Six energy game-changers since 2015
Chairman, Chief Analyst and author of The Edge
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The first Edge was published in December 2015. To mark the 300th edition, here are our top game-changers in energy markets over the last eight years. I’d welcome hearing your views by email.
1. The Paris Agreement
Extreme weather events and unnerving forecasts for climate change strengthened the case for the unified action that was Paris’s crowning glory. Yet the goal to limit the increase in global temperature to 1.5°C above pre-industrial levels is proving more than challenging, not least since the war in Ukraine brought home the reality of the global economy’s dependence on fossil fuels. For the time being, energy security has toppled sustainability on governments’ agendas.
Yet progress towards transforming the way we power our planet is gaining momentum. Capital is today flowing into renewables. Momentous policy initiatives including REPower EU and the US Inflation Reduction Act will support future massive investment in a widening array of low-carbon technologies. Building domestic supply chains matters, too, as a counter to China’s dominance.
Nothing, though, can be taken for granted. It’s an understatement that much hinges on December’s COP28 in the UAE delivering the coordinated global policy and capital commitments required to achieve net zero by 2050.
2. Solar’s coming of age
Solar will be a key pillar of global electrification and is already doing much of the transition’s early heavy lifting by decarbonising the power sector. Innovation and industrial scaling-up have driven costs down by 90% this century, making solar competitive with other technologies in many markets and dominating new build capacity.
Having increased five-fold since 2015, solar is still less than 15% of global capacity but a further tripling of GW by 2032 will lift solar’s share to one-third. This trajectory to commerciality and scale is what nascent low-carbon technologies critical for the transition aspire to, among them EVs, stationary battery storage, hydrogen and carbon capture and storage.
More innovation will strengthen solar’s competitiveness, not least improving cell efficiency and maximising land use. Solar will become the starter platform for domestic energy independence, with consumers complementing their solar panels with battery storage, electric vehicle (EV) charging and heat pumps.
3. Upstream’s re-invention
The collapse of prices in 2015 was the catalyst for a structural reset after E&P grew fat on US$100/bbl oil. The industry’s response was a root-and-branch reset of costs through the value chain from exploration to development and production, strict capital discipline and portfolio high-grading. The result? A more profitable and resilient upstream industry that’s far better prepared for the transition.
Global oil and gas supply has continued to grow. Non-OPEC oil production is up 5 million b/d, or 10%, since 2015, growth driven by tight oil, reinvigorated mature conventional basins and a handful of new deepwater play opening discoveries, including Guyana. The spectre of peak demand should provide sufficient incentive to stay the course on capital discipline.
4. Finance for fossil fuels evaporates
It started with Paris – oil, gas and, particularly, thermal coal faced shrinking finance availability and higher cost of capital. Outside North America, direct financing of oil projects is almost extinct as mainstream banks pull back from the sector. North American banks have been more accommodating, though have also tightened. Equity capital has all but dried up, IPOs reduced to a trickle. At peak-ESG in late 2021, publicly listed IOCs had become virtual stock-market pariahs.
Things have changed since the war in Ukraine, with institutional investors and lenders adopting a more nuanced view of the sector and aligning with governments to support investment in energy security. Capital discipline and decarbonisation strategies have also helped rehabilitate sentiment toward the sector.
The direction of travel, though, is clear. Banks and equity investors will follow their stakeholders and target net zero. More capital will flow into low carbon, less into oil and gas. Thinning out of the sector is well underway, with smaller E&Ps being swallowed up as consolidation takes root. Big IOCs can self-finance at US$80/bbl for the most part while NOCs will capture an ever-bigger share of what will become a declining market.
5. US LNG has revolutionised global gas
US exports have grown from almost zero in 2015 to 85 mmtpa in 2023, capturing an astonishing 20% of the global LNG market. Independent infrastructure developers pioneered a new business model, repurposing mothballed LNG import terminals into liquefaction plants for export and unlocking the huge shale gas resource that couldn’t be monetised in a moribund domestic market. Ongoing investment in capacity will mean that by the early 2030s, LNG exports will account for 20% of US gas demand. And in so doing, they will lift the US share of the global LNG market to one-third and increase the depth and liquidity of a burgeoning LNG spot market.
The revolution, though, is not only about volume, but the way US LNG is sold. Before the US burst onto the scene, a small ‘club’ of sellers dominated the global LNG market. US LNG has introduced more sellers, a new LNG pricing option and more contract flexibility – a combination that’s attracted multiple new buyers into the market.
Henry Hub pricing offers an alternative to the traditional oil-price contract linkage; buyers of US volumes can ship the gas to wherever earns the best price. These innovations enabled US LNG to play a key role in providing the flexibility Europe needed as it scrambled for volumes to replace lost Russian pipe imports.
6. OPEC+, a revitalised energy superpower
OPEC strengthened its influence with the launch of OPEC+ seven years ago. In 2020, the oil market desperately needed stability after the extreme volatility of demand during the pandemic. Wild fluctuations in price, also fanned by the war in Ukraine, suit neither producers nor consumers.
OPEC+, underpinned by the close alliance between Saudi Arabia and Russia, has continued to do the trick. As demand recovers even in a slowing global economy, OPEC+ has managed to balance the market and stabilise price by cutting volumes. More challenges lie ahead for OPEC+ as it seeks to rebuild market share in the face of growing non-OPEC production.
Finally, thanks to all my WoodMac colleagues who helped us get to the 300th, calling out: Harriet McGann (editor in chief) and Jade Heinemeier; Gavin Thompson, Ed Crooks, Julian Kettle, Chris Seiple; and for this Edge, Prakash Sharma, Brian Gaylord, Fraser McKay, Erik Mielke, Massimo di-Odoardo, Giles Farrer, Frank Harris and Ann-Louise Hittle. I’m looking forward to the next 100.