Plenty Of Opportunities For Oil And Gas Companies In Energy Transition, Gaffney Cline Reports

Rapidly increasing demand for energy in developing countries, combined with the need for reliable energy in the developed world, will create opportunities for oil and gas companies to thrive as the world transitions towards a low carbon future, two analysts from global energy advisors Gaffney Cline & Associates told an Evaluate Energy-sponsored webinar.

The COVID-19 pandemic and resulting lockdowns crushed energy prices and demand and led to a global recession, said Davis Varghese, a senior economist at Gaffney Cline. With a new U.S. president rejoining the Paris agreement on climate change and reversing the previous president’s pro-oil agenda, numerous countries and even oil companies announcing net zero emissions targets — and countries setting dates to phase out internal combustion engines — and the future looks tenuous for the oil and gas sector.

But behind the headlines lies another reality, said Varghese. Oil demand is rapidly recovering as vaccination against COVID-19 takes hold. The recent electricity crisis in Texas brought on by extreme cold showed the need for flexible fuel sources, including natural gas to ensure a reliable grid. And high LNG prices in Asia showed the need for low-cost fuel in the developing world.

While the energy transition is underway, Varghese said it will be “a monumental challenge” to cut emissions to meet the goal of limiting temperature rises to 1.5 degrees C above pre-industrial levels while also meeting United Nations sustainable development goals (SDGs) like ensuring the world has access to affordable electricity and mobility.

“It’s extremely ambitious and unrealistic in our opinion,” he says.

Growing populations and expanding economies in the developing world will drive energy demand growth, providing opportunity for oil and gas companies, says Barghese. Much of this demand will be focused on construction of modern buildings, clean cooking fuels, and electrification.

India presents a near-term opportunity, he adds. Currently around 80 per cent of primary energy needs are met with biomass, coal and oil. India’s LNG/natural gas market is expected to triple by 2040 as compressed natural gas (CNG) replaces diesel fuel in heavy vehicles and domestic freight transportation. The urban gas distribution market is expected to double by 2030. Propane penetration as cooking gas reached 99.6 per cent of households in 2020. The next big market for expansion is piped cooking gas.

Cement, steel and petrochemical production is also expected to more than double, adding to natural gas demand.

While India has plans to drive renewable energy to 60 per cent of supply by 2030, Barghese said both hydropower and natural gas would play a key role in providing reliability to the grid.

“It’s a massive opportunity for oil and gas,” he said.

Concerns about power supply reliability with renewables will ensure natural gas remains a key and growing component of the energy mix in both the developed and developing world, said Chris Rachwal, Gaffney Cline technical director for M&A. Oil demand will also remain stronger than many predict as the world targets net zero emissions by 2050 or 2070, depending on the forecast.

“What are the challenges powering the world with renewables? The world wants electricity 24/7 and wind and solar only cover half the day,” said Rachwal. Wind and solar are 10 per cent of supply now and are expected to double to 20 per cent by 2030. “Their dark hours will double as well and we need a power portfolio for 24/7.”

Large-scale alternatives like nuclear and hydropower to meet demand when the wind isn’t blowing and sun isn’t shining won’t work, he added. More nuclear power is being shut down than coming online, and there are limited opportunities to expand hydropower globally.

“Battery storage can help on a local scale but you can’t run an entire grid on batteries,” he explained. “And this is with demand now.”

That demand is expected to increase as the transportation sector electrifies, resulting in the need to double or possibly triple the size of the power grid in many regions of the world.

Green hydrogen production is in its early stages and too expensive right now to have an impact on energy storage, he added.

The solution is a partnership between wind/power/LNG for most of the world, said Rachwal, with natural gas being the swing supplier when renewable supplies fail to meet demand. In many places the infrastructure is already in place, requiring less investment.

“But the industry needs to improve performance and cut emissions,” he added. “The industry knows how to deal with these emissions, they’re not massive engineering challenges.”

Rachwal questioned future energy scenarios calling for major declines in oil demand. He used the International Energy Agency (IEA) 2020 World Energy Outlook scenarios to prove his point. Under the IEA’s sustainable development scenario, oil demand would need to decline to 86 million bbls/d by 2030 to remain on track to reach zero net emissions by 2070. To reach zero emissions by 2050 demand would have to decrease to 65 million bbls/d by 2030.

“Every ICE vehicle would have to be scrapped. That’s 1.3 billion vehicles,” he noted. “It’s not achievable without literally stopping the world.”

Rachwal expects oil demand will peak at around 105 million bbls/d in the late 2020s or early 2030s.

“Most observers recognize we are not on track to achieve the 2030 forecast of a 15+ million barrel per day demand cut,” he added. 

There are a variety of opportunities within the energy transition for oil and gas operators, depending on their size, said Rachwal.

He expects the large, integrated operators to focus on a few mega-projects within their upstream portfolio where it is easier to reduce emissions, while disposing non-core assets.

“Oil and gas majors have industry-leading technologies and human resource capabilities and are uniquely positioned to address energy transition challenges,” he explains. “Disposal of very mature upstream assets will release management time and engineering skills for challenges presented by sustainable energy investments, inclusive of solar/wind, CCUS, blue or green hydrogen, biogas, batteries, geothermal or entirely new technologies.”

He also expects the majors to focus on short-lead time investment opportunities in response to volatile price movements.

“They offer scope for vertical integration with profitable specialty petrochemical plants and vibrant service sector offerings in reducing the carbon footprint,” he explained.

He also expects the oil majors to focus on green or low-emissions LNG technologies to meet demand from customers.

For midcap producers and private equity, there will be opportunities to fill the gap left by the majors by acquiring and consolidating assets and then leveraging the vast geoscience datasets and existing hydrocarbon infrastructure left behind to grow production and returns, he says.

National oil companies operating internationally can also benefit from the majors shedding non-core assets, said Rachwal.

“They can represent both the co-investor and customer of choice for high quality upstream assets,” he explained. “If such investments are indirectly linked to opening up opportunities for host country manufacturing companies to compete for capital projects, or to ensure domestic energy security, low cost state financial backing can be made available.”

Many oil/gas exporting countries experienced a severe loss of revenues in 2020 and seek new sources of capital to rebalance their economies, potentially opening up investments previously deemed off limits,” he added. “Partnerships in upstream and midstream assets may well lead to opportunities in petrochemicals and the development of sustainable energy solutions in exporting countries.”

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