World Energy In 2006

Acknowledgements Marie-José Nadeau, Chair, WEC Communications and Outreach Committee

This inaugural edition of World Energy in 2006 could not have been achieved without the valuable contributions of those WEC members who participated in the Taskforce and the Advisory and Editorial Boards. As the Chair of the WEC’s Communications & Outreach Committee, I would like to thank the following members for their vision, leadership and dedication: u Michael Gibbons – Executive Committee Member, British Energy Association u Dr Hisham Khatib – Chairman, Electricity Regulatory Commission, Jordan u Mary M’Mukindia – Managing Director,

National Oil Corporation, Kenya u Tim Rockell – Global Executive Director, Energy & Natural Resources, KPMG u Dr Carsten Rolle – Member Committee Secretary, WEC Germany u Efraín Carrera Saud – President, CVG Edelca, Venezuela u Dr Hardiv Situmeang – Senior Advisor to the President Director of PT PLN (Persero), Indonesia u Barry Worthington – Executive Director, US Energy Association (USEA) u Ron Wood – Chair, WEC Programme Committee The WEC is also very grateful to all of the authors – without whom there would be no World Energy in 2006.

World Energy in 2006 The World Energy Council (WEC) is the foremost multi-energy organisation in the world today. The WEC has Member Committees in over 90 countries, including most of the largest energy-producing and energyconsuming countries. Established in 1923, the WEC covers all types of energy, including coal, oil, natural gas, nuclear, hydro, and renewables, and is UN-accredited, non-governmental, non-commercial and nonaligned. The WEC’s mission is “to promote the sustainable supply and use of energy for the greatest benefit of all people.” Copyright © 2006 World Energy Council All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, electrostatic, magnetic, mechanical, photocopy, recording or otherwise, without prior permission of the copyright holder. Except where expressly stated, the opinions and views in this publication are solely those of the individual authors/contributors and do not necessarily reflect the opinions or views of the World Energy Council. The World Energy Council is not liable for any errors or omissions, factual or otherwise, in the material herein, or for any damages caused by the use of such material by third parties. Published in June 2006 by: World Energy Council 5th Floor, Regency House 1-4 Warwick Street London W1B 5LT United Kingdom www.worldenergy.org ISBN 0946 121 222

World Energy in 2006

Contents Foreword: The future of energy, today

2

André Caillé, Chairman, World Energy Council

Nuclear energy: Accelerating the nuclear renaissance 

3

John Ritch, Director General, World Nuclear Association

Investment: Reaching the $17 trillion target

7

Michael Bray, Partner, Energy and Natural Resources, KPMG

Supply and demand: International interests and tensions

12

Enno Harks, Senior Expert, Energy and Resources Research Unit, Department of Global Issues, SWP – German Institute for International and Security Affairs

Sustainability: International cooperation – the key to a secure, sustainable energy future 

16

Bret Mattes, Vice President, Australia/Asia Gas, BHP Billiton Gas & Power and Robert Pritchard, Managing Director, ResourcesLaw International

Liquefied natural gas: Fuelling the future – the transition to a global LNG market

20

Linda Cook, Executive Director, Gas and Power, Shell

UNCONVENTIONAL OIL: The Canadian oil sands – tomorrow’s oil, today’s opportunity

23

Robert Skinner, former Director, Oxford Institute for Energy Studies 

Sustainable energy: Inga – powering Africa’s future

27

Thulani Gcabashe, Chief Executive, Eskom

Alternative energy: Reducing the dependence on oil

29

Ildo Sauer, Gas and Energy Director, Petrobras

Energy policy: An integrated policy for India

32

Pradeep Chaturvedi, Chairman, Safety & Quality Forum, Institute of Engineers, India

The future: Looking forward – a global view

35

Jean-Claude Lauzon, Richard Preng, Bojan Pavlovic, Korn/Ferry International



World Energy in 2006

The future of energy, today André Caillé, Chairman, World Energy Council Oil prices have broken record highs. Hurricane Katrina devastates a major city in the US. Nuclear energy is back. Angelina Jolie addresses the World Economic Forum in Davos on the problem of refugees. Booming growth in China, India and Brazil has turned the energy world upside down. New energy investments have exceeded the $1 trillion mark and Russia turns off its gas to 60 million people in Ukraine. Almost one out of every four people continues to live without access to modern energy. Which of these issues will we remember when we think back to 2006?

The objective of World Energy in 2006 is to encourage debate and to inspire energy stakeholders to act As the Chairman of the World Energy Council (WEC) I am proud to introduce World Energy in 2006, a new publication that offers energy stakeholders a unique opportunity to read about the future of energy, today. World Energy in 2006 provides invaluable insight because it is grounded in the WEC’s technical and analytical expertise, and leverages the WEC’s strength in longer-term thinking. The WEC, the energy industry’s only global voice, takes a hard look at these issues in this first edition of World Energy in 2006. The publication is written by energy business leaders, policymakers and academics for business leaders, policymakers



and academics. Based on the real-life experiences of energy decision-makers from all regions of the world and all energy sectors, the objective of World Energy in 2006 is to encourage debate and to inspire energy stakeholders to act. Throughout my tenure as Chairman, I have made it my mandate to ensure the WEC’s contributions to sustainable energy development are action-focused, specifically in the areas of availability, accessibility and acceptability (3 A’s). World Energy in 2006, in its honest assessment of the top global energy issues, analyses what actions have been or could be taken within the context of these 3A’s. Advancing the cause In the interest of advancing its cause – sustainable energy development – the WEC has intentionally included thought pieces that are not completely aligned with the official WEC positioning to provoke and stimulate the reader. Where the WEC messages differ, our Regional Vice-Chairs offer their perspectives to ensure the reader receives a balanced overview of the issue at hand. World Energy in 2006 in its honest assessment of the top global energy issues helps energy stakeholders make balanced decisions for a sustainable future. u

Nuclear energy

Accelerating the nuclear renaissance John Ritch, Director General, World Nuclear Association The value of nuclear power is being reviewed and reaffirmed, but the industry’s growth is not yet fast enough to play its needed role in the clean-energy revolution. Governments must act decisively to support the industry Ten years ago, the phrase “nuclear renaissance” conveyed only a cautious hope within a narrow community of dedicated professionals. Today, the rebirth of nuclear energy has become an unmistakable reality that is gathering speed and momentum on the world stage. This revitalisation is a composite of several developments: U Continuing evolutionary advance in reactor technology; U Multinational research efforts to produce quantum leaps in technology; U Unprecedented levels of efficiency and capacity utilisation in key countries; U A robust and accumulating record of operational safety, backed by the emergence of a global nuclear safety culture; U Political progress in implementing the scientifically sound concept of waste disposal using deep geological repositories; and U Expansive growth planning for nuclear power in major nations, in both the developed and developing worlds.

Major countries stand on the threshold of introducing nuclear energy for the first time In countries representing the preponderance of world economic activity and population – from North America, across much of Europe to Russia and on to the leading countries of South and East Asia – the value of nuclear power has been reviewed and reaffirmed. Major countries without nuclear power – such as Poland, Turkey, Indonesia and Vietnam – stand on the threshold of introducing nuclear energy for the first time. Italy, the world’s largest electricity importer and the only one ever to suspend nuclear generation, must soon reconsider; and Australia, blessed with the world’s richest reserves of uranium, has begun a national debate on its own need – and environmental obligation – to use nuclear power. Anti-nuclear convictions can still be found: in the mythologies that motivate many environmental groups; in the assumptions of environmental journalists and bureaucrats; in the rhetoric emanating from small countries, such as Denmark and Austria, whose credibility must be weighed against their reliance on the importation of nuclear electricity; and, in the case of Ger-

many, in the declaratory policy of a major country that remains bizarrely captive to an outdated anti-nuclear ideology, even after the recent election victory of a pro-nuclear party. But all of these reactionary forces, taken together, are receding under the onslaught of facts that are too strong to be distorted or denied forever. All around the world, old-school anti-nuclear environmentalism is being eclipsed by a new realism that recognises nuclear energy’s essential virtue: its capacity to deliver cleanly generated power, safely, reliably and on a massive scale. The true environmental problem For the nuclear industry – from uranium miners, to technology vendors, to plant constructors – this expansive outlook offers a promising future. But for serious environmentalists, projections can provide little comfort – not because nuclear energy is growing, but because it is not yet growing fast enough to play its role in the clean-energy revolution the world so desperately needs. The urgent imperative of a global clean-energy revolution is evident to any literate person who is not in a state of psychological or political denial. Fossil fuel combustion is pouring carbon dioxide into the atmosphere at the rate of 25bn tonnes a year – or 800 tonnes a second – and this rate

The US National Oceanic and Atmospheric Administration’s Atmospheric Research Observatory at the climate monitoring and diagnostics laboratory in Boulder, Colorado. Climate experts say we are heading rapidly towards a point of irreversible, catastrophic climate change

3

World Energy in 2006

has not yet been slowed by either rhetoric or negotiation. Top climate experts say we are heading rapidly towards a point of irreversible, catastrophic climate change that could bring: U Rising global sea levels, starting with a few inches, but eventually reaching 250 feet; U An end to the Gulf Stream and its benign warming effect on North America and Europe; U An accelerating loss of biodiversity throughout the world; U Widespread drought and extreme weather turbulence; U A global epidemic of pestilence and disease; and U The disruption of human civilisation.

