Path to net zero to require various strategies as oil, gas remain in energy mix: S&P Global

While 2023 was seen as a banner year for clean energy capacity in global power generation, the path forward to net zero will be fraught with complications and require different strategies as oil and gas remain a substantial part of the energy mix, according to S&P Global Commodity Insights analysts.

"When we're thinking about the transition and how to characterize it, the word we've been using quite a lot this year is multidimensional energy transition," said Roger Diwan, S&P Global's head of global energy finance, speaking at the SPGI Excellence in Energy Conference held Dec. 6. The description is apt because the energy transition is "moving in different places in different directions at different speeds, and it's very difficult to characterize it as one movement in any direction," he added.

While the energy transition focus remains firmly on producing clean electricity primarily from wind and solar power, this has created a split screen view, particularly for oil and gas producers and refiners as they look to integrate clean energy into their markets and operations. "What we're looking at here is a really different kind of energy sector proposal, it's very focused in everything we can electrify," said Peter Gardett, S&P Global’s executive director of research.

Oil demand growth to peak in 2030

Decarbonization is key for fossil fuel producers and refiners to meet emissions goals, especially since the fossil fuel sector has proved more durable than once anticipated.

Currently, oil, natural gas and coal meet 80% of total energy demand. Stripping out coal, oil and natural gas meets 54% of total energy demand, according to S&P Global forecasts.

"While, yes, it loses market share over the next 30 years out to 2050, it only drops to…48%," said Daniel Pratt, vice president of upstream solutions at S&P Global.

"You've got to remember that demand is going to continue to grow over the next 30 years. So even though it's losing market share to the renewable sector, you might still need more oil and gas in 2050 than we're actually producing today because of the overall demand growth," he said.

Coal would take the "lion’s share" of the demand loss, followed by natural gas, he said.

Many countries "are looking at gas as that transition fuel for electrification, decarbonization because it's affordable, is sustainable, reliable," he said.

However, oil demand is expected to continue to rise and peak around 2030, which is "just over the horizon", said Kurt Barrow, head of oil markets at S&P Global.

"We’ve got the split screen analogy. We’ve got demand growth of 1.5 million b/d. Next year we will 2 million b/d," he said.

"And if you are going to talk about the energy transition in oil, you are really talking about an energy transition of the four big transportation sectors, that make up the majority of oil demand – such as cars, trucks, ships and planes," he added.

Electron generation vs molecule management

Despite driving more vehicles on the road, there is less carbon being used as new, and more efficient cars, trucks and ships are being produced, according to S&P Global.

The rise of electric vehicles, particularly in Europe, has played a role in lowering carbon, with 1 in 4 cars in Europe and 1 in 3 cars in China being sold currently, due in part to government policies.

Geography also plays a role in an oil company’s carbon strategy and capital investment policy. European oil and gas majors spend more on low carbon initiatives than US-based majors like ExxonMobil and Chevron.

Currently, Equinor, BP, Shell, Total and ENI spend about 15% to 20% of total company capital expenditures on low-carbon initiatives, according to the panelists.

ExxonMobil and Chevron, both of which recently have made major acquisitions in Permian Basin oil and gas production, spend about 5%.

This is expected to rise to about 15% to 20% by 2027, while their European peers expect to increase spending to "20%, 30% even 40%," said Pratt, adding that, in contrast with their US peers, the European companies are making substantial amount of investment in renewable "electron generation."

Conversely, ExxonMobil and Chevron are more focused on investing in "molecule management", which tends to focus more on decarbonization of liquid fuels.

Pratt said the diverging energy transition investment strategies comes down the stakeholders. "If you look at Europe, they very much see energy transition as their path to energy security," said Pratt.

"It's not like that in other parts of the world. In the US, we've achieved energy security through hydrocarbons," he added.

"So the drivers for the European [energy majors] are much more toward renewable transition," he said.