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Energy independence – divergent European and American paths meet

July 25, 2012 2 comments

In recent months, many have touted that the United States is on the road to energy independence. Citibank pointed in the early part of the year that the emergence of shale oil and shale gas and increased vehicle efficiency may make USA the new Middle East of Oil, whilst Philip Verleger, a famed American economist argued that the US will be energy independent in that it will export more oil than it imports by 2023. In March 2012, the United States exports of petroleum products exceeded imports for the first time since six decades.

Whilst the Americans satiate their energy appetite with advanced lateral and horizontal drilling for tight oil and gas, the Europeans are pursuing their own energy agenda via a different route.

Divergent paths to energy independence

The use of gas instead of coal in power generation has reduced American carbon emission by 450 mt over the past 5 years. At the same time, lower energy costs have resulted in a renaissance of industry in the States, with thousands of jobs created and the relocation of petrochemical and fertiliser industries back to the States.

In Europe, countries are adopting a renewables approach towards energy independence instead. Germany’s adoption of Energiewende – an energy turnaround or transformation – faces hurdles to meet all its targets. The Irish targets renewables to be 20% of all energy sources by 2020. These targets are made more arduous by European countries phasing out nuclear power, whilst shale gas lumbers with environmental and geological obstacles in the continent.

Divergent paths meet on transportation

Even as renewables growth accelerates over the next 5 years and natural gas increase its share as an energy source, energy independence in both continents hinges on the key transportation sector. The transportation sector unlike the power sector is made up of disparate millions of vehicles which face inertia to fuel type change relative to more concentrated power stations.

Both continents’ success hinges on reducing the use of gasoline (for America) and diesel (for Europe) in vehicles. The Europeans will largely depend on electric vehicles to wean off oil. However a recent IEA report highlighted the muted impact of electric vehicles – only 5 million of vehicles sold in 2020 or 5% of total vehicles production. It may take another 30 years for electric vehicles to make a material impact, during which re-charging stations and the mileage range of electric vehicles are improved.

The greater abundance of natural gas for the Americans may see it adopt natural gas (CNG / LNG) vehicles as an interim solution for energy independence. However, similar issues arise for this type of vehicles – re-fuelling stations and the mileage range. In the case of natural gas though, prices are not likely to remain at present depressed levels. Advancing renewables technologies on the other hand are likely to see a decrease in unit costs of production over time.

What can international climate treaties do (and not do) actually?

April 5, 2012 Leave a comment

The last few Conferences of the Parties COP have resulted in impasse among the developed and developing countries. Notably the less developing countries highlighted common but differentiated responsibilities amongst the developed countries on carbon dioxide emissions. Whilst developing countries acknowledged the need to curb their carbon dioxide emissions, they also emphasised that it was the economic and industrial development of the developed countries that have brought emissions to its present high level. Developing countries (including the likes of China and India) would not sacrifice the economic development and well being of its populace to reduce carbon emissions. On the other hand, developed countries highlighted the growing emissions of the developing nations (China is now the biggest emitter in the world). Whilst Europe is willing to go it alone, the same commitment cannot be said of other developed countries. Notably the USA would not go agree to any legally binding target without the participation of the developing countries.

Legally binding targets: the be all and end all?

That makes legally binding targets and enforcement – a key objective of international treaties hard to achieve. Negotiations lumbered on with the last COP 17 in Durban hailed as a breakthrough just for a ‘roadmap’ to an agreement in 2015. The difficulties are obvious – the recent EU unilateral move on an airlines tax on carbon emissions invoked threats of trade war and retaliation by China, India, Russia and the USA, with the latter even commenting that it was an infringement on their ‘sovereignty’. Given the nations do not even agree to economic payments of ~$10 million, how likely they will agree on more holistic international agreements?

In an ideal scenario, the international treaties sought to achieve legally binding caps on carbon emissions amongst the nations. These caps would preferably be linked via a global cap and trade agreement as a carrot and stick incentive for nations to reduce their emissions. The objective of a global market for a cap and trade is to assign a price on carbon and thence incentivise carbon abatement programs like renewable energies and carbon sequestration and storage (CCS). Much contention arises on the level of cap for each nation. Too low a level and at which base year would impede its economic growth.

