The path to net zero

Net zero goals imply huge shifts in strategy for global oil majors, but approaches vary. S&P Global Platts Analytics’ modelling lays out the potential displacement in both oil demand and capital expenditure up ahead, and highlights the inherent risks of each pathway for carbon reduction. By Mark Mozur.

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This year may be remembered as a tipping point for the oil and gas industry. In the midst of a global pandemic and economic lockdown that are expected to wipe out over 8 million b/d of oil demand, producers have slashed capital spending to the lowest in 15 years.

Crude and condensate output is forecast to fall 7% year on year, dipping below 80 million b/d, and oil prices in late August remained around $20/b below 2019 average levels.

In almost any other year, these cuts to capital spending and output could be attributed to supply-demand cycles and price responsiveness.

But in more ways to count, 2020 is not just any other year. Prompted by virus transmission fears and the new normal of working from home in many economic segments, the coronavirus pandemic has caused modellers to re-think how the legacy of the virus could change consumer – and business – behavior for years to come as no end-use sector has been immune to the impact of the global economic lockdown.

In the view of S&P Global Platts Analytics, the downside pressure to long-term oil demand in a post-pandemic world can be felt across the board, touching nearly every single end-use sector in our energy models. Examples include reduced vehicle miles travelled as consumers adapt to remote work and slower growth in international air travel as socialdistancing norms become prohibitive for aviation and businesses choose to limit travel. There is also the dampening effect on international trade as businesses – and governments – accelerate efforts to “reshore” global supply chains.

In Platts Analytics’ long-term balances, the net impact has been to reduce projected 2050 oil demand growth considerably as these trends far outweigh upward pressure on demand from competing drivers such as the rise in e-commerce and home shopping, a continued preference for plastic packaging and – not to be forgotten – a substantially lower long-term oil price outlook.

In short, there is an emerging conversation about the extent to which the coronavirus pandemic has shifted the world onto a low-demand and therefore a low-carbon trajectory. Whether in terms of the drop in fossil fuel consumption or in terms of the expected fall in CO2 emissions, Platts Analytics expects near-term decreases to exceed those required in a low-carbon world as defined by a modelled 2-degree-Celsius pathway. Platts Analytics forecasts a drop of 8% and 6%, respectively for the two indicators, versus 1.5% and 1.9% in a 2 C scenario.

The Paris Agreement, ratified by 189 parties to date, targets limiting the global rise in temperature this century to well below 2 C above pre-industrial levels, in order to avoid catastrophic impacts of climate change. From an energy end-use point of view, a 2 C pathway can be modelled by requiring that annual CO2 emissions decline to 10-15 Gt per year by 2050. This is based on the lowest Representative Concentration Pathway included in the most recent assessment report from the Intergovernmental Panel on Climate Change. S&P Global Platts Analytics has adapted this global greenhouse gas pathway to country-level emissions reductions requirements.

In the context of this ongoing conversation, it is all the more remarkable that even as some of the world’s most prominent oil producers have announced major cuts to capital spend, as well as asset write downs and dividend cuts, industry leaders such as BP, Total, Shell, and others have made headlines by effectively redoubling their commitment to long-term net zero targets. As of the third quarter, nearly every single international major has made some form of a low carbon commitment.

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