September 2020

The Last Barrel

Energy transition taking shape
Craig Fleming / World Oil

Just nine years ago, Exxon Mobil was the most valuable corporation in the world. In August, Dow Jones removed the stock from its industrial index that is closely aligned to the U.S. economy. While any change to the Dow is notable, the ejection of XoM marks a particularly stunning fall from grace and suggests the oil business is no longer as important to the U.S. economy. Worth $525 billion in 2007 and more than $450 billion as recently 2014, the stock had fallen in four of six years before 2020. It has lost another 40% since January and is worth about $175 billion today.

The coronavirus has undoubtedly accelerated the change process. Travel restrictions and work-from-home orders have devastated demand for crude, and most analysts don’t see a return to previous consumption levels until a vaccine is widely available. However, this situation has provided a unique opportunity to speed the transition to renewables.

Covid-19 alters global energy outlook. In September, DNV GL published its Energy Transition Forecast to 2050. The extensive report provides a comprehensive analysis of global energy demand and supply, in addition to the competition expected between various energy sources. According to DNV GL, the behavioral and economic ramifications of Covid-19 will permanently reduce global energy demand. Compared to the pre-pandemic forecast, energy demand will be lowered 6-8% each year to the middle of the century due to a reduction in long distance travel and the increase in home office. DNV GL believes these trends will have a major impact on energy demand from transportation and commercial buildings for the foreseeable future.

Carbon dioxide emissions are set to fall 8% this year, making 2019 the year of peak CO2 emissions. “However, we will still blow past the carbon budget for a 1.5° future in 2028. And if we are to meet this target, we must repeat the 2020 emissions saving every year until the middle of the century,” said DNV GL CEO Remi Eriksen. Covid-19 has changed the global energy outlook, yet the global climate crisis remains as urgent as before the pandemic. Early optimism about decreased air pollution has been replaced by the reality that it’s not because of a more decarbonized energy mix, but due to short-term consumption changes unique to the pandemic. We can transition faster with the technology at hand, but we still require national policy incentives to meet the Paris accord.

Natural gas, a key element. With gas set to become the world’s largest energy source in 2026, it will play a critical role in our energy future. Although the technology exists to create a Paris-compliant future, DNV GL forecasts only 13% of the gas will be decarbonized by the middle of the century. Hydrogen has been given a boost by policy developments in the European Union, but it will still only contribute 6% of energy demand by 2050. Decarbonized gas, including hydrogen, is vitally important for reducing emissions from hard-to-abate industries, such as building heating, and industries with high heating demand, and requires a boost from policy to achieve a meaningful impact.

Evolving energy mix. With the current pace of energy transition, DNV GL projects that renewables and fossil fuels will have an equal share of the energy mix by 2050, compared to a 20-80% split today. The share of electricity in the final energy mix is expected to double by mid-century, with solar and wind contributing 31% each. DNV GL expects floating offshore wind to grow into a major business by 2050, with 250 GW installed. Despite these significant shifts in the energy system, DNV GL says the transition will be affordable. As a proportion of GDP, the world’s population will be spending less on energy in 2050 (1.6% of global GDP), compared to 2018 (3% of GDP). (Editor’s note: energy will cost 47% less?)

Electric vehicles. The rise of electric vehicles is a good example of how policymakers can transform an industry. DNV GL forecasts that by 2032, 50% of new car sales will be electric. This will cause a steep reduction in oil demand from road transport, which DNV GL forecasts will decrease by 56% from 2018 to 2050. Applying these same policy levers to help decarbonize natural gas (carbon capture) would also help reduce emissions.

Renewable natural gas. In 2014, Massachusetts-based Bar-Way Farm contracted Vanguard Renewables to install a biodigester on its property. The technology uses specialized bacteria to convert cow manure into “renewable natural gas” (RNG). Once it’s purified, RNG is identical to fossil-based natural gas. Bar-Way Farm owner Peter Melnik won’t disclose how much he’s profited from the arrangement, but did say it’s made his business “that much more viable.”

Because bovine droppings are stored in vast open lagoons, agricultural waste is the single biggest contributor to the country’s total methane emissions from human activity. But by making RNG from cow manure, gas companies say the effect is a net climate win. Virginia-based utility, Dominion Energy, claims that supplying only 4% of its customers with RNG would be enough to offset the emissions from its entire gas system. Nationwide, RNG could displace 13% of total U.S. gas demand by 2040 (American Gas Foundation). But Jigar Shah, co-founder of Generate Capital, a large U.S. RNG owner, says that the cap is closer to 3%, but that still puts RNG on par with where solar is today.

Here to stay. Despite gains in solar, wind and battery technologies, suggestions that the oil business will fade into obscurity, like coal, is not supported by the facts. The main reason the U.S. was able to move away from coal-fired electric generation facilities is a cheap, abundant supply of natural gas (courtesy of the shale boom). The question is how much land and ocean are we willing to concede to unsightly wind farms and solar panel facilities? And the biggie—what’s going to replace fossil-based natural gas, cow poop?

About the Authors
Craig Fleming
World Oil
Craig Fleming
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