This makes it difficult for carbon intensive countries like Canada to agree to binding agreements. Canada with its vast resources of heavily pollutive tar sands has already backed out of the Kyoto Protocol it originally was a signatory to. Other countries like Venezuela (Orinco heavy oils) and OPEC would have found it equally hard on any agreement. Even Japan with the recent closure of its nuclear plants in exchange for fossil fuels generation will find it hard to replace them in time with renewable energies to meet targets.

Market economics and technological drivers:

What international treaties fail to achieve – that of an equitable carbon price and incentives for carbon abatement projects and development are already been driven at national levels and on bilateral agreement levels. This is more the result of corporate entrepreneurship in response to rising oil prices than environmental conscientious governments.  The EU ETS – a result of the multi-lateral Kyoto Protocol has seen its carbon price fell to a record low of €6.05 in early April 2012.  This was the combination of record corporate investment into renewable energy generation and warm weather that caused an over-allocation of EUAs – a flaw of the cap and trade system that artificially assigns emissions permit quota. Present political discourse is ongoing to reduce the emissions quota so has to increase the EUA price. A higher carbon price is needed to send a strong signal to companies to invest in costlier carbon abatement technologies.

A cost-benefits study of climate change policies recommends a carbon price that slowly increases through the next decade. An initial low price would enable it to pick low-lying fruits (of low marginal abatement benefits). This is increased through the 2020s when more advanced abatement technologies become more economically feasible. A too high an initial price set would create large opportunity costs to other measures of social and economic welfare.

Recent technological advances and economies of scale have however made in some cases –carbon abatement technologies competitive. For example, onshore wind generation in some cases have reached grid parity. Solar PV generation costs have also been drastically reduced and projected by experts to be competitive with conventional electricity by 2015. Generally, on levelised costs of generating electricity basis, onshore generation of electricity costs between $70-225/ MWh. Solar PV electricity costs $200-$300/MWh. Coal generation and gas-fired levelised costs of electricity have cost between $40-$120/ MWh depending on the costs of fuel. See the 2010 IEA electricity generation costs by fuel. Over the past decade, renewable generation of electricity have benefited from subsidies and feed-in tariffs, which provided it initial consumer acceptance and lower costs. It is a victim of its own success now with a cut of the solar installation subsidy in Germany by as much as 29% from 1 Apr ’12 while the tax breaks for wind manufacturers in USA may not be extended beyond end of this year.

Other economic factors are at work in growing renewable generation. With spiralling growth in fuel consumption due to a youthful population, many Middle East countries have seen its crude export volumes drop. Notably Saudi Arabia saw its crude consumption increase from 1.2 in 2001 to 2.6 mb/d in 2011. Several Middle East countries still use expensive fuel oil/ crude oil for electricity generation. If this trend continues, Saudi Arabia may even turn to be a net importer of crude oil however unlikely it is in 2035. The Middle East governments recognise this and are building wind farms and exploiting its sunny conditions for solar power. A recent growth spurt has seen Abu Dhabi establishing Masdar city – an envisioned zero emissions city. See the article Middle East countries have reasons to back renewable energies. Other countries like Egypt and UAE are taking marginal steps towards non- fossil fuels generation (including nuclear generation). Another key reason that OPEC countries are backing renewable energies is that oil is still expected to retain its place as a main primary energy supplier till 2030s as assured by all outlook reports by IEA, BP and Shell.

What incremental benefits of international treaties?

Given the inexorable costs reduction of renewable technologies and its deployment, what will be the incremental benefits of legally binding emissions targets and the artificial market conditions created by international treaties ? It will hasten the development of certain backstop technologies -in particular carbon sequestration and storage (CCS). The CCS has been recognised by IEA as a lever technology to lower world carbon dioxide emissions from 2020s. An estimated carbon cost of €40-50 per tonne will make it economically feasible now, when present price is only €6. However, existing CCS technology is still at a research stage for fixed electricity installations. The only economic use of CCS is in enhanced oil recovery (EOR). The World Coal Association updates a current map of CCS projects.

Another backstop technology that may be promoted is electric vehicles – notwithstanding technologies/ measures like – solar, wind, hydro, geothermal, biomass and energy efficiency programs that are already growing without multi-lateral treaties. Electric vehicles however source their power from power generation facilities. Only if the latter power is from renewable generation will carbon emissions be reduced. Further, due to existing vehicle life span – only 20 million electric vehicles (source IEA) out of 1 billion vehicles is expected to be on the roads. This may reduce an estimated 0.2 Gt of total 30 Gt annual emissions (with transportation contributing ~30% emissions) – not much incremental benefit.