A global clean-energy revolution cannot be achieved without a huge expansion of nuclear power These warnings come from scientists who judge that the only hope of averting this calamity is to shrink worldwide greenhouse gas (GHG) emissions by 50-60% over the next 50 years. And this must be accomplished alongside an enormous surge in human population and economic development that will triple world energy consumption. The starting point for action must be agreement on a basic premise that emerges from every authoritative analysis: a global clean-energy revolution cannot be achieved without a huge expansion of nuclear power – to generate electricity, to produce hydrogen for tomorrow’s vehicles and to

desalinate seawater in response to the world’s rapidly emerging fresh-water crisis. Meeting legitimate public concerns A fair assessment of “public concerns” often cited in the media shows that not one poses a reasonable obstacle to a global expansion of nuclear power: U Proliferation. Nuclear proliferation remains a global concern and much can be said about how best to deal with the few rogue nations that may seek atomic weapons by constructing facilities that can produce weapons-usable material. The industry stands ready to work with the International Atomic Energy Agency (IAEA) and national governments in exploring ways to curtail this risk. But the essential truths are that: the proliferation danger is inherent in nuclear knowledge, but dependent on the intent of governments; the global non-proliferation and safeguards system effectively curtails any link between civil and military programmes, and helps to detect and deter illicit nuclear activity; and any proliferation-risk would be unaffected even by a 20-fold increase in the global use of safeguarded nuclear reactors to produce clean energy. U Operational safety. The industry has met the challenge of operational safety through technological advances and a global nuclear safety culture that draws on some 12,000 reactor-years of practical experience. Just as the nuclear NonProliferation Treaty is a great feat in traditional diplomacy, the creation of the World Association of Nuclear Operators (WANO) – with its

Loviisa nuclear power plant, Finland. The nuclear industry’s greatest responsibility is to maintain and build on its already impressive safety record. Photo courtesy Fortum Corporation

4

Nuclear energy

network of safety co-operation encompassing every power reactor worldwide – represents an historic attainment in private-sector diplomacy. The nuclear industry’s greatest responsibility is to maintain and build on its already impressive record of safety. u Cost reduction. The industry’s steady reductions in both operational and capital costs are fast moving to a future in which nuclear power will emerge as a clear winner on the field of affordability. These gains are occurring even without consideration of environmental effects. Once governments begin to introduce serious emissions penalties – through emissions trading or carbon taxes – the balance will tilt even faster. Today, nuclear power can easily dominate any market that imposes a real price for environmental damage. u Waste management. Industry and governments have the joint task of building public recognition that, contrary to common perception, waste is nuclear power’s greatest comparative asset – precisely because the volume is minimal and can be safely managed without harm to people or the environment. For its part, the industry has amassed an impressive record that includes: safe disposal of all low-level waste; safe interim storage of all other end products from nearly a half-century of nuclear plant operations; and safe transport of radioactive waste, with more than 20,000 containers of highlevel waste and used fuel having travelled safely over a total distance of 20m miles without a serious radioactive release. Major responsibility now lies with governments. A strong scientific consensus favours deep geological repositories as a safe and affordable means of achieving long-term storage of nuclear waste and used nuclear fuel. It is the duty of governments – following the lead of Finland, Sweden, Russia and the US – to summon the political will to implement this crucial component of the nuclear fuel cycle. Accelerating the nuclear renaissance Meeting legitimate public concerns about nuclear energy is necessary – but not nearly sufficient to drive a nuclear renaissance that must attain global dynamism if the clean-energy revolution is to be achieved. In three distinct areas, governments must take decisive action to develop an industry that stands – in terms of operational and technological maturity – fully primed for the major growth the environmental challenge demands: u Construct a comprehensive global regime. The first necessity is to move beyond the Kyoto Protocol on climate change to construct a truly comprehensive, long-term climate regime that yields strong political signals – and economic incentives – for a worldwide transformation to clean-energy technology. To be both effective and politically feasi-

ble, any such treaty must include all major nations, developed and developing, and must embody some variation on the principle of contraction and convergence. Contraction means the agreement must produce, over a span of decades, a global reduction in GHG emissions of around 60%. Convergence means the agreement must adopt the principle of equal per-capita emission rights. The principle of equal emission rights is far from utopian. As a matter of political reality, it is the only feasible principle for a global agreement and involves a concession from south to north by accepting the considerable environmental damage already done by developed countries. Additionally, the gap between actual emissions and emissions rights provides the potential for a dynamic international trading mechanism that will promote universal efficiency in clean-energy investment, while producing a large net flow of such investment from north to south.

Governments must take decisive action to develop an industry that stands fully primed for the major growth the environmental challenge demands From a northern perspective, this economic assistance will be the most cost-effective in history if it helps to prevent the globally destructive growth in GHG emissions that might otherwise occur in the developing world. For years, economists have developed models of win-win welfare maximisation among parties with very different characteristics. A global climate-change regime must now apply this body of learning to produce collective action aimed at the most dangerous energy security challenge ever faced by humankind. u Elevate nuclear investment to a national and international policy priority. The second necessity is to shape national policies and international institutions to support nuclear investment directly. Over the long-term, nuclear power is competitive. But two factors weigh against nuclear investment: the short-term bias of deregulated energy markets and the fact that 21st century nuclear reactors have not been built in sufficient numbers to achieve economies of scale. As a step towards energy independence and as an urgent environmental imperative, governments must take steps to incentivise immediate nuclear investments. This pump-priming can be achieved by a temporary production subsidy, by absorbing some first-of-a-kind-engineering costs, or just by redistributing these costs from pioneers to those who follow. Among the tools that can be used are loan guarantees, accelerated depreciation, and production and investment tax credits. For the last decade, such tools have been widely used to subsi-



World Energy in 2006

dise renewables. It is now time to apply the same tools to a technology that can deliver clean energy on a massive scale. The goal is not to subsidise long-term nuclear operations, but to accelerate the nuclear renaissance for reasons of national interest and the environment. A similar rationale applies, at the international level, among the global institutions established a half-century ago to meet urgent developmental needs. It is a fundamental failing of the UN system that, at this crucial juncture, all of its major development institutions continue to embrace, or to be intimidated by, old-school anti-nuclear environmentalism. The IAEA stands isolated and alone in working to promote the peaceful uses of nuclear energy. While an unprecedented global crisis intensifies, others fiddle in a safe cocoon of political correctness. Governments must direct the World Bank and the UN Development and Environment Programmes to act in pursuit of a clean-energy vision in which nuclear power holds a central role. u Preparing the nuclear profession for a nuclear century. A third imperative on which governments must act is to apply the concept of nuclear investment to the human level – by stimulating and supporting enrolments in the study of nuclear science and technology. The nuclear profession must be readied for a nuclear century. There is an enormous disparity between the unfolding nuclear renaissance and the pace at which a new generation of nuclear scientists and engineers are being educated. In many nations, the decisions of students choosing career paths are not yet informed by recognition of the value of nuclear energy and the inevitability of its sharply expanding use worldwide.

There is an enormous disparity between the unfolding nuclear renaissance and the pace at which a new generation of nuclear scientists and engineers are being educated Eventually, market forces will rectify this disparity between the demand and supply for skilled nuclear personnel. But a failure to be pro-active in stimulating nuclear education will make the correction inefficient and delay the nuclear renaissance. To help point the way towards a globalising nuclear profession, the World Nuclear Association has worked with the IAEA, WANO and the OECD’s Nuclear Energy Agency to create the World Nuclear University (WNU). The aims of the WNU’s worldwide partnership of leading institutions of nuclear learning are to: u Enhance nuclear coursework at participating institutions worldwide; u Establish widely accepted global standards in academic and professional qualification; and u Elevate the prestige of the nuclear profession.



To support this institutional co-operation, what is urgently needed is a major global infusion of scholarship funds for study in nuclear science and technology. Governments around the world should marshal their own resources – and summon the support of the great philanthropies – if a professional global cadre is to be developed that can apply nuclear technology successfully to meet a desperate world need. An indispensable technology Technology is spurring a growth in world population and energy consumption that jeopardises the future of the planet. But the technological ingenuity that is propelling a world crisis can also be our salvation – if it is used wisely. The global nuclear industry is the repository of a technology that will be indispensable if humanity is to preserve the environment that enabled civilisation to evolve. Governments must emerge from postures of timidity and equivocation to act decisively in support of that industry. u

Comment Barry Worthington, Executive Director, US Energy Association

The World Energy Council (WEC) has stressed that global policymakers must keep all energy options open – a reference, in part, to sovereign nations choosing to forgo the nuclear option. Our industry should be cautious relative to several concerns: u Dismissing our critics – we did this in the past and it hurt us terribly; u Over-hyping one technology over others; u Basing our arguments on over-stated extreme viewpoints; u Pitting one fuel, or one technology against others; and u Recognising that some countries will be ill suited to adopt certain technologies. These considerations apply in discussing liquefied natural gas (LNG) facilities, hydrogen and integrated gasification combined-cycle (IGCC) technologies, wind and, yes, nuclear generation. Many well-informed industry experts are convinced that, going forward, we will need every volume of energy resources from every source possible, including increased energy efficiency. Government actions, including incentives, should be applied to all technologies and all fuel sources and let the market, not government, choose which are winners and which are losers.

Investment

Reaching the $17 trillion target Michael Bray, Partner, Energy and Natural Resources, KPMG With $17 trillion of investment required to meet energy demand by 2030, a critical factor to raising the capital to fund the investment is the visibility and clarity of attractive and viable investment propositions, enabled by an effective business-reporting and communications strategy In its most recent world investment outlook, the International Energy Agency (IEA) forecast a global energy investment requirement of $17 trillion through to 2030, or an annual average of around $0.55 trillion, if the number of people without access to electricity today – some 2 billion people – is not to increase. (The investment level would need to be significantly higher to create access to electricity for many of the people without supply today.) That annual average requirement is very high relative to capital-raising levels in the sector, which were around $230bn in 2003. However, the IEA predicts it should be possible to close that gap – that the future success of the energy sector will not necessarily be constrained by access to sufficient capital. A critical success factor to raising sufficient energy capital through to 2030 is the visibility and clarity of attractive and viable investment propositions, enabled by an effective business-reporting and communications (BRAC) toolkit to differentiate between competing propositions. Businesses striving to make investment propositions visible and clear, and show them to be superior to competing propositions, do so in the face of limitations in today’s financial-reporting model; short-term perspectives dominating capital markets; immense cross-sector capital competition; technological and other energy market changes; and threats to corporate reputations and security of licences to operate. The energy sector cannot wait for regulation to require change, or for cross-sector forces to drive it. If reporting and communications reform do not occur urgently in the energy sector, there is a large risk that the required investment will not be achieved, which may have huge financial, economic, social and environmental consequences. One of the critical success factors for the sector in meeting the investment challenge is a new model of businessperformance reporting and communications. Establishing the right conditions There are a number of forces that can significantly complicate raising capital in the energy sector, including: u Effects of commodity-price and foreignexchange volatility on performance; u Technological and other risks associated with new projects, with longer lead-times in increasingly remote and sometimes foreign locations; u Significantly increased costs, notwithstanding higher commodity prices;

