Market environment

The challenge for companies will be to shift strategic thinking from the mode of preparing the organization to the expected change to the mode of quick response to unexpected changes. In practice, the ability to react quickly will require the maintenance of adequate reserves in many areas.

GRI Disclosures:

GRI 103-2
GRI 103-3

Capitals:

103-2
103-3

Our last year’s overview of market trends began by noting that COVID-19 did not alter the development challenges faced by our industry, but it did force a profound shift in strategic and business thinking, which had previously relied on long-term analyses and forecasts, assuming that man was able to control the world and natural phenomena, minimising the impacts of any adverse events.

We argued that an accelerating energy transition could have further unprecedented consequences. We will live in a world of increasingly frequent, unpredictable and revolutionary changes for which we will not be able to prepare in the same way in which we prepared for an anticipated decline in demand, increase in prices or fiercer competition.

The all-important challenge for businesses will be to switch the strategic thinking from preparation for an anticipated change to rapid response to unexpected developments. In practice, the rapid response capacity will depend on maintaining appropriate reserves in many areas.

The war in Ukraine and the West’s sharp clash with Russia at multiple levels means that existing geopolitical relations and economic ties are about to change significantly.

The lesson the world is now learning from the energy markets shocks seen almost globally is as follows. Energy dependence on fossil fuels means dependence on countries like Russia. Energy transition enables energy to be generated where it is to be consumed, and thus contributes to climate protection while improving energy and economic security. The war in Ukraine has united the West in action against Russia. The measures taken are a concerted effort and are tailored to the different capabilities of individual countries. This is a lesson for the transition, which needs to be accelerated. However, this needs to be done jointly, with international coordination, and realistically, taking into account the capabilities and energy security of each country.

In total, non-fossil energy is supporting around 2 billion members of today’s population. By tripling its power, it will be able to support about 6.0 of the 9.8 billion members of the population projected in 2050.

Electric energy consumption [thousand of TWh]

The past year further substantiated these expectations:

The development challenges faced by our industry remained unchanged, stemming directly from the steady growth in consumption of energy and other goods by the fast expanding population.
The scale of the challenges prompted a marked acceleration of the energy transition at the level of both regulation and voluntary commitments (made by companies, governments and financial institutions) (Fit for 55 in the EU, COP26 in Glasgow).
Unprecedented growth in demand for energy and energy carriers, accumulated within a short space of time following a rebound from the pandemic-induced slump, came up against insufficient stocks in the fourth quarter.
Tensions were first felt in the natural gas market (the LNG segment), causing massive price hikes, later passed on – through the process of fuel substitution – to coal and oil prices.
Replacement of expensive gas with cheaper coal or oil in the power sector led to increased emissions.
Increased emissions drove up demand for emission allowances. With the looming prospect of tighter regulation, the prices of CO₂ emission allowances on the European market hit record highs.

With market prices of energy and energy carriers surging around the world, global energy security came under threat (in terms of the continuity of energy supply at acceptable prices).
The war in Ukraine has shown that the path to energy security is through international cooperation required to strengthen the energy transition, as this is the only way to earlier reduce dependence on fossil fuels. The energy transition in individual countries should be as fast as possible but it should be adjusted to the local conditions.
The energy crisis and the consequences of the war will cause a temporary shift in the energy mix towards fossil fuels, which will reflect an adjustment of the pace and course of the energy transition to the economic reality and will not reduce the pressure to build the foundations of our security in all dimensions (energy, economic, climate, social and military ones) provided by investments in renewable energy sources.

Since measures to ensure energy security here and now became more pressing in public perception than any efforts to avert climate change, heated debate arose as to what might be the causes of the current energy crunch. Is it a typical supply crisis in the gas market, further aggravated by the pandemic and the resulting strong rebound in demand, or do the root causes lie deeper, in the underdeveloped LNG market and gas infrastructure unable to accommodate the unstable, rapidly changing demand for gas depending on weather, as well as internationally uncoordinated gas purchases?

The conclusions from this debate, and especially how they are incorporated into the regulatory framework, will be crucial for the future pace and path of the energy transition, and thus also for our strategy. Uncertainty over the pace of the transition will grow in the near term, leading to increased volatility in the prices of energy, energy carriers and carbon allowances.

