Global Energy Outlook: OPEC+, Energy Transition Are Key

The best-case outlook for the future of world energy looks highly positive for the oil and gas industry.

In that outlook, energy demand returns to pre-pandemic levels and production increases as the world’s economies recover, giving the industry an opportunity for a strong rebound and years of attractive growth.

But other scenarios could put roadblocks in the way of exploration and production, some of them potentially coming from the energy industry itself.

OPEC+ definitely holds one key to the future, and the global energy transition appears to have picked up a considerable amount of momentum over the past year and a half.

“There’s been a lot of water under the bridge since 2019. A lot of things changed during the pandemic,” said Jim Krane, fellow for energy studies in the Baker Institute for Public Policy at Rice University.

“Here in Houston, it seems like there’s more acceptance of the need to take climate action,” Krane noted.

Many large companies, including oil majors, have put energy transition programs into operation. A majority of those are medium- to long-term, with target dates ranging from 2030 to 2050.

In April, Shell published its Energy Transition Strategy, a plan that will go to its shareholders for an advisory vote in May. The strategy commits Shell to reducing carbon dioxide emissions from 1.7 gigatonnes per year to net zero by 2050.

Earlier this year, General Motors Corp. announced “an aspiration to eliminate tailpipe emissions from new light-duty vehicles by 2035.”

“To address emissions from its own operations, GM will source 100-percent renewable energy to power its U.S. sites by 2030 and global sites by 2035, which represents a five-year acceleration of the company’s previously announced global goal,” the company stated in a release.

For national and local governments, “resolve around cleaning up energy production strengthened during the pandemic. It seems that governments around the world have gotten a taste for dramatic and expensive policy maneuvers, and it seems like their citizens are okay with that,” Krane observed.

“A lot of these (new government policies) include a green aspect. There just seems to be pressure coming from all over. The Chinese are at least starting to push coal out of their energy mix,” he said.

Image Caption

Prelude, Shell’s first floating liquified natural gas facility is expected to produce 3.6 million tonnes per annum of LNG, once operational. Shell’s new energy transition strategy includes a plan to shift the company toward gas production by increasing its natural gas share of total hydrocarbon output to 55 percent, with up to a 2-percent annual decline in its crude oil production.

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The best-case outlook for the future of world energy looks highly positive for the oil and gas industry.

In that outlook, energy demand returns to pre-pandemic levels and production increases as the world’s economies recover, giving the industry an opportunity for a strong rebound and years of attractive growth.

But other scenarios could put roadblocks in the way of exploration and production, some of them potentially coming from the energy industry itself.

OPEC+ definitely holds one key to the future, and the global energy transition appears to have picked up a considerable amount of momentum over the past year and a half.

“There’s been a lot of water under the bridge since 2019. A lot of things changed during the pandemic,” said Jim Krane, fellow for energy studies in the Baker Institute for Public Policy at Rice University.

“Here in Houston, it seems like there’s more acceptance of the need to take climate action,” Krane noted.

Many large companies, including oil majors, have put energy transition programs into operation. A majority of those are medium- to long-term, with target dates ranging from 2030 to 2050.

In April, Shell published its Energy Transition Strategy, a plan that will go to its shareholders for an advisory vote in May. The strategy commits Shell to reducing carbon dioxide emissions from 1.7 gigatonnes per year to net zero by 2050.

Earlier this year, General Motors Corp. announced “an aspiration to eliminate tailpipe emissions from new light-duty vehicles by 2035.”

“To address emissions from its own operations, GM will source 100-percent renewable energy to power its U.S. sites by 2030 and global sites by 2035, which represents a five-year acceleration of the company’s previously announced global goal,” the company stated in a release.

For national and local governments, “resolve around cleaning up energy production strengthened during the pandemic. It seems that governments around the world have gotten a taste for dramatic and expensive policy maneuvers, and it seems like their citizens are okay with that,” Krane observed.

“A lot of these (new government policies) include a green aspect. There just seems to be pressure coming from all over. The Chinese are at least starting to push coal out of their energy mix,” he said.

Industry bench-marker S&P Global defines the energy transition as the “energy sector’s shift from fossil-based systems of energy production and consumption – including oil, natural gas and coal – to renewable energy sources like wind and solar, as well as lithium-ion batteries.”

In general, the transition is expected to produce a smaller percentage share for coal and crude oil in the global energy mix, and a substantially larger share for renewables. Expectations for other energy sources like natural gas and nuclear aren’t as well defined.

Shell’s new transition strategy includes a plan to shift the company toward gas production by increasing its natural gas share of total hydrocarbon output to 55 percent, with up to a 2-percent annual decline in its crude oil production.

Climate change efforts and the energy transition have “gotten well beyond policy-making. It’s become embedded in commercial activity and social mindsets,” Krane noted.

