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Is natural gas in good shape for the future?

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“Are we entering a Golden Age of Gas?” – That was the question the International Energy Agency asked in 2011 when examining the combination of market dynamics and policies that might allow natural gas to thrive in the future.

The idea of a “Golden Age” was built on a few pillars. On the supply side, the main thesis was that the abundance of unconventional gas resources would help to bring down supply costs, making natural gas more attractive and accessible worldwide. On the demand side, the main elements were an ambitious policy promoting gas use in China, lower growth in nuclear power and more use of gas in road transport.

Seven years later, most of these pillars are still at least partly in place. Today’s price levels are very much in line with those in the “Golden Age” analysis; China has reserved a strategic role in its energy policy for gas; the outlook for nuclear has indeed faded somewhat; the only area where natural gas has not made much ground is road transport, where electric vehicles have taken the lead.

Yet the mood in the natural gas industry, at least outside the United States, has not always been so optimistic since then. Demand has slowed considerably for most of the period since 2011, from an average of 2.8% per year between 2000 and 2010, to 1.4% per year from 2011-2016; lower prices squeezed revenues; traditional business models have been questioned without anyone being sure what will take their place; and the competitive landscape has become significantly more complex, as the traditional sparring partners for gas – coal and, to a lesser extent, oil – have been joined by the rising forces of renewables and energy efficiency.

What could the long-term outlook look like for natural gas? Every year, the World Energy Outlook chooses a fuel for an in-depth analysis. In 2017, that focus was on natural gas. The four chapters of that analysis, including a wealth of detail on the outlook for natural gas, are now available to download for free – and describe in detail the possible long-term opportunities and constraints that could face this fuel in the future.

Three key trends highlighted in the WEO projections and in the IEA’s five-year forecasts also came through very clearly in new data on global energy and CO2 emissions trends for 2017.

China and other emerging markets are the consumers of the future

Natural gas demand rebounded and grew by an estimated 3% in 2017. China alone accounted for nearly 30% of global growth – with more than 30 bcm out of a total of nearly 120 bcm. This reflects a structural shift in the Chinese economy away from energy-intensive industrial sectors as well as a move towards cleaner energy sources, with both trends benefiting natural gas. As part of the official policy drive to “make China’s skies blue again,” there has been a strong push to phase out the practice of burning coal in industrial boilers (especially those in and around major cities) as well as reduce coal use for residential heating.

In the New Policies Scenario to 2040, global natural gas consumption expands at an average rate of 1.6% per year to 2040, lower than the estimated 3% achieved in 2017 but a much higher rate than oil (0.5% per year on average) and coal (essentially flat). More than 80% of this growth takes place in developing countries, led by China, India and other countries in Asia. The challenge for the gas industry is that much of the gas needs to be imported (and so transportation costs are significant); infrastructure is often not yet in place; and policy-makers and consumers are very sensitive to questions of affordability.

Gas-for-power is no longer the main growth opportunity

The data for 2017 show that most of the increase came from gas consumption by industry and for use in buildings. In the WEO analysis, power generation is no longer the main projected growth area, even though this is currently the largest gas-consuming sector worldwide. Competition from other sources of electricity generation, from renewables in particular, is fierce. Only where gas prices are expected to be very low (e.g. United States, Russia and parts of the Middle East) is it commercially viable for gas plants to run at high utilisation rates and provide baseload power. In most gas-importing regions, the primary role of gas plants is to provide mid-load and peak load power, implying significantly lower utilisation rates and hence lower gas burn.

In the New Policies Scenario, the largest increase in gas demand comes instead from industry. Where gas is available, it is very well suited to meeting industrial demand. Competition from renewables is more limited, especially for provision of high-temperature heat. Gas typically beats oil on price, and beats coal on convenience and on emissions (notably for air pollutants, a major policy consideration in many developing countries). A similar combination of convenience and environmental advantages helps gas to displace household coal consumption for heating and as a cooking fuel. Gas also has potential in some countries as a lower emissions alternative to oil for transportation, especially for heavy-duty vehicles.

