Hill Vaden:

All right. Welcome to EnergyCents, an S&P Global podcast devoted to covering topics that lie on the intersection of finance energy markets. I'm Hill Vaden, and I'm here today with Breanne Dougherty and Rachel Beaver. How are you all?

Breanne Dougherty:

Great, Hill. Thanks.

Rachel Beaver:

Good. Thanks, Hill.

Hill Vaden:

And, Rachel, I think you may have to sneak out of our recording early today, so we will enjoy the time that we have with you. But if you do have to leave early, thank you for participating in the beginning.

Rachel Beaver:

No problem at all. Very disappointed to be leaving such an interesting topic so early, I'm afraid.

Hill Vaden:

Yeah, and it is an interesting topic, and I've been pretty excited about this. We're joined today by Dr. Steven Knell, who's one of the senior leaders of S&P Global's climate energy scenarios research. Steven, how are you?

Steven Knell:

Yeah, doing really well, really well, Hill. Thanks very much. It's great to be with you today. Looking forward to the discussion.

Hill Vaden:

Yeah, absolutely. So I guess before we get into the discussion, there's a couple interesting trivia points that you mentioned to me last week, a couple weeks ago, when we were talking about your close kinship, I suppose, with two of IHS's more recognized corporate authorities, one with our CEO, Lance Uggla. Both of you share, I guess, a fandom for the Arsenal Football Club?

Steven Knell:

This is correct, yes, and we're both lapsed Canadians, you might say, having chosen to build a new life in the old world but originating in the new. So, yeah, we're kindred spirits, you might say.

Breanne Dougherty:

I'm a lapsed Canadian as well.

Steven Knell:

Really? Oh, wow. Okay.

Breanne Dougherty:

No, I'm not going to call myself a lapsed Canadian. I'm still a tried and true Canadian. I just happen to reside in the United States of America.

Steven Knell:

I got called out by someone from Toronto for wearing a Zion Williamson New Orleans Pelicans jersey the other day. She happened to be a Raptors fan, and we were talking about the game, and she was like, "You're wearing the wrong colors." I was like, "I've been gone almost 30 years." I moved to the United Kingdom as a school boy in the summer of 1991, so despite the dulcet tones that I'm still somewhat well-known for, I've been gone forever.

Breanne Dougherty:

It doesn't matter. It doesn't matter how many years you've been away.

Steven Knell:

Well, clearly. Clearly not.

Breanne Dougherty:

Canadians want to make sure that their own stay really well-connected. It's a thing.

Steven Knell:

Well, in my defense, I did call the sweep of the Nets in my bracket, so I'm feeling pretty good about how the Raptors are performing right now. I have a Leafs jersey from Mats Sundin, and she was like, "That doesn't count. It doesn't draw any water whatsoever." So, yeah, great graphic, the social distancing since 1967, there's a picture of a Leafs jersey and then a picture of the Stanley Cup, which I think is pretty-

Breanne Dougherty:

That's actually brilliant.

Steven Knell:

Pretty amusing for some but not for all. Be that as it may, it's been an interesting journey to suddenly find oneself working for a company that's led by somebody who I share so much with. It's one of the things, I think, that makes S&P Global kind of special, that you look around and you find those associations amongst your colleagues. It's one of the ties that bind, you might say.

Hill Vaden:

Well, and so the other one, it almost sounds made up, but I think you got interested in S&P Global while reading The Prize in undergrad?

Steven Knell:

Yeah, so this is quite an interesting story because I've got the honored privilege of working alongside Dan Yergin. My background was in politics and international relations, focused mostly on sustainability issues in undergraduate years, thinking about how concern for the environment had evolved over time, different environmental regimes and really what the politics of climate change looked like alongside big, broad traditions of how we understand the social domain and the international system.

