Friday, September 29, 2023

WoodMac sees US$10 Brent oil coming, majors facing decline on scale never before seen

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The action to achieve Paris climate goals will upend oil and gas prices. Under consultancy group Wood Mackenzie’s Accelerated Energy Transition Scenario (AET-2), all National and International Oil Companies face decline, and the sector will see asset impairments and bankruptcy or restructuring on a scale far greater than that of 2020.

“If we move to keep global warming to the 2°C limit set by the Paris Agreement, the energy matrix will change – and change profoundly,” said Ann-Louise Hittle, Vice President, Macro Oils, at WoodMac.

She added, “Our AET-2 scenario is a scenario, not our base-case forecast. It is one interpretation of how the Paris Agreement could be achieved, based on our fundamental analysis across the natural resource sectors.”

Even so, Hittle said the oil and gas industry cannot afford to be complacent. “The risks associated with robust climate-change policy and rapidly changing technology are too great.”

Under WoodMac’s AET-2 scenario, oil demand will drop significantly, and with it, oil prices. OPEC has an oil-market share of more than 50% by 2050, but less control.

Price fall

The steep fall in demand prevents those key oil producers from managing the market and supporting prices in the way it does today. Despite losing their price-setting ability, however, low-cost Middle East OPEC producers remain core providers of oil.

Consequently, oil prices begin to slip later this decade. “By 2030, under AET-2, we would expect Brent to average US$40 per barrel (bbl), down from US$60 to US$70/bbl currently. By 2050, Brent may slide to US$10 to US$18/bbl,” WoodMac stated. Gas demand, however, is expected to remain resilient.

WoodMac’s scenario would see the end of Big Oil and the rise of Big Energy. Financially strong integrated companies step up their investment plans to supplement dwindling upstream revenue with new cash flow from renewables, hydrogen and CCS.

The consultancy group’s benchmarking of the majors’ new energy strategies shows that, on the three technological pillars of AET-2, they are latecomers to renewables, are leaders in CCS and, as large consumers, enjoy a potential early-mover advantage in integrating hydrogen.

“The tantalising hope of a few more years of windfall cash flows may lead some IOCs and NOCs to defer action, but delay will not be a sustainable corporate strategy under the AET-2 scenario,” WoodMac said.

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