Competitiveness is key

Gas consumers responded in 2017 to abundant and relatively low-cost supplies, underlining that – if natural gas is to gain a firm foothold in emerging markets – it is of crucial importance that suppliers keep the cost gap to alternative fuels, including solar and wind, as narrow as possible. Projected changes on the supply side are indeed maintaining some downward pressure on prices and increasing the comfort that importers can feel in the future security and diversity of supply. A period of ample availability of LNG, driven largely by new liquefaction capacity in Australia and the United States, is deepening market liquidity and the ability to procure gas on a short-term basis. New projects and exporters are increasing the range of potential suppliers and competition for customers. Destination-flexible US exports are reducing the rigidity of LNG trade. More and more gas is being priced on the basis of benchmarks that reflect the supply-demand balance for gas, rather than the price of alternative fuels. The contours of a new, more globalised gas market are becoming visible.

This re-writing of the gas rulebook is creating uncertainty for some producers, who have claimed that long-term contracts indexed to oil prices and other trade rules (notably take-or-pay clauses) are vital for the financing of capital-intensive upstream and infrastructure projects. In the WEO-2017, we argue that the emergence of a new, more flexible gas order, the rise of major company “aggregators” that maintain a diverse global portfolio of gas sources and market positions, and a marked shift towards LNG are interdependent developments. The risk of a shortfall of investment in new supply is real, but in our judgement there is scope for brownfield project expansions and smaller, less capital-intensive projects in the LNG business to underpin project development in the next ten years and prevent a hard landing for markets in the 2020s. As gas trade expands by more than 500 bcm over the period to 2040, LNG’s inherent flexibility give it the edge over most new cross-border pipeline projects and, as a result, LNG meets the lion’s share of the growth in long-distance gas trade in the period to 2040. Although the European Union remains the largest importer of gas, Asian countries lead the growth in global gas trade with the Asia Pacific region as a whole accounting for some 80% of the growth in net-imports.

The other key debate about natural gas that we focused on in the WEO-2017 is its role in the multiple energy transitions that are underway. This includes how gas might fare in a scenario that is consistent with the Paris Agreement and the sharp reductions in global emissions that are required to keep the rise in global average temperatures down to ‘well below 2 degrees’ and to improve the world’s air quality.

Two key attributes of gas come strongly into play in this discussion. First, versatility: gas can play multiple roles across the energy system in a way that no other fuel or technology can match, generating power, heat, and mobility. Second, the environmental dimension: combustion of natural gas does produce nitrogen oxides (NOX), but emissions of the other major sources of poor air quality, particulate matter and sulfur dioxide, are negligible. The combustion of gas releases some 40% less CO2 than the combustion of coal and around 20% less than the burning of oil. Taking into account the efficiency of transforming gas into electricity, a combined-cycle gas turbine emits around 350 grammes of CO2 per kilowatt-hour, well under half of what a supercritical coal plant emits for the same amount of electricity. Gas-fired power plants also have technical and economic characteristics that make them a very suitable partner for a strategy favouring the expansion of variable renewables.

However, the industry cannot take it for granted that environmental arguments work in its favour, especially in ambitious decarbonisation scenarios such as the Sustainable Development Scenario. As the cleanest burning fossil fuel and one that emits few local air pollutants, natural gas fares best among the fossil fuels in the Sustainable Development Scenario, with consumption increasing by nearly 20% between 2016 and 2030 before exhibiting a very gradual decline. However, the contribution of natural gas to decarbonisation in this scenario varies across regions, between sectors and over time. In energy systems that are currently heavily reliant on coal, notably in China and India, natural gas can play a sustained, positive role. It has much less potential to help emissions reduction in more mature gas markets, although in the United States and Europe there is a window of opportunity for gas to aid decarbonisation by accelerating the switch away from coal. With the rapid ascent of low-carbon technologies in this scenario, the principal function of gas is to provide flexibility to support the integration of variable renewables. For some industrial applications, and in some parts of the transport sector, the “bridge” for gas is a much longer one, as cost-effective renewable alternatives are less readily available.

Secondly, it is important to recall that methane – the primary component of natural gas – is a potent greenhouse gas and emissions of methane along the oil and gas value chain (which are estimated for 2015 at around 76 Mt of methane) threaten to reduce many of the climate advantages claimed by gas. In the WEO-2017, we present first-of-a-kind marginal abatement cost curves for methane emissions from oil and gas operations, which suggest that around 40-50% of today’s emissions from the oil and gas sector could be avoided using approaches that have zero or negative costs (because the captured methane can be sold). Implementing just these cost-effective abatement measures in the New Policies Scenario would have the same impact on reducing the average global surface temperature rise in 2100 as immediately shutting all existing coal-fired power plants in China. If natural gas is to play a credible role in the transition to a decarbonised energy system, this is an opportunity for action that cannot be ignored.

