By Gerard Kreeft
About half of the world’s fossil fuel assets will be worthless by 2036 under a net zero transition, according to a new paper published in Nature Energy. The lead author, Jean-Francois Mercure of the University of Exeter, said the shift to clean energy would benefit the world economy overall, but it would need to be handled carefully to prevent regional pockets of misery and possible global instability.
Countries that are slow to decarbonize will suffer but early movers will profit; the study finds that renewables and freed-up investment will more than make up for the losses to the global economy.
It highlights the risk of producing far more oil and gas than required for future demand, which is estimated to leave $11Trillion-$14Trillion in so-called stranded assets – infrastructure, property and investments where the value has fallen so steeply, they must be written off.
“In a worst-case scenario, people will keep investing in fossil fuels until suddenly the demand they expected does not materialize and they realize that what they own is worthless. Then we could see a financial crisis on the scale of 2008,” he said, warning oil capitals such as Houston could suffer the same fate as Detroit after the decline of the US car industry unless the transition is carefully managed.
The new paper illustrates how a drop in demand for oil and gas before 2036 will reshape the geopolitical landscape. Current investment flows and government commitments to reach net zero emissions by 2050 will make renewable energy more efficient, cheaper and stable, while fossil fuels will be hit by more price volatility. Many carbon assets, such as oil or coal reserves, will be left unburned, while machinery will also be stranded and no longer produce value for its owners.
To what extent can the new independents, taking over oil and gas assets from the oil majors, be a force of good? Carrying out exploration and developing of oil and gas assets and also develop green energy. Some guidance was provided at a recent conference hosted by Frontier Energy. The panel included: Ignacio de Calonje, Chief Investment Officer, International Finance Corporation; Zoḗ Knight, Group Head HSBC Centre for Sustainable Finance, HSBC; Rob Tims, Managing Director, RWT Energy Advisory; Christopher McLean, CEO, Stonechair Capital; Jim Totty, Managing Director, Viridis Capital.
Some key conclusions:
To encourage better sustainable development In emerging markets there is the need to have better financial linkages between interest rates and CO2 emissions standards.
IFC does provide concessional financing to reduce project risk so that other investors can get on board.
In emerging markets, IFC virtually does no financing of oil and gas projects, the exception being some gas projects that are linked to sustainable development. Offshore wind is a growth area for IFC.
Important to understand Africa’s diversity: some of the highest GDP growth in the world, enormous needs for technology and sustainable energy projects. Energy affects agriculture, stable medical delivery, reliable logistics, and efficient technology growth.
Lack of standardization of financial parameters throughout Africa.
Institutions in Africa lack the sophistication to implement equity financing.
Huge need for PPPs ( private-public partnerships) for transmission and distribution projects.
Energy trading must be encouraged across Africa: for example, North African gas and solar producers with Sub-Sahara Africa consuming countries.
Learning to Live with Less
It is estimated that the world population will reach 9.4 billion by 2050, 10.4Billion by 2100, and will ultimately stabilize at just under 11 billion persons around 2200. A growth of such a magnitude also requires an energy system of various aspects- bringing energy poverty nations relief and in the industrialized countries greater energy efficiency with less resources.
Must we think in terms of Jonathan Swift’s Modest Proposal of 1729? In his Modest Proposal he suggests that the impoverished Irish might ease their economic troubles by selling their children as food to rich gentlemen and ladies.
One of the most compelling energy scenarios is Wood Mackenzie’s AET-2(Accelerated Energy Transition scenario). According to Wood Mackenzie: “The AET-2 scenario is based on the Intergovernmental Panel on Climate Change carbon budget allocation for the next eight decades, to 2100. It sets out our view of how the world can limit the average rise in global temperatures to 2 °C compared with pre-industrial times, examining potential policy drivers, cost reductions and technological innovations. Electrification and low-carbon fuels are central to meeting the 2 °C limit. We estimate that electricity meets 47% of total final energy consumption globally in 2050 compared with 20% today. Three key assumptions underlie our AET-2 scenario:
- rapid electrification in all sectors;
- the decarbonisation of the power sector through the penetration of renewables and storage and coal-to-gas switching;
- the large-scale development of carbon capture and storage (CCS) and carbon capture, utilisation and storage (CCUS) – 5 billion tonnes (Bt) by 2050 – and low-carbon hydrogen – 380 million tonnes (Mt) by 2050 – in hard-to-decarbonise sectors.”
AET-2 has massive implications for oil and gas demand in 2050: 70% lower than today. From 2023 onward oil demand drops with year-on-year fall of around 2 million barrels per day (bpd). Total oil demand by 2050 is down to 35 million bpd.
Natural gas demands, in contrast, remains resilient to about 2050. Large scale CCS in the industrial and power sectors will support gas while the deployment of blue hydrogen (135Mt by 2050) is a growth sector. Growth will come primarily from Asia, especially China and India.
Under AET-2 the assumption is that as many as 80% of new vehicles sold are electric, either battery-driven or hybrid. Heavy transport- ships and trains- are electric or hydrogen driven. Non-combustion liquid petrochemical demand for plastics is damped by higher rates of recycling.
Wood Mackenzie’s AET-2’s scenario draws the following conclusions:
- World needs no new supply of oil…” core function is to maintain current commercial production by going into full harvest mode” …
- Market power slips from OPEC to giant gas producers such as USA, Russia and Qatar.
- Downstream suffers death by a thousand cuts. By 2050 the refining sector will have withered to 1/3 of its current capacity with less than 150 of the current sites in operation.
- Era of carbon-neutral gas is born. AET-2 would require $300 billion to support Liquified Natural Gas growth globally and $700Billion to support dry gas development in North America. Blue hydrogen and ammonia emerge as new market products.
- Currently no International Oil Company nor National Oil Company is prepared for the scale of decline envisaged in this scenario.
Gerard Kreeft, BA (Calvin University, Grand Rapids, USA) and MA (Carleton University, Ottawa, Canada), Energy Transition Adviser, was founder and owner of EnergyWise. He has managed and implemented energy conferences, seminars and university master classes in Alaska, Angola, Brazil, Canada, India, Libya, Kazakhstan, Russia and throughout Europe. Kreeft has Dutch and Canadian citizenship and resides in the Netherlands. He writes on a regular basis for Africa Oil + Gas Report and contributes to the Institute Energy Economics and Financial Analysis (IEEFA). His book entitled The 10 Commandments of the Energy Transition, is scheduled for publication in early 2022.