The Demand and Supply Cycle of Peak Oil

February 2, 2012 1 comment

Much has been written on peak oil – the theory made famous by Hubbert which now bears its name. In 1972, Hubbert made an analysis that people born after 1965 will see the dissipation of oil use in their lifetimes. Hubbert did not see the emergence of China and its voracious oil appetite in the 2000s. Neither did he see the youthful population growth of the Middle East with its exorbitant oil subsidies. Yet, 40 years later the Peak Oil date has been pushed back time after another.

Peak Oil theory tends to parochially delve into the supply aspect. Hubbert based his theory that oil resources are finite and will eventually be depleted according to a famous bell-shaped curve below.

Hubbert peak oil curve

Peak oil advocates highlight that much of the world oil is supplied by giant oil fields – Ghawar (Saudi Arabia), Kirkuk (Iraq), Cantarell (Mexico) and Burgan Greater (Kuwait), which are rapidly aging. No new major oil fields have been discovered in the past decade. Further, Norway, Mexico and UK join a list of countries which oil production profiles follow the Peak Oil ‘curve’.

The author wrote in May 2011 that the hidden hand of economics is the best answer to peak oil. This can entail a demand and supply cycle of energy resources with an ‘affordable energy concept for all1’ dictated by price as illustrated below:

The hidden hand of economics of Peak Oil

An analysis of trends in the energy sector reveals this hidden cycle at work. There was much public discourse on high oil and gas prices from the mid 2000s that partly arose from high demand in the developing countries. However it is these high prices that have hastened the development of alternative fuels (solar and wind in particular) and the present shale gas revolution. Already, the media has written a lot about about massive shale gas reserves. A massive potential exists too in new technologies eg coal-to-liquids (CTL), gas-to-liquids (GTL) and underground gasification of coal (UGC) that will greatly increase potential fossil fuel reserves.

The CTL and GTL technologies will increase the amount of transportation fuels from the more abundant coal and gas reserves2. These technologies will not be economically feasible without the higher price of oil driving the push for innovation and efficiency. UGC in particular will almost triple the amount of coal reserves, converting underground coal reserves underground to liquid fuels. These new technologies will further push ‘Peak Oil’ later to the future.

Perhaps the greatest impediment to peak oil theory is the use of renewable energy – a potential game changer. According to Bloomberg New Finance in 2011, the total investment in renewables globally reached $260b with cumulative investment of $1t over the past 7 years. It surpassed the investment into fossil fuels for the first time. Most of the investments are into solar and wind energy. It is projected that in 3-5 years, the unit costs of electricity production from PV solar will be able to compete with that from fossil fuels. This is mainly due to the deluge of investment in China into the manufacture of solar panels, which lowers its production costs substantially. Already, the most efficient form of generation of electricity from wind energy is able to compete on a cost basis with electricity from fossil fuels generation.

The increasing oil consumption in the Middle East exporting countries may decrease their available volumes for export over the next decade. Increasing consumption was partly due to subsidies which alone cost $13b in Saudi Arabia in 2010.  This fact has not gone unnoticed in Arabian governments which have embarked on ambitious renewable projects recently. For example, Saudi Arabia is increasing its electricity generation mix of solar to 10% by 2020 to a few GW. Other countries like Oman and Abu Dhabi, and Egypt have embarked on similar solar and wind projects. This spurt of growth is all driven by the rising costs of oil and a need for fiscal balance. Even more interestingly, Qatar has not displayed much enthusiasm in investment in renewable generation – perhaps because of the availability of its own abundant gas reserves.

According to the BP World energy outlook 2035, renewable energy will contribute about 8% of world primary energy consumption. This compares with 1.3% in 2010.

If the trajectory of oil prices continues over the next two decades, expect this ratio to be even higher. Market capitalism will eventually dominate in this efficient allocation of resources.

BP share of world primary energy

Footnote:

1. The chief economist of Bp advocated in the recent statistical review that an affordable energy future for the world population is possible.

2. The reserves to production ratios of gas and coal are approximately 60 and 160 years presently, whilst that of oil is 50 years.