Tuesday, December 13, 2011

Exxon Still Sees Bright Future for Gas

Exxon released its annual Outlook for Energy report yesterday (press release, link to report dowload page).  The company continues to see natural gas as an ascendant fuel for the first half of the 21st century.  Much of this growth will come at the expense of coal, which is expected to peak in 2025 and decline 10% by 2040.  Look at the red bars versus the orange bars on the table below.

Exxon uses the Outlook report as a strategic planning tool to direct its investments in directions of the greatest long-term benefit.  Energy super-majors like Exxon and Royal Dutch Shell have the financial resources to be able to look at the distant horizon while scrappy independents suddenly are busy chasing oil and liquids to build cash flow and appease investment analysts.

The report is a fascinating look at the next 30 years and is too much to summarize here (it is definitely worth flipping through).  But the bottom line for natural gas is that the biggest growth opportunity is in electricity generation, which is expected to increase 80% from 2010 to 2040.  Over time, lower carbon sources like renewables and natural gas will take on a greater role than coal.  Part of the reasoning is environmental but the other part is efficiency.  Exxon expects power generation equipment, such as newer natural gas turbines, to become more efficient.  As a result, while global electricity demand is expected to increase by 80% by 2040, the demand for primary fuel to create the additional electricity will only increase by 45%.  The chart below sketches out demand and supply for the next 30 years.

Beyond efficiency, the move to gas is also likely to be a cost issue, as Exxon expects most developed nations to affix a monetary charge for carbon emissions.  Below, with the assumption that by 2030 there is a $60/ton charge for carbon emissions, coal suddenly becomes more expensive than gas, nuclear and wind, all of which are expected to take market share from coal over the next several decades.

Exxon expects developed nations to charge $80/ton of carbon by 2040.  In developing nations, Exxon sees carbon costs of around $20 to $30/ton by 2030.  The flip side of carbon charges is that the higher the charge, the more attractive it makes carbon capture technologies look (especially for coal).  The technology still has issues regarding technical feasibility and scaling, but that's another story.

China has been the big boogeyman over the past few years in climate discussions with its coal power station building frenzy, but Exxon expects that to wane in the next couple of decades.  Exxon sees China's coal usage decline around 2030, even as its electricity needs continue to increase.

Nobody has a crystal ball to divine the future, no matter how many billions of dollars they have in the bank, but it is illuminating to see where this super-major sees shifts in the energy markets over the next 30 years.  While you might be able to read in some wishful thinking on Exxon's part, their view of the future is really interesting.  While natural gas is unpopular among producers these days, it looks to have strong growth potential in the long term.

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