Five Things To Know About The Energy Sector And The Energy Transition
In this post, we discuss five things you may not know about the energy sector and its role in the transition to renewable energy
What types of companies do you think of when we say renewable technology? Sustainable innovation? Carbon sequestration? If we had to guess, your first thought probably wasn’t Chevron. However, Chevron (as well as many other companies in the industry) are investing not only in reducing their own carbon footprints, but also the carbon footprint of industrial emitters through carbon sequestration.
When talking about the transition to a low-carbon, net-zero economy - often we hear “just get rid of fossil fuels”. While this seems like a simple solution, it doesn’t account for the global need for reliable, cheap energy in an inflationary environment where some countries lack energy security.
While energy companies do have emissions from operations, it is really the fossil fuel products that are used by other sectors that make up a majority of emissions. Energy companies take the heat for being the least environmentally friendly, but what about the Amazons of the world? With vehicle fleets, jets, and trucks their carbon footprint is immense.
Additionally - this perspective overlooks the energy sector’s sustainable innovation and investment over the last decade. Energy companies are driving investments into hydrogen, carbon capture and storage, along with other forms of more sustainable energy alternatives. For example, Shell aims for around half of its total capital expenditures to be in low- or no-carbon products and services by 2025[1].
Finally, it is impossible to overhaul our energy system without the deep-seated understanding of the power sector that comes from working in the fossil fuel industry.
In today’s post, we are going to share our top 5 insights on the energy industry and start a dialogue on the role of energy companies in the energy transition. The 5 things you need to know about the energy industry are:
Fossil Fuels Make Up Over 70% of the Global Energy Mix and Over 85% in the U.S.
The U.S. is #2 in Energy Consumption, Energy Production, Emissions, and Investment in Renewables
Consumers Make Up Only a Small Percentage of Energy Use & Emissions
The Energy Sector Isn’t Made Up Entirely of Drillers
Energy Companies are Paving the Way in Terms of Sustainable Innovation, Holding the Majority of Green Patents
1. Fossil Fuels Make Up Over 70% of the Global Energy Mix[2] and Over 85% in the U.S.[3]
The U.S. energy grid is one of the most complex systems in the world with over eleven thousand power plants and two million miles of power lines.[4] It’s a vast network of power plants, distribution centers, power lines, and infrastructure is out of sight for most. But energy demand continues to be on the rise. In fact, since World War II, the largest decrease in the energy demand was in 2020, which was a decline of 4% according to the IEA.[5] Typically, as the population gets older, urbanization increases, and people get wealthier, the demand for energy will also increase. While the world continues to add renewables to the energy mix, fossil fuels make up a large percentage, over 70%, of the energy mix. Even with the focus on electrification, it's important to remember coal and other fossil fuels are used to power electricity so the transitioning to more renewable sources isn’t just as easy as increasing reliance on electricity. However, there are ways to create carbon free or low carbon electricity which comes with a variety of challenges including storage capacity. However, where we are today, the world is still largely dependent on fossil fuels.
2. The U.S. is #2 in Energy Consumption, Energy Production, Emissions, and Investment in Renewable Energy
Starting with energy consumption, the U.S. is the second largest energy consumer at the country-level. In 2021, it consumed 41% less energy than China and 162% more than India.
Source: Statista
On a per-capita basis, however, the U.S. is #17 in the ranking.
Source: World Population Review
Next, moving to energy production. The U.S. is also #2 in terms of energy production, behind China and ahead of Russia. U.S. energy production has come into global focus following the Russian invasion of Ukraine. Specifically with regards to natural gas production, T. Rowe Price notes that “Europe’s push to reduce its reliance on Russian energy has led to a paradigm shift in U.S. policy, with Biden viewing U.S. natural gas as a strategic asset. U.S. policy tailwinds could lead to faster approvals and better financing… with the benefits accruing up the natural gas value chain. ”[6]
Source: International Energy Agency
Next, we will be looking at GHG emissions. While the U.S. is nominally the second largest emitter after China[7], on a per-capita basis it is the second largest emitter.
Source: Statista
Finally, we will be looking at renewable energy investment. The U.S. is the second largest investor in renewable energy technology, having invested $114B in 2021 (roughly 15% of total global investment)[8].
Source: Visual Capitalist
3. Consumers Make Up Only a Small Percentage of Energy Use & Emissions
In terms of energy use and emissions, there tends to be a large gap in understanding. The EIA classifies energy use into five categories: electric power (38%), transportation (28%), industrial (23%), residential (7%), and commercial (5%)[9].
In 2021, petroleum provided approximately 90% of the transportation sector's energy consumption, but only 1% of the electric power sector's primary energy use.
