By: David Blackmon – Forbes – A recent report by the consulting/analytical firm Wood MacKenzie projects what would appear to be devastating impacts on the oil and natural gas industry should the world achieve the emissions targets put forward by the 2015 Paris Climate Accords. In the new study’s most aggressive scenario, which it refers to as “AET-2,” Wood-Mac projects that global crude oil demand would drop by as much as 70% from today’s levels, with the price for crude collapsing to as low as $10 per barrel.
So, how do we square these frightening projections 30 years down the road to a near-term situation in which Goldman Sachs GS +0.5% last week projected that Brent crude prices could rise to $80 per barrel during this coming summer, and in which many analysts project still higher prices coming soon due to the deficit of critical investment in the finding of major new resources since 2015? Even more to the point: How do we reconcile the Wood-Mac projection for 2050 in light of the ongoing reluctance by developing nations – including India and, preposterously, China, both of which are classified as such by the Paris agreement – to engage in any real efforts to meet these “net-zero by 2050” targets to which many first-world nations are at least giving lip service.
The inconvenient truth here is that we don’t, and even Wood-Mac itself notes in its executive summary that “To be clear, our AET-2 scenario is just that – a scenario – and not our base-case forecast.” Wood-Mac’s base case scenario – the one it considers to be most likely to come about – projects a far more robust future for the oil and gas industry, especially for natural gas, which will become key to displacing coal from the power generation sector across Asia in the coming decades, just as it has already done in the U.S. over the past decade.
Although the Wood-Mac executive summary focuses mainly on its AET-2 scenario, there are increasingly valid reasons to focus on its base case instead. One example comes from India, a developing nation that is home to 1.4 billion human beings. Early in April, Raj Kumar Singh, that country’s Power Minister, told a meeting organized by the International Energy Agency that these “net-zero” commitments are unrealistic for his country and other developing nations.
Of a recent quasi-commitment by fellow “developing nation” China to potentially pursue a net-zero goal by 2060, Singh said “2060 sounds good, but it is just that, it sounds good.” He then added, “I would call it, and I’m sorry to say this, but it is just a pie in the sky.”
China itself has been hit-and-miss about taking action to work on improving its own emissions profile, or even attending global meetings to discuss such commitments and any progress they are making towards them. With roughly 2.8 billion in population between the two Asian nations, a scenario like Wood-Mac’s AET-2, envisioning a net-zero world just 29 years hence seems highly unlikely, regardless of how many trillions of dollars the Biden/Harris administration and congress choose to borrow in order to target the issue here in the United States.
For the U.S. oil and gas industry, all of this is completely relevant and must be factored into their planning and reporting activities. Independent producers must consider whether to develop their own “net-zero by 2050” commitments, following the lead of some of the larger international companies. They must also consider what to tell investors and the SEC about the likelihood of their long-term reserves ever being produced and sold in a climate-change-focused world, especially when so much of that focus seems to be little more than organized virtue-signaling that is not really grounded in practical reality.
For oil and natural gas producers in the U.S. and elsewhere, the practical reality seems to be that, until India, China and the rest of the world’s developing nations decide that committing to such goals can be reconciled with their needs for continued economic growth, demand for oil and natural gas production is likely to continue to be very robust for decades to come.
Balancing that practical reality with the continually rising demands from ESG-focused investors and end-users that I discussed last week is a real challenge. Remaining profitable in the face of aggressive efforts by the federal government to increase their costs and subsidize their competition could become an even bigger one.
Today’s oil and gas producers truly do “live in interesting times.” But on balance, even the Wood Mackenzie report shows that there is far more cause for optimism than the prevailing narrative about the industry’s future would lead us to believe.