Peak Demand Still Looms Despite Recovery

The strong rebound in oil demand following the Covid-19 crisis led several energy modelers to postpone the expected date of peak oil demand. Consultancy DNV and BP, which last year considered oil could have peaked in 2019, now see demand peaking respectively in 2024 and 2025. But the desired and likely direction of travel has not changed. In fact, the Intergovernmental Panel on Climate Change's (IPCC) recent warning — that keeping a 1.5ºC or even 2ºC warming limit in sight will require a big strengthening of policies — could mean an even faster phasing out of fossil fuels than initially envisaged. This year's spike in oil and gas prices could add momentum to these efforts and accelerate the uptake of electric vehicles in transportation and renewables in power generation, despite calls for increased oil and gas supply in the near term. Indeed, Paris-compliant energy scenarios assume oil and gas demand will fall by respectively 40%-80% and 20%-60% between now and 2050. Gas demand would also need to peak only a few years after oil, around 2025-30. Most scenarios, however, even among Paris-compliant ones, do not achieve net-zero — or near net-zero — CO2 emissions by 2050. This would only happen with the International Energy Agency's (IEA) and BP's net-zero scenarios, and the IPCC's 1.5°C group of scenarios with limited warming "overshoot" — in other words, there is a limited degree to which the average temperature increase misses or overshoots what is targeted. In the IPCC's 1.5°C scenarios with high overshoot, reaching net zero would happen five to 10 years later, and only around 2070 in the 2°C scenarios, in line with Shell's Sky 1.5 scenario. Some big oil and gas consuming and producing nations have set net-zero targets beyond 2050. China, Indonesia and Saudi Arabia are targeting net-zero CO2 by 2060, and India by 2070.

Many experts, including Energy Intelligence, now do not see peak oil demand before 2030 and foresee more of a plateau after it occurs rather than a sharp decline. They also emphasize the role carbon capture and storage (CCS) needs to play to keep emissions within budget, based on its ability to limit emissions in hard-to-decarbonize industrial processes, along with its projected ability to achieve negative emissions by removing CO2 from the atmosphere when combined with bioenergy (BECCS). Conservative scenarios such as Equinor's Rivalry, the IEA's Stated Policies and BP's New Momentum only assume limited amounts of CCS of just a few hundred million tons per year of CO2 by 2050. That's a seemingly modest amount, but five to 10 times more than today's installed capacity of 40 million tons/yr. Paris-compliant scenarios assume more substantial amounts of CCS, ranging from 4 billion tons/yr in BP's Accelerated scenario to 8 billion tons/yr in the IEA's net-zero and over 9 billion tons/yr in the IPCC's 1.5°C scenarios. This is considerable — and unrealistic, critics argue — as it more or less matches the current physical size of the oil and gas industry. Building such a big industry from scratch would require some $150 billion per year over 2030-50, according to a recent report from the Energy Transition Commission (ETC), an international think tank. This is huge but amounts to less than a third of today's oil and gas capital expenditure, at around $500 billion/yr, the ETC's Kash Burchett notes. Western majors, and top US oil companies in particular, are keen on CCS in their energy transition strategies. All Paris-compliant pathways involve rapid and deep emissions reductions in all sectors, but also deployment of negative emissions technologies such as afforestation-reforestation, BECCS and direct air capture to counterbalance residual emissions and reduce excess CO2 concentration in the atmosphere. Negative emissions options, while "unavoidable," face substantial "implementation challenges" including technological and social risks, scaling and costs, the IPCC warns.

Natural gas demand increases in most scenarios in the current decade — with the notable exceptions of truly net-zero projections such as the IPCC's 1.5°C and BP's and the IEA's net-zero scenarios. Sharper divergences on gas demand appear after 2030. Paris-compliant projections see it peaking no later than 2030-35, while several scenarios do not foresee a peak at all within their horizons. Those include the notoriously bullish US Energy Information Administration's International Energy Outlook and Opec's World Oil Outlook, but also Gazprom's and Exxon Mobil's base cases, TotalEnergies' Momentum, BP's New Momentum and the IEA's Stated Policies scenario. The IEA's Announced Pledges scenario, which might replace the Stated Policies as the agency's implicit base case, and the IPCC's 2°C scenarios see gas demand peaking in 2030 at around 150 exajoules, just a few percent higher than today's 145 EJ. It would then decrease by around 0.5% per year to 2050.