An Unsettling Future For Oil, But A Tossup For Gas And Liquefied Natural Gas
Originally published on Forbes.com on July 23, 2024
BP says the energy future depends on, first, the decarbonization of global power plants, and, second, how rapidly emerging economies can do this.
BP is diligent about gathering data on the energy transition. The projections in BP’s annual Energy Outlooks are eagerly awaited. The latest Energy Outlook, dated 2024, is unsettling for oil and gas companies for more than one reason.
The Oil Future
This is downhill if you are an oilman. BP projects falling future oil demand under two scenarios. This is simpler than in BP’s Outlook in 2023 which posed three scenarios, one of which was connected to the war in Ukraine. The first scenario, Current Trajectory or CT, implies current energy use with renewable energies plus decarbonization staying the same through 2050. Peak oil demand stays at about 100 MMbopd through 2035 before falling to around 75 MMbopd by 2050 (falling by 25% in Figure 1).
The primary reason is the electrification of road transport. BP estimates the worldwide number of electric vehicles (EVs) will increase to 1.25 – 2 billion by 2050 (the number today is only 40 million). How much oil is used in road transport today? 40 MMbopd. This will fall to 25 MMbopd (38% drop) under the CT scenario.
The second scenario, called Net Zero or NZ, is based on the Paris Agreement of 2015 where greenhouse gas (GHG) emissions would fall to net zero by 2050. Oil demand would fall dramatically from 100 MMbopd now to 27 MMbopd by 2050 (a fall of 73%). Road transport oil usage of 40 MMbopd today would fall to 5 MMbopd (88% drop) under the NZ scenario.
Natural Gas And LNG Futures
Natural gas is set to increase under the Current Trajectory (Figure 2). This is largely because its liquid form, Liquefied Natural gas or LNG, is a cleaner-burning energy-dense replacement for coal-fired power plants and other industrial applications. LNG is a dominant force for increasing gas usage in emerging economies.
LNG is the best way for emerging economies to grow their natural gas resource. LNG trends track natural gas trends in Figure 2, although the LNG uplift between now and 2050 is 89% and far exceeds the gas uplift of only 19%. This is a visible manifestation of the golden age of LNG described in detail elsewhere.
But the golden age of LNG won’t last beyond about 2030 if government policies turn to renewables like wind and solar that have cleaner GHG emissions than natural gas. This is indicated by the Net Zero scenario of Figure 2, where gas falls by 55% and LNG drops from its 2030 peak by 58% by 2050. According to BP, electrification will increase in energy supplies as countries turn to wind and solar, and gas demand will be squeezed out. This is already happening in South Australia.
These two scenarios are radically different futures for gas and LNG. Government policies around the world, especially in emerging economies, will play a big part in determining which way the curve goes.
The uncertainty is particularly serious for LNG because financing and building of long-term LNG liquefaction trains, typically costing $10 billion, is a challenging and risky proposition. No better example is provided than the pause in approval of new LNG developments by the Biden administration in January 2024 as it wrestles with the pros and cons of how exporting LNG will affect the U.S. economy as well as the consequences of global climate change.
Energy Substitution
In Figure 1, oil demand is projected to decline in both scenarios. But BP’s Outlook 2024 expresses some hesitancy about this from a philosophical stance: “The world has never reduced any fuel on a sustained basis. It’s just consumed more of everything and that’s the historic challenge facing the global energy system,” BP’s chief economist Spencer Dale said. Still, some will argue that whale oil was replaced by geologic oil in the 19th century. Also, global coal usage is falling in OECD countries, but not in non-OECD countries which tap into 86% of world usage. Global coal consumption rose about 2% in 2023, much less than 6% in 2022.
But the statement is validated by data that global oil consumption has increased every year from 2010-2022 except for the pandemic year of 2020. Roger Pielke makes the point that it’s not a true energy transition until renewables like wind and solar replace, or substitute for oil.
The point made by BP is that energy substitution implied in the NZ scenario (Figure 1) would be a “history-defying shift”.
Takeaways
BP points to two factors that will determine the energy future. The first is decarbonizing global power plants. In the Net Zero scenario, global power is completely decarbonized by 2050. In the Current Trajectory, it would take 15 years longer.
Second is how rapidly emerging economies can decarbonize their power plants. In the developed world, power generation will be decarbonized by 2050, even in the Current Trajectory scenario. But not so for emerging economies, where the electricity demand is so high that low-carbon resources like wind and solar can’t keep up. This is one big reason why China and India have announced their goals of net zero emissions, not by 2050, but by 2060 and 2070 respectively.