IEA Expects Global Energy Focus to Shift Eastward

Last month the International Energy Agency (IEA) released its annual long-term forecast, the World Energy Outlook (WEO). Its projection that US oil output would exceed that of Saudi Arabia within five years was featured in numerous headlines, although some of the report's other findings look equally consequential. That includes the continued strong growth of energy demand in China, India and other Asian countries, and the linkages between that growth and a dramatic expansion of Iraqi oil production. The agency also set a cautionary tone concerning the increase in global greenhouse gas emissions accompanying all this growth.

In the IEA's primary "New Policies" scenario, the US overtakes Saudi Arabia in oil production by 2017, adding 4 million barrels per day (MBD) of unconventional output, mainly from shale (tight oil) deposits such as the Bakken in North Dakota. US oil imports decline significantly, due in roughly equal measure to higher production and the implementation of strict vehicle fuel economy regulations. As a consequence, the need for imports from the Middle East approaches zero within 10 years. When this change is combined with the growth in oil demand in Asia, where China alone accounts for half the forecasted global growth in oil consumption in this period, the IEA envisions Asia becoming the recipient of 90% of Middle East oil exports by 2035.

The detailed assumptions behind the IEA's conclusions weren't provided in the public release. These include crucial questions such as the assumed status of US rules barring most crude oil exports. As noted in a Reuters op-ed at the time, maximizing the potential of US unconventional resources may depend on allowing higher quality unconventional oil to seek global markets, while continuing to import oil from Latin America and the Middle East into Gulf Coast refineries geared to these heavier, higher-sulfur feedstocks. The op-ed's author also reminded us that the natural gas liquids included in the headline comparison with Saudi production are useful but quite different from crude oil, yielding little gasoline and diesel fuel.

The expected growth of energy demand in China remains extraordinary, even with the country's economic growth slowing from the levels seen a few years ago. To put this in context, when Dr. Fatih Birol, Chief Economist of the IEA, presented the new WEO to the media in London on November 12th, he suggested that China's electricity demand would grow by the equivalent of "one US and one Japan of today" by 2035. Much of that additional electricity generation is projected to come from renewables, nuclear power and domestic gas. Nevertheless, and in spite of significant increases in China's unconventional gas production, the IEA forecasts that import dependence will grow from about 15% for gas and 50% for oil today, to 40% for gas and over 80% for oil by 2035. That increase in imports would equate to additional hundreds of millions of dollars per year of outflows for energy.

In the view of the IEA, much of the extra oil demanded in Asia will be supplied by Iraq, which they project will increase its output from around 3 MBD today to 6.1 MBD in 2020 and 8.3 MBD in 2035, in the process becoming the world's second-largest oil exporter, after Russia. Since the reserves to support that growth have already been identified, with much lower production costs than many other basins, the uncertainties involved are mainly political and structural. Resolution of the current standoff with Iran over its nuclear program would provide even more Middle East oil for Asian markets.

As in its earlier "Golden Age of Gas" scenario, the IEA expects large increases in global natural gas consumption. Unconventional sources, mainly in the US, China and Australia, would contribute around half the additional production required to meet expanded demand. However, at the launch presentation in London Dr. Birol also stressed that unconventional oil and gas are still at an early stage, with significant uncertainties about the eventual magnitude of their resources. This seemed to be a particular issue for the agency's post-2020 forecast of oil production in the US and gas production in China.

Despite the rigorous analysis and level of detail involved in producing the IEA's World Energy Outlook, long-term energy forecasting should always be taken with a grain of salt. Yet whether or not the highlighted trends mature precisely in line with these projections, the shifts that the IEA identified are significant and already becoming evident in current data for energy production, consumption and trade. Even if North America failed to become a net oil exporter--which many equate with energy independence--by 2030, the movement of the center of gravity of global energy trade towards Asia is essentially pre-determined: baked in by differences in economic growth rates and resource opportunities. The economic, geopolitical and environmental consequences of that shift are just starting to take shape.

A slightly different version of this posting was previously published on the website of Pacific Energy Development Corporation.

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Does A Golden Age of Gas Depend on Golden Rules for Gas?

