The Energy Landscape set to change – How it affects destiny of oil & coal in 2040?

The global energy landscape is expected to change – led by natural gas and renewables, undermining the role of coal in power generation. While structural changes in auto-industry will have devastating effect on the global oil demand during the next few decades! How will it all affect the destiny of oil and coal industry?

Fossil fuels have been the dominant source of energy for global economic prosperity for over many centuries. Rapid industrialization was exclusively led by coal in the 17^th and 18^th century. In 2018, fossil fuels overwhelmingly account for over 84.7 percent in global total primary energy consumption (TPEC)—but what role will they play in 2040 and beyond? There’s an ongoing debate among various agencies, researchers and academia whether the role of fossil fuels will significantly diminish. If yes by how much?  

The dominance of fossil fuel era

Coal that was responsible for industrialization and remains important source for global economic prosperity for over 250 years. Yet today, it is still a major source of primary energy particularly in power generation. Oil was discovered in the US in 1859, but its demand did not grow until the turn of the century when Henry Ford invented the internal combustion engine (ICE). Thereafter the oil demand continues to penetrate and become an important source of primary energy. It ruled the world over a century along with coal. The expectation was that natural gas will become the next important source and expected to rule the current century, partly because of environmental considerations – mostly displacing coal in power generation. This hadn’t happened as yet. The reasons being partly due to major gas resources are located far from the major consuming countries. Moving gas across continent is expensive and difficult. Even laying pipelines across national boundaries pose constraints due to international politics and regional disputes.

Technological developments way back in 1960s allowed the industry to cool natural gas to -161 C, reducing its size by 600 times. In this way bulk of natural gas was transported through specialized LNG carriers – removing the bottleneck of national boundaries issues. Lately, further technological advancements in horizontal drilling and fracking enabled the industry to tap the unconventional both shale oil and shale gas. The USA has now become a major exporter of LNG and competing with Qatar and Australia.

In 2018 oil (33.6%) and coal (27.2%) remained as major sources of primary energy followed by natural gas (23.8%), nuclear (4.4%) and renewable (10.85% including hydro). But this equation is likely to change within the next 2-3 decades or so. Natural gas industry is expected to flourished and gain top spot within the next two decades however, renewable energy will be competing to gain the first spot as well.

Oil industry is currently passing through self-inflicted turmoil pushing oil prices to be below $20/bbl although it has recovered to around thirty. If the lower oil prices prevails for an extended period of time, would affect the future investments. To sustain and enhance current level of production, industry requires trillions of dollars investment in all three streams – upstream, mid-stream and downstream. Moreover, another challenge for oil industry that cannot be ignored is on-going structural changes in auto-industry. Internal combustion engine (ICE) that once allowed auto-industry to flourish and help oil industry grow enormously. The same auto-industry is now posing challenges to oil industry by shifting from ICEs to electric vehicles (EVs). The penetration of electric vehicles, fuel cells and other LPG/CNG based vehicles surely displaced a sizeable quantity of oil. For simplicity we lumped all these types of vehicles and called them EVs. The rational of this theory is that oil demand soon peaked and then declined. There is absolutely no argument about the peak oil demand. It has to come; the only on-going debate is how soon and when?  Generally, most studies are of the view between 2030-2040. My assessment is that it will happen around 2025. In 2015, Andreas and I forecasted penetration of EVs (autonomous vehicles, less desire to buy cars etc.) and the possible displacement of oil demand. Reference case predicted that EVs will displace around 14 mmbd by 2040 while high case is expected to displace over 38 mmbd. My take is that it will displace somewhere 14 -25 mmbd by 2040, depending upon the speed of EV penetration.

Rational for Renewable taking over coal

Coal is still the second most important source of primary energy accounting for 27.2% end 2018. Thirty-eight percent of global electricity has been associated with coal as compared to 23% by natural gas. Compared to the global share of 38%, China and India account for 66% and 74% of electricity based on coal. While Europe and USA  22% and 27% in 2018 (US down to 23% in 2019). Due to greater share of coal in power generation, China is among the 1^st and India is the 4^th largest carbon emitter.

Penetration of renewable and natural gas is expected to undermine the role of coal, which is expected to reduce due to environmental considerations (Paris climate accord) and public awareness. One may argue why now? Well the realistic answer is that natural gas resources are not uniformly distributed – rather biased in favor of few countries. For example, 38.4% (32% in CIS)[i] gas and 48% of oil reserves are associated with Middle East. While major gas consuming countries are located in North America, Europe and Asia. In some countries there is not ample of environment friendly indigenous resources like natural gas that could challenge and displace polluted coal nor there was public pressure on governments.