 Concerns about the social and environmental sustainability of energy investments; u Governments channelling profits from energy businesses into non-energy sector uses for policy rather than financial reasons; and u Existing financial-reporting rules favouring other industry sectors relative to energy, or having unintended consequences in the energy sector. u

If reporting and communications reform do not occur urgently in the energy sector, there is a large risk that the required investment will not be achieved Existing BRAC frameworks generally are not effective in isolating the impact of many of these conditions on past and likely future performance. Much of the projected investment in the energy sector until 2030 will probably be directed towards larger, longer-term and/or higher-risk projects than in the past. Under International Financial Reporting Standards (IFRS), these investments will either be: Expensed (largely) immediately in traditional accounting reports so as to comply with accounting rules if they relate to exploration, evaluation or research. The expensing of activities – generally regarded as making a positive contribution to an organisation’s sustainable net wealth, and being in accordance with its business strategy – may result in these activities being reported as if they were negative events. That is, their accounting treatment reduces the primary-performance measure in the historical cost-reporting model – the accounting profit. The activities underlying these expenditures may be critical elements of the organisation’s business strategy, be highly valued internally and externally and be essential to the organisation’s long-term business performance; or Capitalised as development assets, meaning a long and slow manifestation of returns on investments in an accounting model based on historical cost and measuring past performance. A record of accountability for the past is a critical element Michael has 25 years experience in providing audit and advisory services with KPMG, principally in the energy industries. He is a member of the WEC’s Communications & Outreach Committee.



World Energy in 2006

of the effective operation of capital markets. An account of the past, however, provides little basis on which stakeholders can build decision-support models about likely future performance. The move to IFRS is not assisting in this area from a capital-allocation perspective. While the need for an industry accounting standard is acknowledged, the end product is likely to take some time to produce. In addition, US capital markets – probably the key source of energy finance – do not use IFRS, other key markets have adopted variations in IFRS and certain IFRS standards are having apparently unintended consequences in the energy sector. And some state- and privately owned enterprises in countries important to the energy sector do not produce financial statements under accounting standards.

While the need for an industry accounting standard is acknowledged, the end product is likely to take some time to produce The IEA says that to achieve the energy sector’s $17 trillion investment requirement to 2030, capital markets must be able to reward industry participants for their technological successes and contribution to social, environmental and economic sustainability, in addition to their financial performance, by recognising longer-term financial performance effects. Conversely, sustainability stakeholders need to understand how strong social, environmental, economic and technological performance is consistent with strong financial performance. Today, amounts spent on environmental, social, economic and technology matters are not available in any consistent format, but are almost certainly expensed in many instances, providing no indication of value created either from a capital or reputation perspective. Corporate social responsibility (CSR) reporting has yet to be effectively and widely integrated to clearly portray the value of delivering on sustainability goals, not to mention integrating it with financial reporting. This begs the question of how an investor is able to measure the value generated by amounts spent on environmental, social and technology matters. The financial-reporting model has evolved over many years. Over time, new layers of information and reports have been added to its historical cost foundation in order to meet new regulatory requirements and changing stakeholder information demands. Voluntary disclosures in other reports and market communications – for example, key performance indicators (KPIs) measuring value drivers and return on investment – are generally not comprehensive, comparable, consistent or strategically aligned and so do not compensate for the negativity implied by financial reporting. Consequently, they provide no clarification of the strategic contribution or value created by strategic investments.



Today’s reporting also typically contains poor navigation and linkages between regulated, voluntary and CSR reporting. While some leading energy organisations have made considerable progress in improving reporting clarity and linking reports and communications, for many others it is still difficult for key stakeholders to find the information they need to drive their decision-making models, even if it is reported. There is often scepticism between stakeholder groups as to the reliability of information received, or the effective use of information given. Stakeholders often argue that the required information is not reported effectively. The capital markets refer to obscurity or lack of context regarding critical information, in addition to gaps in that information. Chief executive officers, on the other hand, often argue that the market does not understand their business model, performance or prospects. The result is a business-reporting framework that struggles to paint a clear picture of strategy, performance, value and prospects. This is hardly conducive to promoting the required hike in energy-sector investment to 2030, awarding capital to competing energy projects according to their value propositions. Promoting investment Implementing a new-look BRAC framework may, for many businesses, represent a radical change from the regulation-driven, financial-reporting model of today. Such a change is unlikely to come from legislation, regulation, accounting standards or precedent, at least not in the short-term, although some regulatory drivers exist to help improve financial reporting. Change will occur only because it is generally recognised that change is a strategic imperative if the $17 trillion energyinvestment requirement is to be raised. BRAC must be viewed as a source of competitive advantage in the race for capital, a key capital-management tool to promote energy-sector investment. To drive change, the sector should adopt a new mission for BRAC: promoting more than $17 trillion in energy sector investment at an equitable cost of capital between now and 2030, while maintaining sound reputations and licences to operate – collectively referred to in this paper as businessperformance rewards (BPRs). Optimising BPRs means helping to ensure stakeholders make appropriate decisions based on an understanding of the organisation’s strategy and business model, and a balanced insight into its performance and outlook. Reporting needs to articulate: the business strategy; performance in implementing the strategy; insights about the drivers of and risks threatening successful execution of the strategy; and the outlook for the future if the strategy is well executed. Effective reporting alone is not enough – it must be complemented by effective communication. Communications must focus on expressing these

Investment

performance aspects to key stakeholders so that they can build them into their decision-making models. Stakeholders can have a strong understanding of the business strategy and business model; synchronise their decision-making models with the business model; and apply the performance insights gained from the reports to help improve the precision of their decision-making processes. Comprehensive and integrated BRAC, focused on optimising BPRs, uninhibited by the limitations of the traditional financial-reporting model, can meet all stakeholder needs and balance all stakeholder perspectives. When achieved, it could be said that the Performance:Reward Equation is in balance (see Figure 1). Adopting an investmentenhancing BRAC model, based on the Performance:Reward equation should result in a balanced portfolio of business reports and communications. The portfolio of business reports and communications must be comprehensive, flexible and navigable, with clear links between and within the business reports and communications portfolio, and distributed in the correct formats and through the right channels to drive stakeholder decision-making models. It should comprise: A flagship business-performance report – focused on the unique strategies and differentiating features of the business and its performance, covering: The organisation’s strategic objectives, performance drivers (such as strategic management, people, business processes and infrastructure), KPIs, risks, risk management, governance and strategic initiatives; Implementation performance in each of these areas; and Insights explaining past performance and the performance outlook, assuming the strategy is well executed. This implies specific reporting on the dynamic interplay between all of these factors – in other words, reporting on the performance of the business model. In this way, stakeholders can gain an appreciation of the strength of the business model in terms of velocity (speed of the business processes), vulnerability (to shocks from business risks), versatility (flexibility and agility in the face of changing external forces and market conditions) and volatility (consistency of business processes in the face of change); Aligned special-purpose reports (SPRs) meeting legitimate stakeholders’ needs. The legitimacy of key stakeholders should be clearly established. Their decision-making models need to be understood, dissected and stimulate the design of what to report, who to communicate with and when. The starting point for stakeholders should be the flagship business-performance report, as it conveys the balanced picture of the business, its performance and its outlook. However, various legitimate stakeholders may have more specific information requirements – maybe in defined areas, such as reserves reporting, sustainability delivery, produc-

tion and exploration reports – and maybe at greater depth than is covered in the flagship report; and Tailored communications templates – meeting the format and content requirements of key stakeholders. Communications with stakeholder groups can be tailored using a selection of reports from the portfolio, building them into the appropriate templates and choosing the appropriate distribution channel (paper, internet, presentation) for the message at hand. This approach helps to ensure communications are clear, concise, objective, complete, accurate, timely and consistent. Audit assurance can be obtained on the reliability of the flagship business-performance report, SPRs (particularly their consistency with the flagship report) and stakeholder communications. Each key stakeholder can have confidence that the reports and communications they receive are derived from the common starting point of the flagship business-performance report.

The portfolio of business reports and communications must be comprehensive, flexible and navigable Implementing the framework It may take some years to complete the transition to the new BRAC model. An extended implementation period is desirable given the complexity of transition, the dynamics of the energy industry and key capital markets, and the number of players involved. Significant trade offs may need to be evaluated in moving forward, for example, regulations requiring significant changes in financial reporting (such as IFRS) and governance (such as Sarbanes-Oxley legislation in the US). However, these reporting and governance developments may in many circumstances make only a relatively small contribution to building the conditions for adequate 25-year investment in the energy sector. Figure 1: Performance:Reward equation Performance = Reward Reporting

Communications

Strategy (S)

Understanding (U)

Performance (P) Insights (I)

Capital

Synchronisation (S) Precision (P)

Licences to operate

Reputation

Source – KPMG

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World Energy in 2006

What is required is the creation and implementation of a BRAC strategy that integrates a business’s overall strategy, performance and outlook with the way in which key stakeholders make decisions about the business. The strategy should articulate how BPRs may be balanced and when, by providing a portfolio of reports and communications that are understood by stakeholders and used effectively in their decision-making. Precision is essential. While competing with others in the sector based on business models and competitive advantages, at the same time they can compete for capital with businesses in other sectors and assist the sector overall in attracting sufficient capital in the face of stiff competition from other sectors. It is likely that key stakeholders may require assurance that organisations are presenting a balanced performance story and not just emphasising the good news. A commitment to communicating a balanced performance story must be an essential component of the BRAC strategy.

