Geopolitical uncertainty and the energy transition: Long term planning in the face of short term thinking

Climate change slipped down the priority list over the past two years as governments faced the global upheaval of the Covid-19 pandemic and the Russian invasion of Ukraine.

Yet, with its consequences very much felt across the world – from extreme weather patterns to rising climate activism – activists, experts and international organisations alike continue to caution governments and businesses to keep their eye on the (net zero) target. But now, as we enter a new year which is likely to offer little in the way of certainty, the circumstances under which climate issues will need to be addressed have changed.

In this article Gabrielle Reid, Associate Director, Strategic Intelligence, looks at the impact of geopolitical uncertainty on implementing the energy transition.

A world in flux

The events of 2022 have set the stage for geopolitical uncertainty to intensify this year. The world is still reeling from the economic fallout of pandemic-related lockdowns amid concerns of new and more aggressive variants, while war-driven disruptions to energy and grain supplies have aggravated socioeconomic challenges. 2023 will usher in new concern over a cornered Russia, an unpredictable China and a US heading towards a divisive 2024 election.

Experts caution that a near-defeated Putin could lead to increased Russian aggression and while launching an all-out war with NATO is unlikely, attacks on critical [energy] infrastructure in the physical and cyber world will be on the cards. Meanwhile, facing US and EU decoupling efforts, China may feel emboldened to ramp up its self-sufficiency efforts. At the heart of this US / China divide will be a fight for control over new digital technologies such as semiconductors and the rare earth metals that power them. Powerbrokers like Turkey, India, and Saudi Arabia – the latter a key gatekeeper of global oil supply within OPEC+ – will also find themselves with increased influence in the ‘West versus the Rest’ game, with ambitions only curbed by the restraints of a possible global recession. For developed countries, a recession could mean rising unemployment, labour action, and anti-government unrest, but for emerging markets more severe realities such as food insecurity will arise.

"2023 will usher in new concern over a cornered Russia, an unpredictable China and a US heading towards a divisive 2024 election."

All indicators point to tough times to come.

Now more than ever companies need to understand the drivers and consequences of geopolitical risks and, with coinciding promises among governments and organisations alike to move ahead with the energy transition, the road ahead is even more complex.

Full steam ahead?

Already, governments are backsliding on their net-zero commitments in the face of possible energy and cost of living crises in Europe. The recent geopolitical turmoil has laid bare the world’s ongoing reliance on fossil fuels and, amid economic headwinds and grassroot frustrations, governments are becoming increasingly hesitant to take on the level of disruption and cost the transition will demand in the short term. Today, securing reliable and affordable energy sources have become the top priority with sustainability aims falling down the list.

But let's not write energy transition off just yet. Oil and gas industry leaders such as Shell, BP, Chevron and ExxonMobil remain committed to pursuing the transition goal. And, given high energy costs and the volatile nature of oil prices, many continue to seek alternate energy sources. However, this will not be without its challenges.

"Today, securing reliable and affordable energy sources have become the top priority with sustainability aims falling down the list."

As with the pandemic, and the energy crunch in Europe, the energy transition cannot be separated from the geopolitical landscape in which it takes place. Energy remains at the heart of security questions for all countries and, whether from non-renewable or renewable sources, it will be influenced by the shifting power dynamics and interests on the global stage.

Looking to the transition specifically, the fact that minerals such as cobalt, lithium, copper and rare earth metals critical in the technologies needed to power clean energy are concentrated in a few countries makes the clean energy supply chain vulnerable. More than 70 percent of the world’s cobalt is produced in the Democratic Republic of Congo, for example, while Chile accounts for 30 percent of global copper production and China continues to dominate in the production of rare earth metals. Consequently, while on the one hand a transition to renewable energy will diversify and de-risk energy supply and help governments and companies meet their sustainability commitments, on the other, it will increase reliance on new sourcing countries. This reliance will bring with it new vulnerabilities stemming from local market risks – which in certain emerging markets expand across political instability, regulation complexity and insecurity – as well as geopolitical ones stemming from trade restrictions or the dominance of key producers such as China.

"Though the energy transition may indeed be slower than originally planned, organisations looking to the horizon will do well to use this time to better prepare for impending change."

The potential rise of protectionist laws as countries seek to shield their local resources or indeed tit-for-tat trade restrictions emerging from a divided world could further impede the pace of the transition. And, the green energy sector itself is vulnerable to project delays due to inflation driving up project costs as well as supply chain disruptions. While these seem like issues for the extractive and energy sectors – which will also face shifting labour dynamics – they will have ramifications for all energy-intensive industries competing for clean energy supplies. Further up the value chain, consumers seeking creative and innovative solutions to the conundrum between affordable and sustainable products will look to companies that can confidently navigate both (geo)political and transition risks.

A matter of time

Though the energy transition may indeed be slower than originally planned, organisations looking to the horizon will do well to use this time to better prepare for impending change. Amid managing rising operational costs, companies will need to investigate what an energy transition will mean to them. Doing so in a time of high energy prices, rising inflation and geopolitical uncertainty will not be easy but there are lessons to draw on for the year ahead.

As the Covid-19 pandemic revealed, organisations should be cognisant of their vulnerabilities in global supply chains and their ability to withstand global events. Meanwhile, the Ukraine war has taught us to prepare for the realignment of key markets from friend to foe, and the wide-reaching impact of geopolitical relationships on reputational, compliance and operational risks for businesses. There will be bumps in the road ahead but the transition is indeed in play and understanding your organisation’s footprint, goals and the risks to them, will be critical in navigating the way forward.