After my master's in IR at the LSE, I went to work for the UN Development Program in Croatia, which was a great experience. I was actually able to put into practice a lot of what we had discussed in more abstract theoretical or historical terms. So I was suddenly living the life, driving around in one of those UN Land Rovers. The office of UNDP was just below Carla Del Ponte's office for the war crimes tribunal. In some cases, in Croatia, in 2000 when I was there, it felt like the conflict in the former Yugoslavia had ended the day before. It had that kind of prescience. But, yeah, to pass the time, when I wasn't trying to lift weights with US Marines, hilarious given my fairly slight build ... I'm a cyclist for very good reason, right? But back in the day, that was the way you did things. I got the great chance to read tomes that I'd long thought of as a challenge to be risen to, like Ulysses, which on the nights when I wasn't doing project activity, I spent at least, I think it was March, reading Ulysses in that year of 2000.

And then, yeah, I got The Prize, and I started reading it. I'd long had a history or an interest rather in history in a general sense as a way to understand the future. You must look back and have an appreciation of where we've been. Well, that's one of the rules I've lived my life by but also one of the reasons why I chose some of the subjects of study that I did. And I'm reading this book, The Prize, and I'm thinking, "So this is where power in the international system comes from. This is where the friction with the questions of sustainability that I'd been exploring previously was derived from," in that if you start thinking about energy in a historical context, you understand that certain forms of energy deliver unique yields that are very well-suited to certain types of economic activity, and you can't just wish that away.

It was a real light bulb moment to be like, "Oh my goodness, so this is an account of how our civilization, the lifestyle I enjoyed in Canada growing up and maybe the importance of petrol and gasoline as a fuel for the way of life that I was fortunate enough to enjoy, but also why we weren't changing it." Where was the resistance to the suggestion of supply substitutability or how, from the Rio conventions and then through Kyoto, we talked a lot about addressing climate change but have really struggled to. And I think, ultimately, what The Prize taught me was that energy has a way of being a unique contribution to production functions, that it can be the commodity that enables all other commodities. And Dan rendered that in such accessible, historically grounded, but really accessible terms that suddenly the world made a lot of sense to me in a way which it hadn't really before.

So fast forward. Basically, it inspired me to live the UN and to come back into academic work and basically was one of the cornerstones of my own PhD, which was on the history of energy systems, how they evolved and what rules emerge in a broader economic context from those historical performances that Dan explored in The Prize to get to the point where, all right, well, there's a reason why political economy functions as it does. It's about not just who controls the resources but how the use of resource and energy consumption contributes to certain kind of economic performances and indeed social momentum over time. So, in a way, Dan inspired me to do my own doctorate, and, lo, I've ended up working for a company where he's a thought leader and he reads my work and helps make it better. I can't tell you the part of me that looks back and still I can't believe I'm lucky enough to have be my story. It's absolutely remarkable, Hill.

Hill Vaden:

So, in that, I think that you and your team in the scenarios group have one of the most fun and interesting jobs with S&P Global, the ability to approach things from a scenario basis. I imagine that many of our listeners don't know exactly what ... We speak of it here as if we all know it, and I suppose we do, but for those out there in Internet world who don't know scenario planning, can you explain it in a nutshell of what it is and why it's useful?

Steven Knell:

Yeah. Well, the first thing to say is that it's not a forecast. The terms can be used somewhat fungibly or interchangeably rather, but, basically, a big distinction that we tend to make is that forecasts are really statistical summaries of an expert opinion and you focus a lot on certainty. You're basically projecting from a quantitative base of data into qualitative terms, trying to understand the future or at least anticipate it. Scenarios are more narrative-driven, and it's really, in a way, a description of what's a plausible future. We think a lot about where are the strategic risks in the context of a lot of the work we do, the global economy, in the energy [inaudible 00:09:26], in the evolution of different technologies. Highlighting strategic risks is one of the big things that we do, but it also conversely can be seen as a roadmap for different types of opportunities. In order for that to be the case, well, you have to put on some almost unconventional thinking caps. You have to explore things that are not just the business as usual or the most likely, but what if types of questions. This allows you-

Hill Vaden:

And it starts with a big idea and then puts together detailed things that might happen as a result of that big idea, is that ...