Last Friday I was in Washington, DC for the presentation of the International Energy Agency's latest report on natural gas, "Golden Rules for A Golden Age of Gas."  It is a follow-up to last year's IEA scenario describing the enormous gas potential now being unlocked by new combinations of technology. According to IEA's chief economist, Fatih Birol, who was the lead speaker at the event at the Carnegie Endowment for International Peace, the new report addresses the key uncertainty in delivering on that potential, including the potential of new gas supplies to "fracture established balances in the world energy system."  In IEA's view the resources and technologies are in place, but environmental and social challenges represent serious potential roadblocks; overcoming those obstacles calls for a new set of principles along the lines of the ones included in the report.  Fundamentally, as Dr. Birol put it, the industry must focus on its "social license to operate", if it is to develop the massive global resources of shale and other unconventional gas to the extent now being envisioned.  I believe many in the industry would agree that that license can't be taken for granted. 

The report spells out seven principles that IEA sees as prerequisites for securing the necessary concurrence from governments and publics.  While several of them merely enunciate common sense, others will likely be controversial on one side or the other--if not in theory then in their implementation.  IEA's description of these principles can be found in the report's executive summary. I would paraphrase them as:

1. Operate with transparency
2. Choose appropriate sites
3. Contain potential contaminants
4. Be vigilant with water!
5. Control emissions
6. Recognize scale
7. Regulate carefully

None of these is likely to startle my regular readers, since I've been writing about shale gas extraction and its potential economic, environmental and geopolitical consequences for several years.  The aspect of these principles that got my attention during Friday's presentation concerned IEA's admonition to "Be ready to think big."  Dr. Birol cited statistics indicating that there are currently around 100,000 unconventional wells in the US today--a figure that might include unconventional oil wells.  Supplying the levels of shale gas forecasted by IEA and other agencies would require on the order of one million wells.  That compares to a total US well population of roughly a half-million.  Drilling on that scale requires that we get it right, because if we don't, even small consequences could compound.  However, Dr. Birol also made it very clear that in the view of the IEA, the industry is entirely capable of getting it right.

The findings of this report--at least the high-level findings--have been widely embraced across the environmental and business spectrum.  Among groups embracing the report are the American Petroleum Institute and the Investor Environmental Health Network, while EPA Assistant Administrator Gina McCarthy, who was also on Friday's panel, seemed to place her agency's regulatory approach to shale gas in the context of IEA's principles.  The harshest criticism I've seen so far is that while it acknowledges the industry's work on best practices, it fails to recognize that much of this is already standard practice, at least in the US.  Along those lines, API and the American Natural Gas Alliance (ANGA) are jointly issuing a new report on methane emissions from hydraulically fractured ("fracked") gas wells today.

IEA's report and the early reactions to it clearly illustrate that despite the many thousands of unconventional gas wells that have already been drilled, and the dramatic impact of shale gas on both natural prices and gas-dependent industries, we are still in the early days of a possible global energy revolution.  The extent of that revolution hasn't yet been determined, and it will be shaped as much by the reactions of numerous stakeholders as by the investment plans of producers. Whether you see that as a good or bad thing, it's an indisputable feature of the world in which we now live.  However, I don't think it's appropriate to view IEA's seven principles exclusively as a set of rules to be imposed on a reluctant industry; they're as much about getting the rest of society comfortable with an energy resource that could provide enormous economic and environmental benefits, globally, particularly with regard to greenhouse gas emissions.  Although Dr. Birol emphasized that unleashing all this shale gas won't be sufficient to solve the climate problem, he also demonstrated that without it, our chances of reining in emissions look even worse, because the main trade-off globally is not gas vs. renewables, but gas vs. coal.  Getting this right is crucial for many reasons, and the IEA's report looks like a helpful contribution to the dialogue that must take place.

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The Golden Age of Natural Gas

A regular reader of this blog kindly sent me a link to the International Energy Agency's new study on global natural gas, to which he contributed. The report, entitled, "Are We Entering A Golden Age for Gas?" was launched with a press conference yesterday in London. It presents a scenario in which gas use grows rapidly due to faster demand growth, particularly in the developing world, increased supply from unconventional sources such as shale gas, and a slower expansion of nuclear power in the aftermath of the Fukushima Daichi accident. Its key findings envision gas providing 25% of world energy by 2035, up from 21% today, and eclipsing the share of coal before 2030, with corresponding benefits for global greenhouse gas emissions.

