Five themes for energy and natural resources in 2023

What else lies ahead in 2023? Here are five themes that will shape the world of energy and natural resources – the opportunities, the challenges and the associated risks.

1. The world is adapting, but no end in sight for the energy crisis

The war in Ukraine is putting untold strain on Europe’s gas and power markets which were already under intense pressure 12 months ago. Governments and regulators in Europe are striving to find quick fixes and sustainable solutions to the challenges of energy security and affordability with Russian gas out of the mix for the foreseeable future.

The worst of the crisis may now have passed. We expect gas prices in Europe to be lower this year, albeit still at multiples of historical averages. Warm weather in Europe has eased the immediate pressure, and the market has begun to rebalance. Gas demand in Europe fell 13% from July to December (21% for non-power sectors) and developers have started to push through a wave of LNG project FIDs to boost supply. Strengthening energy security, though, takes time: no additional gas volumes of any scale will reach the market until 2025. Until then, gas prices in Europe and Asia will stay structurally high.

Power markets in Europe also remain severely stretched. Improved hydro availability and falling gas prices late in 2022 have softened prices – by the end of the year, German baseload for 2023 was almost 80% down from the summer’s extraordinary high of more than 900 EUR/MWh. More wind and solar capacity added through 2022 and in 2023 helps. But with the French nuclear fleet continuing to underperform, Europe will rely on expensive gas and coal to keep the lights on – higher emissions are the unavoidable consequence. We expect German baseload prices to average 15% to 20% below 2022’s level but that’s still four to five times above the levels seen before Russia invaded Ukraine.

Energy affordability, therefore, is the other political preoccupation, meaning ongoing intervention. In governments’ sights will be extending the emergency measures of 2022 including refining price caps in both wholesale and retail energy markets; and windfall taxes. Revamping the pricing mechanisms in wholesale power is at the top of the agenda.

The risks? First, gas – a resurgent Chinese economy could pull LNG supply away from Europe next winter. Second, over-zealous intervention in gas and power markets creates more problems than it solves. Third, a big wildcard – war spreads into Europe, threatening disruption to non-Russian gas supplies into the region.

2. Emerging low-carbon energy moves from policy to execution

Technologies critical to achieving net zero including hydrogen and CCUS are poised for take off. We estimate that the combined global project pipeline has grown around 25% over the past year and developers are entering into offtake agreements, improving the bankability of new technologies. About 30 projects took FID in 2022 and another 170 are aiming to by the end of this year.
 
Major policy decisions taken last year pave the way for investment to flow, beginning a great industrial scaling up through this decade and beyond. The Biden administration’s ambitious Inflation Reduction Act (IRA) is game-changing for the US and also has implications for other regions. Clear and generous tax credits aim to secure private investment into the low-carbon value chain as well as foster a domestic supply chain.

The EU and UK both lifted already aggressive targets for renewables and will seek to channel investment into hydrogen and CCUS. The incentives are less clear cut but will likely centre on Contracts for Difference (CfD), which were so successful earlier this century in de-risking and supporting the large-scale roll-out of renewables capacity.

The risks? CfDs won’t work as effectively this time around because of the high costs of hydrogen and CCUS. Separately, the EU’s carbon-border adjustment mechanism (CBAM) is due to be rolled out in October 2023, aiming to create a level playing field for domestic companies. Among the possible unintended consequences is that companies operating outside the EU seek to sell into alternative markets, leaving the EU the loser. Europe’s high energy prices could also lead to energy-intensive industries seeking to relocate to lower-cost countries to stay competitive.

3. The metals super-cycle kick offs at the first signs of economic recovery

Things will get worse for the global economy before they get better – making it both a year of two halves, and a two-track world. Much of Asia Pacific is so far avoiding the worst of the current slowdown, and while China has not emerged from lockdown with a bang, its recovery will be key to stabilising the global economy.

In stark contrast to Asia, we anticipate the US economy to stall and Europe to hit recession in 2023. US interest rates will peak early in the year to suppress rampant inflation but the Federal Reserve could cut rates again by the end of the year if inflation drops sharply amid the economic slowdown. We forecast a low point for US GDP growth of 0% in Q3 2023.

That might be the turning point for global economic recovery. We expect global GDP growth of 2.1% in 2023, down from 2.9% in 2022. But things look much better by year-end and in 2024 we forecast US GDP to rebound to 3.0%, underpinning global GDP growth of 3.3%.

