The energy landscape is transforming rapidly with far-ranging implications for the global energy industry and actors, including oil companies and oil-exporting countries. This rapid transforms introduce multidimensional uncertainty, the most essential of i m sorry is the rate of the transition. While the change of the energy system is fast in details regions that the world, such as Europe, the speed of the an international energy transition remains very uncertain. The is also challenging to define the end game (which technology will win and what the final power mix will be), together the outcome of transition is most likely to vary across regions. In this context, oil service providers are facing a strategy dilemma: attempt the risky change to low-carbon modern technologies by moving beyond their core business or just emphasis on maximising your return from their hydrocarbon assets. Us argue that, as result of the high uncertainty, oil companies need to develop strategies that are likely to be effective under a wide collection of possible future sector conditions. Furthermore, the design strategies must be flexible and evolve easily in an answer to anticipated changes in the market. Because that oil-exporting countries, over there is no trade-off associated in renewable deployment thus investments can liberate oil and also gas because that export markets, enhancing the economics of residential renewables projects. In the lengthy run, however, the main challenge for countless oil countries is economic and also income diversification as this to represent the can be fried safeguard versus the energy transition. Even if it is or no these countries succeed in your goal of achieving a diversified economy and revenue base has actually implications for investment in the oil sector and oil prices and consequently for the rate of the an international energy transition.

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Introduction


The power landscape is rapidly an altering with wide-reaching effects for global energy industries and also actors, including oil companies and also oil-exporting countries. While there are numerous uncertainties induced by the power transition, there is nearly a consensus among forecasts provided by various organizations that the share of renewables in the energy mix will rise <2, 10>. In fact, renewable energy’s recent cost deflation has actually been nothing brief of revolutionary for the global energy industry. 5 years ago, us wind prices were $11 c/kWh (US cents per kilowatt hour) and solar costs were $17 c/kWh, top top a completely loaded basis, including the resources costs that construction. Neither was commercial there is no subsidies. The worldwide Renewable Energy agency <11> estimates that an international average cost for onshore wind and also solar has now decreased to $5 c/kWh and also $6 c/kWh, respectively. A brand-new record was collection in 2016, through a $2.4-c/kWh bid in the joined Arab Emirates (UAE). The was broken in October 2017 v a $1.8-c/kWh bid by Masdar and EDF for Saudi Arabia’s 300-MW Sakaka plant. Wind power prices have also declined, and further deflation to $4 c/kWh by 2020 is in ~ striking distance. As a result, ~ above a plant-level basis and also excluding the expense of managing intermittency, wind and also solar have arised as an extremely competitive sources of energy globally.

As the energy transition is supposed to result in structural changes in energy markets around the globe, oil companies and also oil-exporting countries face serious challenges. The difficulty for oil service providers is the disruption of their organization models and how to combine low-carbon assets right into their portfolios, conversely, oil-exporting countries with confirmed reserves-to-production ratios of lot of decades face the an obstacle of monetizing their big reserve base and also the risk of accident in export revenues, which might disrupt their socio-economic wellbeing, given the high dependency of their budget on oil revenues. Therefore, a an essential question is, exactly how should oil companies and oil-exporting countries position themselves in the shift era in order to be component of the renewables ‘revolution’ and also ensure permanent sustainability?

A successful adaptation strategy requires understanding the nature of energy transition. This is because decisions on business model adaptation and also investment strategy require discovering how rapid the transition will happen, which modern technologies will at some point prevail, and how the final energy mix will look ~ the change is completed. Oil suppliers are faced with a strategic dilemma here. If lock postpone your adaptation strategy till there is much less uncertainty, they may develop a window of opportunity for your competitors. Top top the other hand, at an early stage investment decision or invest in ‘losing’ modern technologies would not just limit your future choices but likewise increase the hazard of legacy write-offs. Oil-exporting countries face similar strategic crises as the change entails structural changes in their energy sector and the as whole economy, and also the allocation the scarce sources towards new sectors, consisting of renewables, which don’t create the sizeable rental fees that the oil and gas market does.

This paper sheds some brand-new light on the worry of energy change and adaptation strategy for oil companies and also oil-exporting countries. The overview of the paper is as follows. Section "Energy transition" discusses energy change and evaluate the arguments and also evidence top top the speed of transition. We talk about the possible adaptation strategy because that oil companies and oil-exporting nations in the Sect. "Implications because that the strategy the oil companies and also oil-exporting countries". Section "Conclusion" offers the concluding remarks.


Energy transition is a radical change in the energy system native an existing model to a new paradigm. It is facility and goes past only the replacement of one resource of fuel through another. In essence, energy transition involves changes in three interrelated size <22>: (1) the tangible facets of the power system, which incorporate technology, infrastructure, market, production equipment, usage patterns and distribution chains; (2) actors and their conduct, i beg your pardon comprise new strategies and investment patterns, also as changing coalitions and also capabilities of actors; and (3) socio-technical regimes that contain officially regulations and policies, institutions as well as mindset and also belief systems, discourse and views around normality and also social practices. Therefore, the energy shift is multidimensional, complex, non-linear, non-deterministic, and also highly uncertain. Although energy change is regularly assessed based upon the rate of changes in the tangible dimension, the is a multilayered procedure with lot of actors.

As the transition outcome is the an outcome of an interaction of technology, institutions, culture and agents, in practice, the is challenging to guess accurately the plot of together a process. Relying on historical data is one means of taking care of these issues; however, together we emphasize later in this section, such evaluation has its own limitations. In this section, us highlight the key features the energy transition using historical evidence, economic insights, and the literary works on the social measurement of energy transition.

Renewables have actually hit a an essential inflection point

Most modern technologies exhibit one S-shaped power curve over your lifetime. This curve indicates that, in ~ the beginning, the performance of brand-new technologies improves and penetrates the market very slowly, however it accelerates at some point thereafter, and finally diminishes when an innovation becomes mature. This power acceleration is an extremely important throughout the an innovation maturity cycle, because it is the an important inflection suggest after i beg your pardon the speed of penetration of an innovation will thrive at a much faster rate than before. Over there is evidence saying that wind and solar have currently reached the inflammation point.

