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The Optimists vs. the Declinists

Oil and gas demand forecasts by OPEC Secretary General Haitham al-Ghais and IEA Executive Director Fatih Birol

The 2023 World Petroleum Congress and COP28 highlighted differences in competing oil and gas demand forecasts. These differences are critical in shaping energy and climate policy, so let’s take a closer look.

As a climate activist, I’ve been heartened to see oil and gas demand forecasts predict imminent decline in the demand for oil. The International Energy Agency, the Canada Energy Regulator, BP, Rystad Energy and others have clearly stated that the energy transition is underway and gaining momentum. The ways in which we produce and use energy are changing so rapidly and fundamentally, these analysts say, that fossil fuel demand will peak before 2030 and then go into permanent decline. If you worry about climate change, this can only be good news. A drop in fossil fuel use means that greenhouse gas emissions will finally begin to decline, slowing our march towards destruction and giving our fragile biosphere a chance to heal.

Yet I’ve been perplexed by the recent public statements of some politicians and industry figures, who argue that oil and gas will dominate the world’s energy mix for decades to come.

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Alberta Premier Danielle Smith typifies this view, arguing that the IEA is “no longer credible.” Chevron CEO Mike Wirth echoes Smith’s dim view of the IEA’s projections, saying, “I don’t think they’re remotely right . . . You can build scenarios, but we live in the real world, and have to allocate capital to meet real-world demands.” And at COP28, conference president Sultan al-Jaber infamously threw shade on fossil fuel phase-out and repeated the old denier’s canard about “[taking] the world back into caves.”

Oil and gas firms have backed their bullish views with investments. Chevron purchased the U.S. producer Hess for $53 billion USD. ExxonMobil bought Pioneer Natural Resources for $64 billion USD. Here in Alberta, Suncor’s Fort Hills mine is poised to expand into a neighbouring wetland. Syncrude has received approval for its Aurora South expansion. Cenovus Energy has applied for permission to develop its Kirby West Project, an in situ facility, and to extend production at its Christina Lake site until 2079.

What’s going on here? With so many oil and gas demand forecasts predicting imminent decline for oil, why are prominent politicians and executives arguing for expansion? They’re not acting blindly or independently. Rather, they are following the lead of a group I call the fossil fuel optimists — a camp led by the Organization of Petroleum Exporting Countries (OPEC), which sees ongoing demand for oil and gas. Opposing the OPEC camp is a group I call the declinists — a group of industry forecasters led by the IEA, which sees a near-term peak and decline in the demand for oil and gas.

How can we characterize these oil and gas demand forecasts? What implications do their views hold for Alberta and the climate?

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The Optimists

Let’s start with the optimists, using OPEC’s World Oil Outlook 2045 as our source. WOO2045 encompasses a Reference Case and two “alternative scenarios.”

The Reference Case is “based on available technology options, cost developments, trends in competition and levels of energy-related investment.” It considers “targets already included in national legislation and Nationally Determined Contributions (NDCs) to the extent they are technically and financially viable.” I suppose OPEC reserves to itself the right to determine what is technically and financially viable. It excludes net-zero policy targets before 2045 and the wholesale adoption of electric vehicles (EVs), which it considers unlikely. These are judgment calls, which any forecaster is entitled to make. OPEC might be right or wrong in these judgments. Only time will tell.

The alternative cases OPEC considers are the Advanced Technology Scenario and the Laissez-Faire Scenario:

  • The Advanced Technology Scenario foresees the widespread adoption of carbon capture and underground storage (CCUS), carbon capture and storage (CCS), direct air capture (DAC), hydrogen, and a circular economy to limit primary energy demand.
  • The Laissez-Faire Scenario assumes more rapid growth in developing economies, resulting in higher energy and oil demand than the Reference Scenario.

For the Reference Case, OPEC believes that between now and 2045:

  • Primary energy demand will increase from 291 to 359 million barrels of oil equivalent per day (Mboe/d) — an increase of some 23 per cent.
  • Oil demand will grow by 15.4 Mboe/d until 2045, when it will reach 106.1 Mboe/d globally.
  • Gas demand will grow by 20 Mboe/d until 2045, when it will reach 87 Mboe/d globally.
  • Coal use will drop, and nuclear and renewable sources will supply the remainder of the energy demand.

OPEC bases these projections on an expected population growth of 1.5 billion people between now and 2045, when world population will top out at 9.5 billion, and on an assumption that global GDP will grow by 3 per cent per year, nearly doubling over the study period. OPEC believes fossil fuel demand will increase primarily in non-OECD regions — that is, in China, India, OPEC itself, Russia, and other Eurasian nations. This regional angle holds great significance for Alberta, as we’ll see in a moment.

OPEC acknowledges that oil’s share in the energy mix will drop modestly during the study period, due to the growth in renewables, but believes oil will still supply about 30 per cent of the world’s primary energy in 2045 — the largest share in the energy mix.

