Rapid Pivot to Gas Crucial for Future Energy Mix
There are numerous views of what the future energy landscape will look like in the next decade and beyond. When thinking about sources of primary energy, it is not a question of either/or, it is a question of what can reach scale fast enough to meet continued demand growth.
The crash in the oil price during March, caused by oversupply coinciding with an expected large drop in short-term demand because of the COVID-19 pandemic, will cause severe disruption to the industry for at least the next 12–18 months. Whether the low price spurs greater demand for oil when the pandemic subsides, or whether demand for oil continues to drop for the next few years, does not really affect the longer-term trends that we examine in this article.
There are numerous views of what the future energy landscape will look like in the next decade and beyond. A common theme throughout is that energy use could switch quite rapidly, from fossil fuels to electrical energy. Many studies, to varying extents, have examined the impact of a primary energy supply that evolves away from oil and coal, and toward renewables.
Although a pivot to gas is widely talked about, none of the major oil companies have yet to significantly alter the ratio of gas vs. oil produced. However, all acknowledge that this is essential. There is no easy alternative that can provide cleaner energy at the volume required to sustain a growing world population with an increasing per capita energy demand.
Dash for Gas
Through our “Rapid Pivot to Gas” analysis, we reviewed a range of forecasts and concluded that a significant and rapid swing to natural gas will be required, in addition to a huge growth in wind and solar power. Global primary energy demand will continue to increase, from 14,300 million tonnes of oil equivalent (MTOE)/year in 2018 to 21,500 MTOE/year in 2040. This rise will be driven by economic growth in non-OECD countries, and much of that increased demand will have to be fulfilled by natural gas.
Under this scenario, approximately $20 trillion would need to be invested in natural gas E&P over the next 2 decades. This will also require significant technology advances if we are to use the gas responsibly, including the need for carbon capture and storage (CCS). Even with the phasing out of coal and oil, and a rapid increase in renewables, CO2 emissions would continue to increase until 2025 before starting to decline.
The starting point for our projection of how a rapid pivot to gas might occur starts with a decline in coal consumption for environmental reasons, and an unprecedented reduction in oil (liquid hydrocarbons) consumption as transportation rapidly converts to electricity produced from other primary sources of energy. We postulate that conventional crude oil and coal could decline to 1,500 MTOE/year and 1,200 MTOE/year, respectively, by 2040. This is 56% and 68% below 2018 levels.
Aggressive growth rates of over 1,000% from 2016 to 2040 have been assumed for new renewables, particularly for wind and solar. In addition to sustained installation of capacity, the uptime and efficiency of new capacity is projected to keep improving for the next 20 years, so that net energy delivered per unit of capacity installed increases continuously. But in relative terms, the overall energy from wind and solar will still be quite small, accounting for less than 10% of total primary energy by 2040.
With the exception of natural gas, other sources of primary energy will not change dramatically and therefore, have a limited impact on the overall picture. Unconventional oil and other liquids such as natural gas liquids are projected to increase over the entire period and reach 1,325 MTOE/year. Nuclear energy is projected to increase by 2.5% per year, to reach 1,200 MTOE/year, assuming no major change in policies and public perception take place. Hydroelectricity is expected to continue to grow slowly and reach 1,585 MTOE/year.
That leaves natural gas. Consumption is estimated to have been around 3,800 MTOE/year in 2018. In this projection, consumption is set to grow 2.5 times by 2040 to some 10,000 MTOE, accounting for 50% of all primary energy consumption and 73% of the fossil fuel component.
Stalling, Falling, and Scaling
When thinking about sources of primary energy, it is not a question of either/or, it is a question of what can reach scale fast enough to meet continued demand growth.
Gas is presented as a transition fuel on the journey to becoming a low-carbon society. It is the fuel that can replace oil and is seen as the ideal complement to intermittent renewable energy, such as wind and solar, which requires backup capacity.
Growing natural gas production to the projected level in just over 20 years looks like an impossible task—but there are historical precedents. From the perspective of someone in 1945, the subsequent rollout of the oil industry would have appeared as unlikely as the natural gas rollout described here appears to us today. Yet, global oil production tripled from 350 MTOE/year, and then tripled again from 1,000 MTOE/year to 3,000 MTOE/year between 1960 and the mid-1970s.