Wind powered about 2.5% of total an international energy demands in 2016, and also solar it is provided 1%, on an end-demand communication (deducting the performance losses from burning of fossil fuels). However our conclusion from examining the 250-year history of the energy markets is that wind and solar are inflecting in a way that resembles coal in the nineteenth century and oil in the twentieth century, and are therefore likely to be same transformational over the twenty-first century. In 2011–16, we estimate that final usage of an international energy climbed by 810 TWh pa (terawatt hours every annum). Solar met 54 TWh pa the the brand-new demand (7%), and wind met 105 TWh pa (13%). This provided wind and solar a 20% share of the new growth in demand, up from zero before 2000.

Such get of market share by new energy resources is in no without precedence. Figure 1 reflects the longer-term history of various energy sources contending to supply new demand because that energy. Coal supplied 15% of new demand in 1800–30, prior to inflecting come 50% of new demand in 1830–60 and also 70% of brand-new demand in 1860–80. Oil offered 9% of brand-new demand in 1900–20, speeding up to 17% in 1920–40, and also 29% in 1940–80. At the same time, gas gave 12% of brand-new demand in 1920–40, before increasing to 30% in 1940–2000.


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Sources: BP <1>; Carbon Dioxide Information evaluation Center <4> ; Smil <18, 20>; authors’ estimates


Recently, BP energy Outlook: 2018 edition further emphasized the growing change to renewables, noting that ‘the pace at which renewables acquire share in power generation over the Outlook is much faster than any kind of other energy resource over a comparable period’. Solar power projections were raised 150% indigenous 2015 estimates, due to panel price deflation, which is expected to proceed at 2% pa come 2040. Hence, BP sees renewables as the fastest-growing fuel source, increasing 5 times, capturing about 40% of new demand development (for comparison with the data in Fig. 1). Renewables would because of this be getting to 14% that primary energy supplied in 2040. The trajectory the wind and solar could also be significantly greater than BP’s estimates, specifically if one analogy is drawn to the expansion of coal in the late nineteenth century and also oil in the twenty century. Conversely, this renewable energies should overcome intermittency and limitations in strength grids come realise their full potential.

Renewable efficiency: extension of a long-term trend

Penetration that renewables is not just the issue of replacement of hydrocarbons v a zero-carbon source: it additionally represents a material step readjust in efficiency. This change in performance has some an essential effects top top the dynamics the the energy industry. Indigenous an output perspective, and given the variety of sunshine and also wind, once a solar panel or wind generator generates a TWh of energy, that is produced in the form of usable electricity, which is immediately obtainable to consumers. Conversely, as soon as burning charcoal in strength generation, only roughly 40% that the power content in the material can be captured as electricity. Gas is only mildly better at roughly 50% in a combined-cycle gas turbine. And, in the internal combustion engine, much less than 20% of the energy in gasoline is harnessed as mechanical energy. Therefore, when considered from the view of end demand, one of the most beneficial disruptive impacts of renewables is the each TWh that generated power can displace 2.5 TWh the coal offers or an ext than 5 TWh of gasoline supplies. Greater performance is among the reasons Table 1 mirrors renewables costs to be very competitive.


But the long-run history helps come contextualize the step readjust in efficiency developing from renewables: the primary efficiency of the an international energy system has been stability increasing since the early industrial transformation (Fig. 2). Renewables must be seen as a extension of the very same trend. Other power sources must continue adapting to improve their own efficiency.


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Source: authors’ estimates


In the previous 250 years, global energy effectiveness has accelerated at 0.1 pp (percentage points) pa (Fig. 2). Particularly since the oil shock that 1980, energy effectiveness has increased at 0.3 pp pa. Electrification has actually long contributed to performance gains, increasing from 10% of worldwide energy consumption in 1945, to one-third in 1980 and also one-half today. In 1900, electrical generators completed just 5–10% thermal efficiency. This climbed to around 5 pp per decade until 1960. The best combined-cycle gas turbines now are about 60% efficient. Also greater effectiveness gains space visible when concentrating on certain industries. In heating, pre-industrial open up fires captured about 5–10% of power at best, when the ideal gas furnaces attain 97% thermal effectiveness today. In materials, the most typical metal created on earth is steel, made from iron, who manufacture consumes 7% the the world’s major energy. Power needed to scented a ton that iron fell from 76 MWh (megawatt hours) in 1750 come 15 MWh in 1900, 8 MWh in 1950 and around 4 MWh by 2010. Huge blast heating systems today require 90% less energy per ton that finished metal than the pig iron heating systems of pre-industrial times <14>.

Vehicle performance has may be lagged these various other examples. Resources quote the fuel economic climate of the Ford model T and other pre-war vehicles at 14–21 mpg. Brand-new passenger cars’ fuel economic climate flatlined in ~ 23 mpg in the 1980s, 1990s and early 2000s, follow to the US ecological Protection company (EPA). In recent decades, improvements sped up again, come 2.5% pa; around 5% annual improvements space decreed through Obama-era Corporate mean Fuel economy (CAFE) requirements <6>.

Efficiency gains have actually a deflationary result on the expense of energy services. In 2000, a lumen of irradiate in Britain cost 0.01% that what that did in 1500. The expense of heating, industrial power, and transportation end land all dropped 90–98% <7>. Real electrical power prices likewise declined 97–98% throughout the arisen world in the twentieth century <13>. This is the other main reason power producers need to consistently focus on efficiency and also cost control.

Returning to the design template of demand, much more efficient, cost-deflated power will unlock brand-new consumption patterns. This impact is termed the ‘Jevons Paradox’, after the English economist that noted great increases in coal usage when steam engines became much more efficient. ‘It is wholly a man of concepts to mean that the economical use of fuel is indistinguishable to a lessened consumption. The really contrary is the truth. As a rule, brand-new modes of economic situation will lead to boost of consumption’, Stanley Jevons wrote in 1865 <12>. Return the rebound result can absent in with the rise in energy efficiency, there is additionally the opportunity of an asymmetric response, definition that consumers reduce their consumption when the price of energy is high, yet do no necessarily boost their intake when the prices of power services decline. There is part empirical evidence on together asymmetric an answer <9>.

