Global challenges face energy industry: debate rages over peak in oil production as pessimists...

During the next few decades, four key challenges will confront the world's energy industry--challenges which will require significant government initiative and industry innovation to overcome. These include growing oil scarcity, achieving energy security, combating environmental degradation,

and meeting the growing needs of the developing world. Other challenges certainly exist. Clearly, though, sometime during the first half of this century a transition from fossil fuels to a non-carbon based world economy will begin, seriously affecting the kind of environment future generations will face. While science may suggest the optimal time for the transition to begin, economic and political influences will play an even more pivotal role.

Future Challenges

In 1956 M. King Hubbert predicted that U.S. oil production would peak at about 1970 and decline thereafter. He was fight. A debate today is over the timing of an inevitable peak of world oil production, with pessimists suggesting 2010 is a likely target, while optimists cite new non-conventional sources of oil such as heavy oil, tar sands, and shale oil, and predict the peak will not occur for at least 30-40 years. In either scenario, the world will face declining oil production sometime in the next few decades.

Optimists believe that improvements in recovery technology and discoveries of new reserves will keep global oil output growing for the foreseeable future. The pessimists' view was bolstered in 2004 when questions were raised about Saudi Arabia's national oil reserves and whether major fields are peaking. The actual timing of a peak in world production will probably fall in between these scenarios, but of greater concern for the immediate future is produceability and accessibility to oil fields.

The problem may not be lack of conventional oil resources in the world, but developing and producing the resources. The physical resources in place are only one factor, while accessibility to those resources, which in part may depend on opening up to international oil companies and the attractiveness or unattractiveness of fiscal regimes, is another determining factor.

To put global oil needs in context, if the world's economy grows as expected over the next two and a half decades, oil demand is projected to rise from nearly 80 million b/d today by more than 50% to just over 120 million b/d by 2030. Where will the additional oil come from? The OPEC nations are currently operating at near full capacity and are finding it difficult to meet rising worldwide oil demand, thus causing record-high prices.

Surging economic growth in China is responsible for nearly one-third of recently escalating demand for oil, and consumption there may rise from 6.3 million b/d to 13 million b/d or more by 2025, says the U.S.-based Energy Information Administration (EIA) (2004). Other industrializing nations, especially India and other emerging Asian economies, have become major consumers of oil, but even demand growth in the U.S. may be two to three times higher than Europe, based on EIA projections.

If the optimists are right, the supplies of oil needed to satisfy growing world demand will be made available due to a combination of price and technology incentives, but how produceable and accessible these reserves are remains a key concern, given that newly identified reserves are also associated with significant technical, economic, commercial, and political risks.

Security Of Supply

Before oil production peaks in the world, a more immediate concern to many nations will be security of supply of transported energy. The critical linkage between energy and economic growth and employment has led many nations to seek secure and reliable supplies of energy through various means, including diversification of oil supply sources, achieving a more balanced energy mix, and energy conservation. Concerns over global terrorism have exacerbated ambitions for security of supply.

Broadly speaking, a government enhances its own nation's energy security by ensuring a reliable supply of energy resources at reasonable prices to support the domestic economy and industry. However, governments define energy security differently across the globe, and the means by which they seek to enhance their own security varies even more widely.

In an era of terrorism and continued heavy dependence on Middle East oil and ultimately natural gas, concerns over energy security will clearly influence the direction of future world energy trade and production. Concern over security will likely increase as energy supplies become more costly and continued economic growth in such nations as China, India, and Brazil eat into available supplies. China, for example, attempting to diversify its oil supply sources for security reasons, now imports oil from more than 20 nations.

China may build a blue-water navy in part to safeguard its oil import shipments. To shift emphasis toward domestically produced energy, China recently announced the most ambitious nuclear development plans anywhere in the world, the construction of 24 to 32 new nuclear reactors by 2020.

Infrastructure

Infrastructure bottlenecks are commonplace today in the world energy industry, particularly in oil and gas. The exploration for new energy supplies and particularly hydrocarbons has taken international companies to remote regions with little access, including West Africa, Siberia, and the Caspian Sea region. Building sufficient infrastructure to move the resource from source to market will require trillions of dollars alone over the next 30 years. In this context, energy supply may not be as much a problem as development and expansion of infrastructure.

Much of the West, including the United States, is expecting Russia to initially expand, and after 2010, maintain oil production sufficiently to challenge the dominance and influence of OPEC. But, with Russia's interest in high oil and gas prices to enhance the power of the state and diversify the economy, Putin's current Russia may become a defacto OPEC member in the future. Moreover, unless oil and gas export capacity in Russia and other parts of the Former Soviet Union are expanded, any new oil and gas supplies coming out of the region will be constrained. In addition to capacity bottlenecks, political, economic, and logistical factors are all complicating new efforts to move the oil to European and perhaps ultimately U.S. markets.