Ultimately, the prospects for natural gas will be determined by how it is assessed by policy-makers and prospective consumers against three criteria: is it affordable, is it secure, and is it clean? In each of these areas, there is homework for the industry to do, to keep costs under control, to ensure adequate and timely investment, and to tackle the issue of methane emissions. If the answers to these questions are positive, then gas can make a persuasive pitch for a place in countries’ energy strategies, underpinning further infrastructure development and opening new opportunities for growth.

The International Energy Agency will provide its updated 5-year gas markets forecasts in the next Gas 2018 publication, which will be launched at the World Gas Conference, in Washington D.C., on 26 June 2018.

IEA

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Gas doom hanging over Ukraine

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The long history of gas transit across independent Ukraine began with Kiev’s initial failure to pay anything for Russian natural gas, both intended for transit to Europe and for domestic consumption, on the pretext of fraternal relations between the former Soviet republics. Later it cost the Ukrainians a meager $25 for 1,000 cubic meters of Russian gas, and that ridiculously small sum remained unchanged for quite some time. The sizeable amount of Russian gas provided at a discount price, plus domestically available oil resources, were distributed by the country’s greedy elite the following way: domestically produced gas was used on utilities, proceeds from the transit of Russian gas went to the state budget (minus the money that lined bureaucratic pockets), and Russian gas – to the industry (plus the corruption component).

Then came the Ukrainian revolutions and Kiev’s desire to join “Euro-Atlantic structures” and the desire to “get off the Russian gas needle and prevent the Kremlin from using energy as a weapon.” Ukraine has tried and is still trying to believe in all this by playing up to the collective West and hoping that the West will compensate Kiev for the losses caused by its revolutionary endeavors and anti-Russian antics. As a result, we see gas prices going through the roof, an energy crisis in Europe, and the completion of the Nord Stream 2 gas pipeline.

Those in power in Kiev hoped for the very last moment that the West valued their country more than it did the energy security of European countries. Much to their surprise (and only theirs), this is not so. It looks like the Europeans are interested in Russian gas supplies and are not so eager to keep Ukraine as the main transit country. Moreover, having “democratized Ukraine” to the state of an openly anti-Russian country, the West turned it into a country, whose leadership the Kremlin does not really want to talk to simply because it does not see any point in doing this. This is the reason why third countries care (or rather pretend to care) about Ukraine. Thus, in July of this year, there came out the “Joint Statement of the United States and Germany on Support for Ukraine, European Energy Security and Our Climate Goals.” According to it, Germany pledged to do everything in its power to make sure that the agreement between Moscow and Kiev on the transit of Russian gas across Ukrainian territory was extended for up to ten years. The statement came when it was already obvious that the construction of Nord Stream 2 would be completed, Germany resisted US pressure on this issue, Moscow paid no attention and Washington, exhausted by the battles of the presidential elections and the search for new strategies in the Old World, was trying to pit America’s European friends against Russia.

It has never been a secret that the West needs reliable transit, and this is something that Ukraine also insists on. However, Kiev has officially labelled  Russia as an “aggressor country,” which means that this very “aggressor” must ensure this transit and bring billions of dollars in revenues to the Ukrainian budget. This looks like a kind of “Euro-schizophrenia” where Ukraine is an anti-Russian country and simultaneously serves as a reliable transit country for Russian gas. Things do not work this way, however, and it looks like Europeans are beginning to realize this. Therefore, most of the European consumers support Nord Stream 2 even though they do not show this in public. Suffice it to mention the recent conclusion of a years-long contract for gas supplies to Hungary.

Vladimir Putin’s statement, made amid soaring gas prices and growing threats to European industry, came as an energy lifeline for all Europeans.

“Russian President Vladimir Putin supported the initiative of Deputy Prime Minister Alexander Novak to increase gas supply on the market amid rising energy prices in Europe… Novak said that Russia can stabilize the situation with prices by providing additional volumes of gas on the exchange, adding that this country’s main priority is to accommodate domestic demand,” Lenta.ru reported.

