As first published in the Commercial Dispute Resolution Magazine as a part of their Expert View series.

The drive for cheaper, cleaner energy shows no signs of abating, but more action needs to be taken now if aspirations are to become reality.

Global energy investment is surging – almost three times faster for green energy than fossil fuels since 2021, according to a 2023 report from the International Energy Agency (IEA). Last year investment in energy transition rose 17% to USD 1.8 trillion.

Significant though this is, the scale and complexity of the energy challenge remain daunting. Demand-side investment – especially in electrifying transport – provided most of the momentum in 2023. On the supply side, investment in renewable generating capacity rose by a more modest 8%, with Bloomberg reporting that USD 75 billion more was invested in fossil-fuel supply than renewables – a consistent 7% gap since 2020.

Meanwhile, the Intergovernmental Panel on Climate Change (IPCC) has said that rising carbon emissions must fall by almost half before 2030 to limit global heating to 1.5°C above pre-industrial levels and avert potentially catastrophic food and water insecurity. The widely held view is that deployment of renewables must triple.

As these goals look increasingly questionable, developers, investors and the infrastructure sector, as well as politicians and wider society, face many difficult questions including: what energy mix best assures security of supply for nations and/or regions in the short, medium and long terms? How are project risks managed and outcomes assured, and when, if ever, will fossil fuels be phased out?

Investment

The IEA’s 2050 roadmap calls for a halt to development of all upstream oil and gas projects with long lead times to correlate with falling global demand, with investment currently twice what should be needed in 2030. But changing the energy supply balance is not straightforward. For example, in the US, even as its Inflation Reduction Act provides game-changing support for decarbonisation (including credits for wind energy), oil and gas output has risen.

The energy shocks brought about by the war in Ukraine have increased the focus on energy security and changed risks and returns. While many oil producers have used record profits to pay dividends or debts rather than reinvest, others (including national oil companies in the Middle East and Asia) are increasing capacity.

Last year’s COP28 commitment in Dubai to “transition away” from fossil fuels may be a turning point, but the pathway is still contested. Even the UK, a former leader on climate change, is grappling with the ‘energy trilemma’ of security, affordability and sustainability.

Trilemma in the UK

Having failed to adjust for inflation to secure projects in its latest offshore wind auction, UK ministers defiantly revived annual licensing rounds for North Sea oil and gas. But ‘maxing out’ production risks failing the trilemma test on all three counts.

With lead times of 28 or more years from appraisal, new oil and gas fields may not start pumping until the 2040s. That said, the industry can act quickly when the market requires, and may fast-track new projects to cover underlying demand as global hydrocarbon production declines overall. However, data from the think tank Carbon Tracker show that, as North Sea oil is traded on the global market, any impact on affordability or security would be marginal. While more gas is directed to the home market, this resource has depleted significantly. If the UK keeps to its net-zero targets, oil and gas consumption must drop dramatically anyway.

Accelerating the roll-out of offshore wind and other renewables, which generally have far shorter lead times and deliver energy directly to UK consumers, may well do far more to reduce bills and increase self-sufficiency.

Prices and costs

Worldwide, falling prices have made renewable energy attractive and the United Nations predicts that wind and solar power will become more competitive, despite inflation. In contrast, oil producers face higher operating costs to maintain well pressures as reserves diminish.

However, further geopolitical shocks from the Middle East or Taiwan could again boost oil and gas prices. Any stimulus to oil and gas investment may prove detrimental to renewables as both sectors compete for installation vessels, yard capacity to build foundations and jacket substructures, and personnel – from electricians and engineers to environmental and other specialists.

