This report is based on the presentations and discussions during the UAE Security Forum 2019, “Reshaping the Future of the Horn of Africa,” held on December 12, 2019 in Abu Dhabi, United Arab Emirates.
The latest edition of the BP Energy Outlook, which explores a number of scenarios in the global energy transition to 2040, sees renewable energy, led by wind and solar, as the fastest growing energy source over the next 20 years, accounting for half the increase in primary energy demand by 2040, with natural gas coming in second with just over a 30 percent share of demand growth. According to BP’s Evolving Transition scenario, one of several models that are contained in the 2019 outlook released on February 14, demand for oil will continue to grow over the next 10 years and plateau thereafter as a result of the global switch to lower carbon fuel sources. While there are no surprises in BP’s analysis, it reinforces the messages that the International Energy Agency and other energy experts have concluded: The energy system is undergoing a radical shift away from fossil fuels in a world where oil is no longer king and coal, one-time engine for industrial growth in the modern world, is flatlining.
There are new kids on the energy block that are making headlines and encroaching slowly on territory once dominated by coal, oil, and gas – hydrogen, carbon capture utilization and storage, and biofuels. These are the fuels and technologies that, given proper policy environments, enhanced technologies, and commerciality, could revolutionize the energy economy in a period of transition to a lower- or zero-carbon future. The latter objective, however, seems elusive without radical changes to existing energy infrastructure and consumer behavior.
Other new technologies may yet emerge that could change the makeup of the energy system as shale oil did when it erupted onto the scene nearly a decade ago. The irrepressible growth in production of light tight oil in the United States disrupted the traditional model in which conventional oil producers, particularly the giant oil powers in the Middle East and Africa, were unchallenged in a market they had dominated for decades. Growing global awareness of the environmental impact of oil and gas production and waning appetite by investors to fund carbon-intensive energy projects have made it more challenging for oil producers and international oil companies to set long-term investment plans, given the very long lead times required for bringing on line conventional oil and gas projects.
Still, BP indicates in its business-as-usual outlook that all fuel sources will be needed to meet future demand growth, most of which will come from the developing world. The biggest challenge is how to meet this demand for more energy and at the same time emit less carbon. The current path, said BP’s Chief Economist Spencer Dale in a pre-launch video, is inconsistent with the goals of the Paris climate summit of December 2015. The central aim of the Paris agreement, which the U.S. signed on to but quit under President Donald J. Trump, was to strive to keep the global temperature rise this century to below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius. What is of concern is that all of the scenarios presented in the BP outlook, including the rapid transition model, fall short of the Paris goals. Improving energy efficiency in countries that use disproportionate amounts of energy is likely to be key to solving the dual challenge of providing “more energy and less carbon” BP suggests in the report.
Population growth, coupled with urbanization and rising incomes, will drive the rise in energy demand, which BP sees growing by one-third over current levels by 2040, led by China, India, and other developing Asian economies. Some 2.5 billion people, roughly one-third of today’s population, will move from low- to middle-income status over the next 20 years, which will drive economic growth in Asia. According to BP, India will overtake China as the fastest energy demand growth market as a result of the slowdown in China’s economy and as the pattern of its economy shifts to less energy-intensive sectors. This is an area of particular interest to Middle Eastern oil producers, which have traditionally been leading suppliers of energy to the Asian market. Increasingly though, investment flows by Gulf oil producers into Asia have shifted to the downstream, where the likes of Saudi Aramco and the United Arab Emirates’ Abu Dhabi National Oil Company have invested heavily in refining and petrochemical ventures both domestically and overseas in Asia to secure markets for their crude oil exports and extract more value from a barrel of oil. Middle Eastern oil producers are also investing more in the production and importation of natural gas to meet growing demand from the power sector, as feedstock for the petrochemical industry and desalination. This excludes Qatar, which remains the largest exporter of liquefied natural gas.
In BP’s Evolving Transition scenario, demand for natural gas will grow across all regions and countries, both within the power sector and industry. The key factor supporting this growth is the expansion of LNG, which makes gas more accessible globally. The same scenario sees wind and solar accounting for two-thirds of the increase in demand for power generation, overtaking coal to become the largest source of power generation by 2040. This strong growth in wind and solar energy is supported by government policies in some parts of the world but, more importantly, by the technological gains that have driven down the cost of renewables. In the oil sector, demand for oil and liquid fuels (usually referred to as natural gas liquids) is driven mainly by the petrochemical and transportation sectors, requiring trillions of dollars in investment regardless of how the energy sector evolves, Dale said in his summary. The increase in liquids production will initially be dominated by U.S. tight oil, but OPEC production will subsequently increase as U.S. tight oil declines.
Threats to oil demand growth might come from policy decisions such as a total ban on single-use plastics after 2040, which is seen as unlikely. However, should that occur, it would reduce demand growth for oil by half over the next 20 years. So, while oil demand would continue to grow over the next two decades it would be at a lower rate. BP estimates that even in the case of rapid growth in the electrification of cars and trucks the reduction in emissions would be quite small. Around one-third of reductions in emissions would come from the power sector, which is key to achieving a lower carbon energy system by 2040.
Beyond 2040, a whole range of technologies will need to play a role if carbon emissions are to fall to net zero by the second half of the century. This will require a decarbonized power sector supported by greater use of hydrogen and bioenergy, particularly in transportation and industry, improvements in energy efficiency, and the use of carbon capture utilization and storage.
However, there are impediments to deployment on a larger scale of technologies like carbon capture utilization and storage, which would be a useful tool to reduce emissions in power generation and industry but is costly and requires investment in new infrastructure. Hydrogen, which is seen as a clean fuel of the future, will need to be produced from renewable energy to be a viable contributor to a lower emissions energy system. Two major Middle Eastern oil producers, Saudi Arabia and the UAE, are investing in hydrogen projects while Kuwait is also considering investing in both carbon capture utilization and storage and hydrogen projects.
The UAE is exploring the potential of hydrogen use in the UAE and is testing a zero-emissions electric vehicle with onboard fuel cell technology. It is also planning to capture carbon dioxide emissions from industrial plants for use in enhanced oil recovery, whereby the carbon dioxide is injected into oil reservoirs to extract more crude oil in older fields. Saudi Arabia has built world-scale hydrogen production and purification units in the Red Sea port city of Yanbu and recently signed an agreement with the United States’ Air Products to jointly build the first hydrogen fuel cell vehicle fueling station in the kingdom. The joint venture, which includes a Japanese contribution, will run a pilot fleet of fuel cell vehicles to run on compressed hydrogen to be supplied at the new fueling station. Aramco will collect data from the pilot project to assess future applications for this emerging transportation technology, it said in a statement on January 25. Saudi Arabia, the world’s largest crude oil exporter, which has embarked on an economic reform program to lessen its reliance on oil exports, is looking beyond oil by investing in new technologies and specialty chemicals. The BP outlook reinforces the wisdom of this strategy.
While it is clear that the transition to a lower carbon energy future is underway and is expected to accelerate, oil and gas will remain key components of the energy mix for decades to come, even if, as Dale says, the deployment of renewables is “off the charts.” Cynics may argue that it is in BP’s interest for fossil fuels – minus coal – to remain relevant to the global economy, but its analysis is one of many that have come to the same conclusion. The report is a counterargument to proponents of disinvestment in oil and should signal to the Middle Eastern oil producers that there is still a seat at the table for them even if their share of the pie is shrinking.
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