It is increasingly obvious that the world is marching towards net-zero. However, does this mean that renewables replace these fossil fuels entirely by 2050? If so, then will it be a gradual transition, or an immediate one? Although it’s controversial to say, I believe fossil fuels, predominantly gas, will continue to play a role in the global energy supply for decades to come. Fossil fuels will most likely aid in the transition to an economy where renewable energy accounts for 80-90% of global energy production by 2050.
Oil and Gas from 2020 to 2022
This shortage of supply was a product of chronic structural underinvestment in energy capacity globally, primarily due to environmental and social concerns surrounding fossil fuel projects. Why would companies commit billions of dollars to multi-decade long oil and gas projects when the space is so heavily regulated and scrutinised? The producers were not confident that the demand would be there in ten years’ time to justify the large expenditure. Put simply, the regulations investing in new assets were too strict, starving the producers of incentives to build out capacity. Furthermore, investment was being redirected from fossil fuels to renewables.
The chart below illustrates that prior to 2014, the investment in resource projects followed the return that those projects could yield. The new projects that were committed to once the return on those projects rose as a function of supply and demand. Post 2014, the returns on these assets have been climbing, although new production has not been following due to the constraints mentioned earlier. When you have very low supply, and very high demand, prices rise, and we have certainly seen this throughout 2022 regarding energy prices.
Europe’s Energy Market
What this Means for Energy Producers
The two main energy producers on the Australian Stock Exchange are Woodside Energy (WDS) and Santos (STO). Both companies have outperformed the local ASX200 index by 61% and 30% respectively year to date. Woodside Energy has the greatest exposure to global prices and has benefitted the most from recent global events, hence the greater advancement in its share price.
Santos and Woodside are predominantly gas producers, which is fortunate for both companies, as gas has been gradually increasing its share in the energy mix. Gas producers are expected to play a key role throughout the transition to renewables with its wide range of applications, due to its acceptance as a transition energy. Looking forward, gas could play a new role in blue hydrogen and ammonia production. Additionally, existing gas infrastructure (which WDS and STO own) could be repurposed for low-carbon fuels such as hydrogen and biogas. According to McKinsey & Company, gas demand is projected to grow by 10% in the next decade, with demand peaking by 2035.
What does the Future Hold for the Energy Landscape?
According to McKinsey & Company’s Global Energy Perspective 2022 Report, demand for oil is projected to peak over the next five years, between 2024 and 2027 most likely, following the electric vehicle uptake, which will see less reliance on oil. Crude oil demand is expected to decline rapidly after 2030, driven by a reduction in its use for combustion. Towards 2035, gas demand across all scenarios is projected to grow another 10 – 20% compared to 2022. Post 2035, demand for gas will be largely driven by its interplay with hydrogen.
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