The need for oil and gas has never been so clearly defined as in 2022. Recovery from the pandemic started it. The Invasion of Ukraine by Russia that pushed European nations into energy independence from Russia has continued it. The inflation of energy prices by various shortages and supply chain blocks has worsened it.
Projections of future energy needs due to industrial growth by large countries like China and India as well as world population rise have reinforced the position that energy needs will rise by 50% by 2050.
But there are certain factors, not widely discussed, that hint at renewables growth that will likely impact growth of oil and gas. One is the transport sector switching from gasoline to electric vehicles (EVs). Another is electricity changing from gas-burning power plants to solar, wind, and battery power.
Yet another is major corporations purchasing green electricity. Let’s take a closer look at each of these.
Corporations buying green electricity.
In Bloomberg Green on September 8, 2022, Nathaniel Bullard reported that corporate companies had been purchasing renewable electricity for the past 10 years in ever increasing amounts. In 2021, they bought about 30 gigawatts (GW) of wind and solar – a 100-fold increase over 2012.
Amazon has bought 5 GW in 25 contracts in 2022 alone. Amazon has purchased 19.0 GW to date, compared with, Microsoft, with 9.0 GW. Surprisingly, the clean power makes Amazon the tenth largest portfolio holder of wind and solar in the world.
In a chart of 15 top renewable power generation portfolios across the world, China dominates with 9 out of 15 members. The State Power Investment Corp of China is No 1 with 55.1 GW. NextEra Energy, the largest North American electric utility, has 29.8 GW. Iberdrola, a multinational electric utility, has 22.5 GW. Amazon has 19.0 GW. EDF (Environmental Defense Fund) has 14.6 GW. Berkshire Hathaway has 14.5 GW. Huaneng Power International of China is the lowest with 13.0 GW.
But what do these numbers mean? To convert, 1 GW is approximately equal to 8 TWh (TeraWatt hours). The total of the 15-member chart companies is about 400 GW or 3,200 TWh renewable power generators.
This is comparable with total US electricity production of 4,000 TWh. The total global electricity production is 27,000 TWh, of which 37% is renewables: wind, solar, nuclear and hydro.
So the renewable power portfolios of the 15 largest companies add to about 12 % of global electricity production, which is a significant but still only minor fraction. But the 15 chart members are purchasing a significant amount, 32%, of global renewable electricity production.
As, Bullard points out, “corporate demand for clean energy is growing, regardless of near-term market disruptions.”
The transport switch to renewables.
The growth of electric vehicles (EVs) means less gasoline for internal combustion engines which means less crude oil refined into gasoline or diesel. President Biden’s goal is for 50% of new car sales to be EV’s by 2030. A zero-sum analysis of energy consumption in the US showed this implies an (updated) drop of 34% in crude oil demand in just 8 years from now.
If supply follows demand, then a 34% decline in oil production would be expected by 2030 – a third of oil production declining in less than 10 years. This would be a big hit to oil production in the US.
There is a caveat: the demand in the US may drop 34% but crude oil sales abroad to places like Southeast Asia may replace the demand and keep the supply up in the US.
The IEA report said five times more car EV models were available in 2021 than in 2015, with the number reaching 450 different models by the end of 2021. In the US, GM announced 30 new EV models by 2025, and Ford expects 40% of its global sales to be battery-electric vehicles by 2030.
Volkswagen is diving into EVs. The basic SRV, called ID.4, will be priced at $40,000 and have a range of 250 miles. Apparently, they even plan to build their own charging stations across the US.
The Biden administration has announced a network of 500,000 EV charging stations across the US by 2030. Over 5 years they will provide $5 billion in aid to states to construct their own charging stations.
To meet the climate goals of the transition to EVs, three things must happen in the US. First, the prices of EVs must become competitive with conventional vehicles. Second, many charging stations must be built across the US, and they have to be much larger than standard gas stations, because EVs can take an hour or more to recharge a battery.
The electricity switch to renewables.
A similar analysis can be done for greening of electricity, based on conversion of coal and gas-fired power plants to renewable sources of wind and solar.
The goal of Biden’s changeover to 100% renewable electricity by 2035 implies a 39% drop in natural gas consumption by 2035. If supply follows demand then gas production could drop by more than a third by 2035.
For the US, this simple supply and demand picture suggests that if demand falls in electrical and transport sectors, then supply is likely to follow in the form of serious cuts to oil and gas production within 10-15 years.
All these shifts toward renewables, and away from oil and gas, are significant even though it’s early days.
The renewable power generation portfolios of the 15 largest companies add to about 12 % of global electricity production, which is not much. But the 15 companies are purchasing a significant amount, 32%, of global renewable electricity production.
Oil and gas usage in the US could drop by 34 – 39% within 10-15 years, respectively, due to greening of transport and power plants (Teknisk Ukeblad, October 2021.)
Oil and gas companies who produce crude oil that’s made into gasoline and diesel fuels should be watching carefully the increase of electric vehicle sales and the changeover from gas-burning power plants to wind and solar – because exponential growth can make changes happen quickly.
It might be wise for oil and gas companies to adopt a proactive stance and see what changes could be made in their business, as uncomfortable as that might be. A way forward might be for oil and gas companies to diversify into renewable energies. It seems a straightforward way to gain – instead of eventually lose – many customers.