The energy transition requires significant levels of investment, with material shifts in the pattern of that investment across different energy sources.
Estimates of the investment paths implied by different scenarios are highly uncertain since they depend on assumptions concerning a range of factors that could affect the cost of energy investments over the next 30 years. The assumptions underlying the estimated investment requirements are discussed in more detail in Estimate of investment profiles. Investment estimates are in real $2018 prices.
Rapid and Net Zero scenarios imply a significant increase in investment in wind and solar power capacity relative to the past. The average annual investment in wind and solar capacity implied by Rapid and Net Zero is between $500-750bn. This is two or three times greater than recent levels of investment, although is roughly equivalent to around only 3% of total business investment in 2018. BAU also implies an increase in investment in wind and solar capacity to around $300-400bn per year.
The hump-shaped pattern of wind and solar investment in Net Zero – reflecting the quick build-out of new capacity in the 2020s and 30s before slowing markedly – may lead to issues of excess capacity in the supply chain supporting this build-out.
The marked decline in oil and natural gas demand in Rapid and Net Zero is reflected in a sharp slowing in the pace of upstream investment relative to the past and is significantly lower than the investment in wind and solar capacity implied by these scenarios. The pattern of investment in oil and natural gas production in the different scenarios is discussed in more detail below.
The level of investment required to support the build-out of CCUS facilities is relatively small compared to that required for wind and solar capacity and upstream oil and gas production. This is the case even in Rapid and Net Zero in which CCUS capacity is increased substantially.
Even though the demand for oil and natural gas peaks and falls in nearly all the scenarios, the faster rate of decline in existing production means that significant amounts of new upstream investment in oil and natural gas production is required in all three scenarios.
The scenarios are based on the assumption that, if oil producers over the next 30 years invested only in maintaining existing (brownfield) sites, as well as completing projects that have already been sanctioned, this would imply an average decline rate of oil production of a little above 4% p.a., with global oil supplies falling to around 25 Mb/d in 2050. The corresponding decline rate for natural gas is assumed to be slightly higher (4.5%), reflecting the greater proportion of natural gas production that comes from short-cycle unconventional plays.
Closing the gap between these ‘no new greenfield investment’ supply profiles for oil and natural gas and the level of supply needed to meet the demand profiles in the three scenarios requires significant levels of new investment in upstream oil and gas production, totalling between $9 trillion and over $20 trillion over the next 30 years.
The profile of oil demand in Net Zero highlights the increasingly difficult judgements concerning future investments in oil and gas as the world transition to a lower carbon energy system.
The relative resilience of oil demand during the first half of the Outlook in Net Zero implies that several trillions of US dollars of new oil investment is needed over the next 15 years or so to ensure adequate supplies. But the pace at which oil demand falls in the second half of Net Zero is faster than the natural decline rate of production, implying that some of these investments by 2050 may not be fully utilized and so may become uneconomic.
This risk may be able to be mitigated by investing in less capital-intensive, shorter-cycle, scalable projects, such as unconventional tight oil and gas, brownfield redevelopments and subsea tiebacks.
The uncertainty about the speed and nature of the energy transition, as highlighted for example by Delayed and Disorderly, means the option value associated with these types of projects could increase in coming years.