New energy sources can unlock new energy demand

One that the key features of previous energy change has to be its effect on demand. The historical data display that revolutions on the supply next of sectors in previous energy transitions have had actually an impact on the need side. In other words, new energy sources unlocked new sources of energy demand, an interpretation that when new energy sources go into the global mix, energy need growth has actually tended come accelerate.

British coal was at first used as a heater fuel, climate in mines: an initial for pumping, then winding, and also then ventilation. Coal’s abundance, however, opened new forms that transportation. The first use was vapor ships, most famously, Robert Fulton’s Clermont on the Hudson flow in 1807. As soon as the Stockton and also Darlington Railway opened in 1825, freight was very first carried through horses. That was just 4 years later that Stephenson’s Rocket won the Rainhill Trials, hosted to determine the best style for steam-powering the new Liverpool and Manchester Railway. Because that a full half-century after, worldwide energy demand accelerated 1 pp pa faster than global populations. Later, coal was the main fuel used for power generation, starting in 1882 when the Edison Illuminating firm began supplying power to Pearl Street station in lower Manhattan. This an extensive coal’s 4% pa demand compound yearly growth price (CAGR) right into the early on 1900s.

Therefore, offered the possibility of induced impacts of supply-side changes on the demand side, critical question is whether the renewable energy change will contend for sector share in a fixed global energy market. If historic trends space repeated, the is possible that new sources of power will unlock brand-new demand that is not right now easy come envisage (currently, demand is virtually stagnant in most of occurred world). Together one example, Bitcoin mining is approximated to consume about 42 TWh of energy this year (2018), about the very same as the totality of brand-new Zealand <1>.

Speeding up travel by ten times, while saving time, calls for a thousands times an ext power to overcome air resistance. Indeed, background shows the human being has unlocked exponentially much more powerful machinery over the past 300 years as power supplies have become an ext abundant <20>. Complying with the object of commonly easily accessible transportation options, a horse-pulled wagon in 1890 achieved 1 kilowatt (kW) that output; the 1910s Ford design T achieved 15 kW at full speed; a 1985 Honda public outputs 65 kW; and also the most popular car sold in the USA critical year, the Ford F-150, deserve to output 200 kW. Likewise, in industry, a donkey treading a roman hourglass mill could output 300 watts (W) in 100 BCE; an eight-man netherlands treadwheel calculation 800 W in about 1500; Newcomen’s vapor engine output 3.75 kW in 1712; Edison’s Pearl Street station got to 92 kW in 1882; commercial compressors accomplished 10 megawatts (MW) in 1970; and, today, the World’s biggest nuclear plant deserve to output 8.2 gigawatts (GW). Lastly, in the round of fixed transportation, a 170-man Greek trireme could output 20 kW in 500 BCE, scaling as much as 30 MW at a Japanese container ship in 1960, and 60 MW for a Boeing 747 in 1970 <20>.

New power sources likewise unlocked social and also industrial changes. A wealth of current research says 50-year pulsations in person waves of innovation, triggered by brand-new primary energies <3>. Period of decentralized renewable power growth can be supposed to to decrease the importance of big cities, and promote more dispersed settlements, ugandan-news.comed right into the financial system by greater digital connectivity and much more rapid travel. If so, this trend would have really long-term implications for virtually all sectors and also industries, from retail footfall come land value.

An essential caveat for extrapolating indigenous the past here, however, is that the constraint the the present energy change is greenhouse gas emissions and also not energy consumption. In various other words, even if new sources of energy unlock brand-new demand, over there is no guarantee the it will advantage hydrocarbon resources if such new demand because that fossil fuel resources is energy-based and the problem of emissions continues to be unresolved. Future energy need growth will be constrained by carbon emissions; thus, the is unlikely that the new demand would cause the same inter-fuel competition as checked out in the historic transitions.

The rate of power transition: slow or fast?

It is not an overstatement come say that the speed of energy change is the most an essential parameter of transition, which has serious effects for the business strategy of actors in the energy sector. Nonetheless, predicting the speed of change with certainty, based on available information, is nearly impossible mainly due to the fact that of the intricacy of change and presence of multiple layers and also actors in this process. In this section, we review the arguments and also empirical proof on the rate of change and evaluate your robustness and also predictive power.

The check out of sluggish transition

The mainstream see is that energy shift is a slow process <21>. This camp gives various debates to back up this position. We summarize the main reasons in favour that slow shift as follows <8, 18,19,20,21,22>:

Historical data and evidence suggest that past energy transitions have been slow.

The scale and complexity of energy transformation is such that it has tendency to produce lock-in and also path dependency.

The transition of the power sector relies greatly on the access of infrastructure, which often takes time and also is an extremely costly come build.

There is a vast sunk cost connected in existing frameworks of the present energy system, which create inertia and also provides an financial incentive to utilize them until they are written off. Because that example, for big power plants, resources costs, which space so large, beat a vital role in the decommissioning the plants. Generator owners often tend to store existing assets to run for as long as that is economically and also technically feasible.

New power sources slowly improve their performance and also competitiveness (through discovering curves and economies the scale). This will result in the sluggish replacement that incumbents in power markets.

Innovation diffusion is a an extensive process. The takes time for technology or brand-new system to move from a niche come a massive market.

As shift causes disruption, incumbents and also declining markets will hit back, and also this delays the change process.

Fast transitions rarely take place and, as soon as they do, they are anomalies the are associated to tiny countries or specific contexts with tiny scope because that replicability elsewhere.

