Navigating the energy transition in a time of geopolitical uncertainty

Over the past two to three years, we have seen climate change slip down government agendas as world leaders have understandably had to navigate the challenges of COVID-19, the cost-of-living crisis, and the Russian invasion of Ukraine, writes Gabrielle Reid.

However, with the consequences of climate change 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 geopolitical certainty, the circumstances under which climate issues will need to be addressed have changed.

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, they will need to navigate a complex road ahead.

An evolving landscape

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 the US heading towards a divisive 2024 election.

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Looking toward Russia, there is a risk that a near-defeated Putin could escalate aggression, and even if an all-out war with NATO is unlikely, attacks on critical energy infrastructure in the physical and cyber world may well occur.

Further east, we may see China start to escalate its self-sufficiency efforts, at the dismay of the US and Europe. Of particular note is the ongoing competition between the US and China over control of new digital technologies 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.

Bumps in the road

But how do these risks actually translate into barriers to the energy transition?

Firstly, this geopolitical instability has not only exposed the world's continued reliance on fossil fuels but, in the face of economic headwinds and grassroot frustration, governments are now increasingly reluctant to take on the disruption and costs associated with the transition. While sustainability remains a priority, securing the reliability and affordability of energy sources are top of the list.

There is no doubt the transition is underway, and oil and gas industry leaders such as Shell, BP, Chevron and ExxonMobil remain committed to pursuing clean energy goals. But, non-renewables remain the bedrock of global energy supplies and a major shift to renewables is likely to be slower than planned.

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Adding to this, minerals such as cobalt, lithium, copper, and rare earth minerals that are vital to the technologies needed to power clean energy are concentrated in only a few countries, making the clean energy supply chain vulnerable.

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.

It may seem that these issues are specific to the extractive and energy sectors – which will also be affected by shifting labour dynamics – but they will impact all energy-intensive industries that compete for clean energy sources as well.

Further up the value chain, consumers will be seeking creative and innovative solutions to the conundrum between affordable and sustainable products. This applies to their energy providers as much as their retail spending.

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Learn from the past; prepare for the future

The COVID-19 pandemic showed that firms should be more aware of their weak spots in global supply chains and their facility to resist and combat global catastrophes.

The war in Ukraine has taught us to prepare for the realignment of key markets from friends to foes, as well as the wide-ranging impact of geopolitical relationships on business reputation, compliance, and operational risks.

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. 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.

ABOUT THE AUTHOR

Gabriela Reid is associate director of strategic intelligence at global intelligence and cyber security consultancy S-RM.