The IEA's presenters were careful to point out that they are not proposing this view as the likeliest scenario, but as an offshoot of their primary World Energy Outlook scenario published last fall, which incorporated the commitments at the Copenhagen climate conference. The new gas scenario depends on a number of uncertainties, including the resolution of some of the concerns about the environmental impacts of unconventional gas production, along with the realization of carbon-intensity and gas-development targets in places like China. However, it doesn't depend on new technology or dramatic changes such as a massive move to natural gas for vehicle use. (The latter is presented as a "High Impact Low Probability" sensitivity.) Its big shifts occur in the big existing gas market segments, for power generation globally and for industry and buildings in the developing world.

I was struck by several elements of the scenario. First, although much of the focus on unconventional gas has been on North America, where many of the techniques were pioneered, this is very much a global story. The IEA shows estimated unconventional gas resources from shale, "tight gas" and coal-bed methane that exceed conventional gas resources in Asia and Africa and rival them even in Eastern Europe/Eurasia. On the strength of its unconventional resources China could become the world's third-largest gas producer by 2035, behind Russia and the US. So even if the US plaintiffs bar attempts to turn "fracking" into the next tobacco or asbestos, unconventional gas exploitation will likely progress elsewhere. At the same time, increases in conventional gas production are expected to exceed those from unconventional sources, by 60/40 over the period studied. That requires big increases in LNG production in Australia and a substantial increase in pipeline capacity linking Russian and Central Asian gas to markets in Europe and Asia. It's also worth noting that despite the shale gas bonanza, the IEA doesn't envision the US becoming a net gas exporter.

As one of my mentors frequently reminded me, natural gas doesn't get developed without a market, and in this scenario the biggest source of new demand is in power generation, where the combination of lower gas prices and the 60% thermal efficiency of combined cycle gas turbines makes gas highly competitive, even with coal. It's less clear whether gas is taking market share from new nuclear based on price, or mainly filling the gap that the response to Fukushima is leaving in some markets. From what I heard on a power industry webinar yesterday, the former is a significant factor, at least in the US. The strong connection between gas and power is another reason why so much of the growth in gas demand--80% by the IEA's estimate--is expected to occur in developing countries including China and India, where electricity demand is expanding at rates that the US and Europe haven't experienced for years or decades. Perhaps the most startling forecast in the report is that China's gas demand could grow from roughly matching Germany's today to about the level of the entire EU in 25 years. That would be supported as much by additional imports as from domestic unconventional gas output.

As I'd have expected, the IEA provided a sober assessment of the environmental implications of their scenario. Increasing the share of gas in global energy demand reduces global GHG emissions by 160 million tons of CO2 equivalent by 2035--less than 1% of total emissions--by substituting for coal and some oil. That's a lot less than if the extra gas didn't also contribute to higher energy demand by keeping electricity prices lower, while outcompeting some lower-emission renewables and nuclear projects. The IEA states plainly that relying on more gas is not a silver bullet for climate change, although it is a positive step.

In addition to pointing out the need for safe handling of the fluids involved in hydraulic fracturing, the report also specifically addresses the critique of Howarth and others concerning the direct emissions from shale gas production. The IEA found that CO2-equivalent emissions for shale gas from well to burner exceed those for conventional gas by 3.5%-12%, depending on whether the methane liberated during well completion is captured, flared or vented to the atmosphere. Even at the high end, that does not negate gas's emissions advantage over other fossil fuels, especially when power generation efficiencies are factored in. The report's authors apparently see most of the excess emissions compared to conventional gas production as representing an opportunity that can be captured with current technology and best practices.

The IEA put a price tag on this shift to gas: a cumulative $8 trillion through 2035 , nearly $1 trillion higher than the gas infrastructure investment in their global energy scenario of last fall. Those figures aren't as hard to fathom in the context of developed-country budget deficits and debt as they might seem, because they mainly reflect unsubsidized, economically attractive investments by publicly-traded and state-owned energy companies that are making healthy profits and have substantial cash flow on which to draw. Surprisingly, the IEA sees most of the incremental investment in gas coming at the expense of oil. Although they deliberately framed the title of their scenario as a question that hinges on a number of variables, the report comes across as a plausible and credible glimpse of our possible energy future.

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