Galvanizing gas use relies on enough gas being available, cheap, and accessible. Gas production is generally considered to be without resource constraints at the global level. The regions with the highest remaining recoverable resources are Russia, the Middle East, and Africa (BGR 2019).
What is different though from earlier energy transitions is that, to all intents and purposes, global conventional oil production is plateauing. Current global depletion of oil stands at over 35% of estimated recoverable resources (BGR 2017). Oil consumption is also under attack from a political angle, making new investments riskier. Whatever is in the ground will ultimately matter less than the appetite for investment.
The transition to gas takes place in a unique environment where the two key alternative primary energy sources, oil and coal, are subject to stalling or falling demand. It is therefore not just demand growth that natural gas will have to satisfy, but also the reduction in supply of oil and coal. Part of the replacement will come from renewable sources, but despite the expected huge growth in these, they are unlikely to be able to plug the gaps of falling output and increasing demand by themselves.
Impact for LNG
In the short to medium term, we envisage a continued increase in LNG-related spending (for liquefaction, FLNG, import terminals, and vessels). However, the long-term effect on the wider LNG market is less certain as more gas is consumed locally by the growing non‑OECD economies. International gas producers may well prefer to export with LNG based on the creditworthiness of international gas buyers, but as more gas is produced by local companies this pressure will reverse with preference being given to local markets.
A rise in local gas demand, for example in sub-Saharan Africa, would mean that less gas will be available for shipping to OECD markets. Also, the takeup of renewables will not be evenly spread across the globe. It is likely that OECD countries will consume a relatively larger amount of renewable energy than non-OECD. Countries or regions will tend to disproportionally use the resources they have, i.e., gas in West Africa, wind in UK, solar in North Africa. The US will likely have a wide range of primary energy options available and markets could become localized within the US.
Big Oil continues to strongly invest in LNG. That need is identified for two reasons. The first is that oil output cannot easily be grown. Despite spending large amounts of capital over the past 10–15 years, overall liquids output has not grown at all. Now the tone is focusing on high-grading the oil portfolio, which really is the same as selling off assets and concentrating on the best of the remaining possibilities. The second is that gas allows growth in overall output, since gas demand is projected to grow much more strongly than oil demand.
The Carbon Conundrum
Burning such large amounts of gas will produce significant quantities of CO2. To achieve anything close to the targets set out in the Paris Agreement, these volumes of gas will ultimately need to be captured and sequestered. Depleted gas fields will be able to store some of this but there will still be large quantities that need to be stored in greenfield, and saline aquifer sites.
The swing to a more sustainable energy future is already underway with substantial investments in renewables and technology, including biofuels, hydrogen, batteries, wind turbines, solar, and even nuclear fusion (Eni with MIT). It appears that traditional oil companies have included climate change into their risk management, meaning decarbonization is considered a means to manage company risks.
Renewables will help reduce the fossil fuel intensity of this growth, but the majority will still need to come from fossil fuels. Natural gas can provide ideal support for electrification with high energy density, wide availability, affordability, and being “cleaner” than oil or coal. Gas therefore should be the likely energy source to fulfil this increase in demand.
While the mix and makeup of future energy sources covers many possible scenarios, the rise in energy demand is evident. To meet this, there will need to be significant growth in the supply of natural gas. Whether this is double or treble current levels is up for debate, but the requirement for the E&P industry to adapt, adopt, and action a gas agenda is not.
BGR Energy Study 2018—Data and Developments Concerning German and Global Energy Supplies. Federal Institute for Geosciences and Natural Resources (BGR): Hannover, Germany. 2019. https://www.bgr.bund.de/EN/Themen/Energie/Downloads/energiestudie_2018_en.pdf?__blob=publicationFile&v=3
BGR Energy Study 2017. Data and Developments Concerning German and Global Energy Supplies. Federal Institute for Geosciences and Natural Resources (BGR): Hannover, Germany. 2017. https://www.bgr.bund.de/EN/Themen/Energie/Downloads/energiestudie_2017_en.html