Steven Knell:

Yeah, that's correct. We have actually a structure in which a number of key questions are explored. One of the big ones that I'm hoping to talk with you guys today about is how quickly and with what results do we respond to the challenge of climate change. It's absolutely a massive variable. But a couple of these big ideas and principal questions then enable a combination of you identify the key movers, you think about what the drivers are, so you know your agents of change. It can be the Chinese state. It can be Tesla. It can be different representatives of the energy landscape today. And then what are the drivers going to be? Is it something like sustainable development goals or access to energy more generally considered? What are the things that qualify our future? What are those uncertainties that contribute towards certain types of risks or certain types of opportunities?

And, essentially, our process involves the development of a narrative that captures the way that things could be, a plausible pathway for the future. That is a reference point for the modeling that we do that allows us to really [inaudible 00:11:24] that we use to express our scenarios. But scenarios in and of themselves are really what if type of questions. The legacy brands of S&P Global from CERA to Global Insight, there's a huge pedigree and expertise when it comes to the way in which this particular tool can be deployed.

And, actually, thinking about this year, we've used this format to understand how quickly we may come back from COVID-related economic dislocation. We've thought about where the winners and losers going to be in some aspects of the green economy, where are seeing elements of a green recovery, what could happen next. We've got a framework. These are the kind of questions that all your listeners are going to be confronted by in personal respects as well as professionally. So we've adopted these frameworks to essentially populate the uncertainty that we see in the international system today and render it in concrete terms that can be used for stress testing, for wind tunneling different ideas, anticipating risk, being nimble, being able to deal with the variability of the market structures that we find, and essentially be better prepared.

Forecasts are kind of right or wrong. There's this narrative that if you're in forecasting, chances are you spend a lot of your time being wrong when it comes to the numbers and the outlooks that you've developed. One of the things-

Hill Vaden:

What's the-

Steven Knell:

... that's great about scenarios is they're really flexible, so they can accommodate that variability in ways forecasts don't.

Hill Vaden:

The classic line is that all forecasts are wrong and some forecasts are useful, and this seems that as opposed to a focus on the forecast precision, it's more of an exercise to plan for different outcomes of an obviously uncertain future.

Steven Knell:

Absolutely. You kind of demarcate a range, and you're able to stress test the merits of a given investment. We spend a lot of time ... The product that I manage focuses a lot on the oil and gas sector. Players in that space, be it the investors that are supporting upstream exploration of production activity or the service companies that are contributing engineering expertise or are indeed the companies themselves, everybody's wondering what the future of the oil and gas business is going to look like. We have some scenarios where, frankly, you've already seen peak global liquids demand. It was last year. Nobody talked about it, but because of the dislocation of economic activity due to COVID and the way the transportation sector in particular has been impacted, well, you've got essentially now an industry that must manage a smaller amount of demand.

Frankly, some organizations are better prepared than others. So thinking about the ranges of different commodity prices that may define the oil market in the future, the way in which different types of regulatory initiatives may impact light duty as opposed to heavy duty segments and what kind of fuel markets will we actually need in the future to pursue some of our climate change targets. Well, frankly, these are the kinds of applications in the way in which we support some of our different clients along the way. You're never going to nail it, but if your strategy can be defensible and is resilient in the context of between 70 and 30-dollar oil, which is one of the bands that our scenario captures, then you're in safer space than if you're following a forecast and you're hoping for 120.

Rachel Beaver:

And, Steven, that's quite different from our previous scenarios, if I remember correctly, because our previous scenarios did not have peak. In fact, I think we had five different scenarios, depending on whether you were looking at our traditional scenarios or our climate-based scenarios. But I think all of them were not necessarily seeing peak oil quite so soon, and therefore this must have a fundamental change to nearly all of our narratives going forward in whichever of the scenarios we wish to look at, which is incredibly interesting if you're going to then pull into the impacts on all of the players that we usually look at, whether it be governments, companies, financial players, NCAs, whatever, in our scenarios going forward. So that's really quite interesting. It means a whole new family form of scenarios.