We must seriously reckon with the possibility that the knowledge-based assessment of the causes behind the current energy crunch will not find its regulatory reflection and that the crisis in the gas market, due to underinvestment, will spill over to fuels and crude oil. This may cause a deadlock in the energy transition which will not be broken for a long time.

The war in Ukraine and its economic impact felt around the world prove that the most effective way to build energy security in the democratic world is through cooperative, coordinated action that reduces dependence on fossil fuels, whose resources are not democratically distributed. Some countries have access to them, others do not. The way to accelerate the transition is international cooperation, including in the use of fossil fuels, which are still necessary, especially oil and natural gas supplied from countries now considered safe (let us bear this in mind: until the start of the war in Ukraine, numerous countries considered Russia a safe supplier of gas). Energy transition, that is investing in renewable energy sources and in technologies increasing energy efficiency and redirecting demand to renewable energy, enables building energy security in every country, regardless of its natural resources.

Against this background, realism should prevail over optimism in strategic thinking about energy. We believe our decision to develop towards a multi-utility business model is the right response to these strategic challenges, strengthening our ability to adjust the pace of our own energy transition to changing conditions in the market and regulatory environment, which are difficult to predict.

They can certainly be traced back to underinvestment in that market relative to actual needs, without probing into any deeper reasons. This is the standpoint presented by Fatih Birol, the International Energy Agency Executive Direction^[1]. He argues that the gas market is going through a classic supply crisis associated with the unprecedented surge in demand recovering after the pandemic, which the supply is unable to keep up with. A remedy that could help avoid such crises in the future would be to invest in the gas market and its infrastructure, while building up adequate stocks.

In trying to pinpoint reasons behind the underinvestment, i.e. to understand why there is not enough gas available on the market (leaving Gazprom aside for a moment), there are strong arguments that such reasons may lie in internationally uncoordinated efforts involving alternative energy sources.

The regulatory and financial incentives for EU operators to accelerate investment in renewable energy are not matched by any requirements to secure the continuity of energy supply. The default role is played by the gas capacity along with the liquid (until now) LNG market, which supplies the entire world. But the market regulators resolving to step up the energy transition not only refused to afford support, but actually discouraged investment in that market. And yet one of the main reasons behind current tensions in the LNG market is a significant increase in the share of interruptible capacities, all of them securing the continuity of supply in the gas market. But that concerns the liquid segment of the market, namely that of LNG, which only accounts for 13% of total gas supplies. This seems like a lot compared with pipeline imports, which add another 16%, but little compared with the 71% share of domestic gas, consumed where it is extracted. If a 10% increment in global gas consumption were to tap the LNG market, it would absorb more than a half of its total supplies. This is a situation we have witnessed since September 2021. China’s boycott of Australian coal has shaken up the coal markets but has also had an impact on the gas market, as China has filled the resulting gap in its generation mix with increased purchases of LNG.

This is why Professor Dieter Helm of Oxford University argues that “The current crisis was very predictable, and its causes run deep. A series of simple myths have been spun out to the wider population, which simply are not true. It is not yet true that renewables are cheaper than the main fossil fuels once intermittency is taken into account. Simply ignoring the need for back-up in claims about renewables costs will not make them go away. On the contrary, two inconvenient facts remain. The first is that whilst intermittency was not much of a problem when there was very little wind capacity in the system, it now very much is. Now that wind and solar make up a much bigger share of total capacity, this really matters – and it needs a much bigger investment in back-up capacity. The economics of that back-up capacity is seriously impaired by renewables at times producing wholesale prices of zero – when the wind is blowing well and the sun is shining – and very high prices when they are not. In the UK, in the old fossil-fuel and nuclear system, total capacity requirements were of the order of 70–80 GW. For a system where wind and solar sometimes can produce all the energy demanded and sometimes very little, that firm power capacity needs to remain in place, plus the wind turbines and solar panels too. We need a great deal more capacity to meet any given demand.” And he puts it bluntly: “That has to paid for by someone. Pretending that the costs do not exist, or that they will all go away in a blitz of new technologies anytime soon, is a dangerous climate change narrative. Worse still is to just assume that it can all be paid for by borrowing. That just means that not only are we not prepared to pay the costs of decarbonisation, but we want to dump both the costs and the climate change onto the next generation.”^[2] After all, at the end of the day, it is us consumers who pay for everything.