Many leading energy firms are well down the track of implementing new approaches to business-reporting and communications Many leading energy-sector businesses are already well down the track of implementing new approaches to BRAC. Significant progress has been achieved in the clear articulation of business strategies, reporting of financial and non-financial performance outcomes, and positioning business-performance reports with sustainability reports. Less progress has been made by even the most sophisticated businesses on: u Reporting KPIs measuring performance drivers, business risks and their management; u Reporting dynamic linkages between performance objectives, drivers and outcomes; u Structuring business reports and communications as a navigable portfolio; u Effective use of alternative report-distribution formats and technologies; and u Use of extended audit assurance on the business reports and communications portfolio. Communications reform is, in general, less well

developed than reporting reform at this stage. Significant progress has been made by some leading businesses in prioritising communication efforts to the level of stakeholder influence, helping to improve the clarity of existing communications, matching communications channels and formats, and constructing decision-making models from reports articulating business strategies. Less progress has been made in the synchronisation and precision areas. By implementing a new BRAC framework, the energy sector will have established one of the necessary pre-conditions for raising the required $17 trillion. There is a diverse group of interested parties that must take defined responsibilities for implementation (see Table 1): The World Energy Council (WEC) – as the energy sector’s peak body, and the body responsible for analysing and brokering solutions to global energy issues, the WEC has a central role in representing the interests of the sector at large. The WEC should take the role of sponsor, setting the stage and having interested parties understand the issues; facilitating the sector in adopting a mission for reporting and communications; encouraging the early adopters to help the followers; and driving change through regularly measuring progress towards the $17 trillion target. The WEC’s Communications and Outreach Committee is looking at this very issue. Energy businesses – energy-sector leaders may need to be the early adopters of new BRAC frameworks. They are likely to be the businesses that can bring many of the requirements for change together most quickly – a realisation that their long-term business survival can be at stake; recognition that there are solutions that do not first require regulation, but do require a highly strategic orientation; and the financial and intellectual resources to implement. Investors – just as leading energy-sector businesses may need to be early adopters of new BRAC models, investors in the sector may need to be leading advocates of BRAC reform on the basis of the potential improvements in their decision-making that should result. Many sector investors and investor-support groups are already well down the track of incorporating new reporting from energy

Table 1: Role-allocation model Players World Energy Council Accounting profession Energy businesses Capital markets Developing countries Environmental and   social stakeholders Governments Regulators Source – KPMG

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2006 R&C mission Thought leadership Adopt mission Adopt mission Monitor Monitor

2007 Working group Working group Conformance rewards Review progress Working group Special-purpose reports

2008 Lead and oversight Preferred model Performance rewards Performance rewards Join WEC programme Performance rewards

2009+ Cross-industry Audits WEC case studies WEC case studies Energy sector rewards Energy sector rewards

Monitor Monitor

Encourage Buy-in to mission

Govt Businesses Promote

Legislate Regulate

Investment

businesses into their decision-making models and processes. There is much to be gained by investors working with energy businesses as they pursue the further benefits described earlier. Governments – governments must create the right conditions for implementation of new BRAC frameworks. One critical requirement may be removing or limiting the impediments of capital markets and regulation. Another may be helping to ensure energy businesses do not face huge litigation risks in progressively adopting new BRAC frameworks. Even in the absence of moves to IFRS, new standards of corporate governance and Global Reporting Initiative conformance, emerging and smaller nations must be prepared to encourage their energy businesses to seek great clarity in their reporting and communications as they try to join a level playing field in the global capital race. Many have an abundance of resources or a lot of untapped demand to be met.

By implementing a new BRAC framework, the energy sector will have established one of the necessary pre-conditions for raising the required $17 trillion Regulators – in major energy nations (those with abundant resources, significant unmet demand or major capital suppliers), regulators must work with the WEC and buy into the energy sector’s reporting and communications mission. They need to appreciate that IFRS and regulated and incremental reform in financial reporting and governance cannot alone make the difference. In conjunction with governments, they must create the conditions for experimentation early on and work through appropriate regulatory mechanisms beyond that. Non-governmental organisations (NGOs) – new BRAC frameworks, particularly the flagship business-performance report, may be critical in ensuring NGOs buy into capital markets awarding a sustainability dividend to energy businesses. This may be on the basis of evidence that good business performance equates to sound performance from the perspective of sustainability objectives. NGOs should encourage new models of business-performance reporting and communications. They should also work with energy businesses in agreeing SPRs. Fit-for-purpose BRAC is a critical success factor for financing the 25-year energy-sector investment requirement. Today’s reporting framework is not fit for this purpose. A new BRAC framework is urgently required to: sustain current capital levels; lift them to levels underpinning the 25-year annual average requirement; and maintain annual levels in the face of unforeseen circumstances and further challenges. The desired framework can be summarised as: u A BRAC strategy founded on the Performance:Reward equation to drive reporting and communications fit for the purpose of individual businesses;

 The strategy specifies a portfolio of tailored reports and communications, comprising a flagship business-performance report and SPRs agreed with key stakeholders, supported by assurance on them; and u Implementation of the strategy is driven by assigning roles and responsibilities as set out in the BRAC strategy. By implementing a new BRAC framework, the right conditions will have been created for individual businesses to raise enough capital to execute their business strategies at a reasonable cost, and for the sector and businesses in it to have maintained their sound reputations and protected their licences to operate. The energy sector will then have established one of the necessary pre-conditions for raising the required $17 trillion. u u

Comment Norberto de Franco Medeiros – WEC ViceChairman (Latin America and the Caribbean)

The evolution of energy consumption in Latin America and the Caribbean (LAC) is highly dependent on politics. Energy developments have varied from a laissez-faire approach, to a state-owns-all concept. Each country has a distinctly different energy sector. The International Energy Agency (IEA) forecasts a global energy investment requirement of $17 trillion up to 2030, equivalent to 1% of global annual GDP. This investment would maintain and expand energy supply to ensure the number of people without access to electricity today – some 2 billion people – does not increase. With a high urban population – over 70% of the total lives in large cities – LAC demand is around 7% of total world energy production. If we assume around 8% of the global energy investment requirement will come from LAC, it is the equivalent of 2.2% of the region’s total GDP. Financing the required investments in developing countries and transition economies is a pressing challenge. Their financial needs are larger than OECD countries, both in absolute terms and relative to the size of their economies. At the same time, investment risks outside the OECD are higher, particularly for domestic electricity and downstream gas projects. Governments will play a vital role in creating favourable conditions for energy investment. Increasingly, they will need to adopt policies and set conditions to attract investors, pay greater attention to overall policy, legal and regulatory frameworks, and find ways to lower barriers to investment.

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World Energy in 2006

International interests and tensions Enno Harks, Senior Expert, Energy & Resources Research Unit, Department of Global Issues, SWP – German Institute for International and Security Affairs World energy demand is projected to increase heavily over the coming decades and as the import dependence of consuming nations increases, international competition for dwindling reserves will gather pace Energy supply and concomitant supply security have returned to the political agenda, settling in as a top priority in recent years. Stable oil and gas markets in the 1990s made politicians believe the energy-security problem had disappeared. But, from the 1998 Asian financial crisis and the consecutive oil bust onwards, world events have succeeded each other in a frantic manner. After the bust the market saw: u The rebirth of OPEC; u Strikes in Europe in 2000, over what were perceived to be high gasoline prices; u The 11 September 2001 terrorist attacks in the US creating question marks about future developments in the Middle East; u The Venezuelan oil-workers strike of December 2002 that cut production to close to zero; u The invasion of Iraq in 2003 and continuing military intervention in the country; u A large and unexpected Asian demand rise; u Hurricane damage to US Gulf of Mexico oil and gas production and refining infrastructure; u A strained world refining situation; and u Oil prices settling around $65-70 a barrel. Similar pressures have built up in world gas markets, as gas prices are mostly indexed to oil. Consumer nations in Europe started to point the finger at the excessive market power of some distributors and gas lost its innocence in the RussianUkrainian gas dispute at the beginning of 2006. While some of these events were symptoms of ongoing circumstances, the rise in prices to previously unknown levels and the rise of Asian, and particularly Chinese, demand have increased politicians’ awareness. Demand and supply of energy have moved to the top of the political agenda and policymakers draw dark pictures of future scenarios.

Demand and supply have moved to the top of the political agenda and policymakers draw dark pictures of future scenarios Asian demand bull Strong Asian oil demand has been the most noteworthy development of the last few years, in terms of pure market metrics as well as in political terms. World oil demand rose by 5.6m barrels a day (b/d) from 2002 to 2005 and is predicted to continue with another 1.8m b/d rise in 2006, according to the International Energy Agency (IEA). Some

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27% of this incremental world demand originated from China, which surpassed Japan as the world’s second-largest oil consumer in late 2004. In parallel with annual GDP growth of 8.5% from 2000-2004, Chinese oil demand has risen by 8.4% a year. Considering that China was an oil exporter only 12 years ago (see Figure 1), the market was taken by surprise. This fast-paced development raises the question of its sustainability and whether demand-side strains on the market will continue. If history is a guide, it can be assumed that China’s oil-demand growth (and imports, as production has been stable) will continue, at least in the medium term. Figure 1: Chinese oil demand million b/d 8 net exporter 7 6 5 4 3 2 1 1Q1986 1Q1991

net importer

1Q1996

1Q2001

1Q2006

Source – International Energy Agency

Two predecessors followed a similar development path: Taiwan and South Korea, which both had booming GDP growth rates of 7.5% a year from 1980 to 1997. Oil consumption growth was 4.3% in Taiwan and 8.7% in South Korea – comparable with the development of China between 2000 and 2004. For Taiwan and South Korea, however, this development lasted for more than 15 years. Accordingly, there is reason to believe Chinese demand will continue to grow for a number of years. Enno Harks serves as a senior expert to the SWP, a chancellor’s office advisory body. Prior to this, he worked as an energy analyst at the International Energy Agency on issues of oil and gas supply.