To meet this increased demand for oil, OPEC believes the oil sector will require $14 trillion USD (2023 dollars) in additional investment between now and 2045 — an average annual investment of $610 billion USD. It expects the bulk of this investment, or $11.1 trillion USD, to be required in the upstream sector, with the remainder being devoted to downstream and midstream requirements. Without these investments, OPEC foresees risks to market stability and energy security.

To reduce emissions, OPEC supports carbon capture utilization & storage (CCUS), direct air capture (DAC), and clean hydrogen. But the efficacy of CCUS is an open question, DAC is an unproven technology, and clean hydrogen produced from natural gas in conjunction with carbon capture and storage (CCS) does not significantly reduce emissions. In the end, these measures do little more than support the continued use of oil and gas.

The Declinists

The declinists, who follow the lead of the International Energy Agency (IEA), adopt a different view. The IEA’s flagship publication is its World Energy Outlook, which received its most recent annual update in October 2023.

Like OPEC, the IEA considers three scenarios to estimate future energy demand:

  • The Stated Policies Scenario (STEPS) considers the latest policy settings, including energy, climate and related industrial policies. This scenario most closely resembles the OPEC Reference Case.
  • The Announced Pledges Scenario (APS) considers national energy and climate targets, and it takes national governments at their word, assuming all targets are met completely and on time. 
  • The Net Zero Emissions by 2050 (NZE) scenario considers the goal of limiting global warming to 1.5℃, deriving demand from consumption levels compatible with a 1.5℃ future.

The Canada Energy Regulator based its scenarios on the IEA’s 2022 World Energy Outlook when it last updated its Canada’s Energy Future report:

Because STEPS most closely resembles OPEC’s Reference Case, we’ll focus on this scenario. Among other things, it foresees:

  • Oil demand declining from 101.5 million barrels per day (Mb/d) in 2030 to 97.4 Mb/d in 2050.
  • Gas demand declining from 4,299 billion cubic metres (bcm) in 2030 to 4,173 bcm in 2050.

The following figure illustrates energy consumption under STEPS.

Oil and gas demand forecasts: Fossil fuel consumption by fuel in the STEPS, 2000-2050 (International Energy Agency, CC BY 4.0)
Fossil fuel consumption by fuel in the STEPS, 2000-2050 (International Energy Agency, CC BY 4.0)

The IEA believes progress in clean energy and electric vehicles will be the chief factors in declining fossil fuel demand. It sees enough momentum in the clean energy economy to produce “a peak in demand for coal, oil and natural gas this decade” — not only in STEPS, but in all scenarios. 

The World Energy Outlook discusses the technological advances driving decarbonization at length — renewables displace coal-fired electricity generation; advances in steel production shrink coal demand in that sector; an “astounding rise” in the adoption of electric vehicles weakens oil demand; while advances in electricity generation and space heating drive down the demand for gas.

Like OPEC, the IEA sees these changes as being unevenly distributed across regions. Fossil fuel demand declines the fastest in wealthier countries and in China while growing in the so-called developing world.

The following figure illustrates these trends. Oil and gas are shown in the middle two panels. For STEPS, the overall trend is one of gradual decline. For APS and the NZE Scenario, the rates of decline are much steeper.

Oil and gas demand forecasts: global total energy demand by fuel and scenario, 2010-2050 (International Energy Agency, CC BY 4.0)

Global total energy demand by fuel and scenario, 2010-2050 (International Energy Agency, CC BY 4.0)

China

The IEA’s discussion of demographic and energy trends in China is particularly complex. Those clinging to the view that China’s robust growth renders all other climate action insignificant might change their views on reading the IEA’s analysis. While it is true that China’s growth and emissions have soared during the last few decades, it’s a vast oversimplification to suppose that such trends will continue indefinitely into the future.

China’s working age population peaked in 2015 and is expected to fall by more than 20 per cent by 2050. This one demographic trend drives falling rates of GDP growth and a near-term peak in Chinese energy demand. Along with China’s rapid electrification and clean energy growth, these trends are expected to result in declining fossil fuel demand and emissions.

STEPS vs. OPEC Reference Case

Together, the IEA and OPEC reports run to hundreds of dense, information-rich pages. It’s not easy to assimilate it all. But the following table summarizes the main points of comparison.

IEA STEPS (in 2050)OPEC Reference Case (in 2045)
Global oil demand97.4 Mb/d106.1 Mboe/d
Global gas demand69.13 Mboe/d187 Mboe/d
Investment required in fossil fuels ($USD)No figure given$14 trillion
International Energy Agency Stated Policies Scenario vs. OPEC Reference Case

When it comes to global demand for oil and gas, OPEC’s World Oil Outlook is decidedly more bullish than the IEA World Energy Outlook. But even a more bullish global outlook does not translate into a bright future for Alberta oil and gas.

The Regional Angle

Most people believe that oil and gas are traded in one large global market. They assume that oil and gas are completely fungible commodities, and that any source of supply can be used to meet any source of demand. This view is an oversimplification of a complex market.