Also Rice University researchers in their recent report take a realistic look at what is needed for the global energy transition to succeed. They warn that too rapid a phaseout of fossil fuels could have the opposite effect – stranding climate progress in the so-called ‘valley of death’. “Pushing to defund fossil fuels – before lower-carbon resources can credibly ‘fill the gap’ – risks destabilizing a global energy- food-water-human well-being nexus that, sufficiently perturbed, would likely delay energy transition efforts for decades.”^[3]

The pace of the transition, certainly a strategically important issue, has preoccupied us for long^[4]. According to scientific consensus, the world can keep global warming below 1.5 degrees Celsius on condition that it achieves carbon neutrality by 2050. This in turn requires a reduction in global carbon emissions of at least 45% compared with 2010 by 2030. Given that the trend in global carbon emissions has remained flat over the past decade,^[5] the energy transition should gather significant speed.

^[1]https://www.linkedin.com/pulse/europe-world-need-draw-right-lessons-from-todays-natural-fatih-birol/?utm_content=buffer5e2e9&utm_medium=social&utm_source=twitter-ieabirol&utm_campaign=buffer (dostęp 03/02/2022)
^[2]http://www.dieterhelm.co.uk/energy/energy/luck-is-not-an-energy-policy-the-cost-of-energy-the-price-cap-and-what-to-do-about-it-2/ (dostęp 3/02/2022)
^[3]https://www.bakerinstitute.org/research/global-energy-transitions-looming-valley-death/ (dostęp 03/02/2021)
^[4] https://www.money.pl/gospodarka/impact21-jak-przyspieszyc-zielona-transformacje-6706094159637152a.html (dostęp 03/02/2022)
^[5]https://www.carbonbrief.org/global-co2-emissions-have-been-flat-for-a-decade-new-data-reveals (dostęp 9/11/2021)

Development is a long-term process, ideally free from recessions. How to avoid a recession? Economic theory recommends the same approach as coaches do when preparing athletes for a marathon. Grow at a rate dictated by the growth in economic potential rather than by consumer and investment demand. If you want to complete the race, you had better run at a pace suited to your capability and physical fitness. Want to run faster? Become fitter. Otherwise, when you accelerate, you will need to stop running to recover strength. As a consequence, you will cross the finish line later, covering the entire distance more slowly.

It is very much the same with the energy transition, being a long-term development process. It should unfold at an optimum pace: any acceleration throwing the important markets into imbalance should not be seen as a welcome development. Rapid renewable capacity expansion without securing continuity of supply leads to overheating and transition recession, i.e. growth rather than a reduction of CO₂ emissions. As demonstrated by the market today, higher CO₂ emissions translate into higher emission allowance prices, thus encouraging investment in renewables and discouraging investment in traditional power generation, which is currently the only reliable security against supply disruptions. This becomes more and more of a vicious circle, of which energy security is the victim. It may thus be worthwhile to consider whether the soaring prices of emission allowances are not a warning signal.

We already know that green transition looks different for the financial sector than it does for the real economy. The consequences of their varying elasticity have sent ripples through the energy and fossil fuel markets, triggering a global spike in inflation. The lesson we are just learning from the energy markets is that the pace of transition should be determined by what is the bottleneck area, being much slower and resistant to change.

Such bottleneck area is global consumption, of both energy and raw materials, and so action needs to be focused there, especially that lower emissions from any consumption always have the effect of reducing global emissions.

The difficulty in steering global consumption through a green transition is that the transition costs must be addressed. Pretending they do not exist is a road to nowhere. Having internalised environment and climate protection costs, green consumer products and services will be more expensive than their currently available counterparts. However, they will be cheaper than their brown counterparts, bearing the additional cost burden of CO₂ emissions. Such costs must be fully passed through to consumers to persuade them to choose green products instead of more expensive brown ones. Failing that, the consumption structure will not shift in the desired direction, causing a supply-demand imbalance across product markets as manufacturers, burdened by the cost of emissions, will phase out brown products faster than consumers are willing to part with them.