Supply and demand

The growth rates in energy consumption in China and also India are one consequence of the dramatic changes in industrial structure in those countries, brought forward by a stringent mixture of development and globalisation. Development has enabled primary industry to grow, in itself a traditionally energy-intensive process, while globalisation has allowed industrialised countries to outsource increasing amounts of their heavy industry to Asia. In the process of moving from primary to servicesector industries, OECD countries have been transferring energy-intensive production processes to Asia – contributing to the huge demand increases. Figure 2: World total primary energy supply 2003 = 10.72bn toe

2030 = 16.27bn toe

11%

12%

2% 6%

24%

2% 5%

23%

21% 36%

24% 34%

Renewables Hydro

Nuclear Natural gas

Oil

Coal

Source – International Energy Agency

Moreover, much of the incremental Chinese and Indian oil demand in the coming years will be the result of intensive motorisation of the population. With an average of less than 20 cars per 1,000 inhabitants in 2005, China has plenty of potential for growth (US car ownership is 800 per 1,000) before it reaches saturation. Additionally, with continuing economic development, new sections of the population are only now reaching the level of income at which expensive durable goods (such as cars) are usually bought. However, one caveat exists: development of motorisation and, consequently, oil demand increases are highly dependent on the oil price and its volatility, much more so than in mature economies. This is because low-income economies (as China and India still are) have a high price-elasticity of demand and high oil intensities. Traditional OECD market-relevance fading Total world primary energy demand is projected to increase heavily over the coming decades (see Figure 2). According to IEA forecasts, energy demand is set to rise by 60% in the period up to 2030. Oil will still lead the world’s energy mix in 2030 (34%), while gas will have taken over as the world’s second-largest energy source, outstripping coal (see Figure 2). Over this period, Chinese oil demand will rise from 5.2m b/d to 13.3m b/d, while India’s will rise 115% to 5.6m b/d. Two main challenges follow from this projection:

 As oil will still be the major energy source in 2030, major efforts must be made to supply markets with the quantities necessary and to provide for a secure supply environment. This requires considerable investment in upstream and downstream capacities, which opens up a discussion about whether market forces will be granted access to the bulk of remaining reserves, or whether output-capacity decisions will be made solely by producer states. This demand scenario also questions the investment behaviour of OECD countries over refining capacity – a bottleneck that is a fundamental driver of prices; and u As more than 75% of the increase is projected to stem from non-OECD countries, markets will see a fundamental inversion on the demand side. While in 1971, 62% of total world energy demand came from the OECD, this share shrank to 51% in 2003 and is set to fall to 42% in 2030. On the oil market, this change is even more pronounced, as the OECD share is set to fall from 74% to 47% of world demand over the same period. Consequently, today’s top consumer nations must make room for the demand and concomitant supply concerns of industrialising nations, especially India and China. The fundamental consequences of this change may be, more than pure market metrics and the adaptation of economic agents, a tangible accentuation of divergent geopolitical interests and political tensions. u

Increasing import dependence The huge expected increase in world demand raises the question of how consumer nations will satisfy their energy needs. Following the first oil-price shock, in 1973, consumers searched for oil in other parts of the world to reduce dependence on imports from the Middle East. As collateral of high prices, exploration and development of new production has proved highly successful, leading OECD countries to produce almost half Figure 3: Oil output in consumer regions million b/d 15 12 9 6 3 0 2004 Other Asia China and India

2030 OECD Europe and Pacific OECD North America

Source – International Energy Agency

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World Energy in 2006

their oil consumption domestically. However, this calming trait has come under pressure, as increasing demand has been confronted with stagnating domestic production in recent years, causing oil self-sufficiency to decline from a peak of 47.5% in 1997 to about 40% in 2005. And this trend is likely to continue. Domestic production in the main consumer regions is set to decline heavily over the coming decades – which holds true for OECD North America, the rest of the OECD, and the booming demand regions of India and China (see Figure 3. Declining production may be smaller when non-conventional oils, such as Canada’s oil sands, are included – see article p23).

Production capacity in consumer nations depends on oil prices, as high-cost production and non-conventional oils will come on stream if prices allow Production capacity in consumer nations depends on oil prices, as high-cost production and non-conventional oils will come on stream if prices allow. So, the higher the price, the more production will occur outside OPEC and the former Soviet Union (FSU). However, the depicted production scenario already embodies a rather high oil price of $65/b in 2030 (nominal), and even high-price scenarios of $86/b in 2030 do not change much of the picture for OECD countries. For the OECD, the share of domestic production is projected to dwindle to less than 25% of consumption in 2030. And as import dependence increases international competition for reserves will gather pace. Concentration of remaining reserves This puts a spotlight on the location of remaining oil and gas reserves and their concentration in a handful of countries. Two-thirds of the remaining oil reserves are in the Middle East and three-quarters of gas reserves are in the Middle East and FSU (see Figure 4). This regional concentration, which is exacerbated as resources elsewhere deplete, raises concerns for consumer nations. This is not only because of the political conundrum of heavily divergent interests in the region that lead to the expectancy of (further) instability, but also the result of the lack of access by market forces to the reserves. In most Middle East countries, upstream policies prohibit access to reserves for international oil companies (IOCs), excluding market allocation of funds and technology to capacity and investment levels. Consequently, sub-optimal extraction paths are chosen, which ultimately lead to higher prices. With the extraction-path decision resting uniquely with the state, discussions about the optimal production path will be heated – as producer visions are unlikely to be congruent with those of the consumers. That is especially the case, as long-term considerations of resource extraction paths collide with short-term necessities of spending oil revenues for

14

political/fiscal matters in producer states. The latter is becoming especially relevant, as ruling governments in many OPEC countries are under societal pressures – such as population growth, age structure, education, and unemployment – pressures to which rulers have to bend, at least partially, to stay in power. So, while highly comprehensible from a political perspective, this behaviour can lead to capital accumulation below the critical mass necessary for investment in production capacity. This is reinforced by the belief of many observers that world oil production outside OPEC and the FSU has already peaked or is about to peak. So, oil demand increases can be dealt with only in cooperation with the Middle East’s resource owners. Latecomer syndrome The rise of the booming emerging markets on the demand-side of the energy equation increases the pressure on the geopolitics of reserves. China and India must supply energy-hungry economies and face a world in which resources are either already in the hands of Western IOCs, or are not accessible. Both countries are demonstrating latecomer syndrome: the frantic hunt for accessing and owning reserves. The consequences of this hunt have been in the news over the last couple of years, as Chinese and Indian companies have overbid for reserves, the corporate strategies of their national oil and gas companies seeming to be less capital-market bound, acquiring reserves wherever possible in Central Asia, Africa, Latin America and even challenging the home-turf of the IOCs with the attempted purchase of Unocal and Canadian oil sands plays. Figure 4: Proved gas reserves, end-2004 trillion cm 60

Total = 179.53

50 40 30 20 10 0 FSU

Iran

Qatar Other Total Other Mena OECD

Source – International Energy Agency

Leaving aside the US decision to block the Unocal deal, most problematic from a Western political perspective is the latecomers’ focus on those countries that are not dominated by the IOCs. Often these are untouched areas because of the sanctions decisions of Western governments. Chinese and Indian investment and bilateral co-operation undermine the political thrust of sanctions on countries such as

Supply and demand

Sudan and Iran. Sudan, long deserted by IOCs, has seen Chinese acquisition of oil stakes, which undermined possible UN sanctions during the Darfur crisis. Similarly, in Iran, where the notable absence of US firms offers a unique chance of acquiring access to reserves, Asian interests may collide with a solution of the nuclear puzzle. In 2004, China and Iran agreed a $100bn gas-export deal. Lost spare capacity – returning? Vanishing spare production capacity (see Figure 5 – a little over 1m b/d today), has disrupted the market’s security cushion. Among events responsible for the lost capacity are: the Venezuelan general strike in December 2002, which disrupted 3m b/d of world supplies (the country’s production is yet to return to pre-strike levels); and the US military invasion of Iraq in March 2003, which disrupted a further 2.5 m b/d of supply. On both occasions, existing spare capacity was brought on stream to replace the missing barrels. But, on top of these output losses, came the unexpected Chinese demand boom.

From a business perspective, it makes no sense to invest in production capacity that is to be left idle From a business perspective, it makes no sense to invest in production capacity that is to be left idle. Consequently, the reality of spare capacity is non-existent for market-focused oil multinationals, as it is for most other commodities, such as coal, tin and copper. Exclusively held by OPEC, spare capacity enabled the cartel to influence the market and manage a price band. However, the times of spare capacity have gone and their comeback is by no means certain, given the exploration and investment behaviour of OPEC nations. This raises concerns in consumer countries, as the lack of spare capacity increases both price levels and price volatility. And the latter has proved a real threat to the oil market, as investment decisions are heavily influenced by price expectations. Without a sufficient buffer, production and price cycles are likely to become more intense. The hidden gas guzzler A key aspect of discussions among energy experts and policymakers has been the emergence of gas, which has become a key resource in the OECD energy mix over the past few decades. Its importance is likely going to increase, due to projected demand growth both in the OECD and Asia, significant reductions in liquefied natural gas (LNG) transportation costs and concerns over the concentration of reserves – Russia, Iran and Qatar possess 60% of the world’s total reserves. From a European perspective, the gas market presents unique challenges: projected demand increases, declining/stagnating domestic production, and relative proximity to the reserves hold-

ers. Europe is the world’s largest gas-import market and the continent will retain this position in 2030. According to IEA forecasts, North America will import 140bn cm/y in 2030, China/India some 80bn cm/y and Europe around 0.5 trillion cm/y (up from 200m cm/y now). European imports will amount to more than double the other two regions together – a situation that will have profound implications for global gas markets, supply infrastructure and security and, most of all, for European interests. Russia does not plan to supply Europe’s supplemental gas demand. According to the “optimistic scenario” in the Russian government’s Energy Strategy to 2020, gas exports to western Europe will rise by around 30bn cm/y up to 2020. Consequently, Europe will have to satisfy its gas-import needs from other sources. North Africa will play an increasingly important role and so will other more remote sources (such as Trinidad). The resources of the Middle East also come into focus, because of their reserves potential and proximity. Iran and the Caspian, with 20% of proved gas reserves, are closer to Europe than Russia’s gasfields in western Siberia and will soon share a common border with the EU (Turkey). Figure 5: Spare world oil output capacity million b/d 12 10 8 6 4 2 0 1970 1975 1980 1985 1990 1995 2000 2005 Source – International Energy Agency; SWP

This change has not gone unnoticed and competition for the reserves has had a head-on start with the China-Iran gas deal. The same holds true for recent activity at the highest political level, with struggles over pipeline routes and upstream access in Russia’s far east and eastern Siberia. East Asian economies see their opportunity to be supplied gas from their neighbour, Russia – which will have to make a decision as to the direction of its future energy exports. It is not clear whether the Gordian knot of divergent energy and political interests in the Middle East will be solved in the future. What is certain is that the Middle East will become the centre of international interests and tensions – even more than in the past. And that increasing energy demand plays the central role. u

15

World Energy in 2006

International cooperation – the key to a secure, sustainable energy future Bret Mattes, Vice President, Australia/Asia Gas, BHP Billiton Gas & Power and Robert Pritchard, Managing Director, ResourcesLaw International Energy is a global commodity and successful action on key energy issues requires solutions grounded in international cooperation and collaboration. In Asia-Pacific, concerns over energy security and sustainable development have prompted two significant initiatives In 2003, the International Energy Agency (IEA) forecast that, in the next 30 years, $17 trillion (or $0.55 trillion a year) will need to be invested in the energy sector globally to keep up with economic and population growth (see page 7, Investment). This level of investment must be managed properly to ensure energy security is improved, progress is made towards the eradication of poverty and the earth’s climate is preserved. Multilateral cooperation (incorporating new partnerships between government and government, and between government and business) is fundamental to ensuring: funds are available to invest and are wisely directed; risk takers are adequately rewarded; intellectual property (IP) is protected; development is encouraged through the availability of cheap, sustainable sources of energy; and global warming is constrained.