In terms of carbon footprint - Burning natural gas for energy (which makes up 32% of energy sources in the U.S.[10]) results in fewer emissions of nearly all types of air pollutants and carbon dioxide (CO2) than burning coal or petroleum products to produce an equal amount of energy[11].
Source: GasVessel.eu and US Energy Information Administration
Similar to energy use, greenhouse gas emissions can be broken down into five economic sectors. Despite the large focus on the energy sector when it comes to emissions profile, fossil fuel producers are not the largest emitters as a result of operations. Transportation, Electric Power and Industrials sectors are responsible for the largest sources of emissions from operations. It is also worthwhile to note that agriculture makes up 11% of total greenhouse gas emissions. Most farm-related emissions come in the form of methane (CH4) and nitrous oxide (N2O). According to the World Resources Institute, “Cattle belching (CH4) and the addition of natural or synthetic fertilizers and wastes to soils (N2O) represent the largest sources, making up 65 percent of agricultural emissions globally.”[12]
Source: EPA
4. The Energy Sector Isn’t Made Up Entirely of Drillers
When you think of an energy company, what comes to mind? Is it a drilling rig? A gas station? What about a pipeline? Or a truck carrying water? The energy sector can broadly be categorized into upstream, midstream, and downstream.
Upstream companies are typically those that come to mind when talking about energy companies. Upstream companies (often called “Operators” or “Independents”) identify prospective areas, select acreage and acquire oil & gas rights, acquire data & identify prospects, drill & appraise, develop wells & facilities, and finally operate the wells and produce the oil and/or gas. Upstream companies include ConocoPhillips, Ovintiv, Antero, and Hess.
Midstream companies conduct activities including processing, storing, transporting and marketing of oil, natural gas, and natural gas liquids.These companies often specialize in operating tanker ships, pipelines, or storage facilities. Midstream companies include Williams, Enbridge, ONEOK, and Kinder Morgan.
Next, we have downstream companies. After oil & gas are discovered and extracted (upstream), they’re shipped and transported (midstream), and then refined, marketed, distributed, and sold (downstream). Companies in the downstream industry are those that provide the link to everyday users.
There are also many large oil companies that undertake all streams are known as integrated oil companies. Integrated oil & gas companies include BP, Chevron, ExxonMobil, Total, and Shell.
Finally, we have services companies. A wide variety of companies serve the energy industry and play a
leading role in several key activities, such as drilling, construction, chemicals, and water services. These companies are often the hardest to understand by those who aren’t in the energy industry. Services companies include Schlumberger, Halliburton, and Baker Hughes.
Source: Eland Cables
5. Energy Companies are Paving the Way in Terms of Sustainable Innovation, Holding the Majority of Green Patents[13]
It isn’t common knowledge that energy companies are leading the way in terms of investing in renewable and low carbon technologies. However, if you accept that an energy transition is inevitable, it is intuitive that companies will need to transition to more renewable products in order to remain competitive. In fact, we are seeing a trend of big oil companies working to reduce their dependence on fossil fuels, expanding their low-carbon activities, and building out venture capital arms that are focused on investing in renewable technologies. BP, Shell, and TotalEnergies are now among the most active clean-tech investors by number of deals closed, according to an article by the Wall Street Journal analyzing data from PitchBook[14]. To this end - among the GREEN100 organizations worldwide, green patent filings was the highest from energy and power industry, accounting for over 25 percent of the filings between January 01, 2015, and February 29, 2020[15].
Source: Statista
Hot Tea
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Sustainability Movers & Shakers
Source: ESG Today
Earlier this week, Patagonia’s founder, Yvon Chouinard, announced that he is donating his entire company to two newly established climate focused non-profits called Patagonia Purpose Trust and the Holdfast Collective. The company was started with the idea to create clothing with materials that would be less harmful to the environment and donate a percentage of their sales. However, through the years, their purpose had switched as they wanted to be in the business to “help save our home planet”.
According to the company, 100% of the company’s voting stock will transfer to the Patagonia Purpose Trust, created to protect the company’s values; and 100% of the nonvoting stock is given to the Holdfast Collective, a nonprofit dedicated to fighting the environmental crisis and defending nature. The funding will come from Patagonia: Each year, the money we make after reinvesting in the business will be distributed as a dividend to help fight the crisis.[16]
Patagonia has had a long history of conducting their business in a way that helps fight the ecological destruction their founder believed has transpired over the past decades. In 2011, the company received the B-Corp designation, meaning their business is driven by both mission and by profits. To become certified, companies must pass the B Impact Scoring Assessment, adopt their legal framework, and undergo a verification process.
“Going Purpose:” Patagonia Owner Donates Entire Company to Fight Climate Change