Uncertainty clouds path to recovery for oil and gas sector
In the wake of the COVID-19 pandemic, the global energy sector has undergone an intense period of flux which is yet to reveal if a traditional path to recovery or permanent change will be the outcome.
The International Energy Agency’s recently released World Energy Outlook 2020 evaluated potential scenarios over the next 10 years, taking into account a prolonged pandemic, a surge in clean energy policies and investment, and the rising number of countries and companies targeting net-zero emissions.
Global energy demand dropped by five per cent in 2020, energy-related CO2 emissions by seven per cent, and energy investment by 18 per cent, according to the report. Demand for natural gas was only marginally affected, falling three per cent whereas oil demand was expected to decrease by eight per cent and coal use by seven per cent.
Prior to the crisis, energy demand was projected to grow by 12 per cent between 2019 and 2030. Growth over this period is now nine per cent if the pandemic gets under control in 2021, and only four per cent if recovery is delayed. With demand in advanced economies on a declining trend, all of the increase comes from emerging markets and developing economies, led by India.
Credit Suisse Head of Energy Research Australia Saul Kavonic said 2020 had induced a record downturn, but it was the historical view that the bigger the downturn, the greater potential for a future upswing.
“The more industry and financiers believe COVID will have a permanent negative demand impact, the more their actions will cause a bigger upswing in the market in time,” he said. “It’s in Australia’s interest to see foreign major oil companies resign themselves to oil’s decline, so Australia can capture market share from them.”
However, Mr Kavonic highlighted that the degree of stock build in 2020 and OPEC uncertainty could delay a future upswing.
“If COVID sees demand suppressed through to the onset of a structural decline event, possibly caused by the rise of EVs and carbon policy from mid-2020s, the ‘traditional recovery cycle’ could be redefined for the worse,” Mr Kavonic said. “If we are to take a more sceptical view of the peak oil demand claims, then there are plenty of up and down cycles to come with a potential big upswing in the years ahead.”
IEA Executive Director Dr Fatih Birol supports the notion that a wholesale decline in oil demand was not imminent.
“Without a large shift in government policies, there is no sign of a rapid decline,” Dr Birol said. “Based on today’s policy settings, a global economic rebound would soon push oil demand back to pre-crisis levels.”
The report paints a better picture for natural gas than other fossil fuels, but different policy contexts produce strong variations.
In the early recovery scenario, demand for global natural gas is expected to spike by 30 per cent by 2040, primarily in South and East Asia. Policy priorities in these regions – notably a push to improve air quality and to support growth in manufacturing – combine with lower prices to underpin the expansion of gas infrastructure.
The report also forecasts that demand in advanced economies will slightly decline by 2040.
An uncertain economic recovery also raises questions about the future prospects of the record amount of new liquefied natural gas export facilities approved in 2019.
Mr Kavonic said Australia’s oil and gas fate was intrinsically linked with LNG demand.
“Despite the COVID downturn, global LNG demand appears on track to return to year-on-year growth by year-end, and see some of the largest compound annual growth rates over the next decade versus other fossil fuels”, he said. “The main concern is not demand growth, but rather the large pool of potential global supply competing for that growth that could put downward pressure on margins for Australia’s pre-financial investment decision projects.”
As a result, Mr Kavonic still expects Qatar to overtake Australia in LNG exports later this decade, but he believes that Australia will retain number two spot.
“Australian operations have continued relatively well despite COVID impacts, unlike many global projects that suffered material logistics challenges that delayed progress,” Mr Kavonic said. “Our oil and gas sector has withstood the downturn quite well, despite some large project FID deferrals. Most company balance sheets have withstood the oil price collapse.”
He said the delay in some large gas offshore gas projects should put upward pressure on WA domestic gas prices, but the WA Government ban on pipeline gas going to export partially offsets this.
“Overall, the COVID impacts on local and global supply should see more market opportunities for onshore Perth Basin gas projects.”