Metals markets weakened with the economy last year, much as we predicted – prices fell by 25% to 30% (lithium was the exception). The long-term future, though, still looks promising from this lower base. Major policy initiatives, including the IRA, underline electrification’s role at the centre of the future energy mix. Demand for the metals – including copper, aluminium, nickel, lithium and cobalt – critical for the transition will be transformational for the mining industry.

So far, the investment in the metals value chain has been largely confined to the customer end: processing, refining and products; giga-factories and the mass production of electric vehicles. We’re not yet seeing the mine supply built out, but it will come. Metals inventories ended 2022 at modest levels and there is little to hold back price recovery when the global economy picks up towards the end of the year. This time it may not be a false dawn – 2023 could finally kick off a new metals super-cycle lasting through this decade.

The risks? Stubbornly high inflation forces central banks to keep rates higher for longer, suppressing recovery and risking stagflation. Delayed economic recovery keeps a lid on metals demand and prices.

4. Global investment edges up, oil and gas closing the gap with power

Investment in energy and natural resources is on an upward trend. However, cost inflation, bottlenecks and the higher cost of capital add to sector-specific challenges. We expect overall spend on supply across oil and gas, power and renewables and metals and mining to increase by 5% to US$1.1 trillion in 2023.

Oil and gas companies and miners will adhere to the capital discipline that has helped restore stock market ratings; surplus cash generated will again be funnelled into buybacks. The strength of Big Oil’s balance sheets, though, suggests targeted M&A will return.

Capital spend in upstream oil and gas continues to recover. We expect an increase of 10% in 2023 to around US$470 billion, well above the cyclical low of US$370 billion in 2020. However, around half of the increase this year is inflation-related, with supply chains tight in major markets – there is little sign of a true upcycle despite high oil and gas prices.

The spectre of windfall taxes adds uncertainty to the cautious mindset of oil and gas companies. Out of a healthy pipeline of 60 large potential project FIDs, we think only 30 will proceed in 2023.

Spend in global power and renewables will be flat at around US$500 billion, matching 2022’s record. The sector continues to eclipse upstream oil and gas as the biggest segment in the global energy market. After a decade of strong growth, spend on renewables will temporarily falter in 2023, checked by cost inflation in a tight supply chain. Renewables spend now makes up 70% of the total, having doubled over the last decade. We expect the strong upward trend to resume in a year or two with the implementation of REPowerEU and the IRA.

A wave of FIDs in nascent low-carbon technologies, including hydrogen and CCUS, won’t deliver much investment this year. We expect more money to flow through in 2024. Recent M&A by Big Oil will trigger more investment in 2023 on biofuels, biogas and biomethane.

Investment in metals and mining will increase by 7% to around US$140 billion, still only marginally above multi-year lows. With cash flow squeezed by lower prices and rising costs, and dividends sacrosanct, discretionary spend will come under increased pressure in 2023. The pace of investment on decarbonization in mining is even coming under scrutiny.

The risks? Prolonged underinvestment triggering sustained high prices is the big fear, whether in energy or metals. Ambitious policy goals for renewables risk slippage due to cost inflation.

5. Recovering demand drives oil prices higher

Prices may be volatile in the early months of the new year with low economic growth or recession in some parts of the world. The last 12 months, though, have proved that oil will be central to the energy mix for years yet. China’s recovering economy is key to the demand side, helping push global oil demand up 2.3 million b/d this year versus 2022 – 8% higher and the fourth-biggest annual rise this century.

The pace of demand growth through the year is a better indicator of how the market could be jolted out of the current doldrums. We forecast an increase of 3.0 million b/d for Q4 2023 compared with Q4 2022, lifting demand to an all-time high of 102.6 million b/d.

Non-OPEC supply growth (US, Canada, Brazil, Guyana) in 2023 broadly matches that growth. But the OPEC+ decision to cut production in November 2022 signalled not only its determination to balance the market but to hold prices around US$90/bbl. Those goals will be more easily achieved with recovering demand growth.

The risks? Mainly Russia. The EU product ban from 5 February will add friction and costs to the global refining system at a time of tight diesel supplies globally. A big risk is that Russian product exports stall, tightening both product and crude markets; while the flowback of product back into the Russian system causes domestic crude production to fall more than our forecast.

Thanks to: Peter Martin (Economics); Julian Kettle and James Whiteside (Metals and Mining); Chris Seiple, Soeren Lassen and Peter Osbaldstone (Power and Renewables); Massimo Di-Odoardo (Global Gas); Prakash Sharma and Murray Douglas (Energy Transition Practice); Elena Belletti (Carbon); Ann-Louise Hittle (Macro Oils); Alan Gelder (Downstream), Tom Ellacott (Corporate Analysis); Fraser McKay and Ian Thom (Upstream).