Game Over for Oil? Welcome to the Matrix Revolution Pt.1

Tactics Institute presents the first part of the report “Game Over for Oil? Welcome to the Matrix Revolution”, which is simultaneously published in Germany by the Stiftung Energie & Klimaschutz (Foundation for Energy & Climate Protection) of EnBW Energie Baden-Württemberg AG, one of the largest energy supply companies in Germany and Europe.

The three articles address the global energy landscape, the changing geopolitics and the vision of zero-carbon, resource-efficient, new economy that will be powered by renewable energy systems.      

The report first appeared on the leading Italian news platform Formiche.net will be published also on https://www.2duerighe.com/

 

Game Over for Oil

U.S. oil consumption is at its lowest level since 1971 when production was only about 78% of what it was in 2019. Worse yet, oil futures are for the first time in history below zero, revealing the surging cost of storing oil. With the demand for oil sinking by 20 million barrels a day, the fossil fuel industry is facing an existential crisis. More importantly, the change – and oversupply – is structural. As the experience of the European Union shows, the world energy system is going through a transition as it decouples from carbon, population and economic growth. Are we witnessing the decarbonisation of the global economy?

Retreat from Fossil Fuels?

More than half (29% nuclear and 27% renewables) of the EU-28’s electricity production was accounted in 2017 by zero/carbon neutral sources, while coal was approximately 19%, natural gas 14 % and crude oil 10%. Over the last decade, production from renewables increased by 71.0%, by partially replacing the production of fossil fuels-based sources of energy. The development and promotion of new technologies and best practices improved energy efficiency significantly, and today EU energy consumption is below 1990 levels.

A New Era for the Global Energy Market

Even prior to COVID19, most analysts forecast that the global peak in oil demand would be reached between 2030 and 2035 followed by a steady demand reduction. International Energy Agency CIE (IEA) projections also point in this direction, foreseeing oil demand plateauing in the 2030s. This process has weighed negatively on investment decisions, both in the oil & gas industries and in the renewables sector. The energy transition needs money. The IEA estimates that by 2050 the global energy system will require an additional $29tn of capital to be invested — over and above the growth capital required to meet the expanding demand for energy globally.

Until the COVID19 crisis, it was expected that most of that investment would have to come from capital markets in a volatile environment with little policy certainty relative to the future of oil. The 2015 climate agreement in Paris had not offered much help. A declaration of principles more than a framework of rules, it left the markets and the industry alike in the dark without clear policy signals on what the long-term price for carbon is going to be and, – most importantly –  when there will be an effective mechanism to implement it.

The multimillion-dollar recovery packaged for post-COVID19 recovery could be a game changer and inject new life into the new energy sector, propelling the accelerated build-up of the infrastructure of the energy transition in primis electricity grids. Without policy certainty, pricing carbon risks and opportunities is going to remain highly complex, however, all decarbonisation scenarios show a decisive increase of electrification rates for all energy consuming sectors: industry, buildings and transport.

The “Global Energy and Climate Outlook 2019: Electrification for the Low-Carbon Transition The Role of Electrification in Low-Carbon Pathways, with a Global and Regional Focus on Eu and China” is a report published by the European Commission’s Joint Research Centre (JRC), the Chinese National Centre for Climate Change Strategy and International Cooperation (NCSC), and the Energy Foundation China (EFC). The Report presents a special insight into the role of electricity in regional GHG emission reduction pathways for the European Union and China.

The scenarios presented in this study show possible pathways to contain global warming to 2°C by the end of this century with different roles for electricity as a crucial energy carrier.

The “Research Report on Global Energy Interconnection (GEI) for addressing Climate Change” was published in December 2019 by GEIDCO (Global Energy Interconnection Development and Organisation) IIASA (International System for Applied System Analysis) and WMO. The report comprehensively analyses the energy system and mitigation technology of GEI in 2℃ and 1.5℃ scenarios. The results are remarkable. By 2050, the global intercontinental power trading volume will amount to 800TWh; the cross-region power flow will be 660GW; clean energy will account for 86% in primary energy; the cumulative global CO2 emissions will be kept under 510 billion tons; and the discharge of sulfur dioxide, nitric oxide and PM2.5 will drop by 86%, 98% and 93% respectively.

The reports show that the 2°C target is technically possible at relatively low cost for the overall economy: globally aggregated GDP reduction ranges between 0.2% and 1.0% across electrification scenarios in 2050, relative to a current policy reference. The range highlights that strong enabling conditions for electrification can play a significant role in lowering the macroeconomic costs of action. Importantly, these numbers do not account for the costs of inaction.

Climate and Energy Security: is Big Oil Ready for the Next Energy Matrix?

While agreeing on the fundamental analysis, most of the traditional energy industry, however, expected the shift to be slow. One of the critical areas was deemed to be the road and transport sector and especially road transport which is vital also for tax revenues in many countries. In Europe, fossil fuels still accounts for 94% (96% in 2011) of EU transport energy demand (European Commission 2017). Additionally, the share of transportation GHG emission even increased to 21.7% of the total (EEA 2018), higher than the 20% in 2011. In the recently published Outlook on the EU road fuel consumption through 2035, Aramco anticipate that fossil fuels will continue to govern the road fuel demand, which will be dominated by diesel through the end of the forecast period, in 2035, in spite of the substitution effect of the EVs, whose mass uptake and market penetration is anticipated to happen in 2023. This, unless more regulations that were foreseen to be implemented would accelerate the substitution trend.

The role of policies and public opinions worldwide are threatening the prospects of the oil industry. A case in point is the plastic crisis. Many in the oil industry expected that lower demand in the primary energy and transport sector could be replaced by the petrochemical and plastics industry. The recent public repudiation of disposable plastics, a trend that see the alignment of legislative measures in the EU and China, is likely to have a negative impact on oil demand growth in that sector.

Investors Pull Out

What is certain is that oil production and prices are unlikely to regain late 2018 levels. The world has been engaged in a profound transformation in the way we use energy and the oil industry would do well to brace for long-term decline. The prospects of oversupply weighs heavily over price levels and represent a structural challenge. Fighting for a shrinking market share in a declining market may not be the smartest approach to financial viability, particularly in the US, where the shale industry faces particularly high production costs.

“In 2019, the five largest integrated oil and gas companies—ExxonMobil, Shell, Chevron, Total and BP—spent a total of $88.7 billion on capital projects, down nearly 50 percent from the $165.9 billion they spent in 2013,” a report from the Institute for Energy Economics and Financial Analysis writes. “Not since 2007 have the capital expenditures, or capex, among the five companies been so low.” Even without the coronavirus, the majors were struggling with energy transition. The bankability of oil projects is at stake while investors look at divesting from the sector.

Renewable Energies – Also a Matter of Energy Security and Geopolitics

The price shock caused by the coronavirus confirms the vulnerability of a singularly fossil-fuel dependent economy and increases the pressure towards securing a foothold in the energy industry of the future, based on renewables, the digital revolution and gas leading to different patterns of consumption. In a not so distant future, the world economy will be powered mostly by renewables: this is a matter of energy security as well as of climate security, of environmental protection as well as geopolitical concerns.

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