In Central Asia, vast oil and gas resources are constrained mostly to the old Soviet pipeline network in and out of Russia, and the only new route which avoids Russian territory is the Baku-to-Ceyhan oil pipeline, which took years of U.S. leverage and delicate negotiations to move forward. The pipeline is outside of Transneft's control but crosses Russian territory and the oil is shipped from a Russian port.

Natural gas was for decades a local or regional industry but is now rapidly becoming a global industry. Plans are to move supplies as much as 10,000 miles from source to consuming center requiring, according to many experts, the most complex supply chain in history. Nearly half of all investment in global gas development over the next three decades will be directed toward infrastructure improvement and expansion, including LNG tanker ports and re-gasification terminals located along coastal areas.

Cambridge Energy Research Associates (February 2004) predicted that over the next eight years, the world's gas industry will expand as much as it did during the past 40 years. This 40 in 8 campaign is meant to satisfy the strong movement toward gas throughout Asia and in the U.S. China alone has plans for as many as nine new LNG terminals this decade, which would cost billions of dollars.

Environmental Degradation

The world energy economy is carbon-based, with oil, gas, and coal accounting for 88% of primary energy consumption. Heavy reliance on fossil fuels is in fact nearly 200 years old, preceded by the wood-burning, deforestation era of the 1600s-1800s. Such a long history of fossil fuel dependence indicates how difficult a transition to a non-carbon-based economy would be. Clearly, such a transition would be revolutionary in scope, and necessarily involve almost unprecedented commitments and actions by government and industry throughout the world.

Making Renewables Competitive

Record high oil prices and increasing environmental awareness are boosting interest in renewable energy, but no rapid transition from fossil fuels is expected worldwide. Renewable energy--including solar, wind, and geothermal--provides just 3% of current world energy demand, excluding biomass. The relatively high costs of most renewables, lack of government-provided economic incentives, and easy access to oil, gas, and coal hinder growth of renewables.

Research continues, however, around the world, as many renewable and alternative forms of energy supply are still at the stage of research and development. Over the longer term--perhaps 20 or 30 more years--renewables will likely make a more significant contribution to world energy supplies in volume terms as technologies become more cost competitive with oil and environmental concerns rise. The IEA (2004) projects that by 2030 renewables will provide about 4% of total demand (excluding biomass).

Nuclear And Hydrogen

In addition to renewable energy forms, nuclear power and hydrogen could constitute a rising share of the world's energy needs by 2030 and beyond. Notwithstanding the problems with nuclear power in the 1970s and 1980s, most energy officials today agree that the use of nuclear energy--to supplement conventional energy--must be revisited in many parts of the world, particularly in light of C[O.sub.2] restrictions inherent in the Kyoto Protocol. China, for example, being so heavily dependent on coal, is perhaps the best-suited nation for nuclear power, given its growing energy needs and poor air quality, assuming the safest and most technologically advanced reactors are employed.

Other options for producing electricity for homes and cars include the use of fuel cells, which convert hydrogen and oxygen into water, and in the process produces electricity. While there are many different possible scenarios for vehicle transportation in the future, most long-term visions of global transport systems beyond 2025 feature the eventual emergence of a fuel or energy carrier that is non-carbon and derived from processes that do not produce carbon.

Hydrogen, the lightest and most abundant element in the universe--can be derived from a variety of primary sources, including fossil fuels, renewables and nuclear power and can be used in mobile and stationary applications. Hydrogen would become the stored fuel used by fuel cells in the vehicle to generate power with only water as an emission.

While attractive from an environmental and energy perspective, hydrogen is inherently expensive and inefficient to produce, transport, store, and distribute--thus technological breakthroughs will be needed to reduce the overall costs of using hydrogen as a transport fuel. Hence, the future contribution of hydrogen as a transportation fuel is by no means assured. Other energy carriers are also being considered for fuel cells, including dimethyl ether (DME), methanol, ammonia, and syngas.

China's Unstoppable Thirst

No country will have more impact on the future world energy industry than China, with 1.3 billion people now and a rapidly growing economy. China surpassed Japan last year as the second-largest consumer of oil behind the U.S. and the Asian giant is currently the largest producer and consumer of coal. On its present course, China may approach the U.S. in carbon emission levels by around 2025, with 6,700 million metric tons of carbon dioxide projected to be released that year, according to the EIA (2004).

In the early 1990s, China's leaders abandoned any thoughts of energy self-sufficiency, recognizing that its demand for energy was far surpassing domestic output capability. Beijing began seeking new supplies of energy in neighboring Russia and Central Asia, as well as far-off areas like Sudan and South America. China is depending on new supplies of pipeline oil and gas from eastern Siberia to supplement its energy requirements for the next decade. If the Siberia-to-China oil and gas pipeline projects fail to materialize, China will have to seek new sources of energy elsewhere and perhaps through other means.

