A new report by the Economist Intelligence Unit (EIU) forecasts that energy consumption in 2021 will rebound partially, by 2.6 per cent, after contracting by an estimated 4 per cent in 2020. Consumption, however, will not return to 2019 levels. Upstream oil and gas producers are expected to reduce dividends and cut back on operational and capital spending.
The EIU report outlines that 2020 and 2021 will be the lost years in terms of demand for the three fossil fuels – oil, gas and coal.
Of the three, gas is forecast to be impacted the least, with consumption returning to 2019 levels by 2022 as the economic recovery drives demand from the industrial sector. Gas is also forecast to continue to be competitive with coal in the power sector, especially in the US and Europe.
Oil consumption is anticipated to show a strong rebound in 2021, rising by 3.1 per cent, but coming off a sharper collapse in demand than gas. The EIU expects changed behavioural patterns, such as more people working from home and lower levels of air travel, are likely to continue into 2021, preventing a bounce-back to pre-COVID-19 levels. They note that it may not be until 2023 that oil demand returns to the level of 2019.
Consumption of renewables (including solar, wind, hydro, geothermal and biomass) is expected to rise in both 2020 and 2021, outpacing fossil fuels. For solar and wind, however, growth will be much stronger next year. The EIU forecasts a combined increase of 13 per cent, which reflects the resilience of low-carbon sources even as the COVID-19 pandemic depresses overall energy consumption.
Four key trends for 2021:
1. Government policy to support growth in renewable energy
Climate-friendly approaches to economic growth are anticipated to dominate in 2021, but not everywhere. Of the three largest greenhouse gas emitters – China, the EU and the US – the EU is expected to make substantial progress towards achieving net-zero emissions by 2050.
In the US, much depends on the outcome of the upcoming presidential election.
The report notes that a win by the Democratic Party candidate, Joe Biden, would align US climate policy with the EU, as Mr Biden has pledged US$2 trillion in climate-related spending over four years.
But all eyes will be on China in the light of its recent announcement to target carbon neutrality by 2060. This is likely to fuel the growth in renewable energy, particularly in Asia, The EIU says.
2. Prices for fossil fuels to remain subdued
Oil, gas and coal prices are predicted to remain subdued in 2021, as consumption is expected to only partially recover from the falls experienced this year.
There is also a question mark over whether oil producers will stick to OPEC production cuts into next year. Overall, The EIU expects oil prices (Brent) to average US$45/barrel (b) in 2021, only marginally higher than the annual average for 2020 (US$42.16/b).
US natural gas prices are expected to average US$2.74/b, reflecting a 43 per cent increase from an all-time low of US$1.92/b this year.
Low prices, The EIU says, will weigh heavily on revenue streams of upstream producers of oil and gas, as well as coal companies, and hurt their market value.
3. Restructuring and bankruptcies will affect US shale operators
The report expects the price slump to continue through 2021, placing pressure on oil and gas producers, especially those in the US shale patch.
“After some years of explosive growth, US oil production is expected to fall further in 2021, although not as severely as this year. The continuation of prices in the US$40/b range means that many shale operators, especially those more exposed to debt, will struggle, and bankruptcies are likely to continue,” The EIU said.
In the first three quarters of 2020, 36 shale operators went bankrupt compared with 42 in the whole of 2019. The rapid increase in shale output that was seen until 2019 is unlikely to be repeated.
Meanwhile, oil majors such as BP, Shell and Exxon Mobil, have announced job cuts in response to the price slump, with no real recovery in prices expected until after next year.
The EIU expects some oil majors to continue to slash costs as they steer towards renewable energy, and others will look to divest non-core businesses.
4. Investment in the power sector will outstrip that in oil and gas
Energy investment declined in 2020 amid the economic downturn caused by the pandemic, and this is forecast to continue into 2021.
According to the International Energy Agency (IEA), investment in the power sector will exceed investment in upstream oil and gas supply in 2020 (although investment in both sectors will fall), which suggests a shift in investment in the sector towards electricity supply. The EIU expects this shift to become more prominent in 2021.
The decision by BP and Shell earlier this year to target net-zero emissions by 2050 highlights that a growing number of upstream oil and gas producers think that there is a better business case for investment in low-carbon sources of power. This is underlined by the fact that Trafigura, a large oil trader, has plans to set up a joint venture that would invest US$2 billion in renewables by 2025, focusing on solar, wind and storage.
The full ‘Industries in 2021’ report can be found here.