Zero-carbon consumption does not have to be more expensive if the inevitable price increase is accompanied by a change in lifestyles and consumption patterns. Consumer spending is important, not prices. Applying higher future prices to the current consumption structure is a mistake, because such higher prices will force a shift in the mix of consumed products and services.

To avoid being left out of pocket, consumers must be able to buy sustainable products in small portions, exactly when they need them and as much as they can consume (on-demand economy). A task facing the industry is to create new business models underpinned by new technologies, mostly digital, to help consumers meet their needs at a lower cost. Possible solutions include delivering products as services and managing consumer demand.

The rising costs and transforming business models will primarily force a reduction in the per capita consumption of raw materials, which can be achieved in a circular economy. This is a formidable challenge for the industry, involving a change in the enterprise valuation model in the transitional period (as a decline in sales profits will not be fully offset by an increase in profits from rendering of services).

One vehicle of the green transition, which takes long to become ripe for the picking, is innovative technologies. Technologies of the future have first to be invented, tested, and scaled up. As they mature and develop, new technologies may involve some unwelcome effects of scale. How many wind turbines can the Baltic Sea accommodate? How to dispose of old non-recyclable wind turbines? Technologies are about supply, whereas preparing a green product offering is the role of the industry. Entering the world of new technologies brings with it a new kind of uncertainty, formerly unknown to companies using ready solutions.

Companies do a good job picking out government incentives to invest in new technologies. However, it would be better if such incentives were technology neutral, supporting every solution equally, without preference or prejudice. This would bring a wider range of solutions to the market and mitigate regulatory risk (failure of the solution the government chose to support). At the other end of the market are consumers, who make the choice. They decide whether to switch to a green product right away or to hold off for a while. Will they benefit financially? New solutions must be attractive and affordable to consumers around the world. They must take account of the purchasing power gap between the global north and the global south. Interregional transfers will be a necessity.

We must also remember that consumption cannot be fully decarbonised due to technological reasons, but also because of economic and social factors. This is why the global goal is not decarbonisation but rather climate neutrality, i.e. reducing the carbon footprint to zero on a net basis. Emissions that cannot be reduced must be captured by natural means or using the CCS/U technology, and then stored or returned to production.

In the economic and social context, due regard must be paid to a just transition, that is one affordable to consumers in the world’s poorest regions. A transition that creates jobs in developing countries with the largest population growth, generating sufficient income to fund consumption. From this perspective, it is pretty obvious that energy transition pathways in the global north will differ from those in the global south. In the richer global north, a reduction in consumption-driven emissions (including the amount of materials consumed) should be deep enough to enable an increase in consumption in the global south. This will require massive financial transfers between the regions, as well as dedicated products, services and business models.

Besides, we are talking about processes that take place on the global scale. Countries around the world make their own decisions about how to achieve an energy transition, thus affecting the global gas, coal, and oil markets in an uncoordinated manner. The consequences of their sovereign actions are felt around the globe. This is why energy transition needs to be a synchronised and coordinated effort.

Energy

Offshore wind farms globally – Offshore wind power as an energy generation technology has been rapidly developing over the last decade and is likely to become one of the leading energy sources in the future. This is largely due to zero CO₂ emissions, technological progress and lower electricity production costs.

The first commercial large-capacity offshore wind farms were built around 2010 and the industry has been continuously developing since then. This has manifested itself mainly in technological advances and growing unit capacity of the offshore wind infrastructure (from about 3.6 MW to 14 MW in the case of turbines offered by market leaders), and consequently – larger foundations installed at greater depths. This creates demand for ever larger components, installation vessels etc.

At the beginning of 2021, offshore wind farms all over the world had installed capacity of 35 GW, of which 28 GW was located in Europe. The European market leaders are the United Kingdom (about 12.7 GW), Germany (7.7 GW), the Netherlands (3 GW), Belgium (2.3 MW), and Denmark (2.3 GW). In Asia, the market leaders are. However, it should be noted that further projects are being developed and that at the end of 2030 the installed capacity of all offshore wind farms is expected to exceed 270 GW. Further development of the industry in these countries will be accompanied by growth on new markets, including the US, France, Taiwan and Poland. European countries (the UK and Germany) will certainly remain the market leaders with the largest number of completed farms, and this group will be joined by the US, being a new player, which is currently developing a number of new projects and investing extensively in its own supply chain.