Action on climate change that does not consider national development, cross-border competition, technology and investment issues will not work Unless governments and industry can build trust, work more closely together, and ensure the sanctity of markets, investment will be discouraged and the supply of cheap, clean, sustainable forms of energy will lag behind demand. The Kyoto Protocol on Climate Change has demonstrated at least two key truths in this regard: any paradigm that gave governments the fiat to decide policy, and then impose it without regard for commercial consequences, has reached the end of its useful life; and multilateral agreements that affect energy markets and look only at single issues in isolation are not practicable. For example, action on climate change that does not consider national development, cross-border competition, technology and investment issues will not work. Action on market mechanisms to control emissions that ignore long-term technology initiatives will not work. Energy-security agenda that ignore infrastructure, barriers to trade and the global climate will not work. And attempts to encourage investment that ignore infrastructure support and do not provide adequate incentives will not work. Heightened concerns over energy security and sustainable development have prompted two sig-

16

nificant developments in Asia-Pacific energy markets: the formation of the Asia-Pacific Partnership on Clean Development and Climate (AP6) and the launch of the Asia-Pacific Economic Co-operation (APEC) Gas Forum (APGAS). The AP6 initiative The AP6 initiative has brought six Asia-Pacific countries into a cooperative framework for the development of technological solutions to “development, energy, environment and climate-change objectives”. The purpose of AP6 is to integrate all four objectives. AP6 is complementary to the Kyoto Protocol but, unlike the protocol, it takes a nonprescriptive, bottom-up approach and focuses on long-term solutions to climate change without precluding the possibility of introducing complementary, short-term market mechanisms, such as offsets and emissions trading. The second regional initiative is specific to gas. The launch of APGAS has brought together 21 APEC members in a common search for best practice to accelerate cross-border regional gas trade. APGAS is concerned with the contribution of gas to energy security and with policies and rules that influence pipelines, liquefied natural gas (LNG) and other technologies for delivering gas to markets. APGAS aims to ensure national policies are designed to encourage markets to work and to boost cross-border trade, through constructive engagement between legislators, regulators and industry. The AP6 vision In January 2006, the US, China, India, Japan, South Korea and Australia met in Sydney to create AP6 – the founding partners collectively account for almost half the global population, half the world’s GDP The authors of this article sit on the APGAS Steering Committee. Bret Mattes is Chairman of the Australian Member Committee of the WEC and the Australian Energy Alliance. Robert Pritchard is a member of the WEC Finance Committee

Sustainability

and more than half of global greenhouse gas (GHG) emissions. AP6 is jointly pursuing “development, energy, environment and climate change objectives”. The aim is the integration of all four objectives through cooperation in technology development – however, AP6 is not concerned with climate change in isolation from the other three objectives. AP6 will complement Kyoto by providing a long-term vision for sustainable management of climate change to balance the shorter-term market mechanisms of Kyoto. It does not preclude the use of key Kyoto mechanisms, such as the Clean Development Mechanism, Joint Implementation and emissions trading. On the contrary, it provides a longer-term backdrop and vision against which the Kyoto experiment can play out. (This is the reason why Japan, for example, sees value in being a foundation participant in both approaches).

The AP6 Charter does not suggest that any single technology will be more suitable or more efficient than any other Unlike Kyoto, however, AP6 acknowledges the supremacy of the national policies and circumstances of the six partners. For both China and India, development is understandably the overriding national concern. For the developed countries that are members the priorities are different. According to US secretary of state Condoleeza Rice, AP6 addresses climate objectives in the broader context of sustainable development and energy security. AP6 technologies The technologies of specific interest to all AP6 partners relate to: u Energy efficiency (it is the World Energy Council’s position that improving energy efficiency across the whole energy chain, from exploration to end-use, is likely to generate the most immediate reduction in GHG emissions); u Clean coal; u Integrated combined-cycle gasification; u LNG; u Carbon capture and storage (CCS) – (the cost of the carbon-dioxide constraint on global real GDP if the electricity industry has access to CCS technologies would be only a quarter of the cost that will be incurred if they remain unavailable, according to the Australian Bureau of Agricultural and Resource Economics); u Combined heat and power; u Methane capture and use; u Civilian nuclear power; u Geothermal; u Rural/village energy systems; u Advanced transportation; u Building, and home construction and operation; u Bioenergy; u Agriculture and forestry;

 Hydro-electric power;  Wind power; u Solar power; and u Other renewables. The AP6 Vision Statement also lists a number of longer-term “transformational” technologies: u Hydrogen; u Nanotechnologies; u Advanced biotechnologies; u Next-generation nuclear fusion; and u Fusion energy. The AP6 Charter does not suggest that any single technology will be more suitable or more efficient than any other, suitability being always linked to country- and location-specific variables, such as primary energy availability, transport costs, fuel prices, grid availability and affordability. AP6 is not just about the research, development and commercialisation of new technologies. It is concerned with the “development, diffusion, deployment and transfer” not only of technologies, but also of technology-related practices and, in the case of gas and LNG, of policies and practices related to reducing barriers to trade. Technologies and practices are allocated to three general categories: existing; emerging; and longer-term or “transformational”. u u

Governance and organisation The governance of AP6 is entrusted to a high-level Policy and Implementation Committee (PIC), comprising three representatives of each of the six partners. The Committee has the power to invite additional partners to join AP6, but this is unlikely to occur until AP6 is properly established, with a functioning secretariat and agreement from the partners on an action agenda and set of achievable goals, and has built some credibility and level of acceptance. Once it becomes apparent that AP6 is focused on achieving real outcomes, that the IP issues inherent in technology cooperation can be solved and that significant commitments are being made by the partners in terms of money and other resources, the AP6 model is likely to become attractive to other participants, such as European countries. Membership of AP6 does not carry funding obligations – each partner contributes funds, personnel or other resources at its discretion. The US, nonetheless, will allocate $52m to establish the secretariat in the first year and Australia will allocate $15m. Australia has also committed an initial $75m to programmes, of which 25% is specifically allocated to renewable energy, and the US has indicated that a significant proportion of the $10bn research and development (R&D) fund allocated in its 2005 energy legislation will be available for projects sanctioned by AP6. Other partners have yet to announce their level of financial support. The Committee has responsibility for the overall framework, policies and procedures of the partnership and for forming task forces. All its decisions

17

World Energy in 2006

are to be made by consensus, reflecting the reality of the voluntary, non-binding nature of the partnership. An Administrative Support Group (ASG) is responsible for administrative matters and will serve as a clearing house for information. The US government will serve as the initial ASG, with the position reviewed every two years. At its inaugural meeting, AP6 adopted an innovative work plan, using government/industry task forces to pursue industry/sector outcomes through bottom-up practical action. The work plan will provide the impetus for the AP6 initiative. Eight initial public/private-sector task forces have been established for specific industry sectors (see Table 1). Other key sectors, such as transport and agriculture, may be included at a later stage. AP6 task force action plans The initial meeting of all of the task forces took place in California in April 2006, after which each task force was to formulate detailed action plans for submission to the Committee by mid-year. The task forces were to: u Review the status of their sector with regard to clean development and climate; u Share knowledge, experience and good practice; u Identify opportunities for cooperation; u Define the state of the technology in terms of cost, performance, market share and barriers, and make a detailed inventory of technology-

improvement projects that are under way; u Identify cost and performance objectives and the actions needed to achieve them; and u Identify, where possible, ambitious and realistic goals based on achievable outcomes. In today’s liberalised and internationally competitive energy markets, the overwhelming driver of decision-making is the provision of reliable, low-cost, commercially sustainable energy on the part of investors; and lower, more competitive prices to customers, coupled with sound environmental management on the part of policymakers. There will be little appetite to invest in costly new technologies if the result is to make companies less profitable and less competitive, if the IP attached to the new technologies is not protected internationally, or if there are no incentives (most obviously tax incentives) to inventors, R&D organisations and entrepreneurs to innovate and take risks. One way of overcoming the financial and commercial barriers is for governments and industry to cooperate by pooling financial and technical resources and know-how. However, the area of international technology development, technology transfer and the protection of IP is rather a muddle – characterised by practices and procedures that lack order, pattern and logic. Attempting to overcome this by seeking global buy-in from all nations is unlikely to be successful, but the AP6 has a chance to achieve real agreement and make real progress on some of these issues.

Table 1: The eight AP6 task forces Chair Co-chair Task force country country Cleaner fossil energy Australia China Renewable energy and South Korea Australia distributed generation Power generation and US China transmission Steel Japan India Aluminium Australia US Cement Japan – Coal mining US India Buildings and appliances South Korea US

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Main objectives Promote clean-coal technologies; future generation gasprocessing improvements; carbon-dioxide geo-sequestration; develop clean coal and LNG/natural gas opportunities and markets. Promote renewable energy technologies and support ing measures, such as renewable resource identification, wind forecasting, grid connection and energy storage technologies. Develop and deploy power generation, transmission and demand-side management technologies that can aid development and climate concerns. Develop benchmark and performance indicators; facilitate the deployment of best practice steel technologies. Enhance current aluminium production processes through uptake of best-practice use of existing equipment; develop best practice processes and technologies. Facilitate demonstration and deployment of energy-efficient and cleaner product formulation technologies Develop benchmark and performance indicators. Improve the economics and efficiencies of mining, processing, safety and environmental effects. Promote best practice and demonstrate technologies and design principles to increase energy efficiency in building materials and in new and existing buildings.

