[NGW Magazine] Editorial: Forecasts or scenarios: what will it be?
This article is featured in NGW Magazine Volume 2, Issue 17
By William Powell
Companies need impartial or independent views of the future in order to justify their decisions to their boards and the market. But like weather forecasts, the further ahead these outlooks go, the more dubious their value. Many – particularly where commodity prices are the object – make the mistake of looking back a short period, and expecting more of the same, forever.
And now is a particularly risky time with energy supply and demand, since the forking paths are now taking directions that would have been unthinkable less than a decade ago, and many of the technologies that will have a big impact are still in their infancy.
Driverless cars, drones, blockchain and artificial intelligence have the potential to replace many physical and intellectual jobs. Will this collectively save energy or involve the greater use of it, as humans are then free to do other things, also requiring energy? With computers able to scrape data from websites and use it to produce readable prose, what will the commuters now doing that work find to do instead? Maybe, as is the case with prospecting for oil and gas, this will simply slash the decision-making time.
These changes are not sprung upon us, and we have time to prepare for them, but that time span is going to shrink as technology advances at an ever faster pace. And in the meantime, we have collectively set ourselves stringent goals for cutting the global emissions of carbon dioxide, and that implies not only the need for accurate measurement today, but the need for advance warning of likely failure, which is one of the uses of these forecasting tools, as opposed to scenarios.
One reason for that failure would be the early exhaustion of the world’s carbon budget, and in that regard, the continued delay in investment in carbon capture and storage (CCS) shows a failure to take the problem seriously. The low price of carbon, traded in the European emissions trading scheme, would be a joke if it were not so serious. It needs to be ten times higher than it is, to make it worthwhile storing carbon rather than releasing it with impunity.
In all of Shell’s scenarios, CCS is essential if the world is to reach a net zero carbon future; but it does not foresee this in all of them. CCS is needed because electrons only take you so far: you also need molecules, for heavy goods transport and aviation, for example. Of course that too might change.
By contrast, the international registrar and classification society DNV GL published an unabashed forecast, its inaugural Energy Transition Outlook 2017, on September 4. It predicts that world energy demand will peak before 2030 as energy efficiency rises and population growth slows, among other things; and by 2050, half the world’s energy will come from renewables. But gas will be the biggest single primary energy source, its decline only following that of coal first, then oil.
But DNV GL was also not hopeful about the prospects for CCS: it assumed that over the next two decades around 20 pilot plants will be supported worldwide; and even by 2050, the end of the forecast period, when the carbon price reaches $30-60/metric ton, the carbon captured will only account for about 2% of emissions.
However, it told NGW that the results are very sensitive to the price: if it were 50% higher than in its central case, CCS uptake would shoot up tenfold. So, like Shell, which plants CCS firmly in the ‘Mountains’ scenario where institutions and governments take the lead, rather than in the free market ethos of ‘Oceans’, it thinks that CCS will only scale with significant policy support.
Companies that stand to lose much from the early exhaustion of the budget are investors in oil and gas production. According to the consultancy KPMG, some $2.3 trillion of surplus capital has already been invested in high cost production assets, which will have to stay in the ground if the UN target aspirations of temperature increases are to be met. Two thirds of the money is in the private sector, which explains shareholders’ clamour for full disclosure of climate change risk, leading to legal action against ExxonMobil for example. ExxonMobil, unlike BP and Shell, did not publish its own energy outlook for this year.
Assets with the best chance of making it to market are low-cost gas, according to Shell, as it announced the launch of two publications which carefully avoid predictions: World Energy Model and Global Supply Model. Gas is the most resilient of the fossil fuels, especially if the world moves towards high density cities where it fits well with renewables.
Moving into the shorter term, another forecasting agency, the French consultancy Cedigaz contradicts Shell, in its view of the LNG market, which Cedigaz sees being oversupplied – not a straightforward term to define except in terms of the discount to the Brent crude price.
Rebalancing of the market is not expected before 2023, or even 2024 if probable developments including Fortuna FLNG offshore Equatorial Guinea and potential upside from currently idle capacity such as Egypt and Yemen are taken into account.
Major LNG exporters such as Shell have said that global LNG supply glut could end by 2022, but Cedigaz’s latest forecast appears to bury such optimism on the part of exporters. Also Italy’s national energy strategy (SEN) this June forecast that global LNG prices would decline until 2024-25, implying the low prices would have lasted a decade.