shell have committed to maintaining their low-carbon investment plans. Shell, for example, has allocated a quarter of its planned $5 billion in CAPEX savings to its integrated gas and new energies business unit, which focuses on renewable energy ventures (Parnell, 2020). BP has similarly reaffirmed its commitment to energy transition and low-carbon investments (Parnell, 2020). These moves signal a strategic shift towards clean energy, driven by both market dynamics and regulatory pressures.

Eight Shifts Accelerating Energy Transitions

According to McKinsey, eight potential shifts could accelerate the energy transition. McKinsey (2018) identifies eight potential shifts that could accelerate the energy transition:
1. Electrification of transport
2. Decentralization of power systems
3. Declining costs of renewables
4. Advances in energy storage
5. Digitization of energy systems
6. Increased energy efficiency
7. Changes in consumer behavior
8. Regulatory and policy support

While these shifts may not represent the most probable future, they are conceivable based on current developments (McKinsey, 2018). These shifts could significantly impact annual demand for oil, gas, coal, and power, highlighting the need for additional measures to meet international climate goals.

Current Trends of Global New Investment in Clean Energy

Recent trends indicate a growing resilience in the renewable energy sector, even amidst oil price fluctuations. Stock prices of renewable energy companies have remained competitive, driven by rapid economic growth in developing countries and increasing environmental concerns (Kyritsis & Serletis, 2017). The resilience is also attributed to the decreasing reliance on oil for electricity generation and the competitive economics of renewables. The figure below shows the trend of global new investment in clean energy, reflecting a positive outlook for the sector.

Policy in Support of Energy Transition in Malaysia

Policy frameworks play a crucial role in supporting the energy transition. In Malaysia, for example, the Kyoto Protocol and subsequent commitments have driven the development of renewable energy policies, such as the Renewable Energy Act of 2011. The Malaysia Renewable Energy Roadmap (MyRER), National Energy Policy 2022-2040, and National Energy Transition Roadmap (NETR) are further steps in this direction. These policies are essential in providing a supportive environment for the energy transition.

Legal Considerations in the Transition to Renewable Energy

The transition to renewable energy is not only a technological and economic challenge but also a legal one. Companies must navigate a complex landscape of regulations, incentives, and compliance requirements. Legal considerations include:

• Regulatory Compliance: Ensuring adherence to national and international regulations governing emissions, energy production, and environmental protection.

• Intellectual Property: Protecting innovations in renewable energy technologies through patents and trademarks.

• Contractual Agreements: Structuring contracts for renewable energy projects, including power purchase agreements, joint ventures, and partnerships.

• Environmental Impact Assessments: Conducting thorough assessments to comply with environmental laws and mitigate potential impacts.

• Tax Incentives and Subsidies: Leveraging available tax incentives and subsidies to support renewable energy investments.

Conclusion

The impact of low oil prices on the oil and gas sector's transition to renewable energy over the next decade is multifaceted, driven by CAPEX cuts, strategic investments in clean energy, accelerating shifts in the energy landscape, increasing global investment in renewables, and supportive policy frameworks. Navigating this transition also requires careful consideration of legal aspects to ensure compliance, protect innovations, and capitalize on financial incentives. As the energy value chain continues to evolve, the shift to renewable energy presents both challenges and opportunities for oil and gas players.

References

• Statista Research Department. (2024). Weekly oil prices in Brent, OPEC basket, and WTI futures 2022-2024. Retrieved from Statista
• Parnell, J. (2020). Shell’s CAPEX Cuts and Implications for Energy Transition. 
• McKinsey & Company. (2018). Eight Shifts Accelerating the Energy Transition. 
• Kyritsis, E., & Serletis, A. (2017). Renewable Energy Sector Resilience to Oil Price Shocks. 
• Government of Malaysia. (2011). Renewable Energy Act and National Energy Policies.