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Petroleum Review Editorial December 2009
Climate challenge
The past year has seen enormous upheaval across the energy sector as the industry strives to cope with the impacts of the global financial crisis and ensuing economic recession. Total world energy demand has plummeted and it remains to be seen how quickly it will recover as we emerge from the recession. In addition, the industry continues to tackle the issue of climate change, a topic high on the agenda as the UN Framework Convention on Climate Change convenes in Copenhagen this month in a bid to negotiate a successor treaty to the Kyoto Protocol. Indeed, according to Nobuo Tanaka, Executive Director of the International Energy Agency (IEA), speaking at the launch of the organisation’s World Energy Outlook 2009 (published just as Petroleum Review went to press), this latest edition seeks to ‘add momentum to the UN negotiations by detailing the practical steps needed for a sustainable energy future as part of a global climate deal.’
‘WEO 2009 provides both a caution and grounds for optimism. Caution, because a continuation of current trends in energy use puts the world on track for a rise in temperature of up to 6°C and poses serious threats to global energy security. Optimism, because there are cost-effective solutions to avoid severe climate change while also enhancing energy security – and these are within reach as the new Outlook shows,’ said Tanaka.
Although, as noted, global energy use has fallen this year, WEO 2009 projects that it will soon resume its upward trend if government policies don’t change. Under this ‘Reference Scenario’, demand increases by 40% between now and 2030, to reach 16.8bn toe. Projected global demand is lower than in last year’s report, reflecting the impact of the economic crisis and of new government policies introduced over the past year. Fossil fuels continue to dominate the energy mix, accounting for more than three-quarters of incremental demand. Non-OECD countries account for over 90% of this increase, and China and India alone for over half. In addition to increasing susceptibility to energy price spikes, the Reference Scenario projects a persistently high level of spending on oil and gas imports which would represent a substantial financial burden on import-dependent consumers. China overtakes the US around 2025 to become the world’s biggest spender on oil and gas imports.
WEO 2009 demonstrates that containing climate change is possible but will require a profound transformation of the energy sector. A ‘450 Scenario’ sets out an aggressive timetable of actions needed to limit the long-term concentration of greenhouse gases in the atmosphere to 450 ppm of carbon-dioxide (CO2) equivalent and keep the global temperature rise to around 2°C above pre-industrial levels. To achieve this scenario, fossil-fuel demand would need to peak by 2020 and energy-related CO2 emissions to fall to 26.4 gigatonnes (Gt) in 2030, from 28.8 Gt in 2007. Energy efficiency is the largest contributor to meeting the goals under this scenario, accounting for over half of total abatement by 2030. Low-carbon energy technologies also play a crucial role – around 60% of global electricity production comes from renewables (37%), nuclear (18%) and plants fitted with carbon capture and storage (5%) in 2030. Furthermore, a dramatic shift in car sales occurs, with hybrids, plug-in hybrids and electric vehicles representing almost 60% of sales in 2030, from around 1% today.
WEO 2009 also identifies higher oil prices, coupled with the downturn in oil sector investment, as a serious threat to the world economy, just as it is beginning to recover. As a result of the financial crisis, investment in upstream oil and gas has already been cut by over $90bn this year compared with 2008. While oil demand has dropped sharply, in the Reference Scenario it starts recovering in 2010, reaching 88mn b/d in 2015 and then 105mn b/d in 2030. ‘Calling for increased investment in fossil-fuel supply is not inconsistent with the need to move to a low-carbon energy pathway,’ stressed Tanaka. ‘Even in the 450 Scenario, OPEC production still increases substantially in the period to 2030, boosting those countries’ revenues in real terms to four times their level of the previous 23 years.’
Whatever climate policies are introduced, natural gas is also set to continue to play a bridging role in meeting the world’s sustainable energy needs. In the Reference Scenario, gas demand rises by 41% from 3tn cm in 2007 to 4.3tn cm in 2030. Gas demand also continues to expand in the 450 Scenario, but is 17% lower in 2030 than in the Reference Scenario thanks to more efficient use, lower electricity demand and increased switching to non-fossil energy sources. Tanaka also noted that: ‘Unconventional gas is unquestionably a game-changer in North America, with potentially significant implications for the rest of the world. The share of unconventional gas in total US gas output jumped from 44% in 2005 to around 50% in 2008 and, in the Reference Scenario, is projected to rise to almost 60% in 2030. The boom in North American unconventional gas production, together with the recession’s impact on demand, is expected to prolong the glut of gas supply for the next few years. The analysis of WEO 2009 shows that the annual under-utilisation of inter-regional pipeline and LNG capacity could rise from around 60bn cm in 2007 to 200bn cm by 2015. This glut could have far-reaching consequences for the structure of gas markets, with suppliers to Europe and Asia-Pacific coming under pressure to modify pricing terms under long-term contracts, to de-link gas prices from oil prices, sell more gas on a spot basis and to cut prices to stimulate demand.
With thanks
As the year draws to a close, I’d like to thank Petroleum Review readers and contributors for their continued support of the magazine and the Energy Institute. This is my last issue for a while, as I will be going on maternity leave before the Christmas break. However, come the New Year,?Petroleum Review will continue to provide you with more news and informed comment under the leadership of its Assistant Editor Louise Smith. It merely remains for me and the team to wish you all a Merry Christmas and a very Happy New Year.
Kim Jackson
The opinions expressed here are entirely those of the Editor and do not necessarily reflect the view of the EI.
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