Steven Knell:

Yeah, so a couple things to say in response to that. You're right. This year is different. So the way in which we're interpreting the impact of the pandemic recession in just the very extraordinary year that 2020 has been is that the extent of dislocation of economic activity, the way emissions have come down, the way demand has been destroyed, in some cases, if you sum it up, we don't catch up. We don't get back to where we were. One of the leading indicators in our planning case, which we call rivalry, is global greenhouse gas emissions. It's a big reference point for a lot of discussions about what kind of environmental outcomes can be associated with our macro-projection, the way energy demand will evolve in different sectors over time, and the transformation of primary energy to final energy that supports that kind of activity.

And, for us, because of the lasting effect that the COVID-19 pandemic is having on some sectors of the economy and the nature of, let's say, the rescue and response measures that we've seen, global greenhouse gas emissions in 2050 compared to our forecast last year are down 10% this year. And 10% is-

Hill Vaden:

That's from the base case? The rivalry case is for-

Steven Knell:

That's the base case, Hill. So this is the one that's pretty conservative in terms of its expectations of, say, climate policy that would be another major variable to consider when we're discussing the pace and path of the energy transition. So 10%, just for context for your listeners, is just a little bit under what the United States emitted last year, the second largest national emitter. So you're basically taking the United States out of the mix. That's the extent of the dislocation. We refer to it as a permanent loss of growth potential or a structural downgrading of economic activity and associated energy consumption and related emissions. It's going to vary in different markets. In some markets, we do catch up. But, globally, what we saw last year is a future that is no longer in play and, hence, the importance of the scenario process and having a contemporary reference point.

Our scenarios came out last month. There's some publicly available scenarios like, let's say, the energy outlooks of the International Energy Agency, which are due in November. They are going to be coming out much, much later in the year. So if you need a reference point for your strategy, it's better to have something is current than that which is not. We've been joined by my son in the discussion. He's looking for-

Hill Vaden:

A whole new scenario.

Steven Knell:

He's interested in the Angry Birds Star Wars scenario, which frankly I don't have a huge amount to contribute to, at least not at this point, I'm afraid, although ranking the various Star Wars films is something that we could devote considerable time to.

So it's really important to understand that this year is not just about this year. This year has changed our expectations of what the future will hold. In a profound sense-

Breanne Dougherty:

And, Steven, what-

Steven Knell:

... and we don't come back from that. Rachel, I'm sorry, Breanne, just before we move on, the other thing I should say in terms of a point of clarification, in our base case, liquids demand has not peaked. That is in our environmentally-focused autonomy scenario, and yet that's one that European businesses say, "Well, that's the base case," because it's one where I see the pursuit of environmental considerations in the public and private sectors being a governing consideration or it's one where I see energy efficiency opportunities tapped into, I see more EVs, I see more of a focus on local air pollution, and the net result is that energy-related emissions decline in quite a sustained fashion. In our base case, it's a different story, and the peak comes later in the forecast or the outlook period, I should say. Sorry, Breanne.

Breanne Dougherty:

That's okay. So, specifically, what expectations have changed in this new round within the base case to drive that 10% reduction in 2050? Is it just global economic activity, or is it specific to types of usage?

Steven Knell:

Yep. So global economic activity is down in a way we don't catch up with the degree of the dislocation that we've seen through 2020. There is some variance at the national level, but the global picture is one in which by 2050, we're anticipating the global economy being considerably smaller than we did last year. It does come out a bit in the wash, that big global picture. If you look at things in regional terms, well, the outlook can be particularly profound. I was having a scenario-based discussion with one of our clients, one of the global IOCs, about the outlook for Africa and what was different this year because of COVID. Essentially, a lot of the primary commodity demand and related investment in the African economy has been really profoundly interrupted by the pandemic recession and the expectation of how we will recover, in our base case at least.

