By Antoine Rostand
The energy industry is at a critical juncture, at a tipping point where tough decisions will need to be made. By 2035, global primary energy demand is projected to increase by more than 40% from current levels. This step-change in demand will be driven largely (more than 90% of the growth) by rapidly industrializing non-OECD countries with booming economic development.
At the same time, there is a strong need to mitigate the environmental impacts that will result from this unprecedented rise in energy demand. By 2035, energy-related CO2 emissions are projected to rise by more than 20% from current levels, and although OECD emissions will drop from current levels, the rise in non-OECD emissions will more than offset OECD declines. The key challenge for the energy industry in the 21st century — if not for the world — will be to overcome this nexus between energy security and environmental sustainability, and transition the energy system in the most optimal way.
Energy Transitions Take Time
There are no “silver bullet” solutions to the world’s energy challenges. While lots of studies “prove” that quick mass-adoption of large-scale, carbon-free energy technologies is possible, they all ignore one historical inconvenient truth — energy transitions take a long time to play out. An “energy transition” is defined as the length of time that elapses between the introduction of a new primary energy source or technology and its rise to attaining significant market share (typically 20–30%). The history of liquefied natural gas technology highlights the reality of energy transitions. It took roughly 60 years between the scientific discovery of liquefaction to the first LNG shipping patent, another 50 years to the first commercial delivery of LNG, and then another 50 years for LNG to account for roughly 30% of all natural gas traded globally (see figure 1).
FIGURE 1: HISTORY OF TRANSITION TO LNG TECHNOLOGY
SOURCE: VACLAV SMIL “ENERGY TRANSITIONS” (2010); SCHLUMBERGER BUSINESS CONSULTING (SBC)
As another example, it took oil roughly 60 years, from the first commercial production in the late 1800s, to capture a 10% global market share, and then another 20 years to reach a 30% market share. Similar time spans are seen historically for the maturation of other primary energy sources. Currently, there is a lot of hope pinned on alternative energy sources to come to the rescue in the next 10 to 20 years, yet none of these alternatives has yet to reach a 5% global market share. History points to at least another half-century before these alternatives even begin to have a material impact on the global energy system (see figure 2) — and that assumes the technology lives up to its potential.
FIGURE 2: SHARE OF GLOBAL PRIMARY ENERGY DEMAND BY FUEL TYPE
SOURCE: VACLAV SMIL “ENERGY TRANSITIONS” (2010); BP STATISTICAL REVIEW; IEA; SCHLUMBERGER BUSINESS CONSULTING
In the 1970s, promoters of nuclear energy promised that the United States would generate 100% of its electricity from nuclear fission by the year 2000, forever banishing coal plants. By the year 2000, however, coal was still generating 50% of all power, while nuclear power had yet to crack 20%. It’s important to be realistic about the time it takes for new energy technologies to reach critical mass, especially during unprecedented levels of global energy demand growth. Just as dangerous as doing nothing at all about the energy system’s looming challenges is banking on unrealistic expectations.
Transitioning in the Most Economical and Rational Way
The right path to a low-carbon energy future involves shifting the energy mix in the most practical way. The challenge lies in reducing emissions in an economically attractive, low-risk, and technically feasible manner. One way to achieve this is to decarbonize the power generation sector by switching from coal to gas. Gas will be vital because it has relatively low CO2 emissions, is abundant, requires low investments, and is a reliable and proven technology. The fuel is gaining a lot of momentum for decarbonization in places such as Europe, a region with ambitious emissions reduction targets.
For example, a recent study presented to the EU Commission highlights the benefits of transitioning the European energy system by using more natural gas.1 The study outlines a renewable energy build-out period from 2010–2030 that is complemented by natural gas. The build-out would progressively replace coal-fired capacity and help Europe achieve its ambitious 2050 target — an 80% greenhouse gas emission reduction.
The approach reduces implementation risk by reducing dependence on technological developments from emerging technologies and by placing more reliance on gas infrastructure that is already in place. The benefits of transitioning the European energy system in this way are far-reaching — leading to significantly lower investments, less risk, and a reliable and secure energy system (see figure 3). A similar approach has to be taken on a global scale, especially in high-impact countries such as China.
