Big themes in 2022 for energy and natural resources

After a year of dramatic recovery, what will shape the world of energy and natural resources in 2022? Here are five themes, and associated risks.

1. Is there a fix for the energy crisis?

Gas and power prices in Europe and Asia are in the lap of the gods this (northern hemisphere) winter.

For gas, the perfect storm has led to a record run since Q3. Power markets in Europe have been hit by a similar chain of events – high gas prices added to system tightness caused by capacity retirements, constrained plant availability, low hydro and the shifting mix towards renewables. A bad winter will push gas and power prices – already near record levels – higher still.

Prices will fall back in the spring, but the gas market is structurally tighter than before the pandemic. Fewer sanctioned projects mean new LNG supply will average just 12 MT a year from 2022 to 2025, less than half that of the last four years. We expect LNG prices in Europe and Asia to settle at more than double the average for prevailing prices between 2015 and 2020 until new supply comes onstream in 2026.

European power prices, too, will remain higher than pre-crisis. The root problem is a flexibility crunch as intermittent renewables gain market share while flexible gas and coal plant are squeezed out of the mix. Other markets around the world face the same challenge, and the answer lies in a range of flexible technologies including battery storage.

The risks? Demand destruction and high prices for gas and power hinders the economic recovery and affordability becomes a major political issue. The perception of gas and power as reliable, stable and affordable sources of energy central to the energy transition comes into question. Feedstock costs tilt the field in favour of green hydrogen over blue in regions with persistent high gas prices.

2. Headwinds for the metals supercycle?

The strong economic recovery from the crisis continues in 2022 – despite a headwind from the withdrawal of pandemic-induced, emergency government stimulus. We expect global GDP growth of just under 4%, below 2021’s stellar 5.5%.

The resurgent economy – specifically, the extraordinary demand for goods – has squeezed supply chains and lifted almost all commodity prices in energy and metals to near-record levels. Markets in key transition metals – including copper, aluminium, nickel, lithium and cobalt – are also looking to the longer term, anticipating sustained investment in decarbonisation with a global roll-out of low-carbon infrastructure.

We believe a metals supercycle is coming, just not yet. The transformative transition demand that will lead to structural tightening in metals markets and trigger massive investment in mine supply is some years away. In the short term, we see markets trending to surplus so there’s a danger the steam comes out of the rally in 2022.

The risks? The impact of Omicron is a reminder that Covid-19 can deliver recurring economic setbacks. The Federal Reserve tapers QE with interest rates raised to counter inflation (from zero to as high as 2% by year end). Persistent high prices for key metals slows the roll-out of the low-carbon economy.

3. Will capital discipline give way to organic investment?

Producers across oil and gas, metals, iron ore and coal are generating record free cash flow at today’s prices. Yet investors continue to dictate that cash is used to pay down debt or returned to shareholders. In E&P and mining, capital expenditure is near multi-year lows.

Investment will pick up in 2022 from the lows of the crisis, though we don’t expect a swift pivot to growth. Decarbonising operations is rapidly becoming a priority across all sectors. One example is Rio Tinto, which has indicated a first-time allocation of US$0.5 billion (6% of spend) in 2022 to decarbonise operations and aims to spend double that each year to 2030.

Organic investment in renewables is already on a strong upward trend and we expect solar capacity to increase by 17% globally and wind by 11% in 2022. Upstream oil and gas spend will be up around 9% to break US$400 billion, with the increase led initially by NOCs; later in the year, IOCs will increase investment in short-cycle projects, notably the US Permian. Big Oil, of course, continues to direct an increasing share of its discretionary spend into low-carbon opportunities.

Metals and mining look least promising in 2022. The industry’s project hopper is thin, and we think M&A is a necessary first step to strengthen the opportunity set. But for deals to happen, the buyer/seller spread may be too wide after the rally in prices.

The risks? Higher costs stifle the pace of renewables investment and growth. Continued underinvestment in upstream by Majors, Independents and private companies cedes market share to NOCs and increases the chances of oil and gas price volatility later in the decade. China cements its dominance of the supply chains for key transition metals.

4. Could rising costs stall the energy disruptors?

The success of COP26, notably Article 6 and various net zero pledges, paves the way for the necessary policy support and incentives for investment. In the US, these include the US 45Q tax credit for carbon capture and storage (indirectly helpful for blue hydrogen) and emissions-related support that favours green hydrogen. A soaring EU ETS price, now above $100/tCO2, is another fillip.

We monitor 200 emerging technologies at different stages of development. The most mature, including solar, onshore and offshore wind, are already able to attract big capital to scale up. EVs (global sales are expected to be up 31% to 8.5 million after more than doubling in 2021), energy storage (including EV batteries) and grid edge (including the all-important EV charging infrastructure) still have commerciality challenges but are getting closer to mainstream.

Others, less mature, are also critical to meeting net zero goals. Among those that will be the focus of capital markets in 2022, hydrogen (the project pipeline doubled in 2021) and CCS (today’s nascent project pipeline will need to increase 14-fold for a 1.5 °C pathway).

The risks? Rising input costs and wages, supply chain challenges and logistics hamper the roll-out and development of a raft of low-carbon technologies. Electrolyser manufacturing capacity, already ramping up fast, struggles to keep up with hydrogen’s exponential growth.

5. Will oil prices rise above US$100/bbl?

Unlikely, at least for any sustained period in 2022. Under the careful stewardship of OPEC+, the market is back in balance again in 2022 on our forecasts. Demand increases by 4.5 million b/d back to pre-pandemic levels of 100 million b/d by Q3, whereas supply rises by 4.8 million b/d, around half from OPEC+. Implied inventories show a surplus in Q1 2022 – we do not expect a shortage of supply. Our forecast is for Brent to average US$70/bbl, marginally below 2021.

The risks? Coronavirus – we’ve already trimmed 2022 demand by almost 0.1 million b/d due to Covid and its variants. OPEC politics – we don’t expect Iran sanctions to be lifted in 2022 but up to 1 million b/d of crude could return to market within months. Geopolitics – Russia/Ukraine, China/Taiwan and Belarus/Poland/EU are potential flashpoints that could spook markets.

Thanks to: Peter Martin (Economics); Julian Kettle and James Whiteside (Metals and Mining); Chris Seiple, Soeren Lassen and Peter Osbaldstone (Power and Renewables); Massimo Di-Odoardo (Global Gas); Jonny Sultoon and Flor Lucia De la Cruz (Energy Transition Practice); Ann-Louise Hittle (Macro Oils); Tom Ellacott (Corporate Analysis); Fraser McKay and Ian Thom (Upstream).

The Edge returns in the new year.