Statoil Energy Perspectives 2015-1Statoil | June 2015

Eirik Wærness, Chief economist

Long-term macro and market outlook June 2015

2015 is an important year. It will give signals about global decision makers’ ability to agree on an effective climate policy that might lead to real progress, or not. We might see Western sanctions against Iran lifted. Relations between Cuba and its northern neighbour seem to be rapidly improving. On the other hand, relations between Russia and the West are cold and might not improve any time soon. China is fighting to reduce the most negative effects of its polluting energy mix, while trying to restructure its economy and avoid a rapid slowdown in growth – a tremendous challenge. Prospects for economic and investment reform in India look good. USA is considering allowing crude oil exports on the back of a tremendous increase in its shale oil production. The new king in Saudi Arabia is putting his mark on political priorities, and the new strategy of watching Opec’s market share in crude oil markets is having profound effects on global markets. The situation in Libya, Syria and to some extent Iraq seems locked and critical. Terrorists are creating havoc in several countries in Africa, from Nigeria to Kenya. Ebola is reportedly eradicated in Liberia. Brazil is struggling between the World Cup and the Olympics, tarnished by corruption. Growth is picking up in Spain, Germany struggles to handle the consequences of its Energiewende, and Greece is going from cash crisis to cash crisis. The UK is considering its long-term relationship to EU. Uncertainties prevail, as usual, with some developments going in the right direction, others in the wrong, and with more muddy geopolitical demarcation lines than we are used to.

Drawing the picture of future macroeconomic development, energy demand, fuel mix, economic development, and CO2 emissions in the light of these developments is an exciting and necessary, but difficult task. In this year’s Energy Perspectives, we discuss uncertainties in important drivers behind energy markets and climate change that may lead to highly different development paths and outcomes. By presenting three different sets of assumptions we get three alternative scenarios for, or stories about, the future. With a 25-year time horizon, it is important to keep in mind that we can only hope to sketch a possible area of likely development for energy demand and fuel mix for different regions and sectors. The actual development will most likely take place within the boundaries of the area defined by our scenarios.

The trajectories in this report describe developments in the scenarios labelled Reform, Renewal and Rivalry. Reform is a story about gradual development towards an energy future defined by tightening of energy and climate policies, emission standards and other framework conditions as signalled by governments leading up to the climate conference in Paris. It portrays a significant and by historical standards sharp improvement in energy efficiency, gradually increasing carbon prices and rapid increase in renewable energy. However, the energy related CO2 emissions remain significantly higher than prescribed by the 2- degree target on global warming. The consequence of this is gradually increasing costs of climate change, which we have taken into account through a reduction in the economic growth rates towards the end of the period. Renewal is a story about a rapid, green energy transition driven by global consensus and action to achieve the 2-degree target through energy efficiency, reduced coal consumption, growth in no- and low-carbon sources of energy, and transformation in transport and electricity generation, driven by increasing carbon prices and energy and climate policies. It is a world where we hardly use more energy than today in 2040, in spite of being more than twice as rich, and where the global energy use is on a sustainable path. Rivalry is a story about continued geopolitical conflict and power struggle, with sanctions, slower economic development, less trade and focus on security of supply instead of on globally efficient solutions to common challenges. On the energy arena, this dampens energy demand, but also leads to focus on domestic energy sources and therefore higher global carbon intensity.

The outcome space defined by these scenarios indicates an average economic growth from 2012 to 2040 at between 2 and 2.9% per year, respectively. Total primary energy demand grows between 0.2 and 0.9% per year, reflecting improvement in global energy intensities of between 1.3 and 2.7% annually. Oil demand will grow between -0.6 and 0.4%, while gas demand is expected to take market share in all scenarios and grow between 0.6 and 1.2%. The outcome space for coal is very wide and indicates the following range for growth rates: -2.4% to 0.8%. Nuclear energy is expected to grow between 0.8 and 2.8% per year. New renewable energy is expected to grow significantly in all scenarios, between 5.9% and 11.1% annually. In Renewal, growth in solar energy equals 15.7% per year, leading to a 59-fold increase in electricity production from this energy source. CO2 emissions in 2040 will be between 61% and 114% of the level in 2012, the lower of these consistent with the 2-degree target.

Hoping to contribute to a fact based discussion on future developments in global energy markets, Eirik Wærness Chief economist

Click here to download the document: Statoil Energy Perspectives 2015