The development of offshore wind power generation is supported by the energy policy of individual countries and organisations, such as the European Union. In November 2020, the European Commission presented the Marine Renewable Energy Strategy, which provides for the support for offshore wind farms necessary to expand the capacity installed in the EU (excluding the UK) to 60 GW in 2030 and 300 GW in 2050.

Development of offshore wind power generation in Poland – The potential of offshore power generation in the Baltic Sea is estimated at 83 GW, of which 28 GW is attributable to its Polish part. The plan for offshore wind development in Poland was confirmed by the Regulation of the Council of Ministers of April 14th 2021 on the adoption of a zoning plan for internal sea waters (the Zoning Plan), territorial sea and the exclusive economic zone on a scale of 1:200,000, as well as Poland’s Energy Policy until 2040 (PEP 2040) adopted in February 2021. The Zoning Plan identifies zones where offshore wind farms will be developed, such projects having priority over other activities in that part of the Baltic Sea. These zones are characterised by conditions favourable to offshore power generation (estimated average wind speed at the hub height: 9–10 m/s, insignificant tides, low salinity, and total area of approximately 2,500 sq. km).

Since December 2021, it is possible to apply for further permits for the construction and use of artificial islands, structures and facilities in Polish marine areas (PSZW permits). The applications cover 11 areas identified in the Zoning Plan. They will be assessed against criteria set out in the Regulation of the Minister of Infrastructure of November 27th 2021 on the assessment of applications in award proceedings. Such assessment will be the basis for issuing, pursuant to the Act on Polish Marine Areas and Maritime Administration, PSZW permits, enabling the preparation of further offshore wind projects in Poland. ORLEN Group companies have applied for PSZW permits covering all the 11 areas.

At present, development work is under way on projects for which permits to construct and use artificial islands, structures and facilities have already been obtained. These are: Baltic I (Polenergia/Equinor), Baltic II (Polenergia/Equinor), Baltic III (Polenergia/Equinor), Baltic II (RWE), B-Wind (EDPR/Engie), C-Wind (EDPR/Engie), Baltic Power (Baltic Power from the ORLEN Group/Northland), Baltica 1 (PGE), Baltica 2 (PGE) and Baltica 3 (PGE).

In February 2021, the Act on the Promotion of Electricity Generation in Offshore Wind Farms entered into force in Poland, providing a legal framework for the implementation of offshore wind farm projects in the Polish part of the Baltic Sea. In accordance with the new regulations, in the first phase of the support scheme for offshore farms with a total installed capacity of 5.9 GW aid will be granted by way of an administrative decision by the President of the Energy Regulatory Office (URE). Further projects will participate in auctions organised on a competitive basis. The first auction will be held in 2025 and the second one in 2027 (each for farms with a total installed capacity of 2.5 GW).

Retail

The COVID-19 pandemic and the restrictions introduced in all countries where the ORLEN Group operates its retail chain continued as a material factor driving market trends in 2021 and had an adverse effect on fuel sales volumes.

In Poland, fuel sales volumes gradually recovered in 2021. A positive growth rate was reported despite the successive waves of the pandemic and the resulting restrictions and constraints.

Likewise, in Germany, 2021 was driven by the impact of COVID-19 and the related measures taken by the German government. The lockdown in the first quarter of 2021 led to a sharp decline in fuel demand, pushing sales volumes down to levels well below ODE’s expectations. Starting from the second quarter, the market recovered steadily but failed to reach the pre-restriction levels by the year end.

A number of shutdowns at German refineries resulted in relatively high prices in the affected areas, leading to higher margins and, despite the adverse circumstances, a sound overall performance.

Under a law passed in Germany in 2021, greenhouse gas emissions reduction targets are to increase annually from the current 6% to 25% in 2030, significantly exceeding the targets provided for in EU directives. The new legislation promotes chiefly electromobility (relying on electricity from renewable energy sources), but the assumed goals will also be supported by the use of green hydrogen and second generation biofuels.