Sustainability

APGAS The acceleration of cross-border trade in natural gas has been high on the agenda of APEC’s energy ministers since 1998. Building on this, and on the recently increased emphasis on energy security, the APGAS forum was launched in Australia in September 2005 to facilitate gas trade by forging closer links and alliances between governments and business, and by aligning policy objectives with private-sector investment activities in supply, transportation, markets and financing. The inaugural APGAS forum, in Perth, provided the first opportunity for almost 200 participants – policymakers, regulators, investors, financiers and producers – from around the region to debate issues facing the region’s gas industry. A model for APGAS is the annual Madrid Gas Forum, held under the auspices of the European Union, which has helped its member countries to move more quickly towards a single energy market. APGAS is similar. Like AP6 (but unlike the Madrid Forum), it will be driven by public- and private-sector cooperation, collaboration and trust. APGAS was organised by a steering committee of executives from the gas industry. In October 2005, APEC’s energy ministers received the report of the first APGAS forum and unanimously endorsed its continuation.

Energy is a global commodity and successful action on key energy issues requires solutions grounded in international cooperation and collaboration APGAS is likely to be pivotal in building energy security in the region by working towards best practice in and between the region’s gas markets. Gas, unlike oil, is not a commodity that can be easily traded across borders – it requires gas pipelines, port facilities and LNG infrastructure to be installed on a massive scale and complex commercial arrangements between buyers and sellers. It is impossible for any economy to participate fully in the international gas trade without costly development of energy infrastructure, requiring large amounts of capital. Financiers need assurance that prudent, long-lasting policies are in place within exporting and importing economies that will facilitate sustainable trade. Each importing economy requires economyspecific market development and must put in place transparent regulatory support to align itself with the requirements of the global market. Gas projects require long lead times – developing a large-scale gas project often takes a decade from concept to commissioning. The challenge is to reduce lead times by putting in place policies that support investment and reduce risk. The vision of APGAS is to achieve a common understanding among the APEC economies on the actions necessary to ensure free and unhindered

gas trade. Its key goal is to enhance energy security by encouraging investment in gas and commercially sustainable cross-border trade. APGAS will contribute to this by bringing representatives of governments and business together in a forum where all can express their views and discuss their plans and aspirations. The second APGAS forum will be held on 31 August and 1 September 2006 in Perth. It will be a meeting of APEC minds on the trading of gas and LNG, its role in regional energy security, and the policy measures to speed up trade. A key topic on the agenda will be how APGAS can play a constructive and complementary role in helping the AP6 initiative develop momentum and achieve practical results. Additionally, in the case of both AP6 and APGAS, the participants recognise that success is dependent on the minimisation of bureaucracy and red tape. u

Comment CP Jain, Chairman, WEC Studies Committee

The WEC is engaged in promoting “sustainable supply and use of energy for the greatest benefit of all”. This aim is achievable, but faces enormous challenges. Nearly 2 billion people do not have access to modern energy supply and demand is growing rapidly. There is a need for greater international and regional cooperation to: attract investment; ensure energy security; optimise resources; promote efficiency; technology transfer; and protection of the environment. Through its regional programme, action plans and bottomup approach, the WEC promotes the addressing of energy issues in an integrated manner. The main challenge to meaningful intercountry cooperation and integration, however, is the perceived lack of convergence between the national energy security of individual countries and regional energy priorities. AP6 and APGAS are two initiatives that are addressing these issues from broad perspectives of technology and markets with a regional agenda that includes energy security, investment and the vision of each nation for an energy mix that will allow it to meet its particular economic growth and climate-change targets. In the context of policy initiatives and technology choices, AP6 and APGAS will have to manage a delicate balance between affordability and the need to reward risk takers to ensure a steady flow of investment. The world’s energy fraternity is looking at these initiatives and their level of success will be an excellent example to everyone facing the challenge of sustainable energy development. 

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World Energy in 2006

Fuelling the future – the transition to a global LNG market Linda Cook, Executive Director, Gas and Power, Shell Just 16 years ago, LNG was a niche product, representing only 4% of gas trade around the world, but by 2020 this share is forecast to reach 14%, as rapidly increasing gas demand drives the globalisation of the LNG sector Natural gas is fast becoming the economic and environmental fuel of choice. The last 30 years have seen the global industry almost triple in size and similar growth can be expected in the next 30, as national governments and global industry look to gas to ensure the stability and diversity of their energy supplies. Moreover, as the world searches for greener forms of energy that have a lower impact on the environment, demand for gas, the cleanest-burning hydrocarbon, is expected to continue increasing.

With a projected growth rate of around 10% up to 2015, the LNG market is increasing rapidly and transforming the way gas is traded Global consumption is expected to be in the region of 4.9 trillion cubic metres (cm) by 2030, compared with 2.7 trillion cm in 2004, with most of this growth driven by the power generation sector. This means that by the end of this century’s third decade, gas will be supplying around 25% of total energy needs worldwide. While an annual growth rate of around 3% in demand can be expected until 2015, it is liquefied natural gas (LNG) – the clear, colourless and nonTable 1: LNG exports (bn cm) % share 1995 2000 *2005 of total Algeria 18.3 26.3 25.4 13.2 Australia 9.8 10.1 15.1 7.9 Brunei 8.4 8.8 9.3 4.8 Egypt – – 7.9 4.1 Indonesia 33.1 35.7 31.8 16.6 Libya 1.5 0.8 0.9 0.5 Malaysia 12.9 21.0 29.3 15.3 Nigeria – 5.6 12.0 6.3 Oman – 2.5 9.2 4.8 Qatar – 14.0 27.6 14.4 Trinidad and Tobago – 3.5 13.7 7.2 UAE 6.8 6.9 7.5 3.9 US 1.6 1.7 1.8 1.0 Total exports 92.4 137.0 191.4 – *estimate Source – Cedigaz

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toxic liquid that forms when gas has been cooled to –162°C – that is growing much faster. With a projected growth rate of around 10% up to 2015, the LNG market is increasing rapidly and transforming the way gas is traded. This growth is driving the globalisation of the LNG sector. In 1990, there were only nine LNG production sites with 13 liquefaction trains. LNG represented only 4% of total gas trade at that time. Today, there is a very different picture. There are now 17 LNG sites, with 87 liquefaction trains, supplying 14 importing countries with over 140m tonnes a year (t/y). And this is set to grow: by 2020, LNG will represent about 17% of the world’s total gas trade. Going global In the past, LNG was predominantly imported by Asia-Pacific countries that have little or no indigenous gas resources and no access to pipeline supply. Historically, Japan has been the largest importer of LNG and is expected to remain so for some time. However, its share of the market has significantly declined to under half the global total. This has been driven by demand from countries that traditionally relied on domestic production, or pipeline imports – such as the US, Mexico, France, Spain and Turkey – as they turn to LNG to enhance their energy security. Meeting these forecasted levels of demand growth will require significant investment. The International Energy Agency forecasts around $2 trillion will need to be invested in gas infrastructure in the first 30 years of this century. This infrastructure will include an additional 100 liquefaction trains, 0.7bn t/y of LNG regasification capacity and a tripling of the world’s LNG shipping fleet. Market confidence in the continued growth of LNG is such that many of these projects are already under construction, while many more are in the design stage. New liquefaction capacity to supLinda Cook is an executive director and member of the board of Shell. Her primary responsibility is for the firm’s global gas & power, renewable energy and hydrogen businesses, and Shell Global Solutions.

Liquefied natural gas

ply more than 100m t/y was under construction at the end of 2005, with around 40 new LNG tankers placed on order in that year alone. One of the driving factors for increased LNG trade is the need to diversify supply and strengthen energy security. By 2020, it is forecast that the average gas molecule will travel some 40% further to market than in 1970 and cross far more political and geographical boundaries. In this sense, LNG is often a more attractive option for importers than relying on long-distance pipelines that cross multiple international borders. Adding to its attraction, the cost of LNG is falling. The development of bigger and more efficient liquefaction trains has been a key factor in this. Liquefaction trains with a capacity of 7.8m t/y are under construction – more than twice the size of those being designed just five years ago. While this development and other technological improvements have significantly reduced costs since the 1980s, recent increases in material costs and a shortage of capacity in the construction sector are resulting in upward pressure. Shipping advances Dedicated ships for LNG transport, which account for a considerable portion of LNG value-chain investment, are also becoming more advanced. The next generation of 200,000 cm-capacity ships is on order and the new vessels will carry some 20% more cargo than the largest ships on duty today. This development also helps to reduce costs, in particular for markets far away from liquefaction centres. Nowhere is this development more obvious than in Qatar. Six LNG trains, each with a capacity of 7.8m t/y, are under construction in Ras Laffan Industrial City. Once on line, they will take Qatar’s LNG production to 77m t/y, or close to a quarter of

the world’s supply, cementing Qatar as a leader in the global LNG industry. On the other side of the world, the Sakhalin II project is pioneering Russia’s offshore and LNG industry. Now more than 70% complete, the project includes two new offshore platforms, more than 800 km of onshore pipeline and a two-train 9.6m t/y LNG plant, at Prigorodnoye, on Aniva Bay, at the southern tip of Sakhalin Island.

The Sakhalin II project illustrates the many important social and environmental challenges facing the oil and gas industry Not only is the project one of the largest greenfield LNG developments in the world, it is also important in many strategic ways. Sakhalin II is the first LNG project for Russia, the country with the world’s largest gas resources. It is on the doorstep of Japan and South Korea, the world’s two largest LNG importers. And, for the first time, Sakhalin II will enable the world’s largest gas-resource holder to supply the world’s largest gas market – North America – with planned deliveries to Baja California on Mexico’s west coast. Social and environmental challenges The Sakhalin II project also illustrates the many important social and environmental challenges facing the oil and gas industry as it ventures into new regions of the world. The development of the Sakhalin II project in this remote arctic area required important land access agreements with local indigenous communities, permits for the more than 1,000 pipeline river crossings, offshore pipeline routing away from feeding grounds of endangered whales, protection of salmon spawning areas and many other actions to ensure the project is implemented to international standards.

