Oil and Gas Megatrends to 2050

In a new report sent to Rigzone, analysts at BMI, a Fitch Solutions company, have outlined several megatrends for the oil and gas sector out to 2050.

The waning of oil demand is one of those megatrends, the analysts highlighted in the report, adding that global oil and gas demand will come under increasing pressure, “forcing industry consolidation as the energy transition accelerates, fostering rising energy efficiency and widespread fuel switching”.

“To date, the bulk of demand destruction has been concentrated in easier to abate industries, such as the road transport and power sectors, and has largely accrued in developed markets (DMs),” the analysts stated in the report.

“However, if the Paris Agreement goals are to be met, deeper decarbonization strategies will be required across all sectors and markets globally,” they added.

In the report, the BMI analysts noted that, according to their data, DM oil consumption will fall into permanent decline from 2025, while the emerging market (EM) peak will lag by at least a decade, “given the greater difficulties faced in meaningfully shifting the energy mix, while meeting rapidly growing consumption”.

“Differences in the underlying energy mix and widely varying economic, demographic, and policy outlooks will see the pace of subsequent declines vary across different regions with markets peaking at varying timeframes,” the analysts stated in the report.

“Over a multi-decade horizon, demand will be most durable in Africa, the Middle East and Central and Eastern Europe, while Western Europe and North America and developed Asia will see the fastest declines,” they added.

Demand trajectories will also vary across the fuel basket, the analysts said in the report.

“Road transport fuels are most vulnerable to the energy transition as fuel efficiency mandates rise and alternatives such as EVs ramp up adoption, while aviation and marine fuels, although harder to replace, will also suffer steep losses up to 2050 as alternatives begin to enter the marketplace next decade,” they said.

“In contrast, those fuels serving the petrochemicals and heavy industrial sectors will be longer lasting as the pathways to viable alternatives is least developed,” they added.

Oil Supply

Another megatrend outlined in the report is that oil supply will track lower as global policy and demand shifts corporate strategy.

“The long-term hydrocarbon supply outlook is weak given the expectation for declining demand long term, which will result in persistent under investment in the upstream sector by oil and gas producers as they evolve into integrated energy companies,” the analysts stated in the report.

“This emerging dynamic of lower demand will see upstream investment pared back to preserve oil prices and sustain profits by limiting market supply,” they added.

“This transition is mainly driven by the shift in strategies among upstream companies as they respond to reduction requirements for high carbon emitting industries, including oil and gas, and the weakening long-term demand outlook which disincentivizes more risky, long-term investments, especially those with high upfront development costs,” they continued.

The BMI analysts noted in the report that increasingly stringent environmental regulations and hardening of government positions against the fossil fuel sector will continue to threaten future greenfield oil and gas projects and accelerate the shift away from hydrocarbon investments.

“From a financial perspective, we note the recent trend for the targeting of energy companies with windfall taxes and rising regulations, thereby disincentivizing energy companies from committing heavily to future exploration and production,” the analysts said.

“We expect that exploration and production companies will continue raising capital expenditure allocations towards low carbon efforts (mitigation of emissions, carbon credits offsets) at the cost of growth in upstream and downstream projects,” they added.

“Under-investment among a number of producers will lead to decelerating production growth, especially among producers facing an increasing share of maturing fields in their upstream project portfolio,” they continued.

“We highlight that the U.S. will see some maturing of its prolific shale asset base and will see output plateauing or declining amid slowing investment in new growth,” the analysts went on to state.

The Role of OPEC

The rise of OPEC was another megatrend flagged in the report.

“The commitment to transition away from fossil fuels to low-emission alternatives will see OPEC’s global market power shift and evolve,” the BMI analysts said in the report.

“Oil producers will become more concentrated as demand trends downward and the degree of competition in supply prompts a focus on efficiency, costs, and emissions intensity,” they added.

“Saudi Arabia has doubled down on efforts to become ‘the last producer standing’ with its goal of raising crude production capacity to 13 million barrels per day by 2027, up from its current limit of 12 million barrels per day, as well as increasing natural gas production by 50 percent by 2030,” they continued.

In the report, the BMI analysts stated that many OPEC and OPEC+ producers already possess low-cost operations and added that “it follows that OPEC’s share of oil supply is set to grow”.

“Coupled with our expectations for oil demand to fall, while this would result in a larger share of the market in total, it would be a smaller pie,” the analysts highlighted.

Looking at future policy from the group, the BMI analysts noted that OPEC will evolve its strategy to move away from short-term price regulation to long-term policy impacts.

“These policy driven actions are expected to be largely set by the key Gulf Cooperation Council countries currently controlling the bulk of oil production,” the analysts said.

“We do expect some group tensions to persist and national interests to outweigh OPEC cohesion but this is only expected from the non-core producers,” they added.

“As a result, the group’s make-up is likely to continue to shift although ultimately control will rest with the current top producers,” they continued.

The analysts also stated that the focus of the group will see a wider move towards climate adaptation and emissions mitigation over a wholesale replacement of fossil fuels.

“This emphasis on technical solutions to climate change (carbon capture, blue hydrogen/ammonia, among others) raises the risk that emissions targets will be missed as limited capital and time is diverted to pursue these oil and gas preserving endeavors,” they said.

BP Outlook

Back in January this year, BP published its 2023 Energy Outlook, which the company said considers the recent disruption to global energy supplies and associated impacts on global prices and explores how this could affect the energy transition out to 2050.

In a dedicated energy outlook segment on its website, BP outlines several “core beliefs” of the report. These include the decline of oil demand over the outlook, “driven by falling use in road transport as the efficiency of the vehicle fleet improves and the electrification of road vehicles accelerates”, BP highlights.

Even so, oil continues to play a major role in the global energy system for the next 15-20 years, BP’s site states.

Another core belief is that the global power system decarbonizes, “led by the increasing dominance of wind and solar power”, BP outlines.

“Wind and solar account for all or most of the growth in power generation, aided by continuing cost competitiveness and an increasing ability to integrate high proportions of these variable power sources into power systems,” BP’s site notes.

“The growth in wind and solar requires a significant acceleration in the financing and building of new capacity,” it adds.

Another core belief is that government support for the energy transition has increased in a number of countries, according to BP.

“But the scale of the decarbonization challenge suggests greater support is required globally, including policies to facilitate quicker permitting and approval of low-carbon energy and infrastructure,” BP states on its site.

To contact the author, email andreas.exarheas@rigzone.com