The vital empirical evidence for a slow change is past inter-fuel competition, which resulted in the substitution that coal because that pre-industrial biomass and muscle power, and oil for coal (see Fig. 3). In the eighteenth century, power was supplied mostly by biomass and also muscle power. Coal’s market share rose from 5–60% in between 1830 and 1914, peaking in the year the the first World War damaged out. Oil rose from 1–40% in between 1900 and 1973, peaking in the year that the first OPEC oil shock. Gas climbed from 4% in 1945 to 24% today, if nuclear climbed from 0% in 1954 to 2% in 2000.


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Sources: BP <1>; Carbon Dioxide Information analysis Center <4>; Smil <18, 20>; authors’ estimates


The very first known usage of coal for heating remained in China in 100 BCE. Charcoal mining expanded in the UK in the 1640s. The Newcomen vapor engine was developed in 1712, transforming the ability to harvest coal’s mechanical energy. James Watt’s improved architecture was occurred in the 1760s. Yet even through 1800, with industrialization in complete swing, there were only 2000 vapor engines working in Britain. For comparison, there to be 6000 water mills registered in Britain’s 1086 Domesday publication survey. In the previous transition, charcoal power readjusted the world, yet over centuries.

Oil’s share of global energy supply was just 13% in 1945 in ~ the finish of the second World War, copy to 27% by 1960 and 37% through 1970. The acceleration synchronized with the tide of us highway construction beginning in 1956—almost a century after Edwin Drake win oil in Pennsylvania in 1859, let alone sixteenth-century explanation of 35-m oil wells gift dug on the Absheron Peninsula, near contemporary Baku, Azerbaijan. Ford began mass-producing version Ts in 1908. Rudolf Diesel created his eponymous engine in 1892 (but had actually sold only 300 devices by 1901). Knife Benz constructed the very first practical car in 1885. So, oil likewise emerged over decades.

The exact same is true in aviation. Luigi Blériot do the an initial English Channel flight crossing in 1909. It to be not till 1957 that airline carried an ext people throughout the Atlantic 보다 ships. Going earlier even further, roman inn water mills were used in the very first century BCE, however did not end up being widespread for another 500 years. The very first large alternating-current hydro station was constructed at Niagara in 1895 (37 MW). Despite the secure completion the ever-larger mega-projects—most notably China’s 22.5-GW 3 Gorges Project, in 2012—water turbines peaked at approximately 16% of the world electricity and also around 2% of complete primary energy supply. Hydro did no continue expanding indefinitely to the point of dominating global energy markets. This to be mainly because of water resource and ecological constraints and competing use of water because that agriculture. This is probably much less of an problem for wind and also solar, other than that wind and solar ranches may challenge public opposition once they space in the vicinity of regional residences.

The past diffusion of modern technologies was slow even for smaller appliances, for which widespread fostering can take generations. The an initial home refrigerators to be marketed in 1914, but ended up being common in the USA only in the 1940s, and also in Europe just in the 1960s (comprising 10% of residential electricity usage today). Similarly, waiting conditioning systems were patented in 1902, but only scaled down for family members use in the 1950s. Meanwhile, in the French census of 1954, just 10% of family members had a bathroom and central heating, climbing to simply 60% through the mid-1970s <15>.

The over examples demonstrate two key features the the previous power transitions: (a) previous transitions were largely driven by industry forces, technological advances and also innovation; and also (b) the adoption of major energy sources developed slowly end decades, no years.

The watch of quick transition

On the other side the this dispute are supporters of quick transition. The main arguments in favour the a fast change can it is in summarised as adheres to <8, 21, 22>:

Comparison through the previous is a biased view because the drivers of the current change differ basically from the motorists of past transitions.

A key feature of historical transitions is that they were more opportunity-driven, vice versa, low-carbon transitions are more problem-driven, which involves a cumulative public an excellent (climate readjust and air pollution). Therefore, policy plays crucial role in the current transition.

Historical transitions were an ext about variation (in power mix), whereas the current change is also around adjusting come the selection environment.

A crucial feature the the present energy shift is that it is managed or incentivized (or planned and coordinated), whereas past transitions were much more naturally developing (or also accidental or circumstantial) as a result of changes in technology, price, demand, or customer preferences.

In a managed transition, political will and a feeling of urgency in culture to mitigate the adverse impacts of climate readjust may bring about policies that change markets and selection environments in a fast manner or even phase the end technologies prior to they room commercially composed off.

Historical evidence does no unanimously suggest to slow-moving transitions. There are additionally examples in history of quick national-scale transitions and also fast transitions in end-use technologies.

In essence, the energy shift is a multilayer and also multi-actor phenomenon. In together a situation, changes that room seemingly sluggish within one isolated class (for example, national energy conversion and also supply) have the right to multiply when one take away a much more holistic and also systematic perspective.

The current transition is no just influenced by alters in the power sector. That draws ~ above synergistic advances in multiple domain names at once, such as 3D printing, blockchain, computing, nanotechnology, products science, and also biological and genetic engineering. Therefore, it can be sped up in means that have actually not been possible in previous transitions.

As human knowledge is a cumulative process, us can benefit from what we have actually learned from past transformations in order come expedite future transitions. In addition, the prices of learning and also innovation in miscellaneous sectors can produce technologies that previous energy systems might not, with technical characteristics that predispose them to collected breakthroughs the were hitherto unseen.

There is additionally some historical evidence that supports the discussion in favour of quick transition. In regards to end-use technologies, Sovacool <21> describes lighting in Sweden, chef stoves in China, liquefied petroleum gas (LPG) stoves in Indonesia, and also ethanol vehicles in Brazil as examples of whereby end-use technologies diffused at a amazing rate.

Sweden completed the shift to reliable lighting in practically 9 years (between 1991 and 2000). The National enhanced Stove regime in China promoted the penetration of enhanced stoves from much less than 1% that the Chinese sector in 1982 to an ext than 80% by 1998, reaching half a exchange rate people. Indonesia perfect the programme that conversion indigenous kerosene stoves to LPG stoves to enhance air quality in simply 3 years (from 2007 come 2009). Within this period, the variety of LPG stoves across the country increased indigenous 3 million to 43.3 million, i beg your pardon served almost two-thirds that Indonesia’s 65 million families (or about 216 million people). Brazil produced its Proálcool programme in November 1975 to boost ethanol production and also substitute petroleum v ethanol in conventional vehicles; and also in 1981, just 6 years later, 90% the all brand-new vehicles sold in Brazil might run on ethanol.

