Scenarios and resilience

According to the Sixth Report of the Intergovernmental Panel on Climate Change (IPCC), climate change will affect all systems, natural and human, and its economic impacts are expected to grow with global warming. However, specific implications present high levels of uncertainty, depending on factors such as advances in carbon-neutral technologies, market structures, behavioral changes, and planning for a just transition.

The impacts on the global energy supply caused by the conflict in Ukraine brought issues related to security and access to energy to the center of the discussion. The effects of the crisis have multiple repercussions: in the urgency of transforming energy systems to be more secure, reliable, and resilient, according to the mix of natural gas, oil, coal and electricity; and on food and climate security.

The last Conference of the Parties (COP), held in Egypt, in Sharm El-Sheik, ratified the need to reduce global greenhouse gas (GHG) emissions in all sectors, in line with the specificities of each country and recognizing the need for a just transition support. The discussion on reducing the use of fossil fuels, including oil and gas, also gained momentum, although no agreement was reached.

The oil and gas industry has an important challenge in minimizing its operational emissions and delivering less carbon-intensive products since energy transition scenarios point to a relevant role for petroleum products in the coming decades.

Our Scenarios

The use of corporate scenarios in strategic planning is an instrument that qualifies the strategic analysis and the consequent long-term positioning decisions. We have been preparing our own scenarios for more than three decades, which guide our vision of the future and are used to quantify assumptions and assess risks.

Our scenarios indicate that there will be persistent world demand for oil in the coming decades. We hold relevant reserves, and it is our priority to continue supplying oil and gas in a competitive and environmentally responsible manner.

In these scenarios, consolidated trends and critical uncertainties combine to shape energy transition trajectories. Economic growth models, environmental and climate policies, technological innovation, and changes in society’s behavior play a decisive role in the transition and substantially change projections for our industry (demand and oil price). The intrinsic competitiveness of liquid fossil fuels remains based on the high energy density, the possibility of transport and storage, and the existence of already developed infrastructure, factors of greater or lesser importance in different energy services. The determining aspect of the resilience of each product in the low-carbon transition is the viable scale of substitutes, so innovation is a particularly relevant factor in the transition. Even in the most accelerated transition scenario (Resilience), we estimate persistent demand, albeit decreasing, for oil products in the coming decades, which should be progressively supplied in models with less carbon intensity.

The price of oil is a variable that decisively influences the definition of the portfolio and the identification of the profitability of assets in the context of accelerated transition. In the current context, in addition to the uncertainties inherent in the functioning of the oil market, there are structural issues brought about by the COVID-19 pandemic, such as changes in the population’s mobility habits and the impacts of the war between Russia and Ukraine. Russia is one of the world’s main oil producers and exporters and its involvement in the conflict, as well as the sanctions imposed by the USA and the European Union on the country, resulted in sharp increases and volatility in oil and gas prices throughout 2022. In line with this context, the scenarios consider the short-term effects of this situation and try to envision the possibilities that these events will cause medium and longterm changes, especially regarding the pace of energy transition.

Growth Scenario

We also note the consolidation of the mobility electrification trend, and the cost reduction and scale expansion of modern renewable energy production and energy storage.

In addition to the demand for fossil products, the transition to a low-carbon economy affects two important variables in our value creation: Brent price and carbon price. We monitor progress in carbon market regulation in Brazil, the main market where we operate, through a specific risk analysis methodology, identifying threats and opportunities for our businesses. Currently, we carry out value quantification and portfolio decisions under the assumptions of our Base scenario.

Base Scenario Resilience Scenario

In the short term, the scenario is characterized by the economy’s rapid recovery after the pandemic’s effects. The war between Russia and Ukraine results in high energy prices and short-term inflation. The decrease in oil and gas exports from Russia to Europe forces a diversification and an increase, in the short term, in the use of coal.

In the medium and long term, economic growth is accelerated, with an expansion of trade flows. The transition of the Chinese economy to a more consumption-oriented dynamic is successfully carried out, and the Indian economy gains relevance. From the environmental point of view, despite the advances, there are still coordination and financing difficulties in deepening the transition to a low-carbon economy.

The result of this scenario is accelerated economic growth, an energy matrix still focused on fossil sources and high commodity prices.

In the short term, the scenario is characterized by a more gradual recovery trajectory after the effects of COVID-19. The war between Russia and Ukraine impacts energy prices and global inflation, requiring long-term action by Central Banks.

In the medium and long term, economic growth is average, in line with that observed in the recent past. The climate and environmental policies align with the goals already announced, without deepening them. There is a greater concern with mobility and air quality in large urban centers. More direct solutions for the energy transition, driven by large cities and popular pressure, characterize this scenario. The global energy matrix has undergone substantial changes, especially regarding the participation of coal and renewable sources.

The result of this scenario is a more diversified energy matrix, with growth in the share of renewables and commodity prices in line with what has been observed historically.

In the short term, the scenario is characterized by a delay in solving the pandemic and a significantly slower recovery trajectory. The disintegration of global production chains and the war between Russia and Ukraine slow down the expansion of world trade amid nationalization strategies in several countries and industries.

The consequences of these events

have caused more lasting impacts on private debt and the labor market.

In the medium and long term, the environmental issue becomes central, and countries are driven to cooperate and coordinate efforts for a quick transition to a low-carbon economy. The demand for fossil products is discouraged, so that the prices of these energy sources are lower.

The result of this scenario is lower global growth, a greater share of renewables in the global energy matrix and lower commodity prices.