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Importance of Energy Security

Over the last few decades, the spotlight on energy security has subsided as globalized markets provided a sense of secure energy supplies. In the past two years, many governments have faced reevaluating their approach to energy security because of skyrocketing energy prices, the cost of living challenges that followed and the geopolitical risk associated with securing energy sources.

This reassessment acknowledges that to secure public support and prevent significant economic disruptions, with the potential political consequences that could follow, the energy transition needs to be grounded in energy security, with adequate and reasonably priced supplies.

While Russia’s invasion of Ukraine in February 2022 did not initiate the current crisis of energy supply, it brought attention to ongoing issues. The current crisis of energy supply began in summer 2021, when the economic recovery that came with the end of COVID-19 lockdowns boosted global energy consumption.

Energy prices increased as demand outstripped supply in the second half of 2021 for oil, natural gas and coal markets. The US government announced the first release from its strategic petroleum reserve in November 2021, three months before Ukraine was invaded. It is now clear that "preemptive underinvestment" constrained the development of sufficient new oil and gas resources.

Government rules and regulations, investor concerns over climate and sustainability, low profits due to two price drops in seven years, and uncertainty over future demand are a few causes of upstream underinvestment. The shortfall in investment was “preemptive” because of what was mistakenly assumed — that sufficient alternatives to oil and gas would soon be in place at scale.

Optimizing the speed of the energy transition

If energy security is the first challenge of the energy transition, timing is the second. How quickly can the energy transition proceed? There is intense pressure to move a significant part of the 2050 carbon emission target of the Paris Agreement on climate change to 2030, but the scale of the change should not be underestimated.

Previous energy transitions were not a product of policy initiatives but of the economic and technological advantages of new sources of energy. Each preceding energy transition unfolded over a century or more, and none was of the type currently envisioned. This transition's goal is to completely alter the energy foundations of the $100 trillion global economy in less than 25 years. Further research is necessary to fully understand the macroeconomic impact of a change of this size and scope.

Global energy security big picture: 2024 energy transition industry outlook

Over the past decade, the global energy transition has faced growing complexities. While energy transition efforts have ramped up, they have been tempered by macroeconomic and geopolitical challenges since 2022. Governments globally are paying closer attention to the nuances of developing and utilizing renewable energy technologies. Amid the complex business environment and uncertain economic outlook of 2024, energy sector and mining companies are confronting numerous challenges.

Policy developments in 2022 and 2023 related to the transition to renewable energy sources, and critical minerals have presented substantial near- and medium-term opportunities for the energy and mining sectors. However, market participants are expected to encounter significant challenges in 2024, given elevated interest rates and a slowdown in economic growth.

Major mining companies are giving priority to critical minerals, energy transition, climate strategy and the decarbonization of operations in their future investment plans. The macroeconomic conditions throughout much of 2024 are likely to discourage additional investment decisions for some companies as relatively weak metals prices disincentivize significant capital commitments. The medium-term outlook for the mining sector remains robust, especially as the global economy stabilizes and energy security and energy transition efforts gain momentum.

Energy and utility companies are also grappling with short-term challenges in deploying renewable energy and traditional energy infrastructure. Complex regulatory pathways, combined with persistent inflation, are exerting pressure on the economics of various projects, especially offshore wind. The industry is expected to adopt a cautious yet rigorous approach to project development efforts in 2024, aiming to avoid the challenges faced by many developers in 2022 and 2023. Despite these hurdles, existing policy incentives should keep the industry outlook for certain renewable energy investments attractive over the next few years.

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Energy security: India gears up for increased renewables capacity in 2024, yet thermal power expansion persists

India's power sector is poised for substantial growth in renewable capacity and the addition of new coal-based capacities in 2024, aiming to meet the escalating demand for energy. With a yearly power demand surge of over 8%, the country is projected to witness the highest-ever renewable energy capacity increase in 2024, totaling 19 GW. This includes approximately 16 GW-17 GW from solar and 2 GW-3 GW from wind sources, said Ankita Chauhan, principal research analyst at S&P Global Commodity Insights.

