There is no doubt that 2022 has been an extremely challenging 12 months, but as the year draws to a close, there is hope.
Spiralling energy costs and the impact of Russia’s war with Ukraine have had a damaging impact on the global economy but may also hasten the changes required to transform the way we power the planet according to “The Silver Linings Playbook”, a new report from Wood Mackenzie.
The report offers views from across the energy and natural resources sectors on five key developments that, despite the setbacks of the past year, are laying the foundations for the delivery of more reliable, affordable and sustainable energy.
Seeing the light: policymakers accept that the world needs energy stability
Policymakers are finally acknowledging that a diverse range of low-carbon technologies beyond variable renewables is required to achieve deep decarbonisation while maintaining a secure energy supply.
“We estimate that the low-carbon hydrogen and CCUS project pipeline has grown around 25% over the past year,” said Prakash Sharma, vice president, Multi-Commodity Research. “About 30 projects have taken final investment decisions and another 170 are aiming to by the end of 2023.”
On the demand side, 30 hydrogen offtake agreements have been signed this year, as buyers seek first-mover advantage.
A market for green commodities, such as low-carbon ammonia, is taking shape.
Fast, flexible and available: US LNG will help keep Europe’s lights on
The disruption to Russian pipeline flows has left a massive supply gap in European gas markets. With Russia only exporting 25 billion cubic metres (bcm) of gas to the EU, down from 140 bcm, Europe has had to look for a new major supplier to fill the shortfall. It is destination-flexible US LNG that has answered the call.
“We now expect two-thirds of all US LNG cargoes to land in Europe this year,” said Kristy Kramer, vice president, Gas & LNG Research. “Regasification capacity is currently the major impediment to even more US LNG exports to Europe.”
The abundance of low-cost gas reserves, the relatively short time to bring new volume to market and its competitive commercial structure continue to make US LNG attractive.
Refining: new capacity will burst the margin bubble
In 2022, refining has played a central role in the energy crisis. Over the next year or so, the sector should retreat into its usual backstage role.
“Stress on the refining system is set to ease in 2023 as major new refinery projects in the Middle East, Africa and Asia become fully operational,” said Alan Gelder vice president, Refining, Chemicals & Oil Markets. “China’s decision to relax restrictions on the export of refined products will also help, as government policy shifts to support near-term economic activity.
Over the next 12 to 18 months, as the new capacity becomes operational, we expect refining margins to return to historical norms.
Lightbulb moment: investors adopt a more realistic attitude to investing in fossil fuels
The current energy crisis has prompted investors to rethink finance for fossil fuels. What has emerged is a more measured approach that reflects the real-world constraints on financial institutions and corporates in making long-term financing and capital allocation decisions.
“The shift in approach reflects both the complexity and the necessity of securing an orderly energy transition,” said Kavita Jadhav research director, Corporate Research. “The past year has made abundantly clear that energy supply and demand need to move in sync for economic stability and minimal price volatility.”
Crucially, immediate divestment from fossil-fuel positions would serve only to move financial-sector portfolio emissions elsewhere rather than achieve any significant real emission reductions.
With this reset the financial sector can drive tangible emissions reductions and set the fossil fuel sector on a pathway that is Paris-aligned.
Rewiring Europe: a power-market reset
Decarbonised electricity is at the heart of Europe’s energy transition. Consequently, when EU energy policy was rewritten in the aftermath of Russia’s invasion of Ukraine, the sector’s ability to deliver was put firmly in the spotlight.
“The accelerated deployment of renewables (45% of energy by 2030, needing around 70% of power from renewables) will require substantially higher levels of investment in wind and solar,” said Peter Osbaldstone research director, Europe Power. “The scaling up of the hydrogen industry and its need for renewable energy supplies will put even greater pressure on the industry to grow faster.”
As one of the most difficult years in recent times comes to a close, the analysts at Wood Mackenzie think these trends are reasons to have confidence in the industry’s ability to provide sustainable, reliable and affordable energy for the long term.
In creating the report, five of Wood Mackenzie’s analysts were asked to give their opinions on some of the major developments across the whole spectrum of the energy sector in 2023 and beyond. You can read the full report here.