January 2021

Special Focus: Sustainability

Hydrocarbons face toughest challenge yet

Over the next 30 yr, the globe’s energy ecosystem—where fossil fuels dominate and renewables play catch-up—will evolve exponentially, as efforts intensify to curb carbon emissions and mitigate the detrimental impact of climate change.

Ketelaars, F., DNV GL Oil and Gas

Over the next 30 yr, the globe’s energy ecosystem—where fossil fuels dominate and renewables play catch-up—will evolve exponentially, as efforts intensify to curb carbon emissions and mitigate the detrimental impact of climate change.

In 2018, 81% of the world’s energy was supplied by fossil fuels. By 2050, oil and gas will account for 54% of the world’s primary energy supply, while non-fossil fuels will comprise 46%.

In DNV GL’s latest energy outlook1, the company forecasts a decarbonizing world in which energy demand plateaus, renewables grow significantly, natural gas becomes the world’s largest energy source and oil demand never reaches the levels it saw in 2019.

Although the study predicts that, mid-century, there will still be demand for hydrocarbons, their role in the energy mix depend on how quickly diversification and significant carbon reductions can be achieved.

Changing energy demand

The outlook forecasts a single likely future of the world’s energy system, not a range of scenarios. Slower growth in productivity and global population, along with continuous increases in energy efficiency, particularly in transport, will cause global energy demand to plateau by 2050—unlike the past 15 yr, where it increased by approximately 30%.

COVID-19 has played its part, as well. Before the pandemic, the author’s company forecast total global energy demand in 2050 to be 456 exajoules (EJ). However, updated modeling shows that the pandemic will reduce energy demand by 8% to 2050—and this is nearly the exact level seen in 2018.

Oil demand will likely never fully recover from market shocks brought on by the COVID-19 pandemic. The outlook forecasts that global crude oil demand will decrease 13% in 2020, reaching a level not seen since the early 2000s. It will rebound somewhat to 2023, before gradually declining to half of its 2018 level by 2050 (FIG. 1).

FIG. 1. Oil demand forecast, by region, to 2050.

However, while oil demand will decline rapidly in some regions, it will continue to increase in others. Therefore, continued investments in oil and gas will be needed to maintain production at the levels required to meet global demand, even in a declining market.

The decrease in oil demand will be led by the transportation sector. The decline will first be due to the electrification of passenger vehicles—followed by natural gas, decarbonized and green gas, and biofuels that are increasingly supplying the energy for ships, larger road vehicles and aviation. The Middle East, North Africa, Northeast Eurasia and North America will account for 90% of oil supply in 2050 and will be the only net exporting regions. This will be caused by a shift from producing “more oil” to “cheapest oil,” and will put increasing pressure on unconventional onshore and offshore oil production to 2050.

As the least carbon-intensive fossil fuel, natural gas will play a prominent role in the energy transition, taking its place as the world’s largest energy source as of the mid-2020s. Global gas demand will peak in the mid-2030s.

Multiple energy transitions

The outlook anticipates that rapid electrification of energy, along with growth in renewables, will significantly reduce emissions in the coming decades. Without greater efforts to remove and adapt to carbon-free operations, the world will miss the 2°C limit for global warming under the Paris Agreement. The analysis warns that the current 1.5°C carbon budget will be exhausted in 2028, with the 2°C budget exhausted in 2051. Extrapolating the emission trends, this points to a 2.3°C warming of the planet by 2100.

There will not be just one energy transition to 2050 but several transitions. These include transitions from fossil fuels to renewables, from coal and oil to natural gas and from fossil fuels to decarbonized gas.

Carbon emissions are expected to remain high until the mid-2030s, falling approximately 15% to 2035 before dropping 40% to 2050. The scaling of decarbonized natural gas, along with the enhanced use of green gas (which is produced using renewable sources), will be key contributors.

The growing awareness of the urgency and magnitude of the climate change challenge is increasing pressure on the oil and gas industry to decarbonize. Several major players have already set net-zero carbon targets and are shifting from being “big oil” to “big energy” companies with a broader and more diverse portfolio. Any delay in this transition may challenge the industry’s license to operate in some regions. Therefore, longer-term success is dependent on proactively driving this transition rather than being a major carbon contributor. Key solutions include electrifying offshore platforms and oil and gas assets, reducing flaring and venting, increasing efforts to detect and stem methane leaks and obtaining efficiency gains through the digitalization of the oil and gas value chain.

