Here Comes The Sun: The Bright Future of Oil and Gas

The United Nations Human Development Index (HDI) combines life expectancy, education and income to provide a more complete picture of well-being than simply considering GDP per capita. If one chart can illustrate the global challenge of combatting climate change, it might be the scatterplot below.

United Nations Human Development Index

HDI is inextricably linked to energy consumption. 100 Gigajoules (GJ) per head is approximately where improvements in HDI begin to flatten out. 80% of the world’s population lives below this level, and presumably aspires to it. Much of the developing world is in this category. The UN recently recommended the adoption of policies to limit global warming. The Green New Deal went further, with highly impractical solutions (see The Green Bovine Dream).

The world wants more energy and reduced emissions. The 2019 BP Energy Outlook acknowledges these conflicting goals. Its base case (called Evolving Transition) predicts that by 2040 two thirds of the world’s population will still be under the 100 GJ threshold, while CO2 emissions will have grown. This compromise will satisfy few, and it’s their central forecast.

The world relies on fossil fuels for 80% of its energy. Critics will claim BP sees their continued dominance because their entire business locates, extracts, processes and sells them. But BP’s outlook forecasts a 20 year penetration rate for renewables of 15%, around triple that experienced historically by oil, gas, hydroelectric or nuclear power as their use ramped up.

Renewables Outpaces Other Energy Sources

BP’s report includes many interesting conclusions out to 2040:

  • Global energy consumption for road use will fall
  • Aviation energy use will rise
  • Developing world energy use will rise sharply, led by China and India
  • Electric vehicles will represent 15% of the global fleet and 24% of vehicle/kms driven
  • Renewables will be the biggest source of electricity generation
  • Coal will be #2, above 25%, because of continued increasing energy demand
  • 53% of EU power supply will be from renewables

The report considers other scenarios, including public policies that accelerate the move away from fossil fuels. If this led to a sharp drop in crude demand, the report speculates that low-cost oil producers might react by ramping up production to avoid having stranded assets. It’s thought-provoking — sell now or miss your opportunity. Such a price collapse would stimulate demand, slowing the energy transition.

Renewables Fastest Growing Energy Source

Returning to the base case, renewables will gain market share in developing countries faster than in the OECD. It may surprise to consider rising energy demand lifting renewables penetration. But energy use is capital-intensive.

Today’s gasoline-burning automobiles last over ten years; power plants can run for 30 or more, and energy inefficient buildings can have many decades of useful life. It’s hard for a new solar farm to compete on economics with an existing natural gas burning power plant.

OECD energy consumption looks to be flat, as population growth is offset by efficiencies. This means renewable infrastructure is replacing something older, and wholesale decommissioning of assets with years of useful life left is an extreme, unlikely solution. By contrast, growing energy demand in emerging economies allows renewables to gain market share. Rising living standards in developing countries will reduce bus use in favor of private cars, hence the jump in vehicle/kms and, most likely, epic traffic jams.

Aviation Biggest Source of Transport Demand

Overall, the report’s central forecast for a substantial increase in renewables and in electric vehicles should be welcomed by those environmental activists who acknowledge the enormous challenge in such an energy transformation. BP’s conclusions are broadly echoed by other long range forecasts, including those from the U.S. Energy Information Administration, the International Energy Agency, Exxon Mobil, IHS Markit and CNPC Economics & Technology Research Institute. This is not a radical outlook.

Nonetheless, natural gas demand is expected to grow at 1.7% annually. Crude oil demand growth of 0.3% reflects rising non-combusted demand, such as for plastics and lubricants offsetting less from private vehicles. Aviation demand will grow.

The U.S. is supremely well positioned for these long term trends. Production costs are falling, and the short-cycle nature of shale (see The Short Cycle Advantage of Shale) continues to attract capital at a time when 20 year investments in oil and gas projects are exceptionally hard to assess.

U.S. midstream energy infrastructure will remain vital to meeting the world’s growing demand for oil, gas and natural gas liquids, even while the multi-decade transition to non-fossil fuels is underway. The sector remains attractively valued after a strong couple of months, with distributable cash flow yields above 10%, substantially higher than REITs’ equivalent funds from operations yields of around 6%. From our vantage point, rising dividends are drawing in new investors.

SL Advisors is the sub-advisor to the Catalyst MLP & Infrastructure Fund.  To learn more about the Fund, please click here.

SL Advisors is also the advisor to an ETF (

Print Friendly, PDF & Email
1 reply
  1. Marcus Pun
    Marcus Pun says:

    Perhaps your natural gas projections are overly optimistic. California, the 5th largest economy in the world, has made major increases in solar and conservation while significantly cutting back the need for natural gas. In 2017, natural gas accounted for 98,315 GWh or a third of the state’s electricity supply. This it’s both in state and out of state sources. This is significantly less than 2014, where at 44.49% of supply, natural gas accounted for 132,157 GWh. Gas use dropped by one quarter in only 3 years. Solar electricity went up from 12,954 to 29,796GWh. Overall system demand dropped from 297,063 to 292,039 GWh. Hidden in that statistic is an incredibly large build out of behind the meter generation, estimated to be at 6.5GW. Many of these are large scale private or public multi megawatt installations. The Budweiser plant near Fairfield has 7 acres of solar. It’s typical to see large installations covering school and business parking lots all over Calufornia. Tesla and other companies recently started installing battery systems of 1 MWh or higher on site. A single Tesla system with 5 units has the same footprint as a walk in closet. Cal-ISO note lists storage as part of its daily presentation of energy data. In summation, at least for California’s extensive energy market, gas has significantly declined as part of the state energy mix. This decline will continue for up 6- 10 years, until it is at least less than 10% of the state’s energy mix as solar, wind, and battery sources rapidly grow along with out of state grid connected resources. Behind the meter solar, wind ( The Budweiser plant has two large wind turbines), and storage will also continue their rapid growth, along with further conservation efforts such as the transition to LED lighting, which increases energy resilience and lessens average demand on the grid. The main source of energy growth will be in EV charging. Again, however, in both private and the public sector, solar and other renewables will take that up in site. Just an observation, but nearly every large installation of 300 KW or higher that I ‘ve seen around the SF Bay Area has EV charging. Individual homeowners often purchase solar as in house demand electricity increases. I also note that solar is making huge inroads in developing nations, especially in Africa as it doesn’t require large investments in infrastructure as centralized plants do. The term “stranded resources” will be much more prevalent in the near future than you think.


Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.