In the Czech Republic and Slovakia, service stations remained open across the country despite the pandemic, however, with restrictions imposed on food service outlets. In 2021, Benzina reported a 7.1% increase in fuel sales in the Czech market, a noteworthy achievement given that both the Czech and Slovak markets experienced fuel sales declines in the previous year due to the COVID-19 pandemic.

The pandemic had a significant impact on the sales performance of service stations in Lithuania. Until the beginning of April 2021, it had been prohibited in Lithuania to leave the region of residence (municipality). Also, a country-wide quarantine was in place until June 2021. Since October, further restrictions were imposed on the use of public utility facilities for those without a COVID-19 vaccination certificate.

As there were no acquisitions or ownership changes involving the main players on the retail fuel market, the leading chains retained their respective market positions in the ORLEN Group’s operating markets.

Upstream

The year 2021 brought major short- and long-term shifts in the energy market compared with analysts’ forecasts published in prior years. The assumptions for a long-term energy market outlook considering multiple scenarios were to show uncertainty surrounding the outcomes of various elements of the energy transition.

For each scenario^[1] the underlying assumption was that energy consumption would increase globally, at least for some time, driven by increasing prosperity and living standards in the emerging world. The rate of growth in energy consumption and trends in demand for particular fuels continue to vary depending on the geography.

The developments in 2021 verified the short- and medium-term assumptions used in the economic models. However, it is important to emphasise that despite the enormous fluctuations in the energy system in recent times, the long-term goals resulting from the implementation of the various energy transition pathways remain unchanged.

The ultimate impact of the COVID-19 pandemic and its scale are difficult to predict. The primary energy demand forecasts assume that economic activity will partially return to pre-pandemic levels as restrictions are eased. Based on how the situation developed in 2021 we know that with the varying rates of progress in vaccination campaigns in different countries and the emergence of new variants of the virus it is difficult to determine when the pandemic will actually end, and that the pace at which individual world economies will return to their pre-pandemic state will vary. The BP Energy Outlook^[2] intermediate scenario assumes that primary energy demand is 2.5% lower in 2025 and 3% lower in 2050 relative to prior projections as a result of the pandemic.

[1] BP Energy Outlook: 2020 Edition considers three potential energy transition scenarios: ‘Net Zero’, ‘Rapid Transition’ and ‘Business as Usual’.

[2] The Rapid Transition Scenario considered in the BP Energy Outlook is closely correlated with the long-term global goal of reducing CO2 emissions, expected to limit global warming to well below 2ºC relative to the pre-industrial levels. A review of the commitments and discussion of the progress and challenges in finalising the Paris Agreement, including continued efforts to limit global warming to 1.5 ºC, were the subjects addressed at the COP26 conference held in Glasgow from October 31st to November 13th 2021.

Primary energy demand grows by about 9% in 2019–2050, with an average year-on-year growth rate of 0.3%. This is significantly slower than the past 20 years, when primary energy demand growth averaged 2% year on year. This reflects a combination of weaker economic growth and improvements in energy efficiency (less energy used per unit of GDP).

In absolute terms, global consumption of all energy sources save for coal and oil remains relatively stable (natural gas) or grows (other) by 2050. The rapid expansion of renewable energy sources (RES) is supported by increasing importance of pro-environmental policies, progressing climate change and changes in consumer behaviour.

By 2050, Asia (mainly China and India) remains by far the largest consumer of primary energy, followed by the United States and Europe.

In 2019–2050, we can see significant changes in the global energy mix. The scenario assumes an increasing share of renewable energy (up from 5% to 44%), hydropower (up from 7% to 9%) and nuclear energy (up from 4% to 7%) and a declining share of coal (down from 27% to 4%) and oil (down from 33% to 14%). The share of natural gas in the energy mix remains relatively stable (24% and 22%, respectively).