Wind-power projects also face significant short- to medium-term supply-chain risks. Major turbine manufacturers suffering from low or negative margins need to push up prices and fund new manufacturing capacity. Increasing turbine size may have brought down the cost of offshore wind’s energy output, but the complexity of design, manufacture and installation keeps costs high. Renewable energy analysts estimate that more than USD 100 billion needs to be invested in the supply chain to reach governments’ 2030 targets. Even the USD 27 billion required by 2026 to sustain recent growth in offshore wind installations might not be achievable. With uncertainty over demand and lack of profitability, the supply chain may struggle to scale up

Project delivery

Unanticipated overruns pose further risk. HKA’s own CRUX analysis shows that schedules and costs have been managed better in the increasingly mature wind power sector.

Time extensions claimed on oil and gas projects averaged 71% of planned schedules, significantly longer than wind power’s 41%. For offshore projects, the variance was 75% for oil and gas, compared with 52% for wind. Onshore, wind overruns dropped to 31%, with only a modest reduction for oil and gas to 66%. In comparison, solar projects faced a typical 53% overrun.

The gap narrows somewhat for cost overruns. Sums in dispute on oil and gas projects averaged 40% of contract values (45% offshore; 35% onshore). For wind, the figure was 27% (29% offshore; 26% onshore). With solar, cost hikes were limited to 20% of contract values.

There was greater commonality among the causes of claims and disputes. Between 36% and 50% of projects suffered design-related conflicts; onshore wind, with 15%, was the outlier. Change in scope was more likely to disrupt oil and gas, and offshore wind. Skills shortages and workmanship deficiencies were only slightly more prevalent on wind than oil and gas projects, and peaked for solar and offshore wind.

Asset stranding

As oil and gas demand declines with the rise of electrification and renewables, the window for viable investment will narrow. The competitive disadvantage widens with longer lead times and project delays (averaging 510 days – two-and-a-half times those for wind), the escalating cost of developing and extracting new reserves, and shifts in government policies to favour clean energy.

Tougher regulations on methane emissions would further challenge oil and gas projects, which could become unviable without tax breaks and subsidies. In the North Sea, UK taxpayers are expected to bear GBP 18.3 billion of the estimated GBP 46 billion cost of decommissioning infrastructure, according to not-for-profit Green Alliance.

Lending may also be harder to find and more expensive, with Barclays now following the lead of other European banks by ending direct support for oil and gas. Climate-related financial disclosures will make investors more aware of heightened risks. Almost 10 years ago, they were warned that the vast majority of reserves would be stranded if global warming was limited to 2°C, and that risk remains even as decarbonisation targets and deadlines are missed.

A clear course?

In the UK, if not in most other markets, renewables will most likely deliver cheaper as well as cleaner energy sooner, while enhancing energy security. Wind-industry alliances are being established to promote standardisation, which will help reduce project complexity and risk. However, significant investment is required to scale up capacity, address supply chain and skills gaps, dampen price instability and improve transmission infrastructure and storage capacity (to manage intermittency).

The global consultancy firm McKinsey & Company reported last year that oil and gas players can offset their risk exposure and regain competitive advantage by diversifying into clean energy – 4% of their upstream investment in 2022, according to the International Energy Agency. Investing too late will probably mean losing out to competitors as well as locking in fossil-fuel use.

Policymakers and funders too must chart a clearer course through the ‘energy trilemma’. A more flexible and dynamic approach to government processes and consents, along with commitment to sustainable finance, will be essential to get on track to meet national targets for the net zero transition.

About the authors

Paul Mansell is a Partner and a Forensic Technical Services Expert at HKA. He is an experienced project manager and engineer with over 35 years of experience in the global engineering and construction industries. Paul has amassed a wealth of knowledge and expertise from involvement on major, complex projects spanning buildings, infrastructure, transportation, industrial, oil and gas, chemicals, power and utilities sectors throughout the UK, Europe, Americas, Middle East, Central Asia, Far East and Africa.

Ieuan Davies is a data analyst at HKA with a wide range of experience across global engineering and construction industries. His expertise and knowledge cover projects in a variety of industries, such as large-scale infrastructure networks, on- and offshore renewable power generation, non-renewable power plants, and industrial and manufacturing sites, covering Europe and the UK, the Middle East, Central and Southern Asia, and North Africa.

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