A pragmatic approach to the transition

The global energy industry is at a turning point. A transition is sweeping across many of its sectors. In some areas – like electric vehicles, solar PV, wind, and batteries – the pace of change has been rapid and gaining momentum. In others, commercially competitive alternatives to oil and gas are yet to emerge. The net effect is that we do not know yet how fast and deep the process of the energy transition will be. But one thing we know for sure: The change already underway is relentless, and it’s not going to be business-as-usual.​

 Fifteen years ago, the shale revolution led to a resurgence in American oil and gas production, playing a crucial role in satisfying domestic and global demand for hydrocarbons. This has helped keep supply steady and – as a result – prices in check through geopolitical upheavals, such as the Arab Spring. In recent times, Russia’s invasion of Ukraine has been perhaps the most powerful illustration of how oil and gas supply routes can be disrupted within a matter of days. Again, US oil and gas has been essential at keeping the market balanced and prices in check.​

 In a similar fashion when oil began to displace coal as the main source of energy in the 20th century, technological breakthroughs have been slowly but surely integrating renewable and non-fossil fuel sources into the US and global energy systems. Just as coal was displaced by oil and gas, renewables and emerging clean technologies are positioned to take much of the pressure away from fossil fuels in the coming years and decades.​

 The energy transition is a once-in-a-generation opportunity for the US. With strategic moves, like the Inflation Reduction Act – with its targeted incentives to accelerate the formation of key cleantech industries, such as hydrogen and CCUS – the US can cement its position as an energy superpower. State-of-the-art innovations providing homes and factories with clean, affordable, and reliable energy also works toward the US’ net zero goals. We believe this is the time for America to bet on the next energy evolution, driven by renewables, carbon capture, storage and utilization, hydrogen, and battery and energy storage. ​

 Yet, oil and gas demand is not going away in the short term. The capital stock associated with energy consumption takes time to be replaced, while emerging nations aim to grow their per-capita energy consumption on the back of their urbanization and industrialization. The US is currently the largest oil and gas producer worldwide, meeting 16% of the world’s oil supply and 20% of natural gas. It is also one of the cleanest and cheapest suppliers. US production is in the bottom quartile of upstream carbon intensity globally and in the bottom half in terms of breakeven costs.​

 Hence, if we were to divest too quickly from oil and gas, the price of both would increase. While focusing on the US, it is also essential that we think of the global market implications.​ Rystad Energy has developed three transition scenarios using proprietary modeling:  A fast transition, called –Sigma/1.6 DG, which would limit global temperature increase to 1.6 DG; a slow transition, +Sigma/2.2 DG; and a middle ground, Mean/1.9 DG.​

 Any of these scenarios are still achievable. The fast deployment of renewables and EVs in the past five years may lead us to think we are on the fast transition. Yet, extrapolation of trends might fail to grasp supply chain constraints, the need for regulatory tightening to achieve those targets and the likely higher costs associated with the fast transition.  Also, China’s current stranglehold on some renewables’ supply chain nodes could be a risk factor if a dramatic reduction in global trade were to occur. By the same token, the current lack of competitive alternatives to oil in key demand sectors like petrochemical, heavy duty road transport and aviation, may lead us to think that oil is on the slow transition, while technological breakthrough could quickly upend these assumptions.  Currently, we think the Mean scenario is perhaps the one with higher chances of coming to fruition for oil. In that case, US shale will remain a key energy source for the next 10-15 years, maintaining today’s levels of oil production, and increasing natural gas. In the slow transition, shale production would need to increase quite dramatically to match global demand. Yet, if a fast transition comes about, then shale production would rapidly decrease in response to low market prices.​

 In conclusion, the transition is highly uncertain and the outlook for US oil and gas could be dramatically different post-2030 depending on the pace of technological development and uptake. Thus, now is the time for the US to take a pragmatic approach to energy policy, which leverages the flexibility of shale oil and gas, while championing renewables, the likely winners in the future energy order. By doing so, the US can maintain its place as the leader of the energy world. 

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Authors: 

Claudio Galimberti  

Senior Vice President, Oil Markets, Head of Americas Research
claudio.galimberti@rystadenergy.com

Manash Goswami

Vice President, Analytics
manash.goswami@rystadenergy.com

(The data and forecasts contained in this column are Rystad Energy’s and the opinions are of the authors.)