In 2021, an economic rebound in many regions affected individual components of the energy system, which was unable to respond quickly enough to growing demand for energy commodities after the significant economic slowdown of 2020. Oil, natural gas and coal prices skyrocketed in 2021 to levels not seen in many years. Despite plans to phase out carbon-intensive fossil fuels, a significant increase in oil and coal consumption was seen in 2021. In addition, high commodity prices translated into record hikes in electricity prices, especially in those countries where the share of renewables in electricity generation is small.

in BP’s Rapid scenario, demand for natural gas is projected to recover to pre-pandemic levels and grow until it peaks in or around 2035. In 2035–2050, global demand for gas is expected to decline at an average rate of 1.0% year on year. Natural gas remains the key component of the global energy transition in the world. Demand for natural gas in the short and medium term will grow significantly. Power generation and industry will continue to drive growth in natural gas demand in the medium term. In the longer term, the projected growth in demand is driven by the use of gas to produce hydrogen (in 2050 hydrogen production will account for almost 10% of demand for natural gas). The United States and developing economies, particularly Asian countries (China) and the Middle East remain the largest natural gas consumers. The United States, Russia and countries in the Middle East remain key gas producers, with production rising in China and Africa.

The economic rebound in 2021 led to a significant increase in demand for natural gas. Gas prices in Europe remained at above-average high levels throughout the year, including in the summer season, driven by lower LNG imports, sub-optimal filling of storage facilities, and a decline in gas supplies from the east. Further developments at the end of 2021, i.e. a sharp drop in temperatures and a significant demand for gas from the energy sector, led to record-high gas prices on the market (the average gas price on the day-ahead market was nearly PLN 450/MWh in the fourth quarter of 2021)^[2]). The average day-ahead market gas price for the whole year amounted to PLN 225/MWh, compared with PLN 51/MWh in 2020, which means a year-on-year increase of as much as 441%.

In Canada, supportive economic conditions helped maintain favourable natural gas prices throughout the year. Increased local demand and a surge in gas exports to the US provided a favourable pricing environment for hydrocarbon producers in Canada. Benchmark AECO gas prices in Alberta reached as high as CAD 5.0/mcf in the second half of the year, the highest level since 2014. The average annual price of AECO gas was CAD 3.61/mcf in 2021, compared with CAD 2.22/mcf a year earlier, up 63% year on year.

^[1] Based on BP Energy Outlook: 2020 edition.
^[2] Arithmetic mean of the TGEgasDA index as at the trading day.

the economic slowdown caused by the COVID-19 pandemic necessitated revision of the long-term oil demand projections. BP’s Rapid scenario predicts that crude demand will continue below pre-pandemic levels in the near term. Oil demand is expected to fall by an average of 0.7% year on year until 2030, with the pace of the decline accelerating between 2030 and 2050 on the back of increasing efficiency and electrification of transport. The reduction of capex spending in the E&P sector had the most severe effect on oil production levels in the United States, with Saudi Arabia and Russia expanding their market shares as a result. The demand side is anticipated to be the key driver of oil prices. After the COVID-19 pandemic, demand for crude oil in the transport sector (from aviation, through to road and maritime transport) is expected to see a sharp decline. In the long term, transport will account for two-thirds of the decline in demand until 2050. The petrochemical sector will become the main driver of global oil consumption in the long term.

Oil demand gradually increased in 2021 as the economy recovered. The US EIA estimates crude demand growth at 5.1 mboe/d throughout 2021, after the pandemic-driven decline of 8.5 mboe/d in 2020. With the OPEC+ alliance pursuing a policy of slow lifting of crude oil production caps, the demand-side imbalance persisted and the upward trend in crude prices continued practically throughout the year. The average price of Brent crude in 2021 was USD 71/bbl, compared with USD 42/bbl a year earlier, up 69% year on year. The average annual price of CLS (Canadian Light Sweet) crude was CAD 80/bbl, compared with CAD 45/bbl a year earlier, up 78% year on year. The average price differential of CLS to the US WTI benchmark was CAD -5/bbl (CAD -7/bbl in 2020).

^[1] Based on BP Energy Outlook: 2020 edition

Market environment

Electric energy consumption [thousand of TWh]

The causes of the current energy crunch extend beyond the gas market.

How to accelerate its progress without creating market tensions?

Energy

Retail

Upstream

Natural gas[1]

Crude oil[1]

See also

Search results