There are also examples of quick diffusion in ~ a an international scale. Indeed, cell phones space a an innovation that did achieve rapid penetration at a world level. In 1982, the world populace was roughly 4.6 billion, however there was not a single mobile phone call subscriber. In 2017, there to be 7.6 billion civilization in the people with more than 5 exchange rate mobile phone call subscriptions. The smartphone, which is a an ext recent phenomenon, has already reached 2.4 exchange rate users, together of 2017. Back a phone weighs ten-thousand times much less than a compact car, and so might not be a an excellent basis because that generalizations around other markets such together transportation, the is an indicator the the an unified effects of cost reduction and also consumer preference.

It is fair to say the the rate of penetration of end-use innovations such together the phone call is various from supply-side resources (such together the coal and also gas supply chains), due to the fact that end-use technologies’ penetration does not need a adjust in the entire power system. Adversaries of fast change often argue that huge infrastructures can not be substituted easily, particularly at the national level. There are likewise examples, however, of national-scale fast transitions in power supply that have actually resulted in far-ranging changes in the facilities within a fairly short duration of time. These are, because that example, natural gas in the Netherlands, nuclear electricity in France, an unified heat and also power in Denmark, and also coal retirements in Ontario, Canada <21>.

More recently, britain is on monitor to come to be the very first major economic situation to transition away from charcoal after century of production and consumption. In the electrical power sector, the usage of coal dropped to 12 million tonnes in 2016, levels not seen since 1935 <23>. This change was unprecedented; it took 14 years for power sector coal demand to rise from 12 come 28 million tonnes pa (1936–1950), yet only 1 year to make the reverse transition (2015–2016). Also, in 2016, the complete consumption of coal in the UK (in all sectors) was approximately 18 million tonnes, a level not viewed over the previous 150 years. The British situation is an excellent example of complexity of energy change and the duty of policy in expediting the process.

Some crucial insights top top the speed of transition

The testimonial of evidence and arguments for the rate of shift reveals some amazing insights:

First, historical evidence about the rate of transition is inconclusive, v both situations of slow and also fast transitions populating the history.

Second, historical data about slow change are instructive, but not necessarily predictive about future transition.

Third, the speed of change differs throughout sectors and also regions and has multiple layers the make it difficult to draw a concrete conclusion in ~ the worldwide scale.

Fourth, plan plays a an essential role in the current change at least in the short to tool term before the market completely takes over.

Fifth, the challenge of acquiring market share this particular day is magnified because the power market is bigger than ever before: 12 time 1900 levels and 35 times 1800 levels.

Therefore, we argue that although transition can be quick in a specific sector or a particular country or even a details layer the industry, the rate of grand transition (at the worldwide level) is unsure (it deserve to be slow-moving or fast) and also will no be uniform throughout the globe. Furthermore, there is some degree of subjectivity as soon as we talk around the time dimension of change because it is not clear what counts together fast and what counts as slow-moving (for example, is 30 years quick or slow?). The speed of energy change is also susceptible come governments’ change of priorities, choice cycles, and also political competitions.

Implications of speed of transition for disrupted fuels

Given the suspicion in the rate of global energy transition, we deserve to envision 2 scenarios. The first scenario is one in i beg your pardon the grand change happens in a slow-moving manner (given that past radical transforms in the an international energy mix have tended to arise over decades) and other energy sources have time to adapt. Historically, there space very couple of examples of significant energy sources disappearing native the global energy mix, as checked out in Fig. 1. Indeed, we could think that the nineteenth century together the ‘great period of coal’ and also the twenty century together the ‘great age of oil’. But the world consumed double as lot wood 보다 coal in the nineteenth century, and also 15% much more coal 보다 oil in the twenty century. In other words, coal’s climb did not note the end of biomass, and oil’s climb did not note the finish of coal.

The capacity of incumbent energy sources to adapt and to preserve industry share is further depicted by the Hirfendahl–Hirschman table of contents (HHI) in Fig. 4. HHI is an index for the measure of market concentration. In the past half-century, what is many remarkable is how small it has actually changed. The HHI is flat at 2500. The largest adjust in the energy mix is herbal gas obtaining 10 pp of share, in ~ the cost of animal and biomass. But since the increase of oil and gas, no separation, personal, instance energy resource has been able to victory a leading market share—and no major energy source has been fully eliminated. Power sources constantly adapted to contend with one another.


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Source: BP <1>; Carbon Dioxide Information evaluation Center <4>; Smil <18, 20>; authors’ estimates


One should go back much further to discover energy sources being displaced. Even in this instances, the disruption took years or centuries, and also the displaced energy source retained a pricing premium while being disrupted, fairly than trading under to expense parity through its competitor. For instance, wood is inferior to coal as a fuel. The last is around 11 times more energy dense and also thus easier to transport. It additionally burns three times hotter, at 1927℃, whereas wood burns at 600℃. Timber prices ongoing to profession at a premium for 500 years, prior to sufficient coal might be produced and transported to meet latent demand. Also over the food of the twentieth century, the use of fuel wood and also other biomass doubled to around 12,500 TWh, meeting about 12% of global energy offers in 2015 <17>.

The 2nd scenario is one in i beg your pardon the cool energy change happens quicker than expected, and also perhaps in a revolutionary way, and therefore disrupts the business model that incumbents prior to they can adapt. Such a revolutionary disruption is no without precedence. In the book “Clean Disruption that Energy and also Transportation”, an innovation advocate Tony Seba contrasts two views of new York’s fifth Avenue, in 1900 and 1913 <16>. In the former, over there is ‘one car’ in a sea the horses, and also in the last ‘one horse’ in a sea of cars. New York’s transition from equine to car took simply a dozen years. Seba argues that technology’s S-curves room chronically underestimated by experts who should understand better.

