Powering Up Energy Efficiency in The Oil and Gas Industry Through Leveraging Financial Tools

Powering Up Energy Efficiency in The Oil and Gas Industry Through Leveraging Financial Tools

Many energy experts would agree that a key factor in realizing the accomplishment of sustainable development goals (SDGs) by using all means possible to enhance energy efficiency both in the energy industry and in other sectors of the global economy. Financing the reforms that need to take place for energy efficiency to become a core aspect of the industry is one challenge, but creating a business environment and economy where energy efficiency can be maintained is another struggle. Financial sustainability of costly energy efficiency enhancements has become a central concern for oil and gas policy-makers and field experts as the global economy heads for more tumultuous times with the beginning of a new year. Yet, hope is not lost. With the right financial tools, economists can create strategies to ensure enhancing energy efficiency is cost-effective and does not hinder economic growth.

The first and most obvious financial tool that boosts the development of an energy-efficient market is investments, specifically to finance the capacity-building programs, technologies, and other essential activities that cultivate a better business where green policies can be prioritized adequately. Energy efficiency investments are essential for realizing carbon neutrality as experts insist that “in order to reach net zero by 2050, investment needs to triple by 2030. The European Union has identified a need to increase investment in energy efficiency by as much as EUR 260 billion per year for the period 2021-2030 to meet their 2030 target of a 40% reduction in emissions from 1990 levels and an energy efficiency target of 32.5%5,” it said in a 2022 academic paper titled “Leveraging Financial Mechanisms for Increased Investment in Energy Efficiency” by Gray Bender. “The potential for investments in energy efficiency globally is estimated at $221 billion, which includes both core investment and green premiums.”

The study also pointed out that oil and gas superpowers US, EU, and China by themselves represented an estimated 70% of global incremental investment in energy efficiency in 2015. These players occupy even larger portions of global investments in that field in today’s market. Currently, most funds to enhance energy efficiency are invested in the building sector, especially with the EU’s construction sector taking up to 80% of all energy efficiency investments and Europe’s economic superpower, Germany, France, and the UK, having up to 90%. Policy-makers are now looking to allocate efficiency investments in parts of their individual economies, especially the industrial (petrochemical) and transportation sectors.

Blended finance mechanisms have also had a long history of success in the oil and gas industry, particularly in reducing risk and mobilizing private capital into investments as part of a comprehensive and effective financial strategy. It combines funding from public and philanthropic organizations in order to boost self-sustaining markets. According to Bender’s study, these “instruments can include concessional debt or equity where public and/or philanthropic finance is junior to private coinventors, guarantees and insurance to protect against private capital losses, preparation and design funding to support projects in becoming bankable, and technical assistance grants to add to the capacity of private finance.” An effective blended finance strategy should seek to create a positive impact on the environment and society and boost private capital while pushing to achieve positive financial returns. This is essential in building a sustainable energy efficient market even when funds from public and philanthropic organizations prove to be ineffective or insufficient.

No economist can deny the benefits of on-bill financing (OBF), which involves third-party financial organizations in providing funds to an energy project to finance various energy efficiency reforms and promote renewable energy projects. These funds can be compensated using regular payments (similar to installments). This solution carries a significant advantage in terms of risk management since it involves lower non-payment risk because of the low rate of default on energy bills. Oil and gas company owners and project managers working in the field will be able to dodge capital costs and enjoy the endless benefits of a simplified repayment system.

In addition, Energy Service Agreements (ESAs) are convenient pay-for-performance models for work to be done with energy efficiency. It helps financially all development and construction costs for energy projects. Functioning almost like a loan, funds are paid back by the customers via service charge payments when actual energy is saved through the various energy efficiency measures that took place during the project.

Finances have always been a fundamental part of the struggle to realize a greener future for the world economy because, without monetary sustenance, dreams about energy efficiency in the oil and gas industry would be considered fantasies. With the advent of more sophisticated tools and other investment technologies that made the market more inclusive, building a more energy-efficient future is something that is within humanity’s grip and will drive economic growth substantially for the years to come.

Accelerating Oil and Gas Production with The Deployment of Early Production Facility Modular

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