Despite this shift toward renewables, India is anticipated to introduce 5 GW-6 GW of new coal plants in the coming year. Existing assets are struggling to keep pace; this was evident in the October coal-fired output surge of 117 TWh, a 33% increase year over year, constituting 79% of total indigenous output.

Addressing the rising power demand ahead of the UN Climate Change Conference, India's power minister, R.K. Singh, emphasized the need to add 80 GW of new thermal capacity by 2031-2032. However, projections in an inflection scenario by S&P Global indicate a trajectory of increasing energy-related carbon emissions in India, rising from 2.91 billion metric tons/year in 2023 to 3.47 billion metric tons/year in 2030, and further to 3.83 billion metric tons/year in 2040.

India has committed to reducing its emissions intensity by 45% by 2030 compared with 2005 levels, ultimately achieving net-zero emissions by 2070 under its Nationally Determined Contributions targets. This ambitious goal relies heavily on expanding renewables to 500 GW by 2030, from 179 GW currently, and establishing a carbon market.

To boost solar additions, a productivity-linked incentive scheme supports domestic manufacturing of solar photovoltaic modules and wafers. Simultaneously, industrial sectors are increasingly seeking renewable sources in anticipation of the operationalization of a compliance carbon market.

India is planning to implement a carbon market around 2025, covering 11 sectors such as refining, cement, steel, chlor-alkali, aluminum, thermal power plants and fertilizers.

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Energy security: Global upstream E&P capex

S&P Global Commodity Insights’ analysis on global upstream and exploration and production (E&P) capital expenditure reported that capex is expected to continue from 2022 at well above pre-pandemic levels but at a much-moderated pace. Global E&P capex increased by 8% in 2023. Offshore projects and increased activities are driving stronger spending.

Expenditure is expected to reach $2 trillion in 2023, with the majority allocated to upstream oil and gas ($565 billion), renewable energy ($463 billion), and transmission and distribution ($349 billion).

Over the five-year span from 2021 to 2025, cumulative global energy sector capex is projected to increase by 49% compared with 2016–2020. In nominal terms, spending on renewable power generation is anticipated to double, while upstream spending is forecast to grow by nearly 35%.

In 2023, the Asia-Pacific region accounted for 45% of total global energy spending, with North America and Europe, respectively, following as the next two largest regions for energy expenditure.

The balance between energy security and energy transition persists. The transition toward clean energy has gained momentum, with record levels of renewable capacity additions and extensive policies in place. Costs are on a downward trajectory; between now and 2030, average annual cleantech additions are expected to double, accompanied by a more than 20% reduction in the cost per kilowatt across all technologies.

Oil and gas activities continue to expand, especially outside of OPEC, even as we approach peak demand. S&P Global Commodity Insights' latest long-term outlook anticipates a peak in global crude oil demand at 82 million barrels per day by 2026. Despite this impending peak, addressing base decline will necessitate significant volumes of new supply.

In the US, employment in cleantech continues to outpace that in the broader economy. However, concerns persist about the labor market's ability to meet the demands of the renewable energy sector. It is evident that the US will require a substantially larger workforce to achieve its low-carbon goals.

European energy security: Russian gas flows to europe

Europe will keep buying Russian gas for now. Reports of revisions to EU regulations on gas transmission have been framed as granting member states the authority to cease gas imports from Russia.

The updated language specifies that EU member states have the right to limit the entry of Russian gas into their gas transmission systems or LNG regasification terminals without violating EU rules on third-party access.

Simultaneously, the revised language establishes safeguards to ensure that member states do not act unilaterally or take actions that would unduly disrupt cross-border oil and gas flows without prior consultation.