A cleaner, greener energy mix

As the demand for natural gas declines from the mid-2030s, this outlook points to three pertinent predictions:

  1. The amount of natural gas used for power generation will start to decrease as renewables scale significantly and electricity is increasingly used to replace natural gas in sectors where it is feasible to do so.
  2. Natural gas will become partially decarbonized through gas reforming, with carbon capture and storage (CCS) to produce blue hydrogen, resulting in rapid growth toward 2050.
  3. Hydrogen produced from renewables (i.e., green hydrogen) will join decarbonized gas in replacing some of the final demand for natural gas, largely in hard-to-abate sectors such as steel, cement, aluminum and glassmaking processes.

The outlook forecasts that 13% of natural gas will be decarbonized in 2050. This follows rapid growth in hydrogen production from natural gas, and of natural gas with CCS in power and industry sectors over the next 30 yr.

In terms of lowering the emissions of natural gas consumption, the forecast asserts that hydrogen—produced from fossil fuels with CCS and from renewables via electrolysis—will supply 23% of end-user demand for gas. Around half of this hydrogen will be produced from fossil fuels in 2050—with approximately 70% coming from natural gas. The other half will be produced from electricity derived from predominantly renewable sources. Both the decarbonization of natural gas through CCS and the use of hydrogen as a vector to reduce emissions from natural gas consumption will be led by Europe, China and North America, and by Pacific countries that are members of the Organization for Economic Co-operation and Development (OECD).

The transition to decarbonized and green gas, with related scaling of CCS and hydrogen, will not be quick enough to meet the goals set in the Paris Agreement, as neither CCS nor hydrogen processes will begin to scale for at least 15 yr. Although the technology is available and viable, the policy framework is only now just taking shape in selected regions. Governments must quickly incentivize industry to adopt these solutions to climate change (such as through a competitive carbon price), so that the cost-learning curve will become financially viable.

Proactive partnerships and policies are vital

Forming partnerships among government, industry and associations will be crucial in scaling innovation and new technologies for decarbonization. Public energy strategies are key, not just in setting out the path for the world and the oil and gas industry to reduce and remove carbon, but also in deciding how fast the world will reach that destination.

The outlook points to policies in Europe, China and North America to create the impetus for scaling hydrogen and other low-carbon fuels globally and to propel recognition that scaling CCS will be essential to meet climate targets. Such policies are influenced by the available energy resources and by societal pressures, which include rising concerns over climate change and calls for cleaner energy.

Some of these policies will affect demand for existing oil and gas products and will drive companies to reduce their carbon footprint—while other policies may completely transform the oil and gas industry. Ultimately, these policies could transform the oil and gas industry into being the decarbonizer of hydrocarbons and the supplier of CCS. The mid-2030s is estimated to be the point at which these policies will begin to act as a catalyst for this transformation.

All regions are balancing decarbonization with the need to ensure an increasing supply of secure and affordable energy. In Europe, net-zero targets have launched the region’s energy transition, and these efforts are now being extended to hard-to-abate sectors. The European Union (EU) is also considering a CO2 border tax that would extend a price on carbon to include imported products. Greater China’s emissions reduction trajectory is also vital to the global energy transition. From 2030, the region will account for more than half of the world’s net emissions reductions.

A patchwork of policy targets and incentives at state and federal levels in North America will drive decarbonization through increases in renewables and electrification, and, additionally, by lowering the carbon intensity of fuels. Policies in the Indian Subcontinent, Southeast Asia and Sub-Saharan Africa regions will largely focus on the transition from coal to natural gas, and on growth in renewables and electrification, thus ensuring the regions’ increased energy independence and their ability to meet growing pressure to curb local pollution.

Urgent action required

Pressure is mounting on the oil and gas sector to address the climate change crisis. However, while the move to greener gas will help to significantly reduce emissions, the forecast doubts that this will have much of an impact on meeting the tough goals set out in the Paris Agreement.

Ultimately, realizing a brighter, greener future for the energy mix requires quicker transformation of the industry. Although leaders, innovators and regulatory bodies are making some headway in putting this energy transition at the top of their agendas, climate change and their ambitions to reduce it are outpacing action. The benefits of the energy transition are clear and achievable, with hydrogen and CCS complementing renewable electricity, advanced battery technology and alternative low-carbon fuels. HP

FIG. 2. World primary energy supply by source to 2050.

 

LITERATURE CITED

  1. DNV GL, “ENERGY TRANSITION OUTLOOK 2020—Oil and Gas Report: A Global and Regional Forecast to 2050,” October 2020, https://eto.dnvgl.com/2020/oil-gas/ 

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