Equinor economist: Energy transition needs action, not arguments

Oct. 12, 2018
It is time for the world to stop arguing and take action if it expects to make the necessary energy transition to meet climate goals outlined in the 2015 Paris accords, the chief economist for Equinor ASA said. “There’s an urgent need to stop talking about scenarios and start actually doing something. It’s an enormous task,” said Eirik Waerness, who also is a senior vice-president at the Norwegian multinational energy company, in an Oct. 10 presentation at the Center for Strategic & International Studies.

It is time for the world to stop arguing and take action if it expects to make the necessary energy transition to meet climate goals outlined in the 2015 Paris accords, the chief economist for Equinor ASA said.

“There’s an urgent need to stop talking about scenarios and start actually doing something. It’s an enormous task,” said Eirik Waerness, who also is a senior vice-president at the Norwegian multinational energy company, in an Oct. 10 presentation at the Center for Strategic & International Studies.

Basing his speech on Energy Perspectives 2018—Equinor’s eighth long-term macroeconomic and market outlook that presents three scenarios through 2050—Waerness said there is general agreement that a growing global population and economic growth will increase demand for goods, activities, and services that require energy.

The challenge is to meet that demand while contributing to increased sustainability, Waerness said. This will require substantial improvements in energy efficiency and a rapid change in the world’s energy mix, he said.

“When we think about where the global energy markets, energy systems, and energy mix might be moving over the next decades, the answer depends very much on which window we choose to look out of,” he said. “On one hand, you can become very optimistic in terms of getting carbon dioxide emissions down when record numbers of electric vehicles are being put on the road, and costs are being reduced in that part of the light-duty vehicle segment.”

At the same time, 79 million new cars were put on the road in 2017 running on a combustion engine—the same number as in 2016, he said. “So, the electric vehicles only take the growth in the new car fleet. But it will speed up. We think electric vehicles may become competitive within the next 5-10 years with combustion engine vehicles without subsidies. So, there is a signal of a potential change here that might be very significant,” he said.

CO2 emissions climbing

On the other hand, global CO2 emissions start to rise again in 2017, Waerness said. “We had 3 years of flat CO2 emissions. Some people thought we actually had bent the curve, but it was not so. In 2018, we will have higher emissions again than last year,” he said.

“One of the reasons is increased oil demand—1.7 million b/d last year. The energy content of that amount of oil is three times the amount of electricity we can produce from those record numbers of windmills and solar panels. That shows a little bit of the scale of the challenge,” Waerness said.

He noted that an examination of both global and regional geopolitics since the Paris climate accords were reached in 2015 shows that nearly everything has gone in the wrong direction. “Hardly anything has happened in terms of putting measures behind targets and actually trying to move us toward climate goals,” he said.

“The level of conflict has increased. We have sanctions against Russia and Iran. We have increased protectionism between China and the US and other parts of the world, lowering economic growth and our possibilities of technological change that would move us in the right direction” on meeting climate targets, Waerness said.

“This all reduces the global probability that politicians can act to solve one of the biggest problems we’ve ever faced as human beings. An enormous collective effort will be necessary,” he said. “Having a political climate where this is difficult, as other legitimate political concerns determine the agenda, makes it more difficult than many people hoped after making those commitments in Paris in 2015.”

Energy Perspectives 2018 uses three scenarios to describe what might happen by 2050. In the reform scenario, which Waerness said is the central one, it is assumed that all national promises in the Paris Agreement will be fulfilled and delivered upon by 2030. “That’s not a walk in the park for many countries. It’s relatively easy for others,” he said.

‘Much more is needed’

“If that happens, energy intensity will go down, CO2 emissions intensity will go down, and energy demand intensity will grow but we will be much more energy-efficient than we’ve been historically,” he said. “But it won’t be sufficient. We will hardly budge CO2 emissions from the energy sector in the reform case. Much more is needed in terms of energy and climate policies than what is indicated by the various national contributions and expectations that those will be tightened further after 2030.”

That’s why the outlook also contains a renewal scenario, which assumes that countries will be able to meet their targets under the Paris accords. “That’s when we would take energy CO2 emissions down to the necessary level to be consistent with the 2° global temperature growth limit target, with a slightly higher than 50% probability. Then we would have a way back,” said Waerness. “But it would not be a walk in the park. It’s an enormously challenging change.”

Finally, there’s the rivalry scenario, under which Equinor’s economists dared to model the consequences of continued geopolitical volatility, including regional conflicts, continued unrest in the Middle East, periods of protectionism, and periods of economic sanctions. Waerness said there would be a great emphasis on economics, but less energy efficiency.

“Countries would resort to their own indigenous sources of energy due to supply security concerns. Therefore, there would be too much coal demand and use, particularly in Asia, where energy demand is growing and the ample indigenous resource those countries have is coal,” he said. “It’s not the scenario we’d like to be in, with both higher emissions and economic growth. But it’s not a scenario we can exclude.”

Waerness said that are a handful of certainties amid the indefinite array of possibilities. “One is that the demand for goods, activities, and services that require energy—either in their production or consumption—will go up. There will be 2.5 billion more people on Earth by 2050. We will have economic growth and higher purchasing power, so we will demand more goods, activities, and services that require energy,” he said.

“Whether total primary energy demand goes up will be determined by our ability to increase energy efficiency and the types of energy sources we will be using. That’s not a given. What we think is a given is that underlying energy demand will go up,” Waerness added.

Transition under way

Equinor’s outlook also reflects the company’s belief that the world is going through an energy transition that is obvious when it comes to the growth of demand for electric vehicles, but less apparent elsewhere. “So, the speed of the transition is much too slow, and the scope of the transition is much too narrow to deliver on the necessary changes. That could change. It will have to if we’re going to reach the agreed upon climate targets,” Waerness said.

A third certainty is that enormous investments will be needed across the energy spectrum to deliver on the demand to replace existing production which is declining. “It’s not only in renewable electricity, with associated infrastructure grids and backup storage capacity, but also in very large investments for a new supply of oil and gas—even in a 2° world,” Waerness said.

“If we were to stop all oil and gas investments except to maintain existing operations, supplies would fall between 3% and 6% globally every year. Under those conditions, 480 billion bbl of new oil would need to be delivered by 2050. That’s 30% more than the accumulated deliveries from [the Organization of Petroleum Exporting Countries] over the last 35 years,” he warned.

The same is true for gas, where there is less of a range, and demand is not expected to fall as much, Waerness said. It also probably is easier to pinpoint where all that new gas will need to come from. Not as much exploration will be needed, and there won’t be as many quality issues as exist with future oil supplies, he said.

“But gas is much more difficult to make profitable for an oil company. It has longer production times, is more capital-intensive, and has a lower price per energy unit than oil,” said Waerness. We might need 79 trillion cu m. That is 60% more than the accumulated supply from the US, Russia, Iran, Qatar, and the rest of the Middle East.”

The challenge will be to assure that companies will be able to realize returns enough to attract investors under regulations that also recognize broader societal and environmental needs, he said. “The balance will need to be between what is most efficient, and what is cheapest,” Waerness said.

Contact Nick Snow at [email protected].