OILX - Global Energy 2023: War Impacts Decarbonization And Energy Security Premiums

2023-03-04 05:55:00 ET

Summary

• Energy costs for oil and gas imports rise owing to the Russian invasion of Ukraine, a dislocation that keeps shifting outlooks.
• The global LNG trade is expected to grow and the U.S. is a beneficiary.
• One cannot auto-pilot their investments in oil and gas or energy. It is more dynamic than in years or decades past.
• Deglobalization and local sourcing of energy is considered inflationary, generally.
• Energy investment is path-dependent, which can change owing to geopolitics, policy and economics.

In a video interview with Seeking Alpha's Michael Hopkins, Jennifer Warren parses BP's (BP) energy outlook 2023 presentation from days earlier by its senior economist. The impact of Russia's invasion of Ukraine and decarbonization are the two major topics. A short list of slides follows.

Video Interview: Global Energy 2023: Ripple Effects from War, Decarbonization and Investment

Four drivers according to BP

The invasion of Ukraine by Russia and its impact on oil and gas, renewables penetration, electricity and lower carbon sources are thought to be dominant trends to 2050.

(The last five videos highlight much of these trends.)

Energy Security

The shock to commodity prices is one stand-out feature of the next several years, with impacts across decades. The "security premium" BP suggests means that energy costs increase as countries react to and redress the loss of Russian gas and oil.

The U.S. picks up more of the LNG trade (above) in 2030, 50% of 25-40 bcm, or 12-20 bcm. An entire pipeline is gone for all intents and purposes. Some of the projection of BP says that gas is reduced owing to GDP reductions (ie., reduced demand) and a reduced preference for imported gas.

US and OPEC Oil Market Share

One takeaway is that one cannot auto-pilot their investments in oil and gas or energy. It's more dynamic than in years or decades past. The projections of U.S. oil's decline is hard to predict, as other variables may become more important, such as low-carbon barrels. The interplay of the energy mix has shifted and continues to shift among countries and energy sources.

Renewables and Oil and Gas Investment Scenarios

Investment in oil and gas increases in the New Momentum case, which is the course we are currently on resulting from the invasion and decarbonization intent. In the Net Zero case, oil and gas investment declines most, unsurprisingly. Renewables investment is the opposite. A real tension exists between how these scenarios play out. Modern economies do not prefer volatile energy prices and high, unbearable costs, as the reactions by countries to the invasion reveal. Technology breakthroughs can change these outlooks and investment cases considerably.

These scenarios are representative of a version of the energy transition. How this plays out will likely be different; BP offers a forward view based on their assumptions, many of which are reasonable based on their premises. The U.S. is a large benefactor from the loss of Russia's gas exports to Europe, which will manifest in the LNG trade. BP sees large increases in renewables capacity additions. That will be something to monitor on the ground, so to speak. Obstacles are emerging regarding the pace of decarbonization but new avenues continue to emerge. The oil and gas industry is also a beneficiary of the U.S.'s Inflation Reduction Act (IRA) with carbon capture, hydrogen and other lower carbon paths being sought.

The IRA has something for everyone. It's an all-of-the-above approach.

See the video interview here.

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