www.abo.net (About Oil) | Dec, 16 2016
Natural gas may lead us towards a future dominated by renewables. However, it will remain indispensable – not only as a transition fuel but also as a permanent feature of our energy future and investments
No doubt, the world needs to be energized in an affordable, secure, growth-inducing and climate-friendly manner, deploying all available resources, new technologies, policies, institutions and investment dollars. This is critical not only for the needs of today but also for our longer term future. Planet Earth will be home to nearly 9bn people by 2040 – up roughly 2bn from today – all requiring access to energy supplies and aspiring to live in a prosperous fashion. Currently, about 1.2bn people live without electricity, including many in Africa, where the generation capacity available to the entire continent roughly equals that of California in the U.S. Globally, 2.8bn people are still cooking on traditional stoves, with firewood, or cattle dung, or some other form of traditional biomass for fuel. Even when energy is available in the developing world, it is expensive and often unreliable. Unless things change dramatically, there is no way we are going to meet the 2030 goal of universal energy access.
The new global energy map
The world’s energy map has significantly changed over the past decade or so. Specifically, with the advent of significant discoveries and oversupply in North America and elsewhere, a new global energy map is emerging – it will change the traditional demand-supply equation, rules and players of the ”game.” The new oil axis runs from Alberta, Canada, down through the shale fields of North Dakota and South Texas to huge offshore oil deposits found near Brazil. All of these developments point to a major geopolitical shift, leaving the U.S. advantageously positioned in relation to any of its international rivals. The U.S. could arguably become the new ”superpower” in oil and gas in the not too distant future, dethroning Saudi Arabia and Russia respectively. Australia will likely replace Qatar as the world’s largest LNG exporter. With a man who says global warming is an ”expensive hoax” about to become leader of the free world, it is no surprise that fossil fuel companies have been seen as some of the biggest beneficiaries of the U.S. election result – while renewable energy investors have taken fright. Donald Trump’s presidency is likely to herald a seismic shift in domestic policy, unraveling many of Barack Obama’s key energy and environmental policies. It also threatens the fragile global progress to tackling climate change that the U.S. helped spearhead – risking undermining the growth of green energy worldwide. The era of hydrocarbons is not over. History tells us that it takes a long time for new energies to gain market share. Whether we like it or not, they will still account for 70 percent of our energy mix by 2050, despite significant breakthroughs in renewables and efficiency. The composition of fuels that provides energy will not significantly change either between now and 2040. Perhaps we will use less coal and oil, and more natural gas and renewables in the global energy mix. It is possible that another major technology breakthrough could transform global energy use the way mobile phones and cellular networks have transformed communications. However, we should bear in mind that while technology will bring costs down, today’s energy infrastructure is so massive and well-established that radical changes would be difficult to effect. The oil and gas industry is therefore not (yet) on its knees; rather, it is at a crossroads that will determine if the industry can flourish for just the next few decades or well into the end of this century. Through collaboration, cost savings and technological advances, it will be possible to improve hydrocarbon recovery and to increase the yield levels to help extend the future beyond a few decades to most of the next century. This does not mean that we will not face a neck-to-neck inter-fuel competition in the world’s energy. We certainly will. There are plenty of energy resources available today – no longer is anyone talking about the scarcity of resources, an approach that has traditionally given rise to geopolitical rivalries, volatility and risks in the global markets. It is the abundance of resources that now concerns the key movers and shakers in the global energy markets, particularly in producing countries. Security of demand and investment takes precedence over security of supply.
Demand is increasing, but for which energy?