“The energy system is so enormous, even if government policy-making is all on board, it’s a huge life. But it doesn’t seem like a mountain anymore,” he said.

Shifting Geopolitical Landscape

“How much that affects energy demand in the short term is – not much,” he added.

In the near term, OPEC+ most likely will continue to limit production and prop up world oil prices as needed, Krane said.

“They’ll probably move back and forth between these bids for market share, then backing off to let prices rise,” he predicted.

In the longer term, how extensive climate change efforts become and how Saudi Arabia and OPEC+ respond to that could be hugely consequential.

Krane is author of the book “Energy Kingdoms: Oil and Political Survival in the Persian Gulf.” His research themes and special interests include U.S. relations with Middle East oil and gas exporters and global energy geopolitics.

With OPEC+, “I’m always stunned that so many countries can get together and agree on self-sacrifice. There aren’t that many coalitions of countries that can get together and take that kind of collective action,” he said.

An imminent reduction in future oil demand could induce OPEC+ to speed up monetization of its in-ground crude assets. What if Saudi Arabia eventually decides that selling its oil at a much lower per-barrel price is better than never being able to sell those barrels at all?

“If Saudi Arabia decides to monetize and oil prices go down, that makes things difficult for the smaller producing companies,” Krane noted.

He sees the possibility of a more virtuous approach and a less virtuous approach for OPEC+ in the future.

“Some of the OPEC players have held a big share of the market and that hasn’t changed much. A lot depends on their response to the energy transition,” Krane observed.

It would be a major change “if OPEC added climate to its rationale for action, instead of handing out quotas based on countries’ productive capacity. They could do it around other criteria,” he noted.

Krane said “there’s also a dark way, a negative effect” and “a race to the bottom” possible for Saudi Arabia and OPEC+. That could include extensive market manipulation, attempts at coercion, placing sanctions on rival producers and other “nefarious behavior.”

“The geopolitics of energy as we go through this transition is changing. It’s changing a lot,” Krane said. “Right now, everyone is talking about Iran coming back (as an oil producer and exporter) and what that means. And Iran is already coming back.”

Also, “the rise of China is a pretty big challenge for the United States,” Krane said. He noted that China’s autocratic approach to government appeals to many other countries.

“There is this whole outbreak of nationalism in the world. Democracy has been in retreat for a few years. A lot of that is happening through grassroots support of illiberal ideas, and a lot of that seems to be percolating up through the Internet,” he said.

Advantages for Renewables

At present, and for the foreseeable future, the outlook for global energy security is still positive, according to Krane.

“Energy markets are still really open and free. Fossil fuels are 5 to 10 percent of all global trade by value, depending on the price,” he noted. “It’s pretty hard to find fault with the way fossil fuels are traded right now.”

“As demand for oil levels off, oil availability will get more secure. Climate change has been great for oil security. It’s an irony,” he said.

He pointed out several reasons for the world’s current oil and gas supply security:

  • Demand growth isn’t challenging oil companies right now.
  • Lots of governments are sitting on large oil reserves.
  • Oil and gas production has become more diversified.

Krane expressed more concern about the risks to the energy industry and the world from interruptions to exports of vital raw materials and capital goods. For example, he said, what if the Democratic Republic of Congo stops exporting cobalt, used in lithium-ion batteries, heatresistant and hard alloys, and many other applications?

“If the price of materials and minerals suddenly spikes, that’s going to make the price of equipment go up,” he noted.

Energy sources like solar, wind and hydroelectric are primarily local sources, and Krane said that gives renewables the advantage for the global energy system of the future.

“In the system we have now, you have to bring in combustible fuels all the time. If that supply line is broken it’s a disaster. With renewables, that doesn’t happen,” he noted.

“You don‘t have to have a constant supply of energy (inputs) to keep things going. If the intermittency problem goes away, you’re going to see a huge advantage” for renewables, he said.

Wild Cards

The global coronavirus pandemic hasn’t ended, and exactly how post-pandemic energy demand will evolve isn’t yet clear, Krane said. Will there be fewer business travelers and less air travel? A reluctance to use mass transit and increased private vehicle driving?

At the moment, “nobody knows how all that will turn out,” he said.

Shipping and other global transportation re-emerged as an energy issue during the past year and a half. In the United States, the Biden administration revoked the permit for the Keystone XL Pipeline’s Phase 4 extension by executive order in January. In March, a container ship mishap interrupted oil tanker and other maritime transport through the Suez Canal.

It reminded the oil and gas industry and the world that getting energy from Point A to Point B can’t always be taken for granted. Krane cited the interruption of electricity and natural gas deliveries in Texas during a severe February cold snap.

“Getting gas from one side of the state to the other turned out to be impossible in cold weather,” he said. “Who knew?”

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