So the GDP forecast, again, thinking 2050 ... I spend a lot of time thinking quite long-term, but it's where some of the implications of our assumptions and the modeling is most profound. So the African economy is expected to be 16% smaller in 2050 in our base case this year compared to last year. Primary energy's down 23%. So roll that up, and basically the African economy is going to need almost a quarter less energy in 2050 in the base case. Now, per capita income, in the African context in particular, is a really big one. And, unfortunately, what the recession has done and the expected recovery is really weaken expectations of some of the key markers that we as a modeling team and when we're building our scenarios need to hit in order for certain types of energy consumption to be realistic in an African context. So there's going to be more traditional energy.

For your listeners that are thinking a lot about, "Well, the demographics in Africa, critical for thinking about the future of the energy economy," yes, absolutely. But affordability and access to energy, if it's predicated on international terms, basically means that it's going to be a lot harder as things stand for Africa to tap into the opportunities for clean, reliable, affordable energy compared to even last year, and the prospects last year were not fantastic.

So the global GDP story is a big one. Which economies have been impacted as well is also really big and what sectors of the economy. It's been the biggest economies. The United States has been profoundly affected. China recovered fairly quickly but still with a notable dislocation. So it's some of the economies that are real bellwethers that are where the pandemic recession and the short-term dislocation has been most profound, and that carries on and cascades in expectations of the future. Also, different sectors. Industry's down, that means power's down. Power's down globally, that's got some pretty profound implications for expectation, particularly of thermal power demand.

So, again, if listeners are thinking about, "Well, I've got a business that's focused a lot on thermal power, and the indicators are that there's going to be more demand for electricity in some emerging markets and it makes a huge amount of sense for me to back the providers of that," well, that was a story that really resonated a few years ago and perhaps persisted to a degree with some fairly weak policies serving to, say, interrupt that strategy. But, now, with some of the industrial activity dislocation, some of the underlying weakness in the thermal business model compared to more compelling, socially acceptable, renewable power projects, for example, well, we're seeing some pretty big shifts in the strategies of different players.

One of the things that reinforces the value of scenarios, our clients in power and oil and gas, other sectors of the economy, use our scenarios and others to really understand some of the variability. One of the narratives that's emerging that's really compelling is renewable-focused power generation to create not just electricity but also hydrogen, kind of a power to gas narrative, which ticks a couple of different boxes if you're seeking to decarbonize segments of the economy. Residential heating, transportation, hydrogen's got a lot of applications. But that story is another challenge to that traditional thermal generating strategy, and we've just done a survey of the 50 largest power companies around the world, and the amount of divestment of traditional thermal assets for the sake of raising funds for renewable investments, well, your listeners would definitely be familiar with the way utility segments have performed relative to, say, the oil and gas sector. In a general sense, those cleaner, more renewable-focused utility groups have been outperforming their peer groups.

So the signal to the investors is comes from policy, see it socially when you sit around the dinner table with your kids, and now you're seeing it in the fundamentals in the market as well. You can see, and the causality flows through the different scenarios from an immediate impact in 2020. You need to explore different ways to recover, but one of the more compelling is that we've seen some sectors, transport for oil demand, power for our traditional thermal generation, really be knocked off-course by this pandemic, and the results are there for all to see today but 30 years down the road in 2050 as well.

Hill Vaden:

And the transport for oil demand, so you say that falls off in our base case, and a lot of the mainstream media is talking about things like the death of the city as a result of COVID. I think even Jerry Seinfeld had an op-ed in the New York Times today saying New York City is not going anywhere. But with that comes the rise of automobiles or the re-rise of automobiles as people start to get bothered about public transportation or take public transportation less, that there's legislation around Uber and Lyft and all of that. So in spite of all of these potential more cars on the road or an aversion to public transportation, we see a structural hit to the transport as fuel demand?

Steven Knell:

Yes, absolutely. You can unpack it from a couple different points of view. So aviation. Planning on flying any time soon, Hill? I'm not.

Hill Vaden:

No.