Commenting on the possibility of increasing gas supplies via Ukraine, President Putin recalled that Ukraine’s gas transport system had not been repaired “for decades” and that “something could burst” there any time if gas pressure goes up.

“At the same time, it is more profitable and safer for Gazprom to operate new pipeline systems,” he added. Putin thus confirmed what is already clear to all that Ukraine is an unreliable and, in fact, an extra link, and that Europe can get gas bypassing technically and politically unreliable Ukrainian pipes. He also pointed out that Gazprom would suffer losses from an increase in gas transit via Ukrainian territory, while new gas pipelines offer cheaper transit options. He added that Gazprom is saving about $3 billion a year by using new pipelines and that Russia was ready to increase gas supplies and make them cheaper for European consumers.

Gas shortages have already forced the Ukrainian government to freeze gas prices for household consumers, but prices for gas for industrial enterprises are rising along with those on European exchanges, where on October 6, they reached a very impressive $ 2,000 per thousand cubic meters and went down only after Putin’s statement came out.

Meanwhile, the head of Ukraine’s Federation of Glass Industry Employers, Dmitry Oleinik, said that this [rise in gas prices – D.B.] would lead to an inevitable rise in prices. However, producers will not be able to jack up prices indefinitely, because at some point buyers simply will not be able to cover production costs.

“The Ukrainian consumer will not even be able to cover the cost of production. Plants and factories will slowly shut down and people will lose their jobs – this is already very serious. Budget revenues will “plummet,” and expenses will skyrocket… The issue of bankruptcies is just a matter of time,” Oleinik warned.

If Ukraine continues to follow the chosen course, it will face de-industrialization. By the way, this will suit the West, but certainly not the Ukrainian industrial oligarchs, who have long been eyeing agriculture, including the prospect of turning themselves into land barons. However, the farming sector will not be happy about the high prices on gas that bakeries, sugar factories and greenhouses run on. There will be nowhere to run.

Apart from purely practical realities, the conclusions I can draw from the current energy situation in the world and Vladimir Putin’s statements regarding the Ukrainian transit, are as follows:

  • Gas supplies through Ukraine and to Ukraine are not solely an economic issue, given Kiev’s endless anti-Russian escapades;
  • This problem affects the energy security of Europe;
  • Since there are several angles to this problem, it must be solved in a comprehensive manner;
  • At the same time, this cannot be done exclusively in the interests of the West and Ukraine to the detriment of the interests of Russia.

As you can see, it is once again up to Kiev and its shadow patrons to decide. And winter is just around the corner…

From our partner International Affairs

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Russian Energy Week: Is the world ready to give up hydrocarbons?

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In an official message to mark the opening of the Russian Energy Week international forum on 13-15 October in Moscow, Russian President Vladimir Putin stressed that there are numerous issues on the agenda related to current trends in the global energy market, including improvements to industry infrastructure and the introduction of modern digital technologies into its operation.

“The efficiency of energy production and consumption is the most important factor in the growth of national economies and has a significant impact on people’s quality of life. Many countries have already adopted policies to accelerate the development of clean energy technologies,” he wrote in the message to guest and participants.

“The forum business programme is therefore set to look in detail at the possibility of developing green energy based on renewable sources and the transition to new, more environmentally friendly fuels. I am confident that the events of the Russian Energy Week will allow you to learn more about the achievements of the country’s fuel and energy sector, and that your initiatives will be put into practice,” Putin said.

Leaders of foreign states have also sent greetings to the participants and guests. For instance, President of the Republic of Angola João Manuel Gonçalves Lourenço, Prime Minister of Vietnam Pham Minh Chinh, Crown Prince of Abu Dhabi Armed Forces Mohamed bin Zayed bin Sultan Al Nahyan, and Vice Premier of the State Council of China Han Zheng.

In their greetings, it generally noted the importance of the topics to be discussed at the forum as well as the need to build an international dialogue and consolidate efforts to achieve the sustainable development goals, including as regards climate change.

