Little remarked by most analysts of the OECD-wide financial and debt rout in 2008-2011, world energy demand rebounded fast from its sharp plunge in 2008-2009. For the year 2010 the BP Statistical Review of 2011 painted a dramatic rebound story. World energy demand jumped by 5.6% led by coal demand growing over 7%, gas demand growing almost as much, and oil consumption by 3.1% as China moved to become the world's biggest single energy using nation. With no surprise, oil prices rose by 29% on average in 2010 from the year previous.
Today we know what would happen to oil prices if there was another 3.1% increase in world demand: we would attain naked, open and declared Peak Oil. Today also, China and India know what will probably happen to world coal prices if, as forecast, China's coal imports increase 8-fold by 2015, from 25 million tons in 2011 to as much as 200 million tons, while India's coal import merely doubles by 2015, to also attain 200 million tons a year. The theoretical limit-price for coal could be as high as oil parity on a $100-barrel basis, making coal cost as much as $500 per ton. The likelihood of this is however low, for reasons including rising availability of LNG, in major part due to the price of LNG, for Japan shipments averaging about $16.75 per million BTU in February 2012, compared with US pipeline gas at around $2.50 per million BTU. Another reason is that hopes for a fall in global gas prices are high, when or if the US shale gas boom can be transplanted outside the US and large global stranded gas finds can be processed and shipped as LNG.
The bottom line is there is no problem for world energy demand, but supply is different. World power demand was also in rebound mode, since 2010, with either double-digit, or near double-digit growths of electricity demand in Emerging Asia and other Emerging countries. Simply due to the rate of growth, power blackouts and brownouts are sure and certain for these countries, witnessed by China which at present faces brownouts in many cities while it increases its national power production capacity by about 90 GW-a-year. This is around 1.5 times the total installed capacity (63 GW) of all France's nuclear power plants, which took 40 years to build, or two-thirds of Germany's total national power capacity. Global electricity demand also knows no problems.
SUPPLY AND INFRASTRUCTURES
These run together on the other side of the equation. We can make calculations on what it would cost to match the present rates of energy demand growth, but energy resource and infrastructure development runs on several levels and responds to both anticipated and policy-desired change of world, regional or national energy supply and demand. Using a rough figure for world oil and gas E&P (exploration and production) spending in 2011 of about $400 billion and taking only the oil side, the net result of this spending, worldwide, was to grapple 0.1 Mbd growth of net supply, after depletion losses, with global oil demand in 2012 estimated by the IEA at 89.9 Mbd.
The bang for the buck on the gas side was much higher, with a net gain of at least 1 Mbd of gas energy supply from much less than one-half of the $400 billion spent by the world's major energy companies, including the large National Oil Corporations. The drift of Big Energy E&P spending away from oil, to gas - and coal - is easy to understand. Shell is now a gas-dominant energy company by share of its energy output, and in 2012 Exxon will produce more than 50% of its energy output as gas.
Global spending on oil E&P is now only sluggishly responsive to any oil price on the upside, and shuts down fast when oil prices turn south: in 2009 oil and gas E&P spending was more than 35% lower than this year's forecact, at around $275 billion, led by falls in oil spending. The onrush of shale gas production in the US, and the collapse of US gas prices has already impacted, and cut E&P spending plans by companies as large as Exxon, Chesapeake and Shell inside the US and on gas. The trend for gas investment is therefore geographically focused outside the US, heavily Asia-oriented, drawn by Asian LNG shipments priced at 7 times the US gas price.
The energy supply side is also increasingly infrastructure constrained, worldwide. Coal transport, downstream from coal mining, is the biggest threat to Chinese and Indian plans to massively raise their coal imports in the 3 years to 2015. Likewise their plans to ramp up LNG consumption, needing huge investments, and long construction times for building LNG regasification plants and either local, or national gas distribution grids. The infrastructure constraint is clear in Japan, also. Following the March 2011 tsunami and Fukushima disaster, Japan's oil imports have risen by 440 000 barrels/day in 1 year, and its LNG demand for electric power companies has more than tripled In both cases to replace its nuclear power production, this has strained the physical capacity of Japan's oil storage, refining and distribution networks and drawn in Chinese oil imports, as well as straining its gas infrastructures.
In Europe another energy infrastructure limit is now clearly in view - on electric power transport capacities and utility-scale electricity storage caused by EU member state REAPs (renewable energy action plans), with high, or extreme high goals for the role of renewable energy in European power supplies by 2020. The power transport goal of a fully functional pan-European high power Super Grid is easy to describe on paper, but could take 20 years to build and cost more than 300 billion euro. More important there is almost zero real world action, on the ground, to start building it. At the same time, in Europe windpower capacity is mushrooming, attaining 30 GW in Germany and close to that level in Spain, on windy days, which for Germany already creates heavy power system integration problems with neighboring countries. Further growth of wind and solar power capacities, in Europe, will surely tilt the energy equation for the continent.
As in Europe, the US and several other developed OECD countries have large but unfunded outline plans to shift away from fossil energy, for environmental, climate and energy security reasons, but the energy infrastructure barrier is clear. Shifting from fossil energy to renewables is possible on resource grounds, but building the infrastructures and integrating both types of energy is more than a simple economic challenge or management and finance problem. When the financing is entrusted to a semi-delinquant finance sector habituated to boom-slump asset plays, the results can often be disappointing as Italy, Spain and Germany have already found.
The most likely is a major breakout on the upside for oil prices. This could be caused by the heavily simmering Middle East political scene shifting to all-out wars, in several theatres, possibly on a simultaneous basis. It can also be caused simply by global demand tracking back towards the 2010 growth rate - of 3.1% - resulting in YOY oil demand growing by more than 2.7 Mbd. The supply will not be there. Supply outages, breakdowns and accidents can also take their toll on the increasingly edge-of-technology infrastructures needed to wrestle just enough oil from the Earth's crust, including deep offshore and tarsand oil.
Increase of global prices beyond about $150/barrel will surely be treated as Economic Armageddon, by editorialists and pundits, for a few days, but the economic sentiment damage can be high and may be used to trigger another financial-led recession, repeating the 2008-2009 sequence.
Possible delays in the US shale gas boom being transplanted to Europe and Asia are shaping up and even under the best hypothesis shale gas will not attain major supply levels outside the USA before 2017-2020, leaving the Gas Window as LNG-only, outside the US. Demand growth for gas will surely continue at a high level, but the breakpoint for gas may include an initial softening, then a real fall in LNG prices to ranges of around $12 per million BTU for Asian and European delivery. At only 4 to 5 times the US gas price, this will be revolutionary !
The 2017-2020 horizon is shaping up as a probable hinge point for world energy, at which the shift to renewables and gas become so strong that investment and action in fossil energy will plummet. The already three-year-long, year on year fall in energy demand, led by oil in several major European countries like Spain and Italy, can break out to many other OECD developed countries, not obligatorily under all-out recession conditions but through policy decision and the prressure of public opinion. For the Asian emerging giants, national-focused energy policies and programmes will surely take the high ground, in which the renewables and energy conservation will have a leading role, in a future for world energy that will every year be less and less like the present.
By Andrew McKillop
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights
Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012
Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.
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