That is, availability of resources at a competitive price is the major constraint. As such generally, countries prefer to utilize cheaper indigenous resources even though those causes pollution. For example, in the past major chunk of electricity in the United States was associated with coal-based power plants because of enormous coal reserves. In contrast, more environment friendly natural gas reserves were not enough and therefore, US companies invested globally in LNG business to meet US future domestic gas requirement. The shortage of gas kept Henry Hub prices on the higher side and it was not economically advantageous to substitute with cheaper indigenous coal. However, technological innovations - horizontal drilling and fracking techniques helped oil companies to exploit unconventional resources – trap in the form of shale oil and shale gas. US shale gas boom’s resulted in decline in Henry Hub prices substantially and helped in replacing polluted coal with relatively clean natural gas in power generation. The share of coal in the US power generation dropped from 52.8% in 1997 to 23% in 2019, most of it was captured by natural gas. Natural gas share increased to 38.5% in power generation. Therefore, availability and competitive price of a resource are necessary for substitution.

As more and more natural gas is available in the form of pipe and LNG, significant cost reduction in renewable energy due to technological innovations and environmental reasons both natural gas and renewable energy can penetrate energy market. Both China and India have greater opportunity to improve and reduce share of coal-based power generation by substituting for natural gas and renewable. This strategy will help them to alleviate coal emission and achieve Paris climate targets.  

Efforts in achieving Paris climate goals

Since 2010 the growth in renewable has been phenomenal. For example, during 2010/2019 total renewable capacity increased by 106%, hydropower 27%, wind 244% and solar recorded at 12-fold increase. Figures:1-4 depict the historical trends of regional growth in renewable sources of energy. Asia is most polluted region due to home of 60% of global population and holding 27.5% of coal reserves. In contrast to coal reserves, the regions share in global production and consumption is over 65%. Most of which is being used in power generation. Incidentally, both China and India generate 66% and 74% of electricity respectively from coal-based power plants.

Due to public pressure, agreeing on Paris climate targets, most countries are seriously taking measures in cutting down carbon emission. In addition, the substantial decline in cost of renewables help the countries to take advantage in mitigating the role of coal in power generation. At the end of 2019, both China and India are the major producers of hydro, wind and solar energy in the world. Surely, if such efforts continues, they would be able to reduce the contribution of coal in their energy mix. By the end of 2019, Asia is the leading renewable capacity holder – more than 44% of total renewable capacity, 42% hydropower, 56% wind and 42% solar capacity is associated with Asia. Europe is the second important region followed by North America. Up until 2014 and 2015, Europe was the major producer of both wind and solar energies, however, since 2014 (wind) and 2015 (solar) Asia surpassed the European dominance and became the largest producer of hydro, wind and solar energy Figures-1 to 4)[ii].

Figure-1: Regional Total Renewable Energy – GW (Source: IRENA – 2020 report).

Figure-2: Regional hydro power energy – GW (Source: IRENA – 2020 report)

Figure-3: Regional wind energy – GW (Source: IRENA – 2020 report)

Figure-4: Regional solar energy – GW (Source: IRENA – 2020 report)

Figure-5 depicts comprehensive summary of renewable for top ten countries for each of renewable source of energies. Eighty-three percent of global wind and solar, 70% of total renewable and 68% of hydro associated with given top ten countries. China, USA, France, and India are amongst the top ten in all forms of energy. Common countries associated with Europe – Germany, Italy and Spain. Japan is among the top ten with the exception of wind.

Figure-5: Top ten countries % share in respective renewable sources – IRENA 2019.

Rational of scenarios rather than forecasting

Since future is always difficult to predict especially with many known and unknown factors. Generally, most of them difficult to predict due to element of uncertainty. Therefore, international agencies, such as International Energy Agency (IEA), BP, and others generally prefer to develop a number of scenarios based on different stories of assumptions. For example, regional GDP and population growth, pace of technological advancements in energy & and other sectors, structural changes in auto-industry, the impact of strict environmental regulations. Such as, Paris accord on climate change and many other factors including public outcry as well as perceptions of individuals. The Paris accord and public awareness forces, most polluted countries to devise policies and invest in renewable to cut pollution.  

Primary Energy Mix - Outlook

The role of fossil fuels will decline in the next 22 years from 84.7% in 2018 to average of 70.7% in 2040, but remain the dominant source of primary energy (Table-1). Though it varies from agency to agency and for different scenarios. From high of 76% Exxon to low of 56% BP-RT (rapid-transition) while EIA 68.2%. IEA energy mix under different policy scenario vary from low of 60% sustainable development (SD) and high of 80.8% current policies (CP) scenarios in 2040.

Oil share in global energy mix declined from 33.6% in 2018 to average of all scenarios to 26.8% in 2040. However, Exxon scenario assumes role of oil remains the dominant source of primary energy by 2040 and only marginally declining to 30%[i]. While in BP-RT and IEA-SD scenario, it will decline to 23%. My assessment is that it could shrink from 33.6% in 2018 to around 26% in 2040 or even less. Oil demand is expected to decline to about 75 mmbd in 2040 compared to 99.8 mmbd in 2018. The major decline is associated with road transport sector due to penetration of EVs, increasing ICEs efficiency and preference of using autonomous, uber rather than owning. As such, global oil demand declines somewhere between 75 – 86 mmbd by 2040, depending on speed of EVs penetrations.