Global energy demand, driven by rapid industrialization, growing population and wealth in emerging markets, especially China and India, increased mobility, and long-term energy security concerns, is expected to expand by 34 percent between 2014 and 2035 from 12,928 million tons oil equivalent (toe) to 17,307 million toe. In this picture, coal’s share of global primary energy production is expected to drop from 30 percent in 2014 to 25 percent in 2035, its lowest share since the industrial revolution. The shale gas revolution that began about a decade ago sparked the first wave of coal retirements. With Henry Hub prices below $2 per million Btu (MMBtu), owners of coal-fired power plants are having trouble justifying keeping their plants open. Then, the sun could arguably be the world’s largest source of electricity by 2050, ahead of fossil fuels, wind, hydro and nuclear, according to the International Energy Agency (IEA). Globally, it provides 0.5 percent of electricity generation and, in the U.S., only 0.2 percent. Some optimistic IEA roadmaps show how solar photovoltaic systems could generate up to 16 percent of the world’s electricity by 2050 while solar thermal electricity from concentrating solar power plants could provide an additional 11 percent. Combined, these solar technologies could possibly prevent the emission of more than 6bn tons of carbon dioxide per year by 2050 – that is more than all current energy-related CO2 emissions from the US or almost all of the direct emissions from the transport sector worldwide today. It looks as though we are in a better position with wind power, which could possibly generate up to 18 percent of the world’s electricity by 2050, compared with 2.6 percent today. The nearly 300 gigawatts of current wind power worldwide will increase eight-to-ten-fold, with the more than $78bn in investment today progressively reaching $150bn per year. China is likely to overtake OECD Europe as the leading producer of wind power by 2020 or 2025, with the US ranked third. If it so happens, wind power deployment would save up to 4.8 gigatons of CO2 emissions per year by 2050, with China providing by far the largest reductions. The reduction is equivalent to more than the current European Union’s annual emissions. Nuclear power generation is already an established part of the world’s electricity mix, providing some 11 percent of world electricity of 22,752 TWh. The global use of nuclear energy is forecast to grow by 1.9 percent per year from 574.0 million toe in 2014 to 859.2 million toe in 2035 this is not actually 50 percent. Nuclear output in the European Union and North America is expected to decline 29 percent and 13 percent, respectively, as aging reactors are gradually retired and the economic and political challenges of nuclear energy stunt new investments. However, output in China is forecast to increase 11.2 percent annually. Japan’s nuclear output will reach 60 percent of its 2010 level by 2020, as reactors restart over the next five years. Other key energy hungry emerging economies are also busy building new nuclear plants to deal with future shortages and to move away from heavy dependence on fossil fuels.
The shift away from fossil fuels takes hold
True, the world is increasingly turning towards renewable energy and, in proportion to total consumption, is moving away from oil, gas and coal. Within the markets for fossil fuels, natural gas has become increasingly favored over coal and oil. The question for government policymakers and business investors is how far and fast these changes can go. While renewable energy has been growing rapidly, it is coming from a very low base. The share of electricity that the world’s 20 major economies are generating from the sun and the wind has jumped in the space of five years. Whether this breakthrough is sustainable and what it means for the battle against climate change is not clear yet. What’s clear, though, is that the growth of renewables and other low-carbon energy sources will not follow a straight line. Investment in ”clean” energy has been faltering this year after hitting a record high in 2015 (China, alone, had invested over $110 billion). For the first half of 2016, it was down 23 percent from the equivalent period last year. There are a few dark clouds on the horizon that could upset the banner year for clean energy. The Trump factor is still not well known in terms of which direction it may go, despite the worrisome rhetoric. China’s economic troubles could put a dent in investment. The U.S. Federal Reserve raising interest rates, and supporting a strengthening of the U.S. dollar, would increase the cost of capital for new solar and wind projects. And while cheap fossil fuels did not head off the clean energy boom in 2015, persistently low oil and gas prices could prevent much stronger growth. Still, the clean energy sector is now a third-of-a-trillion-dollar industry, with much more room on the upside. The transition to clean energy is already underway, and there is probably no going back.
Investing companies to focus increasingly on gas
Major international oil companies have gradually shifted focus towards gas, to the extent that they are now sometimes referred to as ”Big Gas” rather than ”Big Oil.” For companies like Shell or BP, gas now comprises more than 50 percent of their total production. Gas reserves are more accessible and have a wider global distribution. Cleaner gas takes away market share from coal produced for electricity production and oil in the transport industry, due to environmental concerns. Compressed natural gas (CNG) is already being used in some parts of the world to fuel cars and trucks. It is a ”chicken and egg” situation. Consumers do not buy CNG vehicles if they do not live near a filling station. But no CNG filling stations are built if there are no CNG vehicles in circulation. Natural gas could win a considerable share of the truck and ship markets in the coming decades. In addition to CNG, the use of liquefied natural gas (LNG) also has significant potential. By 2030, CNG and LNG together could replace 1.5 million barrels of oil per day in the transport industry. It is important to remember that, due to its low energy density, gas is much more expensive to transport than other fossil fuels. Transport of gas requires pipelines (for shorter distances) or liquefaction (for longer distances). LNG incurs especially high costs. Recent history reveals price projections have been repeatedly and significantly wrong for natural gas. The actual price of natural gas has fluctuated by more than 400 percent over the past two decades. Future price projections today vary but fall in a similar range. Since gas exports depend more on rigidly interconnected infrastructure and long-term production arrangements that generate lower revenue streams than those derived from oil, gas sector arrangements carry an intrinsically long-term and strategic character. The capital intensity of the gas value chain and the lower energy density of gas vis-à-vis oil implies a greater profitability in the oil sector. Geopolitical considerations also tend to heavily influence gas infrastructure interconnections and long-term production arrangements.