FIGURE 3: BENEFITS OF TRANSITIONING THE EU ENERGY MIX BY USING MORE GAS
SOURCE: EUROPEAN GAS ADVOCACY FORUM
Policy Action Likely to Alter the Energy Landscape
A practical and sustainable path to a low-carbon energy future is needed and despite current uncertainties, positive signs are emerging. The outcome of the United Nations’ landmark Copenhagen climate conference in 2009, in which several countries recognized the need to limit global temperatures to no more than 2ºC above preindustrial levels, is a step in the right direction. The 2010 UN climate conference in Cancun further affirmed the world’s commitment to the cause by recognizing that current emissions pledges need to rise. In addition, a fund was created to help developing countries adopt low-carbon technologies. These events hint to a future where new policies will fundamentally change the way oil and gas companies operate.
Fossil fuels, even under the most ambitious IEA decarbonization scenarios, will still capture the majority of global primary energy demand by 2035 (ranging from more than a 60% share under aggressive emissions reductions targets to as high as an 80% share if no change in government policies takes place). By 2035, the share of global primary energy demand taken up by renewable energy, excluding hydropower, could range from around 3% to as high as 7%, depending on the policies enacted. All sources of primary energy — fossil fuels, nuclear, biofuels, and renewables — will rise significantly in absolute terms to meet the world’s growing hunger for energy, but the energy mix will shift. Oil and coal will lose share, while natural gas, nuclear, biofuels, and renewables will pick up share. These changes will engender opportunities for oil and gas companies.
Oil and Gas Industry in Prime Position
When it comes to the energy transition, the oil and gas industry is in a great position to capitalize. Transitioning the global energy system in the most optimal way will not only involve the expansion of all economic supply sources (e.g., fossil fuels and renewables), but also require the development of new technologies that unlock new sources of supply and mitigate environmental impacts.
Employ all economic sources of supply
The world will need to expand all economic sources of supply just to keep up with the step-change in energy demand growth. This opens up attractive opportunities for oil and gas companies in areas such as unconventional oil and gas, the deepwater, and even biofuels and renewable energies as economics improve. This is especially relevant for decarbonization of the power sector, where natural gas is emerging as an abundant and low-carbon supply source. Also, the rise of abundant unconventional gas helps bolster the case for decarbonization by switching from coal to gas.
Develop new technologies to unlock supply and reduce emissions
New technologies will be needed to unlock supply and mitigate environmental impacts. Renewable energy and decarbonization technologies such as carbon capture and storage (CCS) will be critical, although most are currently in the capital-intensive R&D stage. Oil and gas companies, unlike most venture capital firms and utilities, have the balance-sheet strength, patience, and project management savvy needed to drive these large, long-timeline technology projects.
We are already seeing the industry taking action. For example, ExxonMobil recently invested $600 million to develop next-generation algae-based biofuels with biotechnology company Synthetic Genomics. Then there’s the Chevron-led Gorgon gas project in Australia, which will capture roughly 40% of the project’s CO2 emissions and store it 2.5 kilometers below ground. The $2 billion CCS project will be equivalent to taking two-thirds of Australian vehicles off the road. Companies such as these that take the initiative now to identify future opportunities and learn the technology will gain significant first-mover advantages as the energy transition plays out.
A New Landscape: from IOC to IEC
The world’s energy system will experience significant change over the coming decades. A step-change in energy demand growth, coupled with policy action that encourages low-carbon energy, will dramatically change the energy landscape. Battle lines will be redrawn and there may be a convergence of several industries — oil and gas, power, mining, conglomerates, venture capital — jostling to take a piece of the energy transition pie.
The good news for oil and gas companies is that fossil fuels will remain relevant for decades to come. Furthermore, oil and gas companies have the capital, project management expertise, and R&D capabilities needed to capture a significant portion of the future growth in renewable energy and low-carbon technology. Just a decade ago it would have been inconceivable for an oil company to make a major investment in a true renewable energy such as solar power. If Total’s recent $1.4 billion investment in SunPower Corporation, one of the largest investments ever made by an oil company in renewable energy, is any indication, then oil and gas companies are destined to become an even bigger component of the world’s energy system as they themselves transition from IOCs to IECs — or international energy companies.
works for Schlumberger Business Consulting (sbc.slb.com).
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1. European Gas Advocacy Forum, “Optimized Pathways to Reach 2050 Abatement Targets with Lower Costs and Improved Feasibility” (Feb. 2011).