The demand for natural gas is expected to increase in petrochemical, power, industries, transport and residential sectors due to its availability and environmental advantage. Moreover, natural gas has the ability to address greenhouse gas emissions and to displace coal in power generation. Gas is also utilized as a backup for intermittent renewables making it an essential resource for more wind and solar development. There have been major gas discoveries in developing countries in Africa and North Africa. Soon it will play an important contribution in domestic sectors of these regions. The role of natural gas expected to increase as more gas is available both in the form of pipe gas and LNG. Surprisingly, most of the underlying scenarios assumes that it will only marginally increase to 26%. According to IEA monthly electricity statistics, natural gas continued to be the leading source of electricity in the OECD, overtaking coal for the first time in 2018. In 2019, electricity produced from natural gas increased by 4.8% and was responsible for 29.0% of the total electricity production. My assessment is that its share will increase to 28% in 2040, as more gas supplies are available in the form of pipe and LNG and more gas discoveries are made in other parts of the world.  

Coal after governing the world over many centuries remains second most important source of primary energy - 27.2% in 2018. Environmental considerations, Paris climate accord, availability of substitutes (natural gas & renewable) its role is expected to plunge considerably by 2040. Its share in all given scenarios declined from 27.2% in 2018 to 20% in 2040. Though there is variation, low of 7% (BP-RT) and high of 25.4% under IEA-CP scenario. Though average of all scenarios is 18.3% in 2040, it will help in meeting agreed Paris climate targets. The major reduction is expected in power generation particularly in China and India – facilitating in mitigating coal-based emission. In 2019, coal-fired generation continued decreasing in most of OECD countries, with a total decrease of 361.4 TWh or 13.4% reducing its share to 22.1% of total electricity mix.  This decrease in coal production was the largest ever recorded, both in absolute and relative terms. The important decrease in OECD Europe highlights European efforts to phase out coal in the electricity mix. Many countries have established strategies to remove coal from their electricity mix by 2030. For example, Germany, the largest coal consumer in Europe, plans to be coal-free by 2038. These strategies include coal-to-natural gas fuel switching. Furthermore, new coal-fired power plant capacity receiving final investment decisions (FIDs) declined by 30% to 22 GW, the lowest level this century. The way renewable capacity in China, India and other parts of the world is exponentially growing it is quite possible the role of coal in primary energy shrink to 18%.

Study by “Statista” predicted that the global share of coal in electricity generation will decline from 35% in 2018 to 23.2% in 2040 while the share of renewable up from 28.2% in 2018 to 45.6% in 2040. This seems to be encouraging assessment and may complement average of all scenarios.   

Table-1: Summary of total primary energy mix scenario[i]

Analyzing the historical growth in renewable and natural gas, one can conjecture that this paradigm shift would be biased and in favor of environment friendly natural gas and renewables. An advantage of renewables is that there is not necessarily a huge upfront capital investment in the transmission system. Solar panels and wind farms can provide electricity to the community without big investments in their transmission systems, especially when populations are scattered in developing countries, thus overcoming the hurdle of transmission cost/constraint. In the past the only constraint was cost of renewable that requires government subsidies. However, due to technological advancements and significant cost reduction these constraints are more or less manageable and have become quite competitive.

Interestingly enough, there is quite of variation in the scenarios of various agencies but all assume that renewable is the future for power generation as it helps in mitigating coal-based emission. The average share of all agencies scenarios is 23.7% by 2040. The lowest contribution of renewable is associated with IEA-current policies where it only grows to 14.7% while BP-RT comes up with 38%. My assessment after analyzing the historical data and its advantages is that its share could increase to well over 23% by 2040.

The growth in nuclear is pretty straight forward though there is variation. Its average of all scenarios stood at 5.9% with low of 4.3% Statista and high of 9.5% IEA-SD. 

i] BP Statistical review of world energy June – 2019.

[ii] IRENA total renewables include – hydropower (including mixed plants, pure pumped storage), marine energy, wind energy (on and offshore), solar (solar photovoltaic (PV), concentrated solar power (CSP), Bioenergy ( solid fuels and renewable waste), Biogas (renewable municipal waste, and other solid biofuels), Liquid biofuels (Biogas), and Geothermal energy. We have only used hydro power, wind and solar energy as these accounts for 76% of total renewable energy. For details see IRENA – 2020 report.

iii] Oil companies may not come up with a scenario for public use where oil share decline substantially by 2040. It could severely affect share value. Though they might be developing alternative strategies as to how to deal with lower future oil demands.

III) Since most of these scenarios are based on last year (IEA 2018), I am pretty sure the new scenarios further tilted in favor of natural gas and renewable due to significant growth in renewable and less FIDs for coal-based power plants.