Looking further ahead, the expected loosening of the global LNG market as substantial new liquefaction capacity comes online in 2025–2026 should weaken opposition to restrictions on Russian LNG within Europe. If Russia’s war against Ukraine and occupation of its territory continue beyond 2024, the chances of its LNG being blocked from the European market will grow.

S&P Global Commodity Insights’ short-term forecast continues to assume that Russian gas pipeline flows to Europe remain stable in the range of 70 MMcm/d to 90 MMcm/d, which has been typical since September 2022, with roughly half delivered through Ukraine (to Slovakia, Austria and Italy) and half via TurkStream and Bulgaria (to Greece, Hungary and non-EU Balkan markets). The countries still importing Russian gas have buyers with Gazprom contracts that survived the renegotiations of 2022 after Russia demanded to be paid in rubles. Governments are unlikely to mandate the termination of these contracts.

S&P Global Commodity Insights’ short-term forecast continues to assume that Russian gas pipeline flows to Europe remain stable in the range of 70 MMcm/d to 90 MMcm/d, which has been typical since September 2022, with roughly half delivered through Ukraine (to Slovakia, Austria and Italy) and half via TurkStream and Bulgaria (to Greece, Hungary and non-EU Balkan markets). The countries still importing Russian gas have buyers with Gazprom contracts that survived the renegotiations of 2022 after Russia demanded to be paid in rubles. Governments are unlikely to mandate the termination of these contracts.

Italy said it intends to meet the EU’s nonbinding target date of 2027 to end imports of Russian gas; other countries have avoided similar statements.

Next risk up: Ukrainian transit, January 2025

The next source of uncertainty for pipeline flows of Russian gas will come at the end of 2024 as expiry approaches for the five-year transit agreement signed in December 2019 between Gazprom and Ukraine’s Naftogaz. Ukraine rejected renewing this agreement but also said it will follow EU rules on gas transmission — as it is supposed to do as a member of the Energy Community — implying that it will offer short-term (monthly or daily) capacity to Gazprom.

In this case, Ukraine’s energy regulator (NEURC) and gas transmission operator (GTSOU) would not be bound by the transit tariff decided upon in the 2019 agreement — approximately $32/MMcm or $0.85/MMBtu — and could substantially increase entry tariffs at the Russian-Ukrainian border. Negotiations and brinksmanship reminiscent of December 2019 are likely. Our base case assumes an agreement is reached that allows flows to continue at current levels, but an end to Russian gas transit through Ukraine starting in January 2025 is also possible. In this case, the Slovak, Austrian and Italian markets would need to replace Russian gas with other sources, significantly affecting prices and hub differentials. Intriguingly, Ukraine will be formally obliged to follow the forthcoming revised regulation on gas transmission, requiring it to engage in consultations before any move to block transmission access to Russian gas.

In practice, this may not be relevant given that Ukraine has shown no inclination to openly disrupt the flow of Russian gas across its territory for fear of angering allies such as Italy. Yet Ukraine would be well within its rights from a regulatory perspective to revise its gas transmission tariffs upward to reflect the end of the Gazprom transit contract and the many changes to gas transmission precipitated by Russia’s invasion. The risk to flow will arise if Russia rejects higher tariffs or uses higher tariffs as an excuse to terminate deliveries via Ukraine.

Russian gas supply via Ukraine & Turkstream

The energy sector policy responses to the global energy crisis

The next potential challenge to Russian gas flows emerges with the expiration of the 2019 Russian-Ukrainian agreement on gas transit at the end of 2024. While our base case assumes this will not disrupt the flow of Russian gas, there is a notable downside supply risk, leading to a potential upside price risk for the first quarter of 2025.

Meanwhile, European gas market prices have been softening due to weak demand and historically high seasonal storage levels. Our latest forecast anticipates title transfer facility prices averaging $12.50/MMBtu in the first quarter of 2024, reflecting a $1.60/MMBtu decrease from our early November 2023 forecast. If the security threat to LNG carriers in the Red Sea persists, it could exert upward pressure on prices.

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