By Sarah Miller, GPA Midstream President & CEO
A new report from J.P. Morgan’s Michael Cembalest reflects the reality midstream professionals and others in the energy industry have been discussing for years. We’re in a period of energy addition — not transition — with long-term need for oil and gas products and infrastructure.
J.P. Morgan’s report shows that despite solar capacity doubling over the past three years, the transition from oil and gas to renewables hoped for by some policymakers is going to be a long and slow process. It also underscores real differences between the wish to rapidly remake our energy systems and previous rapid industrial transformations.
While renewables and battery storage are being added to electricity grids, rising global demand, and the fact that “capacity” is not the same as “output” means that the contribution of renewables to energy remains modest. According to the J.P. Morgan study, solar generation supplies just 7% of global electricity, and only 2% of final energy use.
Modern life requires reliable and affordable energy. Because wind and solar are intermittent sources, and battery backup is helpful but limited, grid operators are moving to add gas turbines to make sure they can serve all their customers when power is needed.
Germany spent billions to shift the country’s energy system to wind and solar, which journalist Robert Bryce has written gave rise to a spike in the use of a new word: dunkelflaute. The word means “dark lull” — a period of low wind and solar power generation and reduced electricity supply. The country has been forced to add back to the power grid thermal energy sources such as coal and gas-fired power plants.
America’s grid operators and power companies are warning that retiring gas power plants is a major risk to grid reliability. Further, the concern isn’t just a matter of needing backup. Instead, growing demand in the U.S. and abroad means we’ll continue to need hydrocarbons to meet baseload demand.
The push to “electrify everything” is running headlong into limitations of our power grid. Generation capacity is only one part of the challenge. To achieve electrification hopes, we need to increase transmission and replace aging equipment, and in the U.S. we’re lagging. We’re not building the high-voltage lines we need, and the supply chain is severely backlogged. Companies are being forced to wait years for essential equipment.
The prosperous lifestyle people around the world desire requires not only energy generation but also things like transportation, fertilizers, plastics, steel, and cement — all of which rely on hydrocarbons. Heavy industrial processes such as making steel need temperatures and materials that fossil fuels reliably and affordably provide.
The hoped-for transition to renewables is also more challenging than transitions achieved in the past. As Cembalest wrote, the energy transition is fundamentally different from history’s rapid industrial revolutions. For example, changing how we make steel took just 20 years because the new process allowed energy savings of 80-90%. Electrifying industrial plants took about 30 years in the 1900s because of enormous economic benefits. “Fast historical industrial transitions financed themselves via returns accruing to innovators and early adopters,” Cembalest wrote.
Renewable energy doesn’t offer the same kinds of financial benefits. Contrary to previous rapid industrial transitions that brought savings, electrification — which is fundamental to the wished-for energy transition — is costly. As Cembalest explains, “[t]he gradual and linear renewable energy transition has required $9 trillion in global spending since 2010.” Unsurprisingly, electrification increases costs for end users.
The result: Europe leads the world by adding renewables at just 0.6% of final energy use per year, followed by China at 0.4% and the U.S. at 0.3%. Absent a transformative technological breakthrough, J.P. Morgan predicts similar slow, linear progress for the foreseeable future.
Producing and using energy involves careful consideration of tradeoffs across dimensions of reliability, affordability, and sustainability. In our current reality, midstream has never been more important. Natural gas and oil will remain the backbone of affordable, reliable energy and materials for decades to come.
Midstream innovators will continue finding ways to reduce emissions, increase safety, and improve environmental performance. As an industry, we will continue the development, operation and maintenance of oil and gas infrastructure necessary to deliver the stable energy supply required for a prosperous and sustainable way of life.
In her monthly "Midstream Matters" column, GPA Midstream President & CEO Sarah Miller writes about strategic midstream issues.
Click here to read the full report from J.P. Morgan.
