Market Turmoil Fuels Transition Debate

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A Pause in the Transition

Surging gas prices and tightening oil markets are fueling controversy over the low-carbon transition. Our analysis suggests that imbalances in the post-Covid-19 recovery are the prime cause, but that such crises offer a preview of likely market disruptions as the transition advances. These topics will lead the agenda at next week’s Energy Intelligence Forum.

  • Spiking gas and power prices are fueling debate over energy’s direction. Rebounding demand has seen Asian LNG prices surge above $30/MMBtu with European gas prices close behind, sparking fears over vulnerable consumers and industrial closures. In Europe, rising carbon prices and fast-growing renewables have led some to blame the energy transition. We believe this is overstated, with the crisis due more to a mix of supply factors (including LNG plant outages, limited Russian gas supply, declining domestic production, lower Norwegian output), plus strong Asian and Latin American demand. Low EU gas storage levels ahead of winter — 75% full, versus 95% last year — mean tightness will not ease soon. China is also seeing power shortages and industry shutdowns, due to high coal and LNG prices, amid rigid pricing and tight emissions quotas.

  • Oil pressures are rising too as markets tighten. Recovering demand, tighter markets and falling stocks have also pushed Brent close to $80/bbl. We have revised up our 2022-25 price outlook to $73-$77/bbl. Bullish factors include (1) high gas prices, boosting oil demand for power, (2) US supply hit by Hurricane Ida, and (3) expected Iran volumes not materializing. Low upstream spending — 20% below pre-Covid-19 levels — adds medium-term pressure; we see non-Opec-plus output peaking by 2025. Balancing this are sizable Opec-plus spare capacity (6 million b/d immediately available, at end-August) and concerns over the economic recovery, notably in China. We see Opec-plus capable of filling supply needs through 2022, but underinvestment could tilt balances toward tightness mid-decade, before demand peaks in the late 2020s.

  • Producers are seeking to slow transition momentum. At Gastech in Dubai last week and in private conversations, we heard producer states citing current market upheavals as support for ongoing oil and gas investment. While still finalizing their positions ahead of COP26, top Opec producers remain wary of net-zero plans, advocating a circular carbon economy with continued fossil fuel use plus growing carbon management. Advantaged NOCs — as in the Mideast Gulf — are looking to build on existing resilience, and quickly develop new fuels like blue hydrogen. Asian NOCs, while voicing net-zero goals, continue to spend on hydrocarbon capacity, especially for gas. Weaker producers remain focused on efforts to attract new investment to jump-start adaptation.

  • Investors are pushing a supply shift well ahead of any demand response. Investors, after elevating climate risk in the pandemic, have pressed listed oil firms to cut emissions and redirect spending to low-carbon alternatives. Yet the post-Covid-19 rebound has exposed a wide gap between supply pressures and slower demand responses. Electric vehicles will take time to erode oil demand, while renewables are meeting growth and displacing coal rather than directly replacing gas in power. Oil majors are pledging to cut Scope 3 (product use) emissions but cannot reshape demand alone. Rather, we see a successful net-zero pathway needing (1) progress on policy, globally and at other levels, (2) technology advances, especially in harder-to-decarbonize areas, (3) action by firms in other sectors (e.g. aviation, shipping, steel), and, potentially, (4) higher prices changing consumer behavior.

  • Energy companies must navigate a volatile, uneven transition. We have long argued the transition will be disruptive rather than orderly. The current gas crisis, even if only tangentially tied to the transition, offers a foretaste of future market upheavals. We see Covid-19-linked volatility persisting through 2022, with potential for further disruption — and elevated prices — through the mid-2020s as supply and demand respond to transition pressures at differing paces. Supply will face continued investment constraints, even with higher prices, as listed firms remain wary of investor pushback on increased oil and gas capital expenditure. Despite the social, political and economic risks of higher prices, we do not expect overall transition pressures to ease. Oil and gas firms face a highly challenging decade, with conflicting signals from markets, investors and others. Flexibility and resilience will be key in the near term, while maintaining focus on longer-term transition goals.

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Energy Intelligence Forum 2021, Corporate Strategy , Gas Prices, Oil Prices
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