Steven Knell:

We've had to make adjustments in our traditional outreach schedule. We're not hosting the events and going to see clients in different parts of the world because of public health concerns. So the dislocation in aviation and what that means to part of the liquids business has been profound and will be slow to recover. We've seen that in a generalized sense from the way the sector performs after recessions. Business travel can be slow to get back on its feet. I think the Great Recession of 2008-9 provides some good reference points for listeners. It's really not coming back in a predictable fashion, in part because, well, we're able to hold a discussion like this in how many different parts of the world? I'm in London, you guys are in North America. We're able to bridge the gap in some compelling ways, which basically means the traditional travel spend and focus on aviation, let's just say that it's no longer essential to conduct business affairs and deliver insights. So I think that's one part of it.

As individuals, well, I think you have to consider access to vehicles in a culturally or market-specific context. I'm based here in the city of London where not that many of my peers own vehicles. Generally, families do, but that's by no means a given because it's really expensive to run a vehicle in a European context in general. If nothing else, being able to ... Well, maybe separate the nice to have from the essentials has been part of many families' adjustment to being furloughed, changes in revenue, and just the fact that there's been a lot of dislocation in many parts of the economy where people don't have jobs anymore, let alone cars to drive to jobs. So I think that we're seeing that feed through as well.

The death of the city in flight, there's no doubt that there's going to be a certain persona that's like, "I can get out now. I don't have to commute anymore. I can flee the Big Smoke," or however you would describe your urban [inaudible 00:29:32]. For me, I must admit, even in a personal sense, we're starting to talk about it as a family in ways that we never have before because maybe I go to the office now once a week, something to that effect, for the next maybe year. It does breed a certain type of behavior. You now have an option. There's an opportunity to have that greener life or whatever that may look like. And, yet, cities are also responding by doing some different things, so here in the city of London, you don't need as many streets. Okay, great, you know what we're going to do? We're going to put tables out on the streets.

The Westminster Council's done this fantastic job of putting out essentially opportunities for restaurateurs, publicans, whomever, café owners, to absorb part of the street. The place I go for a coffee and a slice of banana bread if I've done enough laps on my bicycle a couple mornings a week, and now our favorite café basically has got tables out front, and this is in the middle of SoHo. No problems, the Council's very supportive, and it means that suddenly the capacity of the place is back where it was before, with social distancing observed. It's great for our British summer, such as it is. It may be slightly tougher to execute in winter, but I've really been inspired, particularly over the last, say, six weeks when it was, "Okay, out of lockdown, what's your business going to look like?" People are finding new solutions, and that will be breed maybe different kinds of consumption patterns. We've got some scenarios where we come back quite optimistically. We've also got some scenarios where people are like, "Let's just wait and see," and the delta for energy demand is still broader.

There are definitely in a North American context ... I know what it was like. I wasn't getting anywhere in my Southern Ontario suburbs if it wasn't in my parents' car. I think that now with certain types of public transport being problematized ... You see it on the Tube here, too, the numbers are down. If you have a car, you're likely to ... Hill, I can't tell you how much money it would cost for me to drive my little Q2 down to the office and park it there all day, but it's a lot. I don't even think there's anywhere to park the thing. So, frankly, we assume that there's a certain behavior that would say, "This is how I'm going to respond to this pandemic," and then at the same time, there's the reality, and I think we got to be careful about generalizing it.

The way our oil team, and they've done sterling work, has thought about this is where can it be made to work and where are there alternatives. I see a lot more cyclists on the road. I see people walking, cycling. We've got these electric scooters that I don't know why they're not regulated. Some guy almost knocked me over going about 40 the other day, so maybe there's a bit of regulation that'll creep into it. But there's alternatives emerging. This is one of the things that thinking about Dan's work, as we were talking about at the top of the discussion, there are certain rules. Mobility is one of the rules of the energy system. You're not going to deny it. It's part of modernity as an experience. But the kind of unforeseeable substitution effect that the pandemic is having within the energy value chain means that you need to have more than one answer, hence why we have five scenarios because there's winners and losers on the basis of a lot of different variables there.