Furthermore, from an evolutionary perspective, historical transitions were more about occurring variations (technologies) in the period of scarcity, whereas low-carbon transitions are more about adjusting the choice environments <22> in the age of variety (via policies, regulations, and incentives that form markets), and also this influence the balance that demand and supply. Under power scarcity in a civilization of raising demand, the is possible to have a partial and also slow substitution of incumbents, where incumbents even retain a pricing premium and also satisfy the marginal demand in presence of a new source of energy, i m sorry is cheaper and also has an ext calorific contents (the instance of timber versus coal, because that example). However, things deserve to be completely different when there is it is provided abundance and also demand is not growing. The is possible that a new source the energy fully displaces the incumbent. In together a world, the incumbents cannot retain a pricing premium if the is walk to have a industry share.


Oil companies and oil-exporting nations cannot purchased to ignore the shift of the energy sector, which can disrupt their service model and also erode your revenue base. For this, they need to know what aspects of energy shift affect their organization activities. Among the multiple dimensions of the power transition, its speed is the paramount importance for the organization strategy that oil-sector actors since of its result on the long-term demand for oil. Despite the speedy transformation of the energy sector in some regions, such together the european Union (EU), the speed of shift at an international scale is uncertain, and this further induces skepticism in the long-term need for petroleum resources (for example, it is no clear when peak oil demand will occur; the various demand projections are extremely sensitive come underlying assumptions such as populace growth, economic growth, performance gains, and also carbon tax, amongst other factors). On peak of that, that is difficult to specify what the endgame is, which technology wins, and also how the last mix of power will look. It is quite likely that the result of the transition will be different throughout regions. Faced with these high uncertainties, the an essential question is: how can oil-exporting countries and oil companies adapt their business models come the transition period?

Traditionally, investment in the oil and also gas sectors (and maybe investment in the entire energy sector) has had actually three key features: (a) investment in hydrocarbon assets is largely sunk and also thus irreversible; (b) over there is some level of apprehension over the price from invest and, therefore, the finest a decision-maker can do is to assess probabilities of various outcomes that can lead to higher or a reduced profit indigenous the investment; and also (c) possibility of delay, meaning that the decision-maker might wait until he or she obtains much more information around the future. Throughout the transition, however, the situation is even more complex as not correct assumptions about uncertainties have the right to lead to misallocation the capital and write-offs. Also, underinvestment in standard energy can yield shortages, underpinning shortages of light, heat, power, and also mobility—the mainstays of contemporary civilization. Conversely, a wait-and-watch strategy through postponing invest decisions can produce a home window of opportunity for competitors. The other side the the coin is the too at an early stage investment likewise limits future alternatives and can lock the agency into a sub-optimized investment decision. Offered the range of uncertainties neighboring the change of the power sector, oil companies and also exporting countries should think about multiple variables at once and form strategies that are sturdy in most feasible outcomes.

Adaptation strategy for global oil companies and also the role of renewables

Until this decade, the organization strategy the oil and also gas providers was straightforward: change or thrive reserves, refine and also sell products in a growing an international market. As oil demand prospects have become an ext uncertain and also traditional energy sources face disruption, oil companies require a various approach. The alternative approach, however, is not straightforward. First, over there is no one-size-fits-all solution. Oil service providers have had a various path and risk attitude, various endowments, have operated in different geographies, and have different varieties of expertise (some, for example, are more experienced in offshore procedure than others).Footnote 1

Second, the successful response of oil service providers to energy change is past the inquiry of completely or no integrating renewables in their service model. The organic hedge of industry versus the decline in oil demand growth might be to boost the re-superstructure of gas in their portfolios, which still has actually room for growth, in ~ the the very least in the medium term. The assistance for a work carbon taxation by part oil suppliers can also be checked out in this light, since it benefits herbal gas in ~ the price of coal. In the long run, however, gas usage in strength generation will battle to maintain industry share—although gas might retain a competitive function in high-value heating. In effect, oil companies need to evaluate which component of their organization model is at danger with energy shift and in what time frame. Effective adaptation strategies in the past have consisted of unlocking brand-new sources that demand, boosting efficiency, and also deflating costs. Several of these class are applied in Table 2.


A relevant concern is whether oil companies’ main point business skills can be translated into the renewables business. That is not so challenging to see why oil suppliers are reluctant to undertake together a move. First, oil carriers are supplied to invest in high-return upstream projects, whereas go back to investment in renewables is modest. Oil companies complete on efficiency and economics, whereas renewables space a regulation industry. The higher return the upstream and also familiarity with industry regularly wins end the risk and modest return that renewable investment. Second, the success of the renewables sector depends on the access of subsidies, and oil carriers are often reluctant to build a complete company strategy approximately subsidies for miscellaneous reasons (for example, dependability on plan support and also unpopularity that subsidies because that oil companies). What complicates the concern is that oil companies’ past moves right into the renewables industry have not been constantly successful. BP invest $8.3 billion in wind and renewable assets in 2005–13. It failed to find a the person who lives for the 1.6 GW of united state wind volume in 2013. The replacement expense at today’s wind price is estimated at roughly $2.3 billion.

Despite this drawbacks, oil companies need to not view their alternatives as a an option between one of two people renewable or hydrocarbon investment, yet rather a selection between static effectiveness (focusing on maximizing the return from their current hydrocarbon assets) and also dynamic effectiveness (positioning in the shift for permanent survival). We argue the neither a wait-and-watch strategy nor a hasty relocate to renewables is a good way of positioning for power transition, due to the fact that both approaches are risky native a organization perspective. Instead, us suggest progressive ‘business design extension’ as part of a substantial adaptation strategy. The service model expansion involves changes in the investment, operation, research and development, and also coalition decisions of oil companies with a one-of-a-kind view to future technologies. Because that a effective move, oil companies have to reassess your existing portfolio across the whole value chain and consider methods in most competitive and an important assets, both indigenous hydrocarbon and low-carbon resources. The operating version of these companies likewise needs to become much more compatible and agile offered the continuing readjust in the energy sector. The business model expansion differs indigenous the changing strategy in that it balances the short-lived revenue maximization through long-term organization disruption risk. For example, if, for any reason, it turns out the the oil company has make incorrect assumptions about the speed of transition, to win technologies, and also future energy mix, that will only affect part of their company model. Therefore, an oil company with prolonged business version is unlikely to challenge a total company disruption also under a worst-case scenario.

