Sustainable Energy SecurityStrategic Risks and Opportunities for Businesses

Antony Froggatt (afroggatt@chathamhouse.org.uk)

Energy, Environment and Development Programme, Chatham House

High Level Meeting on Climate Change, Peak Oil and Energy SecurityUniversity of Winchester19th November 2010

Background

• Chatham House is an independent international affairs think tank. Within the EEDP programme we have expertise in oil and gas sector, renewable energy, energy and carbon markets, impacts of climate change and regional energy and climate security.

• Lloyds of London is the world’s leading insurance market. Lloyds publish a series of reports under it “3600 Risk Insight” programme.

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Momentous Times

In some cases, the surprise element is only a matter of timing: an energy transition, for example is inevitable; the only questions are when and how abruptly or smoothly such a transition occurs. An energy transition from one type of fuel (fossil fuels) to another (alternative) is an event that historically has only happened once a century at most with momentous consequences .

(US National Intelligence Committee 2008)

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“Peak oil presents the world with a risk management problem of tremendous complexity” US Dept. of Energy, 2007

• Some studies suggest the “peak” has already occurred, others maintain it is either impossible to predict or shows no sign of appearing.

• Predicting further than a decade ahead presents many uncertainties: availability and cost of extraction technologies; substitute technologies; pricing systems in major economies; carbon legislation.

• A two-year, comprehensive study by the UK Energy Research Centre (UKERC) ( Aug. 2009) found that: a peak in conventional oil production before 2030 appears likely and there is a

significant risk of a peak before 2020. just to maintain current production levels would require the equivalent to a new

Saudi Arabia coming on-stream every three years. as giant fields pass peak production levels, there is a shift to smaller, more

difficult-to-produce fields with faster depletion rates and the rate of decline will accelerate

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IEA – Raising the alarm

“Crude oil output reaches an undulating plateau of around 68-69 mb/d, by 2020, but never regains its all-time peak of 70mb/d reached in 2006.”

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Source: IEA 2010

Growth in non-OECD oil demand

• China

– it is hard to overstate the growing importance of China in global energy markets. (IEA)

– Domestic oil production in China is expected to peak in 2013, while demand could more than double by 2030.

• Saudi Arabia

– Last April, Saudi Aramco’s CEO, Khalid al-Falih, warned that Saudi Arabia’s crude export capacity would fall by about 3 million b/d to under 7 million b/d by 2028 unless the kingdom’s domestic energy demand growth was checked

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Source: BP 2010

Changing oil market between East and West

• Advanced economies remain the biggest consumers of primary energy per person, but lower population growth, de-industrialisation, greater efficiency, higher fuel prices and concern for the environment are lowering demand.

• By 2008 non-OECD countries led by China and India for the first time took the biggest share of world energy demand.

• A tipping point likely in 2015 when countries in Asia-Pacific need more imported oil in total than the Middle East (including Sudan) can export.

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Middle East oil surplus versus Asia-Pacific deficit

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2010

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MiddleEastsurplus

AsiaPacificdeficit

Source: John Mitchell 2010

New oil becomes more expensive and riskier

• Recognition of limitations of conventional oil driving exploration and development of new resources in riskier environments: Deep water: “Some 30 per cent of existing global oil, and nearly

50 per cent of new supplies by 2015, needs to be sourced from offshore, much of it from deep water,” IEA

The Arctic estimated to hold a quarter of the worlds undiscovered oil and natural gas (US Geological Survey).

Non-conventional: Heavy oil, tar Sands, oil shale (higher CO2 emissions, water use, pollution)

Coal to liquids and gas to liquids: Significantly higher resource requirements and C02 emissions

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Oil supply and demand trendsShort-term price spikes, volatility• Price volatility and

unavailability of capital reduces investment

• Growth in demand and lower outputs may result in tightening of markets and ‘price spike’

• A ‘yo-yoing’ of oil prices probable as old institutions unable to balance supply

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Bank of America/Merrill Lynch(range)

Barclays Capital

Paul Stevens, Chatham House

Deutsche Bank

EIA 2009 reference (2007 USD)

IEA IEO 2009 reference (2007USD)

OPEC (high)

OPEC (low)

Source: Chatham House

Growth in coal driven by Asia

• Major source for new electricity generation in developing countries, Asia plans 546 GW in 10 years

• China and India import coal, invest abroad: while major resources exist, logistical problems increasing with mining and shipping

• Significant CO2 emissions associated with use10

Source: BP 2010

Natural gas – a reliable ‘bridging fuel’?

• Often described as ‘bridging fuel’ because:– Lower CO2 emissions (half that of coal) associated with use– Flexible power plants – balance intermittent renewables or

base-load coal or nuclear

• Liquid Natural Gas (LNG) aiding development of global gas market – has diversified potential sources and created new markets

• Depletion in major gas fields lead to investment in replacement with new conventional and non-conventional resources

• Shale gas in US has changed the global market • Created huge investment uncertainties (Stevens 2010)

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Energy investment requirements for 2 degree target

• Reference Scenario it will be in the order to $26 trillion, by 2030 or 1.4% of global GDP per year.

