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Energy Outlook finds absolute demand for fossil fuels to drop
Kristen Nelson Petroleum News
BP’s Energy Outlook 2020, released Sept. 14, presents scenarios around an energy transition away from fossil fuels, tying in with BP’s goal to get to net zero by 2050, and to transition from being an international oil company to being an integrated energy company, as Bernard Looney, the company’s chief executive officer, said in introducing an online presentation of the outlook.
Spencer Dale, BP’s group chief economist, said the role of the outlook is to help understand the range of uncertainty about the future and is organized around three major scenarios.
The rapid scenario, Dale said, is based on policy measures with significant increases in carbon prices, resulting in carbon emissions from energy use falling by about 70% by 2050.
Net zero is based on an assumption that in addition to policy measures in the rapid scenario, there are significant changes in behavior and preference - such as shifting to electric vehicles - that reinforce policy measures, causing carbon emissions from energy use to fall by more than 95% in 2050.
Business as usual, BAU, assumes policies, technologies and preferences continue to evolve as they have in the recent past, resulting in slow progress, and a reduction of carbon emissions by 2050 of around 10% from 2018 levels.
Oil demand over the 30 years falls in all three scenarios: by 10% in the BAU scenario, by some 55% in the rapid scenario and by 80% in net zero.
Oil, gas not going away An energy transition does not mean fossil fuels (coal, oil and gas) are going away, just that their role declines over time, Dale said, from about 85% of primary energy in 2018 to between 65% and 20% by 2050 in all three major scenarios.
But in all three scenarios something unprecedented happens - a reduction in the absolute demand for fossil fuels over the next 30 years, something, Dale said that has never happened in the modern history of energy.
No traded fuel has ever had a sustained consumption decline, he said: While the shares of coal and oil have declined, their absolute levels of consumption have never declined.
In the first half of the twentieth century coal provided the bulk of the world’s energy; by the 1960s coal had been supplanted by oil. In the rapid scenario, over the next 20 years the global energy mix will be oil, natural gas, renewables, other non-fossil fuels, with growth in primary energy dominated by renewable energy - wind, solar, geothermal and bioenergy - and in all three scenarios their penetration of the energy system is faster than any fuel in modern energy history.
The growth in renewables is supported by an increasing role for electricity, which increases in all three scenarios. And because it is more costly to transport, it causes energy markets to become more localized, Dale said, again referencing the rapid scenario. There is also increasing competition between different forms of energy, increasing the bargaining power of consumers.
COVID-19 impacts COVID-19 is considered in the outlook and Dale said the central view for all the scenarios is that over the next few years economic activity recovers from the impact but that some effects persist, with the level of global GDP assumed to be reduced by some 2.5% in 2025, increasing to 3.5% in 2050, and energy demand reduced by some 2.5% in 2025 and 3% in 2050.
He said the majority of the pandemic’s impacts stem from the weaker economic environment, but there are also impacts from behavioral changes, with less travel, a switch away from public transportation and work from home. While many of the behavioral impacts dissipate over time, some of the changes, particularly more people working from home, are expected to persist.
For two scenarios, rapid and net zero, the level of oil demand never recovers to its pre-pandemic level and has the effect for both those scenarios of bringing forward the peak in oil demand to 2019.
Oil demand in the BAU scenario plateaus in the mid-2020s.
Transition investment issues For an energy transition to occur, the outlook said, both the rapid and net zero scenarios would require significant investment in wind and solar capacity. The average annual investment for those scenarios would be between $500 billion and $750 billion, two to three times the recent levels of investment in wind and solar capacity. BAU also requires investment, an increase to some $300 billion to $400 billion per year.
The net zero scenario implies a quick buildout of capacity in the 2020s and 2030s and then falling off, which “may lead to issues of excess capacity in the supply chain supplying this buildout,” BP said in the outlook. Because there would be a marked decline in oil and natural gas demand in both the rapid and net zero scenarios, there would be “a sharp slowing in the pace of upstream investment relative to the past” and that investment would be significantly lower than that in wind and solar capacity.
Oil, natural gas investment Significant investment would still be required in oil and natural gas production, even with a decreased demand for those fuels.
BP said the scenarios are based on the assumption that if over the next 30 years producers invested only to maintain existing production and complete projects already sanctioned, “this would imply an average decline rate of oil production of a little above 4%” per year, and oil production would fall to some 25 million barrels per day in 2050.
Natural gas production would decline at a rate of 4.5%, “reflecting the greater proportion of natural gas production that comes from short-cycle unconventional plays.”
Significant investment would be required, BP said, to close the gap between no greenfield investment and the supplies needed to meet the demand profiles, a total of between $9 trillion and more than $20 trillion over the next 30 years.
Under the net zero scenario, oil demand is relatively resilient in the first half of the outlook, suggesting a need for several trillion dollars of new oil investment over the next 15 years to ensure adequate supplies.
But oil demand falls rapidly in the second half of the net zero scenario - at a faster rate than the natural decline rate of production - which implies, BP said, “that some of these investments by 2050 may not be fully utilized and so may become uneconomic.”
Gas different The role of natural gas is different.
In the BAU scenario, natural gas demand grows and in 2050 is about a third higher than in 2018.
Natural gas demand peaks in the mid-2030s in the rapid scenario and in the mid-2020’s in the net zero scenario.
There are two main components in the role of natural gas, Dale said: it supports a shift away from coal in developing economies and plays a role when combined with carbon capture use and storage as a source of near zero carbon energy.
In the rapid scenario, by 2050 some 40% of natural gas is used in conjunction with CCUS; that share is about three-quarters in the net zero case.
The role gas plays in relation to coal, Dale said, is based on the possibility that renewables and other non-fossil fuels may not be able to grow fast enough to replace coal, at lease in the short term.
- KRISTEN NELSON
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