It would be more accurate to say that oil and gas are partially fungible commodities, which are traded in regional markets. Several factors combine to align particular sources of oil and gas with particular regional markets.

One factor is infrastructure. Crude oil and gas travel by pipeline, railcar, and — given tidewater access — by ship. Alberta oil currently has limited tidewater access, via the original Trans Mountain pipeline (for light crude). Alberta gas does not currently have a route to the Pacific Ocean.

This situation will change in the near future with the opening of the Trans Mountain Expansion pipeline. TMX will twin the existing pipeline, bringing its total capacity from 300,000 barrels per day to 890,000 barrels per day. Heavy crude will travel primarily through the TMX expansion to Burnaby, B.C. The TMX was expected to enter service late in the first quarter of 2024, but a construction challenge and regulatory hurdle pose a threat of “catastrophic” delay.

Another factor is refinability. Alberta produces primarily bitumen and heavy crude. These resources require specialized refining facilities, such as the Pine Bend Refinery in Minnesota. Even with TMX, Alberta oil will not have access to an infinite number of refineries.

Both the IEA and OPEC agree that oil demand will decline in Alberta’s most important market — the United States. Both also agree that demand will grow in the near term in the non-OECD markets — primarily China, India, OPEC, and Russia. Yet it’s unlikely that Alberta will be able to sell oil in these markets.

Alberta may sell crude oil to China, which will have some capacity to use heavy crude oil as a feedstock for petrochemicals and plastics. It may also sell some gas to China if it acquires a way to ship it there, although even then, Alberta would face stiff competition in China from American and Qatari gas suppliers. But with its falling population, rapid electrification and shift to renewables, it’s unlikely that increased demand from China will replace lost U.S. demand entirely.

Alberta also ships some oil to India — about 57,000 barrels per day, which travels via connecting pipelines Flanagan South and Seaway and by rail to the Gulf Coast, and from there to Asia. Even with TMX in operation, it will be difficult to expand this trade, given the current state of Canada-India relations.

Alberta will not sell oil to OPEC, which has its own ample supplies of light, sweet crude and natural gas.

For geopolitical reasons, Alberta will not sell oil and gas to Russia. Even if geopolitical issues were not a concern, Russia has ample supplies to meet its own needs.

The outlook in regional oil and gas markets does not bode well for Alberta producers. Both the IEA and OPEC expects the largest and closest markets for Alberta fuels — the United States — to decline sharply. Both agencies foresee growth elsewhere, but in non-OECD markets that Alberta will have difficulty reaching, such as Asia, OPEC, and Russia.

The Politics of Oil and Gas Demand Forecasts

Oil and gas demand forecasts have political dimensions. We can glimpse these politics in the rhetoric employed by the forecasters and in the way vested interests align themselves with particular forecasts.

In the simplest sense, forecasters who represent producers, such as OPEC, have an interest in producing forecasts that show increased demand for oil and gas. These scenarios attract investment, which enables the oil and gas sector to expand. Oil-producing jurisdictions (such as Alberta) and the political parties most aligned with the petroleum industry (such as provincial and federal Conservatives) have an interest in highlighting these forecasts.

Aside from the numbers they publish, those predicting higher oil and gas production buttress their case through their rhetoric, which makes heavy use of terms such as realistic, pragmatic, real world, and the like. These terms have persuasive force, and they’re easier to remember than figures for production and demand. There’s also an opposite rhetoric used to belittle environmentalists and proponents of renewable energy: radicals, socialists, alarmists, dreamers, and the like.

When Danielle Smith scoffs at the IEA and says it’s “no longer credible,” she’s referring only to the NZE scenario. She omits STEPS and APS, which also forecast decline, albeit a more gradual decline. She also mischaracterizes the NZE scenario, painting it as a polemic when it is in fact merely a roadmap for an objective to which many firms and governments have already publicly committed themselves: net zero.

OPEC bases its scenarios in part on assumptions of a “gradual evolution of energy policy” and slow adoption of technologies such as electric vehicles. These are not neutral assumptions, but rather serve OPEC’s interest in bolstering investor confidence in the petroleum sector. Given its gargantuan size and influence, we can also assume that OPEC members may act in ways that foment resistance to change. In fact, we see a glimpse of such strategies in Saudi Arabia’s oil demand sustainability programme (ODSP), which aims to promote hydrocarbon demand through the development of supersonic air travel and (in poorer states) fossil fuel-powered transport and electricity generation.

How do we explain the Alberta petroleum industry’s drive to expand production in the face of credible predictions of declining demand? Perhaps the strategy is simply to glut the U.S. market, hoping that the low prices brought about by oversupply — coupled with overt and covert resistance to climate action — will prolong the energy transition or even derail it altogether.

Regardless of the outcome, an oversupply strategy will result in stranded assets, financial havoc, and climate-driven destruction. That’s a poor bet, and we shouldn’t take it.

  1. Stated as 4,173 billion cubic metres per year in IEA, World Energy Outlook 2023 ↩︎
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