Increased efforts to accelerate the energy transition and ensure energy security are driving a new upcycle in investment in the supply of oil, natural gas, renewable power generation, and metals critical to electrification.
Total investment in supply is set to hit an eight-year high in 2023 as demand for oil and gas rises in the post-Covid rebound and as the energy transition continues to gather momentum, according to estimates from Wood Mackenzie.
We have not reached the boom time, yet, but some metals key to the energy transition could soon see a new supercycle, the consultancy says.
That said, investments need a massive shift from fossil fuels into renewables and other low-carbon technology—including small modular nuclear reactors, long-duration battery storage, tidal power, and advanced geothermal—if the world has a chance to reach net-zero emissions by 2050, WoodMac’s Chairman and Chief Analyst Simon Flowers said last week.
For a shot at net-zero, the already record investment in low-carbon power needs to at least double and stay there for the foreseeable future. That’s not even considering the investment in grid expansions to support high levels of electrification, which is also a must, says WoodMac.
Investment In Energy And Metals Supply To Rise 5% To $1.3 Trillion
This year, investment in supply across oil and gas, power generation and renewables, and metals and mining is expected to rise by 5% annually to hit $1.3 trillion. Although growth will be modest, the level of investment would be 26% higher than the cyclical low of 2020/2021 and the highest annual total for eight years, per WoodMac’s estimates.
The modest growth in investment will partially reflect corporate strategies by upstream oil and gas operators and miners to stick to capital discipline, and rising costs and supply-chain bottlenecks for renewable power projects.
The share of investment in fossil fuel supply has dropped from 60% of total energy spend in 2015 to an estimated 40% this year. Fossil fuels, however, still deliver 80% of the global primary energy supply mix today, and they “are proving hard to shift,” Wood Mackenzie said.
The share of fossil fuel investments could rise in the next few years as governments look to boost energy security after the Russian invasion of Ukraine and the subsequent shift in global energy trade.
Upstream Oil & Gas Cautious On Spending Big
This year, upstream oil and gas investments are expected to rise by 8% annually to around $470 billion—continuing their recovery from the cyclical low of $370 billion in 2020, according to WoodMac. Most E&P companies are still very conservative in spending amid rising costs and the threat of more windfall taxes. Nearly half of the increase in spending will be inflation-driven, while only half of 60 large potential project FIDs are likely to proceed this year.
“We intend to remain disciplined while delivering compelling shareholder returns,” Shell’s chief executive Wael Sawan said last week, commenting on the supermajor’s record earnings for 2022.
The record profits of the oil and gas majors prompted renewed criticism from the White House and renewed talks about additional levies on company profits.
Investment In Metals Supply Barely Above The Lows Of Downcycle
Mining companies are even more cautious in their spending on supply, WoodMac says. This year’s investment is set to rise by 3% year over year to $149 billion, with copper leading growth.
“There is little sign yet that the mining majors are prepared to loosen the shackles and embark on a new phase of organic investment in the new capacity critical for the transition – copper, cobalt, lithium, nickel and aluminium among them,” WoodMac’s Flowers wrote.
Record Low-Carbon Investment Still Not Enough For Net-Zero
Growth in renewables is expected to see a brief slowdown this year and next, due to rising costs, supply-chain bottlenecks, and regulatory obstacles, before a new upward trend beginning in 2025.
Still, recent policies, especially the Inflation Reduction Act in the U.S., are reasons to be optimistic in renewables growth this decade, according to WoodMac. The consultancy sees the IRA boosting annual investment in renewables in the United States from $64 billion last year to nearly $114 billion by 2031.
Despite the rise in renewables, low-carbon energy supply needs at least double the current investment if the world has any chance of net zero by 2050.
“There needs to be a massive change in the allocation of capital from fossil fuels into low-carbon energy and transition metals if the world is to get onto a net zero pathway by 2050. There’s enough spend, but not in the right fuels and technologies,” WoodMac’s Flowers says.
In overall energy investment—not only supply—the energy crisis and policy actions sent global investment in low-carbon energy soaring to a record $1.1 trillion in 2022, with the money spent on the energy transition equaling for the first time investment in supply of fossil fuels, research firm BloombergNEF (BNEF) said in a report last month.
Despite the largest annual jump in investment in clean energy—31%—much more investment is needed to get the world on track for net zero in the long term, according to BloombergNEF.
In the company’s Net Zero Scenario, the world should invest an annual average of $4.55 trillion for the rest of this decade.
Last month, the International Energy Agency (IEA) said that as the world enters a new industrial age, total investments in clean energy technologies and infrastructure have to top $4.5 trillion in 2030 under the net-zero emissions by 2050 scenario.
By Tsvetana Paraskova for Oilprice.com
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