The programme covers a wide range of issues of transformation and development in the global energy market. In the context of energy transition, the issues of energy development are inextricably linked with the introduction of new technologies, and the transformation aimed at reducing greenhouse gas emissions into the atmosphere. Climate protection is a task that cannot be solved by one country; it is a global goal, which can be achieved through building dialogue and cooperation between countries.

The participants in the discussion will answer the question: Is the world ready to give up hydrocarbons? In addition, during the panel session, the participants will discuss whether oil, gas and coal are really losing ground in the global energy sector; whether the infrastructure will have time to readjust for new energy sources; how long will there be enough hydrocarbons from the field projects that are being implemented; and whether an energy transition using fossil fuels is possible.

The international climate agenda is forcing many countries to reform their carbon-based energy systems. For Russia, which holds a leading position in the global hydrocarbon markets, the transition to development with low greenhouse gas emissions presents a serious challenge, but at the same time it opens up new opportunities for economic growth based on renewable energy, hydrogen technologies, advanced processing of raw materials and implementing green projects.

The Climate Agenda included sessions dedicated to the operation of the Russian fuel and energy sector in the context of energy transition, the impact of the European green pivot on the cooperation between Russia and Europe, as well as the session titled ‘The Future of Coal in a World Shaped by the Climate Agenda: The End, or a New Beginning?’

Sessions of the ‘New Scenarios for the Economy and the Market’ track are dedicated to the global challenges and opportunities of the electric power industry; the impact of ESG on the Russian fuel and energy sector; the potential for the renewable energy sources; and other issues of the future of energy.

The Russian Energy Agency under the Ministry of Energy brings together experts from key international analytical organizations to discuss the future of world energy during the session titled International Energy Organization Dialogue: Predicting the Development of Energy and Global Markets.

The Human Resource Potential of the Fuel and Energy Sector, participating experts will discuss the prospects for developing the professional qualification system, and a session titled Bringing the Woman’s Dimension to the Fuel and Energy Sector. Optimizing regulation in the energy sector and organizing the certification and exchange of carbon credits in Russia are the basis of the Regulatory Advances in Energy. 

Anton Kobyakov, Advisor to the Russian President and Executive Secretary of the Russian Energy Week 2021 Organizing Committee, said “the level of various formats of international participation testifies to the importance of the agenda and Russia’s significant role in the global energy sector. We are a reliable strategic partner that advocates for building international cooperation based on the principles of transparency and openness. With the period of major changes in the industry, it is particularly important to engage in a dialogue and work together to achieve both national and global goals.”

The forum, organized by the Roscongress Foundation, the Russian Ministry of Energy, and the Moscow Government, brought together many local and foreign energy and energy-related enterprises. The speakers attending included  Exxon Mobil Corporation Chairman of the Board of Directors and CEO Darren Woods, Daimler AG and Mercedes-Benz AG Chairman of the Board Ola Kallenius, BP CEO Bernard Looney, and TotalEnergies Chairman and CEO Patrick Pouyanné.

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World Energy Outlook 2021 shows a new energy economy is emerging

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A new energy economy is emerging around the world as solar, wind, electric vehicles and other low-carbon technologies flourish. But as the pivotal moment of COP26 approaches, the IEA’s new World Energy Outlook makes it clear that this clean energy progress is still far too slow to put global emissions into sustained decline towards net zero, highlighting the need for an unmistakeable signal of ambition and action from governments in Glasgow.

At a time when policy makers are contending with the impacts of both climate change and volatile energy markets, the World Energy Outlook 2021 (WEO-2021) is designed as a handbook for the COP26 Climate Change Conference in Glasgow, which offers a critical opportunity to accelerate climate action and the clean energy transition. The new analysis – which the IEA is making available for free online – delivers stark warnings about the direction in which today’s policy settings are taking the world. But it also provides clear-headed analysis of how to move in a well-managed way towards a pathway that would have a good chance of limiting global warming to 1.5 °C and avoiding the worst effects of climate change.

The WEO-2021, the IEA’s annual flagship publication, shows that even as deployments of solar and wind go from strength to strength, the world’s consumption of coal is growing strongly this year, pushing carbon dioxide (CO2) emissions towards their second largest annual increase in history.

