As the energy transition forces markets to shift toward a carbon-neutral economy, industry experts believe shortages in the skilled labor market, bottlenecks in the supply chain and delays in government permitting could push transition goals off course, industry executives said this week at CERAWeek by S&P Global.

Corporate strategies have never depended more on government policy, regulations, incentives, and, most importantly, permitting.

Delays due to government permitting lead to delayed project timelines. This gives massive infrastructure projects higher intrinsic risk since permits can be rejected and often are, said Pooja Goyal CIO with the Carlyle Group.

"It's very challenging nowadays to get any infrastructure asset, to get any regulatory approval. There's no way to assign any certainty or timeline when you're developing these kinds of large-scale infrastructure projects," Goyal said.

Even projects required to successfully transition to a carbon-neutral nation, like electric transmission lines necessary for the adoption of EVs, are encumbered by layers of red tape, Goyal said.

Transmission infrastructure in the U.S. is historically underinvested to handle renewable capacity additions.

"There isn't enough transmission and distribution infrastructure. But even that requires a lot of permitting and regulatory approvals, both at the (U.S.) federal level as well as the local and state level," Goyal said.

These problems are translating into project delays.

"The timeline is extending out pretty significantly on our projects. And what really needs to happen in the U.S. is permitting for, and not just for natural gas transmission and gathering projects, but also for electric transmission companies," said Michael Dunn, EVP and COO of Williams.

During high global election years like this one, there are higher associated risks that require companies to keep a close eye on potential upcoming policies. These risks ultimately add to uncertainty and increase the cost of capital for these large infrastructure projects.

"We don't want to make large, concentrated bets on projects very early on in their development cycle. The cost of capital goes up, as uncertainty goes up. There is a risk premium associated with regulatory approvals and forwarding," Goyal said. "I just think that if you take a step back, there seems to be a divergence between some of these net zero transition targets versus the practical reality on the ground."

Government vision and regulatory bodies must align with what the companies are developing, said Ashraf A. Al Ghazzawi, Saudi Aramco executive vice president strategy and corporate development.

"The Ministry of Energy in Saudi Arabia is viewed as an enabler for our industry. It allows us to think long-term and share our views in the global energy industry, and this why we don't have our projects that are usually standing up, waiting for some policy or regulatory framework," Al Ghazzawi said.

Even if the permitting and government hurdles are passed, global supply chain issues still linger. Coming out of the pandemic, the global supply chain for vital equipment like transformers, motor control centers, air compressors and steel is less than desirable.

Companies looking to build large infrastructure projects have adapted by adopting nontraditional methods.

Williams began locking in materials and contractor prices long-term, buying supplies and equipment one to two years before the building process, Dunn said.

"We use many of the same products over and over, so I have a pretty good look ahead as to what we're going to need in those projects. I would say one of the silver linings of delays in permitting is the fact that it gives us a longer time to procure materials," Dunn said.

Supply-chain inefficiency was something echoed by multiple executives across CERAWeek. Lead times for key manufacturing components like electrolyzers for hydrogen and power components for grid infrastructure continues to lag behind demand, forcing some in the industry to begin vertically integrating.

"If it's that critical ... we try to find a way to vertically integrate ... we fabricate our own pipe now, and we build our own tanks on LNG jobs, so vertical integration is part of that ... we take it in house, allowing better integration, and have more control when we can," said Craig Albert, president and COO of Bechtel.

Saudi Aramco has been preparing for supply chain issues for a while, with 65% of materials needed to conduct business is already available in Saudi Arabia with plans to increase it to 70% within a few years, Al Ghazzawi said.

On the capital side, although money flows across the energy spectrum, renewables have an easier time financing their projects.

"Carbon-intensive assets are having trouble getting financed. The cost of capital is definitely higher there for a bunch of different reasons. Whereas local energy projects or projects that have a transition principle to them, those kind of capital markets tend to be quite broad as well as quite deep," Goyal said.

Some investment firms have also been working very closely with equipment suppliers, aggregating procurement across assets to get deals with Chinese-dominated power manufacturers and potentially skip the multi-year long waitlist, according to Goyal.

"We are going to talk about procurement across the entire portfolio, across multiple pools of power. And people are able to get a lot of these strategic agreements in place," Goyal said. "The supply chain for renewable energy projects being heavily concentrated in China? This is absolutely true. The further out you go on this supply chain, you do become reliant on China."

The global construction market is expected to increase 40% by 2030 in just about every sector, but the shortage of skilled craft professionals could lead to severely delayed timelines, according to Bechtel findings.

Bechtel expects 80,000 skilled workers will be required on the Gulf Coast by 2026, double the current levels. Expecting the shortage to severely affect future infrastructure projects, Bechtel is focused on reducing the demand for labor by optimizing the building process, leveraging AI and digitalization across the board.

"Craft labor -- that's the real challenge. Hiring craft professionals is going to be the biggest constraint on everybody's ambitions," Albert said.


This content was created by Oil Price Information Service, which is operated by Dow Jones & Co. OPIS is run independently from Dow Jones Newswires and The Wall Street Journal.


--Reporting by My Nguyen, mynguyen@opisnet.com; Editing by Bayan Raji, braji@opisnet.com

(END) Dow Jones Newswires

03-21-24 1709ET