One that the elements in the extended organization model have to be to integrate renewables into hydrocarbon projects. However, faced with enhanced pressures indigenous shareholders and also in anticipation of a speedier transition, complete renewables into existing projects might be seen by plenty of as service providers not doing sufficient and, therefore, in the upstream, oil companies might need to expand their portfolio exterior fossil fuels, also though that is seemingly much from their main point business. Indeed, it is known that there is a risk associated in moving beyond the core business; however, that is often said that this risk demands to it is in weighed against the threat of eventual disruption the the company model.

In practice, the oil majors’ many recent solution has actually been to gain a foothold in renewables v bolt-on acquisitions. Because that instance, in April 2018, full agreed to purchase straight Energie for €1.9 exchange rate in cash, to gain access to a pre-existing pipeline of 550 MW of renewable capacity, to add a larger pipeline the 2 GW. This complies with BP’s $200 million salvation of a 43% stake in LightSource in 2017, alongside plans come quadruple the solar capacity to 8 GW. In December 2017, shell agreed to obtain the UK’s first Utility, additionally moving its organization further downstream into the power sector—although this bolt-on (likely come be roughly £200 million) was shy of a potential bid because that Equis Energy, Asia’s largest renewables firm, at 11 GW, which eventually sold for $3.7 exchange rate to GIP.

While underlying job economics appear sound, the risk of rapid renewables growth—organic or via lot of bolt-on acquisitions—is the patience is required by shareholders. For instance, on modelling Statoil’s seven largest renewables projects, us conclude the while the all at once internal rate of return (IRR) will exceed a passable 8% hurdle rate, the in its entirety portfolio will not turn free cash-positive until the so late 2020s, if it will be in the early on 2030s that return on capital employed access time 10% in the continually growing renewables portfolio (see Fig. 5).


*
Source: authors’ own calculations


In summary, balancing the momentary revenue maximisation target with irreversible survivability requires adaptation that the existing company model of oil companies. Oil companies require to embrace a company strategy the incorporates uncertainty and is robust with respect come a wide set of future feasible market outcomes. Complete renewables into their hydrocarbon investment portfolio is an important part of together a strategy; however, a complete adaptation strategy is past the question of renewables.

Adaptation strategy for oil-exporting countries and also the role of renewables

The nations that room dependent top top oil and gas production for government revenue are likewise highly breakable to transforms in the energy landscape. There are two important distinctions between significant oil companies and oil-exporting countries in relation to energy transition. When the an essential issue for oil service providers is disruption of existing organization models, the main an obstacle for oil-exporting countries, in addition to loss of revenues, which is essential for the to work of their economies, is the capacity to monetize their huge reserve base. This is mainly due to the fact that the proved reserves-to-production ratio of global oil suppliers is typically around 8 to 10 years, whereas this number is number of decades, beyond all peak-oil need forecasts, for few of the resource-rich nations (for example, it is an ext than 63 years for Saudi Arabia with about 90% dependence of government spending plan on oil revenues).

The 2nd important distinction is that, because that oil-exporting countries, over there is no conflict between static and dynamic performance when it concerns positioning because that the power transition. Indeed, invest in renewables could aid further an increase their short-term profits as the frees up their hydrocarbon resources for fiddle (as long as worldwide prices are above the break-even price). Oil-exporting countries have unique characteristics that do the reason of invest in renewables because that them quite compelling. These countries have rising power demand and are at a phase of advance where financial growth is tied increase with power consumption. The rise in energy need is intended to stress, overload the export capacity of this countries. Indeed, several of them, such as Kuwait and also the UAE, are already net importers of organic gas.

The economics of renewables in exporting nations depends top top the opportunity price of residential oil and gas consumption, which is reflect in the international price that hydrocarbon resources. Follow to the energy Information administration (EIA) <5>, generating 1 MWh of electricity requires 1.73 barrels of oil or 10.11 mcf of herbal gas. The document low auction prices for solar photovoltaics (PV) in Dubai, Mexico, Peru, Chile, Abu Dhabi, and also Saudi Arabia have displayed that, under the ideal circumstances, a levelized expense of power (LCOE) that $0.03/kWh because that solar is achievable <11>. The international Renewable Energy firm (IRENA) <11> also estimates the worldwide average cost of solar PV come be about $0.06/kWh. If the lower band is considered (which is closer to costs of solar at the region), the break-even price of oil and also gas would be $17.34/bbl and $2.96/mcf, respectively, which are well listed below international prices. If we consider the worldwide average prices of solar rather (which is pretty lot conservative for the region), the break-even prices will increase to $34.68/bbl and also $5.93/mcf, which is still listed below the global price for oil however slightly higher than the mean price for organic gas. Also if we add the prices of dealing with solar intermittency (at about $5/MWh) to this numbers, the economics of renewables is quiet winning over timeless resources in this countries.

The economics of renewables will be boosted if us account because that the acquire that these countries will do from liberated oil and gas. Algeria is a an excellent example with its underutilized gas export capacity, a miniscule $0.5/mcf residential gas price, and also no shortage of floor in the Sahara. Here, insolation can reach 2400 kWh/m2/year. If the nation develops solar to meet its strength needs, it have the right to liberate gas to straight down existing pipeline facilities towards high-value europe markets. The economics of such a project are modelled in Table 3, acquisition the example of a 100-MW invest in Algerian solar. Price would be intended at about $140 million. The basic net present value (NPV) on power generation is zero, or, in various other words, the project earns its price of capital. However, the as whole NPV is uplifted to $40 million, after adding in the value of liberated gas.


