The changing global energy mix…and the strategic challenge for energy producers.
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What will the energy world look like in twenty years time and beyond? Advances in technology and environmental policy are among the factors influencing demand growth and shaping what may be a very different energy mix in the future.
First, India’s emerging lead role in global energy demand growth. China has been the mainstay for two decades or more and will still be the world’s biggest consumer of energy for the foreseeable future. But China’ s economy is pivoting away from industrialisation towards services. Environmental policy, focusing on clean air in particular, will also slow the rate of energy demand growth.
India will take over the mantle, becoming the biggest growth engine in the 2020s.
An economic focus on manufacturing will spur demand growth at 3% CAGR through 2035. Energy security is India’s concern, as an importer of oil and gas; a planned rapid build-out of solar and wind capacity provides just part of the answer.
Second, ‘lift off’ for zero carbon energy. Energy systems are being transformed by the rapid progress of technology and by regulation. Globally, carbon intensity and energy intensity have already peaked and will trend down through 2035. But the revolution, with the Paris Agreement a signal moment, has only just begun and carbon emissions continue to rise over the period. Developing economies’ dependence on coal is one of the factors. But China is already showing how swiftly change can come as an energy intensive/high emissions developing economy matures. Other high growth economies will follow the same path, in time.
Third, transportation goes electric. It’s not going to happen quickly, but it will certainly happen. We aren’t believers in peak oil demand, at least not yet - oil dominates the transportation sector and will still do so in 2035. Electric vehicles have come a long way in the last year or two, in aspiration at least. But there are many barriers to entry, not least battery technology, cost, government policy – and inertia. We expect just 2 million b/d or 2% of oil demand is lost to EVs by 2035.
A tipping point will eventually come, but when?
The oil industry is beginning to grasp the nettle, the Majors investing in renewables to build optionality for future proofing. The fundamentals aren’t there yet for a decarbonised transport sector. But air quality initiatives in China and other emerging markets, and the audacious entrepreneurial zeal of the tech sector point to disruption some time down the line.
Fourth, the power sector’s influence on the changing commodity mix. Gas demand will grow by 41% over the next two decades, overtaking coal as the second most consumed energy source by 2030. The rise of gas consumption is a global phenomenon; as increasingly is renewables which are set to triple their share of energy supply to 13% from 2015 to 2035. Coal will remain vital to global energy supply through the period, but incremental demand growth is isolated to India, South Korea and SE Asia, as environmental policy and competition from other fuels eat into traditional OECD coal heartlands.
Fifth, shifting regional supply dynamics. We expect the US to be energy independent by 2021 and a near Saudi Arabia-scale exporter (oil and gas combined) by 2035. The EU in contrast becomes increasingly reliant on imports. Climate change policy and other regulation are dampening demand in Europe, but indigenous oil and gas production continues to decline long-term. Asia Pacific supply is set for rapid growth, driven by gas and to a lesser extent coal; whereas oil is in decline.
Most of these themes are only just emerging, and the energy mix in 2035 may not be vastly different to what it is today.
But there is, presently, the sense of an incipient paradigm shift in energy consumption with decarbonisation at the centre - the global energy mix will look very different by 2050.
Adjusting for what the world may look like more than 20 years from now is perhaps the biggest strategic challenge ahead for energy producers. Quite what the right business model is won’t be clear perhaps for some years. But adjust they must, and build optionality for changes that will surely come.