Rising Vehicle Use

Transport demand, mostly for oil, will grow more rapidly than consumption in the residential and services sectors, and overtake industry sometime after 2020 as the largest final-use sector, according to the IEA (2004). Nearly half of world oil consumption is dedicated to the transportation sector, and barring any breakthroughs in advanced transportation technologies, such as hydrogen fuel cell vehicles, alternative fuels including gas-to-liquids, coal-to-liquids, and biodiesels, are not likely to make a significant inroad in the conventional transportation fuel market before 2030 except on a regional basis. The outlook for alternative fuels could, however, become slightly more favorable if global oil production does plateau sooner than expected or concerns over national security increase.

Rising Capital Needs

If current trends continue, the world will need to spend an estimated $16 trillion over the next three decades to maintain and expand energy supply, according to the IEA (2003). Electricity generation, transmission, and distribution will absorb almost two-thirds of this investment, while capital expenditures in the oil and gas sectors will amount to almost 20% of global energy investment.

While the world energy industry met its financial challenges during the past three decades, competing needs for domestic investment to 2030 including health services for an aging population in Asia, the U.S., and Europe, environmental cleanup and infrastructure expansion will likely lead to difficult decisions governments will have to reach. Meeting this financial burden will be especially challenging to the developing world, where investment needs are typically larger than in North America or the European Union in terms of absolute dollar levels and relative to the sizes of their economies. Many African nations and India, for example, will require huge investments in power generation and transmission, though only deep reforms will lower barriers to investment and improve the investment climates.

Over the longer term, plans to dramatically expand the worldwide LNG market will be extremely capital intensive, requiring the development of reserves (often in remote regions), liquefaction facilities, transportation, and marketing through regasification plants. Development of non-conventional hydrocarbons, including heavy oil deposits in Venezuela, oil sands in Canada, and gas-to-liquids in Qatar, will require major companies to mobilize substantial capital resources to proceed with such large-scale projects.

The Misinformation Phenomenon

Trillions of dollars and millions of jobs are tied to energy production and utilization activities worldwide and, as a result, information released through publications, speeches, advertisements, or other venues can be misleading, misinterpreted, or just plain wrong, depending on the vested interests of the messenger involved, level of expertise, and a host of other factors.

Without placing blame, this misinformation phenomenon has led to uninformed or poor decisions being made by governments and industry alike, resulting in billions of dollars sometimes being used in inefficient energy activities. Examples could include the continued use of traditional, central electric power plants in many parts of the world--as compared to more efficient and less polluting cogeneration facilities--because regulated utilities earn returns on their investment regardless of how efficient their plants are.

In many areas, regulated utilities view the cogen plants only as competition rather than a technological improvement that may be worth pursuing. Cogen facilities using improved intercooled gas turbines at high power to heat ratio can be twice as efficient as central power plants.

Significantly, when looking to the future, the misinformation phenomenon will serve as a drag on any transition because of short-sightedness, unwillingness, or inability to make a change.

Looking Ahead

Key decisions will have to be made by governments and the energy industry worldwide over the next few decades on how best to confront growing pollution caused by continued use of fossil fuels and how to facilitate an eventual revolutionary-like transition to a non-carbon-based global economy.

Governments will be faced with choices as to the level of financing and economic incentives to commit toward promotion of energy efficiency and conservation, more advanced energy technologies, and environmental cleanup as well as on the extent of cooperation needed between nations to facilitate a smooth transition away from fossil fuels.

Energy companies will need to revamp their research and development and investment strategies to coincide with changing consumer preferences and government policies. Clearly, the sooner these decisions are made, the less difficult and costly the choices will be.

Authors' Note: All opinions, analyses and statements are solely those of the authors and do not reflect the official position of any U.S. or international organization or government agency.

Authors: James P. Dorian is an International Energy Economist based in Washington, DC and former East-West Center Research Fellow in Honolulu. E-mail: jamesdorian@verizon.net.

Herman T. Franssen is President of International Energy Associates, Inc. of Chevy Chase, MD, Senior Economic Advisor to the Oil Minister of Oman, and former Chief Economist of the International Energy Agency. E-mail: HFranssen@aol.com.

Dale R. Simbeck is Vice President of Technology at SFA Pacific, Incorporated of Mountain View, CA. E-mail: dalesimbeck@sfapacific.com.

BIBLIOGRAPHY

Cambridge Energy Research Associates, February 2004, "CeraWeek 2004," Houston, Texas.

International Energy Agency, 2004, World Energy Outlook 2004, Paris, France.

International Energy Agency, 2003, World Energy Investment Outlook 2003, Paris, France.

Energy Information Administration, 2004, International Energy Outlook 2004, U.S. Department of Enemy, Washington, D.C.

Goldman Sachs, October 2004, Global Economics Weekly, "The BRICs and Global Markets: Crude, Cars, and Capital," Issue No. 04/36.