Our strategy development is guided by the analysis of long-term trends and developments in energy markets. This type of review helps us assess our business strategy and market position relative to regulatory, market, technological, reputational, and physical risks associated with climate change. For the purposes of our analysis, we use the publicly available scenarios produced by the International Energy Agency’s (IEA) World Energy Outlook (WEO) 2020, which is currently one of the most widely recognized models contemplating the transition risks associated with climate change.
The WEO 2020 presents two main scenarios: The Stated Policies Scenario (STEPS) and the Sustainable Development Scenario (SDS). Each scenario assumes a different set of changes in policy along with associated technological advances, market demand trends, and energy efficiencies. The energy market projections of the scenarios extend to 2040, while assumptions around population growth and economic growth are the same in both scenarios.
The primary difference between the WEO 2019 and WEO 2020 is that there is no longer a “Current Policies Scenario.” The STEPS scenario reflects current policies as of 2020, and from 2021 through 2040 “describes a pathway forward from a new, postcrisis starting point.”1 The SDS scenario assumes the same economic growth outlook and outlines a pathway to reaching 2040 climate goals. IEA has also added a Delayed Recovery Scenario (DRS) through 2030, to reflect a slower return to normal economic activity and thus energy demand from the Covid-19 pandemic.
Under the STEPS scenario, natural gas demand rises at 1.2 percent annually over the 2019-2040 period (Figure 8.1). This level of growth is lower than pre-pandemic forecasts as assumptions on the timing of cost-effective fuel switching have been brought forward into this decade as opposed to the 2030s. In terms of sector shifts in gas consumption, growth will come from the industrial sector as renewables claim a larger share of power generation.
Under the SDS scenario, natural gas production peaks in 2025 and then falls, ending at 13 percent below current levels by 2040. Average annual production in this scenario declines by 0.7 percent from 2019 to 2040 (Figure 8.1).
When looking at regional production in North America, overall gas production grows by 0.6 percent per year in the STEPS scenario over the 2019-2040 period. While in the SDS scenario, North American annual gas production falls on average by 2.2 percent annually during the same period. (Figure 8.2)
* One billion cubic meters (bcm) is equivalent to 35.3 billion cubic feet (bcf)
According to IEA’s analysis, shale production globally has a stronger growth rate than conventional or tight gas in the STEPS scenario, rising on average by 2.7 percent.
While no scenario can predict future events, scenarios can serve to evaluate strategic priorities and positions under a variety of policy circumstances. Based on our review of global energy market projections, it is apparent that the natural gas industry is better positioned relative to other fossil fuels under both scenarios. The projected compounded annual growth rate for global natural gas production outpaces oil and coal significantly in the STEPS scenario. In the SDS scenario, natural gas production declines albeit at a much lower rate than other fossil fuels.
While natural gas production is projected to face a compounded annual decline of 0.7 percent under the SDS, the impact is significantly lower compared to the other two fuels. Under the SDS, the 2040 production level for natural gas is projected to be approximately 13 percent lower than current levels, while 2040 oil and coal production levels are projected to be lower by 33 percent and 67 percent, respectively. For context, IEA’s Gas Market Report for the third quarter of 2021 shows the progress of demand growth in relation to the SDS scenario: global gas demand by 2024 would already be 2% above the 2025 level in the Sustainable Development Scenario.
A closer look at the natural gas production forecasts by type shows that shale gas proves to be more resilient compared to conventional gas or tight gas. The Stated Policy Scenario projections estimate 2040 shale gas production levels to increase by 75 percent compared to current production, while production for tight gas is projected to drop significantly. Conventional gas production in this scenario grows by 19 percent in comparison (Figure 8.3). SDS projections show similar reductions in both conventional and shale gas, of 11 percent and 12 percent respectively, while tight gas production has a 42 percent drop.
* One billion cubic meters (Bcm) is equivalent to 35.3 billion cubic feet (Bcf)
Our business strategy outline recognizes these favorable projections in the STEPS scenario but incorporates the fact that our industry faces challenges that will require us to maintain operational and financial flexibility. Under the Sustainable Development Scenario, the price of natural gas remains at relatively low levels, which underlines the need for Range to maintain discipline and focus on cost efficiency. Our current costs of production and breakeven prices are among the lowest in the industry and should allow us to remain competitive under these various forecasted price scenarios (Figures 8.4 and 8.5).
Under both policy scenarios, North America is projected to remain a net exporter of natural gas as demand is expected to grow more rapidly in other parts of the world (Figure 8.6). In line with our business strategy position to market our products to a broader customer base and different markets, the global market dynamics may require us to continue positioning our products and services for exports.
* One billion cubic meters (Bcm) is equivalent to 35.3 billion cubic feet (Bcf)
Our investments in the production of natural gas liquids (NGLs) will also likely prove to be more resilient compared to conventional crude oil. While NGLs are projected to face a slight decrease in production under the Sustainable Development Scenario, they are expected to gain a larger portion as a percentage of total production (Figure 8.7).
Further, LNG/NGLs provide additional benefits beyond resilience to climate change. According to the IEA, the use of LNG/NGLs for power generation, and in the automotive and industrial sectors, is associated with significantly lower GHG and air pollutant emissions, such as particulate matter, nitrogen oxide, and sulfur dioxide, relative to oil and coal.
Moreover, NGLs can help prevent premature deaths related to illnesses attributable to household air pollution from cooking with solid fuels in emerging markets. IEA estimates there are currently 2.6 billion people without access to clean cooking facilities. IEA estimates a total of 2.44 million premature deaths in households due to lack of clean cooking in 2019. Under the Sustainable Development Scenario – which envisions universal access to clean cooking by 2030 – reducing reliance on polluting fuels for cooking by 2030 reduces PM2.5 emissions by more than 80 percent compared to the Stated Policies Scenario.
With the backing of policy in jurisdictions around the world, NGLs will catalyze access to clean cooking to hundreds of millions of households, saving people’s lives. Premature deaths due to household air pollution fall to 0.6 million a year in the Sustainable Development Scenario by 2030, compared to 2.4 million a year in the Stated Policies Scenario (Figure 8.8). According to the IEA, access to clean cooking facilitated by liquified petroleum gas also reduces overall greenhouse gas emissions by reducing methane emissions from incomplete combustion of biomass and reducing deforestation.
A careful analysis of climate change policy scenarios reinforces Range’s commitment to our current business strategy. Each key element of our strategy aligns with the risks and opportunities presented by climate change and ensures we maintain a competitive and resilient market position under the various policy scenarios discussed above.
1International Energy Agency, 2020, World Energy outlook (2020), IEA, Paris, p. 171