Despite new government commitments to reduce greenhouse gas emissions, fossil fuel demand is set to surpass pre-pandemic levels, says Moody’s Investors Service.
In a new report, the rating agency said it expects demand for energy to continue its recovery in 2022, with strong consumer appetite for gasoline and resurgent international travel driving an increase in demand for oil that is predicted to exceed its pre-pandemic mark.
This resurgence in fossil fuel demand is running up against efforts to combat climate change by curbing emissions, the report noted.
“New COP-26 commitments provide momentum for accelerated decarbonization, but increased demand for oil and natural gas poses a stubborn impediment to progress,” it said.
In turn, this could could drive greater policy action, the report suggested, as increased emissions due to rising oil consumption “will likely lead to added investor pressure for oil companies to transition their businesses, and to inspire more policy initiatives to cut oil and gas demand.”
Moody’s said that the oil and gas industry’s efforts to combat emissions will include switching to renewable energy, along with “a new focus on developing technologies to generate low-carbon energy sources.”
“Companies are exploring technologies to generate less carbon-intensive fossil fuel, and technologies that offset [emissions],” it said. “But the commercial viability of even the most promising low-carbon technologies appears uncertain without regulatory support or subsidies.”
In the meantime, the strong demand for energy and uncertainty about the prospect of expanding supply will keep prices high, Moody’s said.
It expects oil prices to remain at the high end of its medium-term range of US$50-US$70/barrel, and that natural gas prices will stay high too, “as the global industry resolves significant ongoing dislocations.”
For companies in the sector, high prices should generate strong cash flows and lead to improved credit quality.
With prices at the high end of its forecast range, Moody’s said that major oil companies “will be able to deliver even higher operating cash flow” than when oil prices were over US$100/barrel in 2014.
“Much of their sizeable cash flow will benefit shareholders during 2022, since the companies will remain disciplined about capital spending, and many of them no longer need to reduce their net debt,” the report said.
Additionally, Moody’s expects consolidation to continue in the exploration and production sector.
“The industry should generate substantial free cash flow in 2022 based on favourable prices and efforts to keep spending in check, providing fuel for M&A,” it said.