Amid the deep disruption and uncertainty caused by the Covid-19 pandemic, global energy demand is set to drop by 5% in 2020, with oil and gas investments falling by an estimated 18%, and the pain could linger into 2023 depending on whether the virus is controlled, according to the International Energy Agency (IEA).

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The global energy watchdog on Tuesday issued its flagship World Energy Outlook 2020 (WEO-2020), with the pandemic overtaking all energy demand scenarios over the coming 10 years. 

“The Covid-19 crisis has caused more disruption than any other event in recent history, leaving scars that will last for years to come,” researchers said. “But whether this upheaval ultimately helps or hinders efforts to accelerate clean energy transitions and reach international energy and climate goals will depend on how governments respond to today’s challenges.”

Four pathways are compared in the WEO-2020 scenarios that show how the energy sector could develop. 

The Stated Policies Scenario (STEPS), the most likely, has Covid-19 gradually coming under control in 2021, with the global economy returning to pre-crisis levels next year. 

More ominous is the Delayed Recovery Scenario (DRS), which uses the same assumptions as in the STEPS, but a prolonged pandemic would cause lasting damage to economic prospects.

In the DRS, the global economy would not return to its pre-crisis size until 2023, “and the pandemic ushers in a decade with the lowest rate of energy demand growth since the 1930s.”

Slower demand growth under the DRS also would lower the outlook for oil and natural gas prices compared to pre-crisis trends. The large decrease in investment would “increase the risk of future market volatility.”

In the Sustainable Development Scenario (SDS), a surge in alternative energy policies and investment would put the global energy system on track to achieve all sustainable objectives, including the United Nations climate accord, energy access and air quality goals. The assumptions on public health and the economy are the same as in the STEPS.

A fourth scenario, Net Zero Emissions by 2050 Case (NZE2050), extends the SDS analysis.

“A rising number of countries and companies are targeting net-zero emissions, typically by mid-century,” researchers noted. “All of these are achieved in the SDS, putting global emissions on track for net zero by 2070.”  

The NZE2050 models what would be needed in the next decade to put global carbon dioxide (CO2) emissions on track for net zero by 2050.

U.S. Still Gas Boss 

Fossil fuels face varying challenges in the next 10 years, but the WEO-2020 matches forecasts by other reliable prognosticators, including BP plc, with natural gas demand still leading the way.

The most likely SPS shows natural gas growing significantly, mainly in Asia, while oil remains vulnerable to the major economic uncertainties resulting from the pandemic.

“This year’s projections for natural gas in the STEPS see a 2% downward revision in 2030 demand compared with the 2019 projections, similar to oil but much smaller than the downward revisions to 2030 demand for coal (9%),” said researchers.

“Shale gas production in the United States bounces back relatively quickly in this outlook, but Qatar and Russia are also well placed for supply growth, given their vast reserves of low cost supplies.”

The United States is forecast to see a 130 billion cubic meter (bcm) increase in gas production to 2030 in the STEPS, a lower rise than in WEO-2019, but still the largest projected growth of any country. 

In the short term, the drop in U.S. tight oil production in the aftermath of the pandemic is forecast to drop associated gas production, while weak export margins are seen reducing demand from Lower 48 liquefied natural gas (LNG) export terminals.

“However, production rebounds relatively quickly as dry shale gas basins respond to the lost output in associated gas, particularly in the Appalachia and Haynesville plays,” researchers said. “This means that total gas production is on course to surpass its 2019 peak by 2022.”
In the longer term, “the lower outlook for domestic demand dampens the rise in Henry Hub prices and, with some new LNG export projects crowded out by the supply glut, total U.S. gas production flattens and starts to fall around 2030, earlier than projected in the WEO- 2019.”

Global gas output is forecast to decline by nearly 200 bcm this year. While gas has been “more resilient to the effects of the pandemic than coal or oil…a more subdued macroeconomic outlook” led to lower supply projections in the STEPS compared with the WEO-2019.

The WEO-2020 reduced gas output worldwide in 2030 by around 100 bcm, and there is a cumulative reduction in output for 2019-2030 of nearly 1,000 bcm.