Simply switching from fossil fuels to renewables alone will not solve the climate change problem. We need to start removing carbon from the atmosphere. And we need to tackle the demand side
Global investment in energy fell by 8 percent last year to $1.8tn, reflecting low oil and gas prices and cost declines in the sector. Nearly half of the decline was accounted for by the U.S., where plunging oil prices and a recent boom in shale gas, along with cost deflation in the energy sector, have played an increasing role. China remained the world’s biggest investor in energy worldwide, with $315bn spent in 2015, despite a slowing in the pace of its headlong economic growth. Investment in renewable energy in 2015 remained robust compared to other fuels, according to the IEA. The move towards clean energy was driven by government policies and international demand, with countries pursuing low-carbon growth. About $313bn was invested in renewable and other low-carbon forms of energy last year, representing about a fifth of total energy spending. Much of it was in electricity generation. Overall, more than twice as much money was spent on renewables than on coal and gas-fired power generation ($130bn in 2015). For the first time, emerging economies outspent richer nations in the green energy race, with China accounting for a third of the global total. The oil and gas companies are now starting to use clean-energy investments to hedge their bets that markets for oil and gas will exist decades from now. They have invested in wind farms, electric battery storage systems and carbon capture and storage. In the future, the companies will likely call themselves ”energy” companies rather than oil, gas, wind, solar or nuclear specialists, though each has a distinct business model and involves different challenges and opportunities.
As a “bridge” for a low carbon economy
The energy industry is coming under increasing pressure (and obligations) on carbon. Simply switching from fossil fuels to renewables alone will not solve the climate change problem. We need to start removing carbon from the atmosphere. And we need to tackle the demand side. We cannot simply assume that relentless economic growth is compatible with a green future. The commitments made at Paris still fall far short of what is required to halt global warming at the 2° C mark, never mind reversing the growth of greenhouse gases in the atmosphere. The simple truth is that the Paris agreement is blind to the fundamental, structural problems that prevent us from decarbonizing our economies to the radical extent needed. There are some hard facts that cannot be ignored. First, the renewable schemes to date have largely been at the expense of unpopular nuclear installations, while the global share of fossil fuel-generated energy consumption remains at about 80-85 percent: just where it’s been since the early 1970s. Second, the massive amounts of land required for installing gigawatts of solar and wind power will destroy natural habitats and take away valuable farmland. This is already evident in the way existing biomass production schemes – forests in the U.S. for instance, sugar cane in Brazil, palm oil in Malaysia or windfarms in Turkey – have had serious environmental and social side-effects to the extent that they have been labelled as ”greenwash.” Third, together with demand from electric vehicle manufacturers, a worldwide renewables boom would rely on a 5 percent to 18 percent annual increase in global production of minerals for the next 40 years. Inexpensive natural gas provides a low-cost transition path from higher-carbon-content fuels such as coal and petroleum. For economic and pollution reduction reasons, more natural gas is needed for electricity production and transportation around the world. Natural gas as a power plant fuel has already played an important role in a transition to a low-carbon economy. For example, electricity sector carbon dioxide emissions in many U.S. states are at some of the lowest levels in the past two decades thanks to increased efficiency, deployment of renewables, and structural changes in the electricity sector such as a transition from coal to natural gas-fueled power generation. Despite environmentalist groups insisting that natural gas cannot be a permanent solution to ending our addiction to coal and oil, I believe that as a ”bridge fuel,” it will buy us some good time to develop new technologies that can ultimately replace fossil transportation and power generation fuels. It will also remain a permanent feature of our energy future given its abundance and increasingly effective deployment through the ”gasification” strategies in almost every sector of the economy. Therefore, as our transition towards achieving lower carbon energy and feeding the energy hungry world continues, a careful, commercially meaningful balance needs to be found between the investments allocated to natural gas and those reserved for renewables, nuclear and advanced technologies.