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CERAWeek: Managing the demand side of the energy picture

09 March 2021 Kevin Adler

One sobering thought that emerged during a number of CERAWeek by IHS Markit sessions is the idea that the net-zero announcements by governments and industry will not enable the world to reach the Paris Agreement goal of limiting temperature increases to 1.5 degrees Celsius or even 2 degrees Celsius by 2050 compared with pre-industrial levels.

At some point, governments, companies, and individuals are going to have to consider lifestyle changes that will reduce demand for energy as part of the solution, three financial industry executives said during a 5 March CERAWeek discussion.

But will people be willing to adjust, asked Raoul LeBlanc, IHS Markit vice president North American unconventionals. "If we get into a situation where people will have to trade off [lifestyle and emissions], how important do you think societal pressures will be?" he asked.

"There are stated preferences, and there are revealed preferences," observed Steve Pattyn, managing partner of Yaupon Capital Management, a New York City-based hedge fund. "We have the stated preference to eliminate carbon, and the way we [have started to] do that is by changing the supply of energy. But so far, there have been no government actions to enforce changes in consumption or the demand side."

Revealed preferences so far show a small appetite for sacrifice. "What sacrifices are we really willing to make in order to achieve net zero — and if it's [only on] the supply side, is it enough? I think we are going to face some really thorny questions on demand that will be unpopular," Pattyn continued.

Pattyn posed this hypothetical: What if the government said that "unless you have a family member who has passed away, you can only take five flights per year, because that's the only way we can eliminate carbon on a scale that's fast enough that our stated preferences require?"

Daniel McCarthy, vice chairman of investment banking for National Bank of Canada, agreed that people are resistant to sacrifice. "I don't think there are many people who are going to do things not in their own economic interest, just to meet societal goals to reduce emissions," he said. "Look at sales of electric vehicles — they're just not relevant [to the scale needed] in most jurisdictions, unless there's subsidies on those purchases."

Besides, the minimal behavioral change of using an electric vehicle would produce only a tiny sliver of the solution, McCarthy said.

Bobby Tudor, chairman of Tudor, Pickering, Holt & Co., a Houston investment and merchant bank, said that even advanced technologies being developed now are likely to fall short of delivering a net-zero carbon future.

"Our fundamental issue around taking [carbon dioxide] out of the air is that it's not going to be solved from the demand side," he said. "The demand side is a lot more difficult because it involves all of us individually. It involves paying more for energy, it involves making sacrifice — and none of those things is politically popular or what any of us want to do."

How to get there

How would society get to a demand-management solution, and what would it mean for traditional oil and natural gas producers?

IHS Markit's LeBlanc said that "a reckoning is coming because we're not doing enough on the demand side," and something will have to be done to incentivize private capital to help propel solutions.

The panelists agreed, and they said that a combination of government support and better returns for carbon-reduction solutions could be the answer. "I think what's going to have to happen, to one extent or another, is the government is going to have to subsidize … those new technologies," said McCarthy.

As the costs of new technologies fall, such as solar and wind have done in the last decade, they will make economic sense and will be adopted more widely. "At the end of the day, that's where we have to get to," McCarthy said.

At another CERAWeek session, "How to Think About the Energy Transition," Hunter Hunt, CEO of Hunt Energy, spoke about the crossover between government mandates and consumer-driven behavioral change. "At the end of the day, I think a lot of this will be consumer driven," Hunt said. "Almost all big transitions … are a pull not a push. Nobody mandated that you couldn't use horses any more when the cars showed up."

Texas is a prime example of how a major economy can evolve to lower carbon emissions without mandates, he said. "It hasn't been mandates that's been driving the wind and solar, and now batteries, that are coming on," he said. Instead, it's been the economic competitiveness of the new technologies.

Speaking from a European perspective as the Director of Integrated Gas & New Energies for Royal Dutch Shell, Maarten Westelaar said that the demand-side change will take a coordinated approach. "I do think there's a combination of here of technology push, customer pull and intelligent mandates - that can get us onto the trajectory to net zero," he said.

The role of companies is "to respond to consumer choice and political mandates," he continued. And that can create opportunities. "It's fascinating to look at how quickly electric vehicle penetration is happening in Europe. We're seeing three times faster pickup this year than last year. It is not mandate-driven, and everybody is happy with it."

At the same time, both Westelaar and Hunt said that change will happen gradually in energy, which is so embedded in everday life. Westelaar reminded CERAWeek participants that forecasts are that global energy demand will grow by 40% in the next three decades. "So, let's start providing more energy in a clean way and then displace it [fossil fuels]," he said.

Positive impact

For the oil industry, the public's awareness of the true scale of the change that's needed could be a positive, said Tudor. "I actually think the high-pitched noise directed at the traditional oil and gas business will fade over time, and it's going to become more oriented towards consumption," he said.

Ironically, at the same time that attention might shift from the supply side to the demand side, the public pressure on the supply side that's rising now could help oil companies that stay in the fossil fuel game, said Pattyn. As European oil majors BP, Shell, and Total are pushed to stop drilling in Europe, Pattyn said this "is an unmitigated positive for US and OPEC … [and] extremely bullish for oil prices."

Companies that make smart investments and reduce the carbon from their oil and gas projects will prosper, Tudor agreed. "Investors can make money in businesses that are not growing and, in fact, are declining," he added. "And while I would suggest that the US onshore shale conventional business is highly unlikely to grow anything like it has in the last five to 10 years, that doesn't mean that the capital that goes into it can't make an attractive return."

Posted 09 March 2021 by Kevin Adler, Editor, Climate & Sustainability Group, IHS Markit

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