Vol. 28, No.6 Week of February 05, 2023
Providing coverage of Alaska and northern Canada's oil and gas industry

Changing energy world

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BP Energy Outlook sees steady transition to low-carbon energy over 30 years

Alan Bailey

for Petroleum News

In its recently published Energy Outlook 2023 publication, BP expects a continuing transition to the increased use of low carbon energy sources over the next 30 years. The report anticipates the world moving into an energy system dominated by renewable energy, hydrogen-based fuels and biofuels.

BP Chief Economist Spencer Dale, in an introductory talk, commented that energy scenarios evaluated in this year’s Energy Outlook are dominated by four overriding trends: the declining role for fossil fuels; the increasing role for renewable energies, in particular wind, solar and bioenergy; the increasing electrification of the energy system; and a growing role for low-carbon hydrogen.

However, Dale cautioned that, with existing oil and gas resources insufficient to ensure adequate energy resources during the decades-long energy transition, there is a continuing need for investment in upstream oil and gas. A focus on reducing hydrocarbon supplies rather than tackling the demand side of the energy equation introduces a risk of future energy shortages and higher energy prices, he said.

“The world needs to see a decisive and orderly transition away from hydrocarbons,” Dale said.

Three scenarios

The Energy Outlook assesses three potential future energy scenarios. The “new momentum” scenario envisages the continuing energy trajectory, along which the world is currently moving, taking into account recent government pledges and ambitions. The “accelerated” scenario evaluates the possibility of carbon emissions dropping by 75% by 2050, while the “net zero” scenario would see emissions dropping by about 95% in the same timeframe. Accelerated would require significant tightening in climate policies, while net zero would, in addition, entail a shift in societal behavior preferences. Carbon emissions from these two more aggressive scenarios would be consistent with those required to limit global warming to a range of 1.5 C to 2 C, Dale said.

However, rather than predicting the future, the scenarios provide a means of assessing a wide range of possible energy outcomes over the next 30 years. And, by identifying common features of the three scenarios, it may be possible to shape our understanding of how the energy system may evolve in the future.

All three scenarios anticipate a diminishing role for hydrocarbon fuels, with oil demand peaking at some point over the next 10 years and declining thereafter. The biggest declines are in the accelerated and net zero scenarios. In the new momentum scenario, oil demand remains close to 100 million barrels per day through much of this decade, after which it declines to about 75 million barrels per day by 2050.

A major driver boosting oil demand is increasing consumption in emerging economies, as living standards improve. The biggest factor in this demand is the need for fuel for road transportation, Dale said.

And while all three scenarios predict future drops in oil and coal consumption, the prospect for natural gas is much less clear. The accelerate and net zero scenarios anticipate gas demand rising in the near term before declining by between 40% and 55% by 2050. In the new momentum scenario gas demand would grow throughout almost the whole 30-year timespan of the Energy Outlook.

Less fossil fuel, more renewable energy

Overall, the Energy Outlook anticipates a decline in fossil fuel consumption in all its scenarios, the first time this has happened in modern history, Dale commented. In contrast to this, there will likely be a strong increase in renewable energy use, in particular wind and solar power - the new momentum scenario anticipates a nine-fold increase, while the other scenarios anticipate a 15-fold increase.

However, there are a couple of caveats associated with the rate of implementation of renewable energy sources. One caveat is that an acceleration in the pace of buildout in wind and solar capacity will only be possible if there is a matching expansion of the power transmission and distribution capacity - this will all depend on rapid planning and permitting, together with the availability of critical metals needed for electrification of the energy system. The second caveat is that in the accelerated and net zero scenarios about 70% of the required renewable energy investment would have to take place in emerging economies, a transition that would require adequate access to capital and finance.

Increasing electrification

A common feature of the three scenarios is the increasing electrification of the energy system, with electricity demand increasing by about 75% by 2050 in all the scenarios. The share of electricity consumption in total energy consumption increases from about 20% today to somewhere in the range 35% to 50%. However, about 90% of the growth would be in emerging economies as a consequence of improving living standards.

Although there are widespread opportunities for increased electricity use, the biggest possibility for increased electrification is in buildings - in the accelerated and net zero scenarios the growing use of heat pumps would be particularly significant, Dale said. In addition, there would be a large increase in the use of electricity in transportation, as the use of electric cars and light trucks becomes more widespread.

Low carbon hydrogen

The Energy Outlook anticipates the increasing electrification of the energy system being accompanied by the growing use of low carbon hydrogen - hydrogen can act as a carrier of low carbon energy for use in processes that are difficult to electrify. Within industry this fuel has applications in the iron and steel sector, for example, as an alternative to natural gas and coal. In transportation, hydrogen based fuels could be used to decarbonize long-distance air and marine transportation, while pure hydrogen could fuel long distance road transportation, Dale said.

Blue hydrogen is manufactured from natural gas and coal, together with the sequestration of the resulting carbon emissions, while green hydrogen is manufactured through the electrolysis of water using renewable electricity. Blue hydrogen could act as an important complement to green hydrogen, providing a lower cost form of hydrogen in some regions, Dale said.

While pure hydrogen would probably need to be shipped by pipeline from regional sources, hydrogen derivatives such as ammonia and methanol could probably be shipped globally by sea, he suggested.

There is also likely to be an accelerated use of bio-based fuels, especially as aviation fuels, he commented.

Impact of Ukraine war

The Energy Outlook addresses the potential impacts on the global energy system of Russia’s invasion of Ukraine. Essentially, the war is causing countries to adopt a heightened focus on energy security, is causing weaker economic growth and is changing the composition of global energy supplies, Dale said. The Energy Outlook assumes a persistent reduction in Russian hydrocarbon exports.

The focus on energy security is driving countries to try to reduce their dependency on imported energy. That in turn will likely encourage moves towards the increased use of domestic renewable resources together with improved energy efficiency.

Particularly dramatic has been the impact of the war on international natural gas flows, with Russian pipeline exports to the European Union all but eliminated. The Energy Outlook anticipates the global liquefied natural gas trade continuing over the coming decade, but with a failure in the expansion of Russian LNG exports offset by stronger growth in LNG exports from elsewhere - U.S. LNG exports may account for more than half of that growth.

“Threats to energy security can have large and persistent affects,” Dale commented.

In the near term, higher food and energy prices caused by the war will lead to weak global economic growth. In the longer term the war will likely reduce the pace of global integration and trade, as companies reduce their exposure to international risk. And while the annual slowdown in growth may be modest, the compounding of annual slowdowns over a number of years will likely be significant and will likely impact energy demand.

Ultimately, the impact of the war will probably be to reduce energy consumption, with the reductions tending to focus on oil and natural gas, the two most heavily traded fuels. On the other hand, the demand for domestic renewable and nuclear energy will likely increase. Thus, the war in Ukraine will probably have the effect of accelerating the energy transition, Dale said. However, the impact of the war on the energy mix is greatest for the new momentum scenario, given that the other two scenarios already assume an aggressive transition to renewable energy.

The Inflation Reduction Act

Dale also commented on the significance of the Inflation Reduction Act, legislation passed by the U.S. Congress last year. The act included various measures supporting low carbon energy sources and decarbonization technologies. While the policies embedded in this act provide significant support and incentives for low carbon technologies, the fact that these policies do not go far enough to have much impact on the accelerated and net zero scenarios demonstrates the huge scale of policy support needed for these more aggressive carbon reduction scenarios. On the other hand, the passage of the Inflation Reduction Act in the U.S. could encourage other regions to offer similar incentives for carbon emission reductions, Dale said.

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