• The investment costs associated with this ‘450 Scenario’ requires an additional $10.5 trillion but with reduced energy cost of around $8.6 trillion by and a total saving over the lifetime of the structures of $17 trillion.

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Growth in renewable energy

• Renewables supply technology that delivers climate and energy security objectives simultaneously

• IEA ETP forecast 17% of emissions reductions from RES

• Some regions RES now dominates new electricity capacity (2009 60% of EU)

• Accelerated deployment still needed

13Source: New Energy Finance 2010

Conclusions: A shifting energy security landscape

• Energy security is now inseparable from the transition to a low carbon economy and business plans should prepare for this new reality.

• Traditional fossil fuel resources face serious supply constraints and an oil supply crunch is likely in the short-medium term with profound consequences for the way in which business functions today.

• A "third industrial revolution" in the energy sector presents huge opportunities but also brings new risks. Of particular importance for new technologies is the risk of constraints on raw materials such as rare earth metals as scarcity may drive up costs

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• Increasing energy costs as a result of reduced availability, higher global demand and carbon pricing are best tackled in the short term by changes in practices or energy efficiency.

• The sooner that business reassesses global supply chains and just-in-time models the better.

• While the vast majority of investment in the energy transition will come from the private sector, governments need to create the necessary investment conditions and incentives.

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Back-up Slides

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Will shale gas change the game in Europe?

• Shale accounted for 1% of natural gas in US in 2000, today 20%; forecast to reach 50% by 2035.

– Already impacting on electricity sector

– Potentially accelerate movement to LPG and electric vehicles

– Significantly reducing need for LNG import and impacting global trade

• European potential still unclear – much smaller exploration infrastructure

• Key questions determining extent of global impact:

– How large is potential economically available resource?

– What are limiting environmental impacts, water contamination etc?

– Rate of depletion of fields is undocumented.

– Impact on price and exploration rate for conventional gas

– How far will gas be used in non-electricity sectors?

– Chevron “price tag is too high” to justify the investments required

“A major new factor – unconventional natural gas – is moving to the fore in the US energy scene…it ranks as the most significant energy innovation so

far this century. It has the potential, at least, to cause a paradigm shift in the fuelling of North America’s energy future.” HIS Cera, 2010

Nuclear power: big plans, little progress

18Source: Mycle Schneider Consulting 2010

Meeting the challenges of climate change

• 97–98%of the climate researchers most actively publishing in the field support the tenets of anthropogenic climate change outlined by the Intergovernmental Panel on Climate Change

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Examples of minerals and metals required for a low carbon economy (1)

Problem Solutions Raw materials (application)

Future energy supply

Fuel cells Platinum PalladiumRare earth metalsCobalt

Hybrid cars Samarium (permanent magnets)Neodymium (high performance magnets)Silver (advanced electromotor generator)Platinum group metals (catalysts)

Alternative energies Silicon (solar cells)Gallium (solar cells)Silver (solar cells, energy collection /transmission, high performance mirrors)Gold (high performance mirrors)

Energy storage Lithium (rechargeable batteries)Zinc (rechargeable batteries)Tantalum (rechargeable batteries}Cobalt (rechargeable batteries)

Source: Materials Innovation Institute, November 2009

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Energy conservation

Advanced cooling technologies Rare earth metals

New illuminants Flare earth metals (LED. LCD. OLED); Indium (LED. LCD. OLED); Gallium (LED. LCD. OLED)

Energy saving tyres Industrial minerals

Super alloys (high efficiency jet engines)

Rhenium

Environmental protection

Emissions prevention Platinum group metals

Emissions purification Silver; Rare earth metals

High precision machines

Nanotechnology Silver; Rare earth metals

IT limitations Miniaturisation Tantalum (MicroLab solutions); Ruthenium (MicroLab solutions)

New IT solutions Indium (processors); Tungsten (high performance steel hardware)

RFID (hand-held consumer electronics)

Indium; Rare earth metals; Silver

Further examples (2)

Source: Materials Innovation Institute, November 2009

Vulnerability of major energy infrastructure to environmental change

• Energy production relies on complex, interlinked, expensive and transnational infrastructure. Long life-spans.

• As climate changes, constants become variables

“We’ve had our third “once-in-a-hundred-year” storm so far this year” North Sea oil industry exec.

• Sites chosen in 1980s may be relied upon for next 100 years or more

• Problems for hydropower, nuclear power, offshore & coastal production, gas pipelines

• Hurricane Katrina – shut off around 19% of US refining capacity, huge damage to pipelines and drilling platforms- Oil price spike follows

• Summer 2003 heat-wave in France – 17 nuclear power shut down due to heat and water problems- Cost to EDF = €300million

Rig beaches on Dauphin Island after Hurricane Katrina. Source: AP/ Photo/Peter Cosgrove

Risk for the business sector in general

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Risks for the energy sector

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