For oil exporters such as those in the center East, i m sorry are extremely reliant top top oil revenues, invest in renewables addresses, to part extent, the government’s short-run revenue maximization objective by freeing exports of hydrocarbons, however does not guarantee their long-term sustainability. In the long run, diversification of your economies and also income sources stays the main adaptation strategy the these countries need come pursue. Renewables might replace hydrocarbon sources in the domestic energy mix, yet not in the federal government budget, due to the fact that investment in renewables does not generate the high returns that the oil and also gas industry does. Furthermore, when the renewable power industry is component of the diversification strategy, the alone cannot deliver the real requirements of this economies, together as project creation and welfare improvements. Thus, during the transition, the oil and also gas ar will continue to pat a vital role in this economies, generating the rents required to broaden parts that the abundant economy, including manufacturing industries, agriculture, and also the organization sector (with a certain view come those sectors in i beg your pardon they have comparative advantage), in bespeak to increase the non-oil portion of gross domestic product and, consequently, diversify the resources of governments’ income. In fact, the oil and gas sector might play its component in the diversification drive v building new industries and also fostering backward and forward ugandan-news.comages. This is a flexible strategy that maximizes the benefit from rent-generating resources (that is, oil and also gas reserves) and, at the exact same time, location the nation for an era that can see oil demand flatline or decline. Throughout the transition period, export rental fees will originally constitute the mass of the governments’ revenues, however will decline if diversification progresses together planned.

However, achieving financial diversification is less complicated said than done, since this involves extensive transforms in the economic climate with effects for citizens’ welfare and distribution of national income. For example, oil nations need to carry out painful fiscal reforms the will bring about the reduction or removed of subsidies (including under-priced power careers) and the introduction of taxes, such as income and value-added tax. These worries are inherently facility given the rigidity that existing politics structures, institutions, and the implicit society contract v which absence of politics participation is compensated for by circulation of hydrocarbon rents. This is why gradual and small-scale reforms linked with mitigation measures can be implemented, but one should not suppose speedy changes of oil-exporting economies.

Also, there is a probability (which is not trivial) the these countries might fail in their goal of afford a diversified economy. This, in turn, will impact the speed of the worldwide energy transition. In other words, the an international energy shift will not just shape the political and economic outcomes in oil-exporting countries, however the change in the major oil exporters will additionally shape the an international energy transition. The is a two-way street. The feedback impact from exporting nations is relevant even if these countries succeed in expanding their abundant economy, or the global oil market shifts from the present scarcity-oriented design to a marginal-cost-based market in which hydrocarbons cannot retain a premium pricing. Because that instance, if these nations succeed in your diversification objectives, lock may connect in a much more aggressive reserve monetization strategy, which will an outcome in reduced oil price and huge changes in loved one prices the fuels, influence the rate of transition unless these changes in family member prices are adjusted through carbon taxes, i beg your pardon open brand-new sets of issues related to global coordination and distribution. ~ above the various other hand, if the shift does not go smoothly and does an outcome in plenty of output disruptions and an ext volatile oil prices, this would subsequently speed increase the energy shift process. Together feedbacks include other layers of skepticism to the already facility issue that the existing energy transition.


The worldwide energy market verges top top its next power transition. The twenty-first century will be defined by a increasing share the cost-competitive renewable technologies, and a move away native carbon-intensive fuels. The an essential uncertainty is the speed of the change and its implication for the company strategy that oil companies and also oil-exporting countries.

We argue that while the energy transition is happening very fast in some regions, such together the EU, the speed of the global energy transition is very uncertain. Historical proof points to a slow energy transition, i beg your pardon is instructive however not have to predictive. Furthermore, the current change is gift managed and also coordinated through government policy aimed in ~ decarbonization and reducing waiting pollution, whereas past transitions happened mainly naturally or accidentally without strong policy support. This means that the vehicle drivers of the current transition are fundamentally various from the previous transformations and this root cause uncertainty around how events could unfold.

Given the uncertainty in the speed of transition, we argue the oil companies require to embrace a strategy the is most likely to be successful under a wide set of future sector conditions. We identify that moving past core business is risky for oil companies, but, in ~ the same time, a ‘wait-and-watch’ strategy can be costly. Instead, oil companies need to progressively ‘extend’ their service model rather than completely ‘shift’ native hydrocarbons to renewables. This company model expansion implies building an incorporated portfolio, consisting of both hydrocarbon and also low-carbon an innovation assets. Provided that the endgame (in regards to winning technologies) is unclear, oil companies should emphasis on a mix of competing low-carbon technologies rather than investing in a specific technology.

With regards to oil-exporting countries, the adaptation strategy is different. Over there is no conflict in between renewable investment and also hydrocarbon organization in this countries. This is because these nations can liberate oil and gas because that export with investment in alternate technologies. This will be much more pronounced when considering the oil-exporting nations are in ~ a stage of advancement in i beg your pardon their economic growth is bound with power consumption and also thus residential energy consumption is meant to rise, reducing their export capacity. The economics of renewables in oil-exporting nations will be prone to oil price cycles; nonetheless, once the gains from liberated hydrocarbon room taken into account, this invest rationale is reinforced. We argue the although renewable invest can an increase the temporary export revenue the oil-exporting countries, it is not a permanent solution against the potential disruption in an international oil need growth. In the lengthy run, diversification the their economic climates is the key strategy that deserve to shield these nations from the results of energy transition. During the transition, the oil sector will certainly play a dominant role in the economic climate of these countries, but is intended to start decreasing if the target of diversification is achieved. Furthermore, the success or failure of oil-exporting countries in your goal of achieve a diversified economic climate will additionally influence the rate of global energy transition (through its impact on oil prices), adding more layers the complexity and uncertainty.

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Therefore, we carry out not pretend to market a substantial strategy for oil suppliers in response to energy transition; instead, a means of thinking about the issue.