At the core of Citi’s Energy Vision are more than 300 proprietary economic models of assets that the industry either is developing or has in its visible backlog across oil, gas and renewables investment.
Citi's Research analysts use these asset models to
- build curves of marginal long-run cost of supply for both oil and gas and
- assess the relative competitiveness of 36 global energy equities ($4 trillion of market cap and one-quarter of global oil and gas supply).
Back-testing shows that Energy Vision can help investors generate alpha.
In the past two years, the top 5 positioned companies have delivered c.40% outperformance versus peers, driven in part by the value of their resource positions to opportunistic M&A.
Energy Vision Projects Database
Source: Citi Research Energy Vision
What will the energy industry look like by 2030? The direction of policy (countries pledging net zero) and society's choices look certain, and with that, capital is pivoting.
In 2010, 65% of annual investment into the global energy system was in fossil fuels. By 2030, Citi expects 60% to be into green power. Investment in fossil fuels will not go to zero, or at least not by 2030, but the market will clearly become more discerning about which resources can be exploited in the long term.
In response to this capital shift, Citi's Research analysts see two business models emerging in energy:
- Companies that stick to oil and gas and strive to be the most competitive in this business.
- Companies that try to pivot into providing low-carbon energy. This is a pathway that looks, on paper at least, strategically sensible but faces the challenge of achieving scale in a landscape of intense competition.
Top positioned companies have been rewarded, either by the market or through industry M&A. It is noteworthy that there has been no sign that the new energy ‘pivots’ are yet being rewarded, and indeed, one could argue that the market is realizing that it is a partly down to a lack of competitiveness in their oil and gas portfolios that is driving these companies to shift—i.e., the portfolio is making the strategy.
On the face of it the global energy system is pretty resilient to change. Renewable energy has grown to take a 4% market share of global primary energy in the past decade, but fossil fuels still have a dominant 83%.
Energy Capital Is on a Clear Pivot from Fossil Fuels to Green Power
There is, however, clear indication that fossil fuel's resilience will face much greater pressures. Supportive political policy has seen Europe do much of the heavy lifting on renewables, far more than the region's 11% of global energy demand. The new "net zero" ambitions of China (26% share of global energy demand) and changing political winds in the United States (16%) imply a real shift in momentum. By 2030, the push to green power, in all parts of the globe, could consume 60% of total energy investment.
Investment in the fossil fuel economy is expected to fall to around 25% (from 50% today), a still-significant component that reflects the deep role these fuels will continue to play to fill a large part of society's needs. The remaining capital is set to be directed to several other technology areas. Biofuels, carbon capture and blue hydrogen are essentially adjacencies to the existing fossil fuel economy, while storage and green hydrogen are businesses that come into play as the green power system evolves.
Oil and gas companies would look to have two choices in this rapidly changing energy picture, Citi's Research analysts say. One is to argue that the benefit of high energy density will keep hydrocarbons as part of society’s needs for several decades to come, and low-cost suppliers can still remain relevant even in a market where consumption gradually declines. At the same time, positioning around some of the adjacencies—e.g. refining into biofuels—can be used as a way of extending asset life.
The other option is to embrace the forces of disruption and pivot the business. But companies would need to establish dominant market shares in renewables to even get close to preserving the size of their current business.
The full report goes on to discuss and analyse in depth the economic credentials of shale, the future role of green gases such as hydrogen, the impact of carbon pricing and much more. Read the report (published on November 9, 2021) here Global Energy - Energy Vision 2021: Where to Go When the Super-Spike Fades and the Changing Flows of Energy Capital Take Over.
Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.