While we are still very much in the midst of the COVID-19 pandemic, it is already becoming clear that the future of energy will be very different once it has run its course.

The world’s economy has already been hit harder than any event since World War 2 as governments put lockdown restrictions into place that have slashed energy demand.

Global resources consultancy Wood Mackenzie outlined three scenarios based on the trends that are already emerging, the first of which models a full global economic recovery, the second the widespread rejection of globalisation and the third considering the consequences of governments using economic stimulus to accelerate the energy transition.

It noted that come changes common to the scenarios included:

  • An expanded role for government thanks to stimulus programs and moves to limit the risk of COVID-19 re-emerging;
  • A reduced appetite for globalisation due to the pandemic exposing the risks in some critical supply chains and rhetoric in some countries, particularly the US, about “holding China accountable”;
  • The increasing use of automation in response to the threat of infection in the workplace; and
  • A reduced demand for personal travel as some people will remain nervous about the risks while governments could keep some restrictions in place. Remote working could also become more common, which will lead to a decline in commuting.


Sliding doors, the possible energy futures

The ‘Full recovery’ scenario envisions a sharp but relatively short recession with an effective COVID-19 vaccine becoming available next year and government intervention helping economies rebound to the global 2.5 per cent trend rate.

This would see world trade and travel return to previous trends with oil demand growth returning to the long-term outlook that Woodmac had forecast at the end of 2019, which sees demand reaching a peak in the late 2030s.

Gas demand is likely to continue growing to about 5 trillion cubic metres in 2040, up 34 per cent from its demand in 2019, while coal declines slowly as it is replaced by gas and low-cost renewables.

Meanwhile, the ‘Go it alone’ scenario presumes that vaccination effectiveness proves to be limited, resulting in a longer recession and slower subsequent growth.

This leads to backlash against international trade and pressure for shorter and more secure supply chains resulting in a slower long-term trend for global economic growth.

While this could result in weaker international action to curb emissions, travel restrictions and trade barriers could mean that oil demand will show very little growth after the initial post-pandemic rebound.

Coal demand could rise in India, China and Southeast Asia, though declines in the US, Europe, Japan, South Korea and Taiwan would outweigh those increases.

The last scenario — ‘Greener growth’ — is similar to the full recovery scenario but has governments in the US, China, Europe and elsewhere focusing their stimulus programs on supporting the energy transition.

Tax breaks, grants and low-cost loans are offered to renewable energy, electric vehicles, storage and other low-carbon technologies.

Woodmac says this scenario was in line with its existing projection for an accelerated energy transition, reflecting potential changes to the global energy system if governments worldwide commited to radical change to cut carbon emissions.

Oil demand will remain essentially flat after the post-pandemic rebound before starting a steep decline in the 2030s, while demand for gas drives out coal for power generation and domestic use.

The combined share of oil, gas and coal in total primary energy drops from 84 per cent in 2019 to 68 per cent in 2040 while battery metal demand increases sharply.


Scenario impacts

Oil and gas companies are likely to become more risk averse with increased adaptability.

The divergence of their strategic focus is expected to accelerate with US majors focusing on their global core businesses — including an exit from high-cost, high-carbon assets — while European majors diversify into zero carbon energy.

Demand for gas is more resilient in each of Woodmac’s scenarios and is expected to increase its share in upstream portfolios.

Both strategies can co-exist for a time under the ‘Full recovery’ case, while focusing on core businesses will win out in the ‘Go it alone’ scenario.

Conversely, the ‘Greener growth’ strategy will favour the move towards zero carbon with the upcoming US elections likely to play a big part in whether US majors will be forced to follow their European peers.

For miners, the crisis has underlined the benefits of commodity diversification, scale and balance sheet strength with the debate between shareholder returns versus growth expected to swing towards the former.

Environmental, social and governance (ESG) compliance will continue to impact on capital allocation decisions away from carbon-intensive commodities.

Pure play commodity producers will suffer varying extents of disruption and damage with stronger companies likely to emerge in a position to advance their strategies while distressed companies holding good assets may become takeover targets.

Focused growth opportunities are likely to be defined by the part of global recovery as financing is likely to come at a higher cost.

The ‘Go it alone’ scenario will favour lower-risk diversified companies and lower-cost pure play producers, while the ‘Greener growth’ scenario is bullish for pure-play miners with a focus on lower-carbon energy commodities such as copper, nickel, cobalt and lithium.

For the power sector, the ‘Go it alone’ world will see the industry face more policy fragmentation as well as depressed demand growth from negative economic and trade policies.

The economics of renewables are unlikely to backtrack and their share of generation will continue to grow.

In the ‘Greener growth’ scenario, the power sector will likely benefit from the move towards electrification to reduce carbon emissions.

This will require grids to become flexible with revenue streams tied to services.


The path most trodden

So what path are we on?

Woodmac believes that despite the upheavals cause by COVID-19, some things will not change.

People will still want to meet friends and family and congregate in large groups when they can, while the economic logic that created complex global supply chains is unlikely to change either.

However, not all features of the post-pandemic world will be the same with the consultancy noting that while the ‘Full recovery’ scenario is not impossible, oil demand is likely to be lower in the long-term than seemed likely before the pandemic hit.