The energy sector is returning increasing amounts of capital to shareholders instead of reinvesting into low-carbon growth areas, a report by Bain & Company said
Only 43% of capital in the oil and gas sector was reinvested for growth in 2022, down from 58% in 2018, according to Bain & Company's Global Energy and Natural Resources study. In contrast to 2021, when 56% was reinvested, in 2022 it was just 44%. Although capital expenditures and the proportion of capital spent for growth in utilities are both rising, the grid has to be fully modernised and expanded in order to support the desired levels of renewable energy and electrification.
The report added that only 19% of the executives in charge of energy and natural resources polled believe that raising financing is a barrier to expanding low-carbon firms. Return on investment and consumer willingness to pay are their main worries, with 78% of CEOs citing this as the biggest obstacle to decarbonisation.
“Energy transition ambitions demand record-setting investment in many sectors, and so far, capital expenditure is significantly lagging,” said Joe Scalise, global head of Bain & Company’s Energy and Natural Resources practice. “Far from this being an issue of ‘dry powder’ or capital availability, it’s an issue of customer value, willingness to pay, and the ability of policymakers and regulators to set the rules of the game to generate sufficient returns.”
Positive outlook for hydrogen
According to the survey, Middle Eastern CEOs are upbeat about hydrogen and carbon capture, with 67% of them anticipating clean hydrogen to be a significant development driver. Raja Atoui, partner at Bain & Company Middle East, said, “The statistic of 67% of Middle East executives expecting low-carbon hydrogen to play a crucial role, should not be a surprise considering the natural advantages the region has to be among the world’s lowest cost producers of both blue and green hydrogen.
Countries such as the UAE, Saudi Arabia, and Oman are already investing and understand the importance of this fuel at a time where economies and industries are transitioning to a low-carbon world. “With so much potential, this is a market that is expected to grow significantly in the coming years especially as there is so much focus on how we can protect our planet against climate change,” he added.
According to Bain's research, assuming an average cost of capital of 10%, every US$1bn in capital deployed has to generate around US$160mn in annual income from consumers. Although consumers are concerned about climate change, there is a chance that they won't be prepared to pay higher prices to do anything about it. Less than half of US and EU consumers are ready to pay even a slight increase in their domestic power bill or gasoline price to cut emissions, according to recent Bain studies. Instead, they favour boosting taxes on affluent families, indicating that consumers do not feel that the government should act to lower the cost of new technology on consumer bills.
Bain’s analysis also shows that nickel and cobalt production need to double, while lithium must increase sevenfold, in order to increase renewable energy capacity.
Eric Beranger-Fenouillet, head of energy and natural resources practice at Bain & Company Middle East, said, “Bain & Company’s Global Energy and Natural Resources report comes at a vital time ahead of COP28 in the UAE later this year. Findings from this comprehensive report underline how imperative the energy sector is to our world, where we stand, and what challenges are being faced today.
“While steps are being taken to build a sustainable future, it is clear that more progress is needed. With the Middle East growing rapidly, many sustainability initiatives are now in place as governments seek to decarbonise through adoption of all forms of energy. Exploring the use of clean hydrogen or CCUS is a key focus, but governments and organisations in the region need to collaborate to ensure the right enablers are in place, including access funding and talent.”