Energy transition could see gas take the lead over oil

The continued global energy transition and the growing momentum towards achieving net zero emissions by 2050 presents significant levels of uncertainty for the oil and gas industry.

While the International Energy Agency (IEA) believes current pledges by governments to date will fall short of what is required to bring global energy-related carbon dioxide emissions to net zero by 2050, it notes that there is still a narrow pathway to achieve this.

Its report calls for annual additions of solar photovoltaic to reach 630 gigawatts by 2030 and wind power to reach 390GW, which is four times the record level set in 2020.

The IEA added that while most of the global reductions in emissions between now and 2030 will come from technologies that are readily available now, half the reductions from 2030 to 2050 will require technologies that are currently only at the demonstration or prototype phase.

For the oil and gas industry, the energy transition represents a US$14 trillion uncertainty.

Wood Mackenzie noted that oil demand may continue to grow for a decade or more – particularly if the energy transition continues to current trajectory – it could also fall rapidly if the world acts decisively to limit global warming by 2 degrees Celsius by 2050.

Gas demand and pricing is expected to be somewhat more resilient.

“The industry now finds itself having to supply oil and gas to a world in which future demand – and price – are highly uncertain,” Woodmac vice president Fraser McKay said.

“The range of possible outcomes is dizzying. But the world will still need oil and gas supply for decades to come, and the scale of the industry will remain enormous.”

Energy transition to drive gas to forefront

However, the consultancy warned that delivery and discipline will be paramount in all aspects of the upstream value chain as the macro environment for oil and gas gets tougher.

Woodmac research director Angus Rodger said that only exceptional, low-cost projects will work in all demand scenarios as the cost of capital and doing business would inevitably increase.

“The industry will have to figure out the conundrum of weaker economics if the giant gas projects the world needs are to happen,” Rodger noted.

“The returns on developing a barrel of oil are currently higher, with oil-production and cash-flow profiles delivering more value upfront. Gas prices are lower than oil prices on an energy-equivalent basis; that relationship will have to invert as it does in our AET-2 scenario to make this happen.”

The energy transition will also mean that business models must adapt to maximise value.

“Consolidation to bolster margins will gather momentum. Specialists will carve out niches. Applying the right technology and retaining the right people will determine their success,” McKay added.

“Just a few more years of firm oil prices would strengthen balance sheets, making transition strategies easier to execute.”

Finance steps away from oil

There is further evidence that oil is on the downslope.

Oilprice.com noted that Bloomberg data covering 140 financial-service institutions worldwide indicated that at least US$203bn in bonds and loans have gone into renewable projects through May 14, compared with $189bn to businesses focused on hydrocarbons.

Major institutions such as Goldman Sacs and Blackrock have already flagged that they are stepping away from fossil fuels.