BMI Flags Trends It Says Will Shape Future of Oil, Gas

A BMI “megatrends analysis” sent to Rigzone by the Fitch Group this week highlighted “key trends within trade and globalization which will shape the future of the oil and gas industry until 2050”.

One of these trends is that “divergent climate policies drive carbon-differentiated oil and gas trade”, the report pointed out.

“Divergent decarbonization pathways and cyclical stop-start climate action will reshape global oil and gas markets,” a description of the trend in the report noted.

“As governments pursue differing policy mixes, trade will fragment, forming loose blocs defined by carbon intensity and regulatory alignment. After decades of deepening integration, fungibility will give way to a more fractured energy system,” it added.

Looking at the “winners” of this trend, the report flagged “low-carbon producers and exporters and those with carbon-management capabilities that can capture price premia”.

It also highlighted “oilfield services and technology providers offering carbon management solutions, efficiency and electrification technologies and emissions certification and compliance services”, “trading intermediaries and financial institutions exploiting policy-driven arbitrage and structuring products around carbondifferentiated trade”, and “carbon accounting and MRV providers supplying emissions monitoring, verification and certification services”.

The report flagged “high-carbon producers and exporters with limited carbon-management capabilities that face structural discounts on their O&G” as “losers” of the trend.

“Oilfield services and technology providers tied to high-emissions operations with limited capacity to diversify geographically or technologically” and “capital providers and insurers exposed to carbon-intensive assets at increased risk of asset stranding” were also predicted to lose out in the report.

Another trend highlighted in the report is that “energy security fears lead to a restructured oil and gas trade”.

“The continuing global fragmentation into a multipolar world order would divide up existing trade blocs and necessitate a re-routing of vital energy supplies from allied states,” the report noted in a description of this trend.

“The ‘bifurcation’ into a U.S.-led bloc and China-led bloc could become increasingly entrenched, leading to more fixed O&G trade arrangements between aligned blocs. Increased emphasis on upstream investment is likely for legacy producers to reduce reliance on imports from outside allied blocs,” it added.

The report also pointed out some “winners” and “losers” for this trend. In the winners section was “O&G net exporters which can secure export agreements with high-demand and politically aligned markets”, according to the report.

“States with vast midstream infrastructure connections and close geographic proximity to demand markets and allies … [and] ‘neutral’ countries which sit at the crossroads between rival blocs,” were also flagged as winners of this trend in the report. The report added, however, that the latter “remain exposed to shipping and finance countermeasures”.

“Markets which achieve energy independence through renewables … [and] states with LNG liquefaction or regasification facilities, which have more flexibility than those relying on pipelines,” were also flagged as winners of this trend in the BMI report.

Looking at the losers of the trend, the report flagged “O&G exporters with limited proximity to close trading partners or demand markets, leading to a struggle to secure buyers for cargoes and greater risk of asset stranding”.

It also pointed out “smaller exporters which cannot compete with larger producers to secure long-term trade security” and “consumers facing higher and more volatile prices”.

The report went on to state that “Europe bears near-term costs from its pivot away from Russian supply but gains with expanded LNG and renewables”.

Another trend highlighted in the report was that “protectionism sees energy used as leverage”.

Describing this trend, the report noted that, “the shift to deglobalization will see materials and energy become more expensive as producers leverage their control of supply to achieve favorable terms of trade”.

“This will be net bullish for oil and gas as existing energy systems remain in place for longer and incumbent producers become national champions for economic excellence,” it added.

The description said the oil and gas industry will be less impacted by protectionism than other sectors due to its current prevalence in global trade, “while the lowest-cost producers will expand their market share and leverage over importers in the face of long-lasting trade tariffs and economic competition”.

Looking at the winners of this trend, the report said “O&G companies and oilfield service providers will benefit from the slowing energy transition as marginal upstream opportunities move forward to offset exposure to undependable trade partners”. It also said “higher cost producers with significant trade imports will see more opportunities for market share for their energy exports to offset trade deficits”.

Looking at the losers of this trend, the report stated that “low cost producers of oil, natural gas and LNG will lose out on their ability [to] outprice competitors who use energy trade to balance trade deficits”.

“Markets without domestic energy production will be subject to restrictive trade leading to higher prices for imported LNG, refined fuels and crude. Less flexibility in energy import partners will result from restrictive trade agreements and concentration of suppliers,” it added.

Flagging another loser of the trend, the report pointed to “Asian markets that are highly dependent on energy imports, where buyers are highly sensitive to price”.

“Outsized trade imbalances will come closer into balance as energy imports are determined not by price but strategic trade considerations,” the report stated.

To contact the author, email andreas.exarheas@rigzone.com