“Major producers ride out the glut by reducing production, minimizing operational costs and deferring capital expenditures,” researchers said. “With total investments in the gas supply chain down by $700 billion over the period to 2040, the lower supply is not subsequently made up in the second-half of the projection period. Nonetheless, even with these revisions, there is still a substantial overall increase of over 500 bcm in gas production in the STEPS by 2030 compared with 2019 levels.”

Gas markets worldwide should remain amply supplied until the mid-2020s under the STEPS, pressuring prices during a period in which around 150 bcm of LNG contracts are due to expire. 

“A delayed recovery from the pandemic cuts into near-term demand for LNG, while the downside case over the longer term arises from stronger climate policies. In the STEPS, new LNG projects get the go-ahead to start operation before 2030 to meet rising demand for

internationally traded gas, but these are not required in the SDS.”

Plummeting Coal Consumption

Coal demand is once again slated to lose over the longer term and may not return to pre-crisis. By 2040, coal’s share in the global energy mix could plummet to under 20% “for the first time since the Industrial Revolution,” researchers said.

“The era of global oil demand growth will come to an end in the next decade,” IEA Executive Director Fatih Birol said. “But without a large shift in government policies, there is no sign of a rapid decline. Based on today’s policy settings, a global economic rebound would soon push oil demand back to pre-crisis levels.”

In all of the scenarios, renewables take the starring roles, “with solar center stage.” 

Backed by favorable government policies and maturing technologies, renewables are now gaining access to capital in leading markets. 

For example, solar photovoltaic “is now consistently cheaper than new coal- or gas-fired power plants in most countries, and solar projects now offer some of the lowest cost electricity ever seen.”

The SPS indicates renewables could meet 80% of global electricity demand growth over the next decade. Hydropower remains the largest renewable source, but solar is the main driver of growth, followed by onshore and offshore wind.

“I see solar becoming the new king of the world’s electricity markets,” said Birol. “Based on today’s policy settings, it is on track to set new records for deployment every year after 2022.”

If governments and investors were to step up their renewables efforts as outlined in the SDS, “the growth of both solar and wind would be even more spectacular — and hugely encouraging for overcoming the world’s climate challenge,” he said.

Still, strong renewables growth has to be paired with robust investment in electricity grids. Minus investments, “grids will prove to be a weak link in the transformation of the power sector, with implications for the reliability and security of electricity supply,” researchers said. 

According to researchers, the pandemic has had the worst impact on the globe’s most vulnerable, reversing the number of people in Sub-Saharan Africa without access to electricity.

“And a rise in poverty levels may have made basic electricity services unaffordable for more than 100 million people worldwide who had electricity connections,” researchers said.

While global CO2 emissions are set to bounce back more slowly than after the financial crisis of 2008-2009, the world is a long way from a sustainable recovery.

“A step-change in clean energy investment offers a way to boost economic growth, create jobs and reduce emissions,” researchers said. “This approach has not yet featured prominently in plans proposed to date,” except in a handful of countries that include Canada, the European Union, South Korea, New Zealand and the UK.

In the SDS, rapid solar, wind and energy efficiency technology growth over the next decade also could lead to a “major scaling up” of hydrogen, nuclear power and carbon capture, utilization and storage.

“Despite a record drop in global emissions this year, the world is far from doing enough to put them into decisive decline,” Birol said. “The economic downturn has temporarily suppressed emissions, but low economic growth is not a low-emissions strategy; it is a strategy that would only serve to further impoverish the world’s most vulnerable populations. 

“Only faster structural changes to the way we produce and consume energy can break the emissions trend for good. Governments have the capacity and the responsibility to take decisive actions to accelerate clean energy transitions and put the world on a path to reaching our climate goals, including net-zero emissions.”

A significant initiative could focus on reducing emissions from existing energy infrastructure including coal plants, steel mills and cement factories, the WEO noted. Otherwise, international climate goals could be unreachable, regardless of other actions.

The analysis found that if today’s energy infrastructure continues to operate in the same way as it has so far, it would already lock in a temperature rise of 1.65 C.

“Despite such major challenges, the vision of a net-zero emissions world is increasingly coming into focus,” researchers said.