Thought Leadership

Delicate balance in 2024: Risks and rewards as new supply chains poised to emerge

This year is likely to be seen in hindsight as one where supply chain control proved key to delivering on energy targets around the globe. In fact, all years after 2019 have seen the supply chain made a priority by governments and energy players. Covid-19 pandemic-related shutdowns in 2020 and 2021, Russia’s invasion of Ukraine in early 2022 and geopolitical tensions around supply chain independence in 2023 have all shown the importance of developing and maintaining flexible, reliable and scalable supply chains for energy and other industrial sectors. With the rapid energy transition, new supply chains will emerge – and with this comes risks and opportunities.

Read our special insight from Audun Martinsen, Head of Supply Chain at Rystad Energy.

In 2024 suppliers will continue prioritizing the return cash to their owners instead of investing in new capacity

Audun Martinsen, Head of Supply Chain

This year has shown how fast legislative support can unlock investments in the low-carbon sectors. With the one-year anniversary of the Inflation Reduction Act in the US, we have seen a doubling in battery cell manufacturing capacity and a five-fold growth in electrolyze and solar PV capacity. This is part of the plan for the US to re-shore and wrestle control of critical supply chains for new energy systems with heavy government-induced subsidies.

These additional capacity increases are, from a global point of view, in fact not necessary as mainland China has boosted its annual battery production capacity by a factor of 20 since 2015, and its solar PV cell capacity by a factor of 100. Given the current and planned manufacturing capacity worldwide, the supply chain could deliver on a 1.6-degrees-Celsius (°C) pathway – where average global temperatures rise 1.6°C above pre-industrial levels – towards 2025 and for most sectors towards 2030. China currently represents three-quarters of global battery cell manufacturing capacity and 90% of global solar PV cell manufacturing capacity and it is this dominance that the European Union (EU) and US want to reduce.

Regional supply chains emerge, but will they be able to deliver on low-carbon targets?

Developing regional supply chains means less optimal supply chains from a cost perspective as significantly more redundancy will need to be added to the value chain and the supply of labor, metals, materials and manufacturing from the more expensive part of the cost curve will need to be targeted. This ultimately represents the cost of independence that will have to be borne by society. If governments continue to advance these protectionist targets and increasingly ban foreign suppliers and imports, it will likely slow the energy transition as low-carbon energy will become more expensive and lead times in supply chains will not be able to cope with the increasing demand. Conversely, it could benefit various environmental, social and governance aspects by moving supply chains to more transparent markets.

What bottlenecks should energy developers and suppliers expect in 2024?

For next year, Rystad Energy continues to see supply chain concerns mount and an increasing focus being put on the re-shoring of services. Even in oil and gas, we see that the use of local content requirements is increasing in the middle of the biggest investment cycle since the 2010 to 2013 period. There will be more bottlenecks in the offshore supply chains related to the rig, vessel, subsea and floating production, storage and offloading (FPSO) sectors and continuous high activity within onshore oilfield services.

Energy developers are becoming increasingly concerned about securing capacity for their upcoming final investment decisions in 2024 in addition to keeping existing projects on time and within budget. Most likely we will see cost escalation playing out for the majority of projects and increasing delays materializing. Suppliers will continue to have the buying power and will increase their prices further in 2024. Given the growing cash flow among oil and gas suppliers, we would normally expect to see capacity increases based on historical trends, but this will not be the case this time around.

Suppliers will continue prioritizing the return cash to their owners instead of investing in new capacity. If new capacity is added, it will materialize via mergers and acquisitions to consolidate the market further without growing the supply side. Another option would be for traditional oilfield service players to invest in adjacent markets such as hydrogen, carbon capture, utilization and storage (CCUS), offshore wind and carbon-reduction technologies.

Better equipped to navigate the challenges in supply chain

Rystad Energy is helping clients in procurement navigate this tight supply chain in energy, providing transparency on price inflation and helping mitigate cost increases. Our suite of products within our Cost & Prices provides detailed quarterly price indices for services and goods used within oil and gas, solar, wind, CCUS, batteries and hydrogen. Our Cost Dynamix framework allows clients to right-size energy developments through quick and accurate early phase cost estimating. Relying on a third-party independent source of price data is key for both suppliers and buyers to align on expected price developments and optimal contract timings.

Those that need to understand the detailed build-up of supply chains within solar, wind, CCUS, geothermal, hydrogen and batteries can use our sector-specific solutions that shed light on projects, players and prices. We recently launched our Wind Solution that delves deep into the supply chain for onshore and offshore wind. The onshore wind sector faces challenges with geographic re-shoring and quality concerns around turbines, while for offshore wind understanding cost, governmental support and off-take prices is key for success.

As supply chains continue to become more regionalized and global oil and gas trade decreases over time, the shipping industry will see significant changes over the coming decades. On top of this, there will need to be a continued drive towards a cleaner shipping industry with lower emissions and new ships to be built to transport carbon, hydrogen and ammonia. As a result, Rystad Energy in recent months launched our Shipping Solution, which is a tailored solution for vessel companies, yards, port authorities, traders and financial markets to help grapple with these changes.

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