“The world’s hugely encouraging clean energy momentum is running up against the stubborn incumbency of fossil fuels in our energy systems,” said Fatih Birol, the IEA Executive Director. “Governments need to resolve this at COP26 by giving a clear and unmistakeable signal that they are committed to rapidly scaling up the clean and resilient technologies of the future. The social and economic benefits of accelerating clean energy transitions are huge, and the costs of inaction are immense.”

The WEO-2021 spells out clearly what is at stake: what the pledges to reduce emissions made by governments so far mean for the energy sector and the climate. And it sets out what needs to be done to move beyond these announced pledges towards a trajectory that would reach net zero emissions globally by mid-century – the Net Zero Emissions by 2050 Scenario from the landmark IEA report published in May, which is consistent with limiting global warming to 1.5 °C.

As well as the Net Zero Emissions by 2050 Scenario, the WEO-2021 explores two other scenarios to gain insights into how the global energy sector may develop over the next three decades – and what the implications would be. The Stated Policies Scenario represents a path based on the energy and climate measures governments have actually put in place to date, as well as specific policy initiatives that are under development. In this scenario, almost all of the net growth in energy demand through 2050 is met by low emissions sources, but that leaves annual emissions still around today’s levels. As a result, global average temperatures are still rising when they hit 2.6 °C above pre-industrial levels in 2100.

The Announced Pledges Scenario maps out a path in which the net zero emissions pledges announced by governments so far are implemented in time and in full. In this scenario, demand for fossil fuels peaks by 2025, and global CO2 emissions fall by 40% by 2050. All sectors see a decline, with the electricity sector delivering by far the largest. The global average temperature rise in 2100 is held to around 2.1 °C.

For the first time in a WEO, oil demand goes into eventual decline in all the scenarios examined, although the timing and speed of the drop vary widely. If all today’s announced climate pledges are met, the world would still be consuming 75 million oil barrels per day by 2050 – down from around 100 million today – but that plummets to 25 million in the Net Zero Emissions by 2050 Scenario. Natural gas demand increases in all scenarios over the next five years, but there are sharp divergences after this.

After decades of growth, the prospects for coal power go downhill in the Announced Pledges Scenario – a decline that could be accelerated further by China’s recent announcement of an end to its support for building coal plants abroad. That move may result in the cancellation of planned projects that would save some 20 billion tonnes in cumulative CO2 emissions through 2050 – an amount similar to the total emissions savings from the European Union reaching net zero by 2050.

The differences between the outcomes in the Announced Pledges Scenario and the Net Zero Emissions by 2050 Scenario are stark, highlighting the need for more ambitious commitments if the world is to reach net zero by mid-century.

“Today’s climate pledges would result in only 20% of the emissions reductions by 2030 that are necessary to put the world on a path towards net zero by 2050,” Dr Birol said. “Reaching that path requires investment in clean energy projects and infrastructure to more than triple over the next decade. Some 70% of that additional spending needs to happen in emerging and developing economies, where financing is scarce and capital remains up to seven times more expensive than in advanced economies.”

Insufficient investment is contributing to uncertainty over the future. Spending on oil and natural gas has been depressed by price collapses in 2014-15 and again in 2020. As a result, it is geared towards a world of stagnant or even falling demand. At the same time, spending on clean energy transitions is far below what would be required to meet future needs in a sustainable way.

“There is a looming risk of more turbulence for global energy markets,” Dr Birol said. “We are not investing enough to meet future energy needs, and the uncertainties are setting the stage for a volatile period ahead. The way to address this mismatch is clear – a major boost in clean energy investment, across all technologies and all markets. But this needs to happen quickly.”

The report stresses that the extra investment to reach net zero by 2050 is less burdensome than it might appear. More than 40% of the required emissions reductions would come from measures that pay for themselves, such as improving efficiency, limiting gas leakage, or installing wind or solar in places where they are now the most competitive electricity generation technologies.

These investments also create huge economic opportunities. Successfully pursuing net zero would create a market for wind turbines, solar panels, lithium-ion batteries, electrolysers and fuel cells of well over USD 1 trillion a year by 2050, comparable in size to the current oil market. Even in a much more electrified energy system, major opportunities remain for fuel suppliers to produce and deliver low-carbon gases. Just in the Announced Pledges Scenario, an additional 13 million workers would be employed in clean energy and related sectors by 2030, while that number doubles in the Net Zero Emissions by 2050 Scenario.

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