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Equinor annual perspective study of three scenarios for the energy future

Equinor produces an energy perspective study each year. It illustrates the forward uncertainty using three scenarios. These scenarios differ in their assumptions of economic growth and decarbonization, geopolitics and corporation amongst other things. Under all scenarios, they expect renewable energy to be the fastest growing energy source.

“Firstly, we expect the demand for goods and services, and activities that require energy to increase,” Russell Alton, head of finance, Equinor, says. “If we think what we're doing by population growth, by urbanization, particularly in emerging markets. Second, we're in the early stages of the energy transition, a transition driven by an intention to reduce carbon and other emission intensity, and as defined by the Paris Climate Agreement. Third, we think it is becoming increasingly clear that significant investments need to be made in the world's energy system to deliver into the demand growth and into the energy transition.”

In the renewable scenario from the energy perspective or the two-degree scenario as it is often referred to, they predict renewables growing at 7.4% annually from now to 2050. They also expect oil and gas to remain very relevant over this time frame, and a need for new investments in oil and gas under each scenario. It assumes significant growth as a part of the final energy demand mix.

Investment needed
“For oil, we see the supplies from existing fields decline annually,” Alton adds. “We think typically 3-6%, so there is a need to invest. To meet demand, we calculate that as an industry we need to develop up to about 480 billion new barrels of oil over the next 35 years. That's 30% more than is being delivered by the OPEC countries over the last 35 years.

“We also expect the need to invest in around 70 trillion cubic meters of new gas resources over the next 35 years. That's about 60% more than a combined production from the US, Russia, and the Middle East over the last 35 years. A good reason to continue investing in good gas projects, and especially those with a low carbon intensity.”

What about the cost of delivering all these new volumes? The IEA projects that almost $20 trillion needs to be spent between 2015 and 2040 on new oil and gas. Also, new investment is required for the energy transition including renewable energy, and new solar, and new wind in significant infrastructure, and in energy storage.

If you look at the IEA numbers, no less than $500 billion is going to be required for renewable power annually between 2015 and 2040 to deliver the two-degree climate target. Last year the investment in renewable energy barely reached $300 billion. That had fallen from about $450 billion in 2015. “We're looking at a number between now and 2040 of around $10 trillion in new investment in renewable energy,” Alton says. “A large number, and a number that we feel in Equinor that we're very well-positioned to deliver into.

“We see partnership as highly relevant as we seek to build our renewables business. We've developed excellent symbiotic relationships with our partners across the globe. The partnership is not just with strategic players; we also seek to partner with financial players. Project financing has been a pivotal tool to assist the funding of our renewable’s assets, delivering risk-sharing with the business community.

“We're keen to continue to use the financing markets and to use our balance sheet, primarily where it may enable access to attractive projects. Looking forward, we see a significant need to finance the construction and operation of renewables assets. Given the risk profile, we've seen a smaller pool of capital to fund during the construction phase.

“Part of the construction of renewable assets can be widely financed. They're becoming a focus for a broader street of investors including infrastructure farmers, pension funds, and insurance companies. We do see a high volume of project financing capital, much of which can support that important construction phase.”

Building a renewable future
Again referring to IEA and the latest world energy investment report, 60 billion dollars of project financing have supported renewables globally in 2017. “We also see interesting developments in the capital markets,” Alton explains. “Notably in the UK, with the Walney offshore wind transaction, which was partially funded by the first project bond issuance for an offshore wind farm in the construction phase. We do expect the project bond market to be relevant in the current refinancing of our Dudgeon wind farm.

One final thought from Alton to finish on. While he sees an increasing number of banks as the typical risk takers for the construction phase, there is evidence of growing interest from the project bond markets and the capital markets. “I do wonder whether the global fixed income capital markets will develop an increasing appetite to fund renewables and infrastructure assets either during or post the construction phase,” he concludes.

“This, for us, will provide a broader set of partners to fund the significant amount of capital to deliver the energy transition. I'm sure that this will need some structuring support. Maybe this is the question we should pose to my banking colleagues on today's panel.”

Sources: ACC Smart Brief, Global Energy World, Forbes

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Equinor annual perspective study of three scenarios for the energy future

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