The Sakhalin II LNG export plant, under construction. The project illustrates the many important social and environmental challenges facing the oil and gas industry as it ventures into new regions of the world

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World Energy in 2006

Increased demand is also breathing new life into ageing LNG projects. One example is in Brunei, where the LNG facilities have delivered thousands of cargoes to Asian markets since the early 1970s. New technology has enabled an extension of the plant’s life and the maximisation of gas recovery from offshore fields. By upgrading various elements of the plant’s liquefaction and compression equipment, the project is expected to continue production into the first three decades of this century. In addition, Brunei LNG has seen a year-on-year increase in production, culminating in its best-ever year in 2004 with 214 cargoes. LNG demand increases in both Europe and North America continue to drive new LNG supply from Africa. This includes new projects in Nigeria, Equatorial Guinea and Angola and the rapid expansion of the existing Nigeria LNG (NLNG) plant to a total of five trains, with construction of a sixth train well under way.

contracts to be in place for a majority of planned sales. And secondly, traditional LNG customers still value long-term contracts for the security of supply that they offer. The increasingly global demand for LNG supplies is creating a degree of price connectivity between different regions. This is apparent in the competition for spot cargoes. However, it is also influencing longer-term supply discussions. Traditional Asian and European customers – used to purchasing LNG at prices linked to oil – now realise they must compete with North American markets and Henry Hub-based gas pricing. All of this makes for much more interesting LNG market dynamics than just 10 years ago.

LNG is still in the relatively early stages of its development, so new and exciting business opportunities will continue emerging While the first three trains of NLNG started up with sales dedicated to European markets, the realisation that domestic gas supplies in North America were no longer sufficient to meet growing demand resulted in decisions to add an additional three trains. Once Train 6 is on line, NLNG will supply almost 22m t/y to key markets, making it one of the largest LNG suppliers in the world less than 10 years after its initial start up. NLNG also raised $1bn in what was one of the biggest thirdparty financing deals in any industry in Africa. Managing change The rapid growth in demand from European and North American markets is steadily moving LNG from being a fuel for the Asia-Pacific region, towards becoming a more global commodity. The LNG industry will soon be characterised by a wide range of producers supplying a more diverse range of customers with more of their gas needs than ever before. The result is a more dynamic industry, with opportunities for global optimisation and increased flexibility for customers. One result of an increased proportion of LNG targeting the more mature and liquid gas markets is greater global trade flexibility. The LNG spot market accounted for only 1% of total sales in 1992, but by 2005 this figure rose to over 10%. This meant around 14m t/y of LNG was available for delivery to help meet customers’ short-term requirements. Notwithstanding the drive for increased spot trading, long-term LNG sales contracts will continue to play an important role in the sector. Firstly because LNG investments typically utilise third-party financing, which requires long-term

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The Granatina LNG tanker. Commissioned by Shell Gas & Power to supply the company’s growing number of LNG markets © Shell

While overall sector costs have improved over the past 20 years, there is still potential for further optimisation. For example, utilisation of the world’s LNG regasification capacity in 2005 was probably less than 50%. This means billions of dollars in assets were left idle. While utilisation of liquefaction and LNG shipping capacity was higher, sector-wide it most likely fell well short of worldclass industrial standards. As the sector continues to expand, as the number of customers and suppliers increases and as access to liquid markets grows, the ability to drive optimisation and improved capital efficiency will be considerable. Looking ahead LNG is still in the relatively early stages of its development, so new and exciting business opportunities will continue emerging in the years ahead. For those involved in the LNG industry, the challenge is to grasp such opportunities and respond effectively to the changing global marketplace.U

Unconventional oil

The Canadian oil sands – tomorrow’s oil, today’s opportunity Robert Skinner, former Director, Oxford Institute for Energy Studies Supplies from the conventional, upper parts of the world’s petroleum-resources pyramid are struggling to meet burgeoning global demand. The industry is digging deeper, literally, into the base of the pyramid – unconventional hydrocarbons The Alberta oil sands of Canada, long considered a costly and problematic source of oil, are the focus of unprecedented interest by companies from around the world. While some hurdles must be overcome before the full potential of this resource can make a significant contribution to world oil supply, these are not diluting the industry’s enthusiasm. After years of surpluses in the production capacity of virtually every energy commodity, surging demand in Asia and North America, and a set of political and technical events that reduced spare capacity, the oil market has tightened. In the 1990s, the oil industry restructured, as its managers struggled to meet investors’ expectations of growth and return on capital. A wave of mergers and acquisitions at the turn of the century produced an upper tier of super-sized international oil companies (IOCs) that, in order to grow, continue to need access to super-sized prospects. The few countries with large conventional oil resources that could meet these firms’ materiality targets for prospect size are either not open to the private sector, the terms are insufficiently attractive, or political or other risks are too great. In these circumstances, many IOCs are pursuing liquefied natural gas (LNG), gas-to-liquids (GTL), ultraheavy-oil and oil-sands projects – investments that provide a large and increasing production profile drawing on large hydrocarbons reserves. The story so far The story of the Alberta oil sands is impressive. Visitors to the operations in northern Alberta confront a Lilliputian world where everything is described in superlatives: the greatest volume of dirt moved per day; the largest fluid coker; the largest trucks and power shovels; the lowest unemployment rate; lowest vacancy rate; highest housing costs; and other indicators of an over-heated industrial sector, as well as the fastest-growing source of Canada’s greenhouse-gas emissions. This dichotomy defines the oil sands: huge potential, major challenges. The Athabasca oil sands, or tar sands, entered recorded history when a sample was delivered by a Cree native to a fur-trading post on Hudson’s Bay in 1719. The deposits form high, unconsolidated cliff banks along the Athabasca River and its tributaries around Fort McMurray in northern Alberta. In 1778, Peter Pond, a Connecticut-born

explorer for North West Company fur traders, was the first non-aboriginal to travel through the Athabasca area and reported that the local natives used the tar to caulk their bark canoes. Sporadic attempts to develop the oil sands since the early 1900s failed. The most significant early plant, designed to produce 3,000 barrels a day (b/d), operated for a short period then burnt down in 1941. The industry was finally launched by the pioneering projects by Esso (now Imperial Oil), with cyclic steam injection at Cold Lake in 1964, and Sun Oil, with construction of an integrated mining and upgrading plant (Great Canadian Oil Sands – now Suncor) in 1967, north of Fort McMurray.

The surge in lease sales and hyperinflation of prices is an indicator of the interest among oil companies The Suncor plant, which produces 260,000 b/d of synthetic oil, was followed in 1977 by the Syncrude mine and upgrader, about to increase to 350,000 b/d, and in 2002 by Shell Canada’s Athabasca Oil Sands Project at 160,000 b/d. All are planning expansions. Other projects were proposed in the 1980s, but project-specific negotiations between industry consortia and provincial and federal governments foundered on disagreement over the fiscal and pricing terms. In the mid-1990s, a generic

Oil sands on the Hangingstone River, a tributary to the Athabasca River. It shows a massive oil sands zone with melting bitumen glistening in the light

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World Energy in 2006

fiscal regime was implemented that takes into account the high, front-end capital cost of oil-sands projects by delaying the governments’ take until after pay-out of the initial investment. After a gentle threat from government to use the leases or lose them, and certainly encouraged by higher oil prices, investment has accelerated. But defining the fiscal terms was not the only critical step. Technology was needed to access the bulk of the resource, too deep to develop by openpit mining. Through government and industry funding research and development, and special royalties on pilot projects, steam-injection technologies were commercially demonstrated. And traditionalists in oil companies had to be convinced that mining tarsoaked dirt could provide returns to shareholders. The resource The crude bitumen and related heavy-oil deposits of Alberta constitute one of the greatest known concentrations of hydrocarbons in the world. The Alberta Energy Utilities Board estimates the ultimate resource could exceed 2.5 trillion barrels. However, it places the original resource in place at 1.6 trillion barrels of bitumen. Of this, 174bn barrels are classified as initial established reserves and 315bn barrels as ultimate recoverable reserves. The deposits are part of an assemblage of heavygravity oil (11-22°API) and bitumen (8-10°API, 35% sulphur) accumulations in sands and carbonates along the eastern up-dip edge of the Western Canada Sedimentary Basin. They follow a crescentshaped trend from the southern border between Alberta and Saskatchewan, north to Fort McMurray and then plunge west to Peace River. However, in order to qualify for the special oil-sands royalties, the Alberta government limits the definition of oil sands to three designated areas (OSAs): Athabasca, Cold Lake and Peace River. Together they cover an area of about 140,000 square km. The Athabasca OSA contains about 80% of the resource. It is divided into where the sands can be mined in open pits (generally where there is less than

Two heavy haulers unloading at Suncor’s 260,000 b/d project, near Fort McMurray, northern Alberta Photo courtesy Suncor Energy Inc

24

75 metres of overburden) and deeper deposits where in situ production techniques must be applied. The richest, thickest and most laterally continuous oil sands occur in the mining area north of Fort McMurray. Deeper in the basin to the south and west, the difficulty of tracing bitumen layers with confidence between test holes belies the frequent claim that oilsands development is without geological risk. Surge in lease sales In 1992/93, the Alberta government sold 2,600 hectares of oil-sands leases at an average price of C$10.50/hectare and received bonuses totalling C$425,000. In 2004/05, nearly 300,000 hectares were sold averaging C$314/hectare. In the first quarter of 2006, over 360,000 hectares were sold ranging in price from C$159 to more than C$5,500/hectare with total bonuses paid to the province exceeding C$0.86bn. The surge in lease sales and hyperinflation of prices is an indicator of the interest among oil companies in securing or expanding their positions in the oil-sands business. In the most recent land sale, Shell’s US affiliate paid nearly $0.5bn to secure leases that include the bitumen-bearing carbonates. Because no technologies have been proved to extract bitumen from these rocks, this purchase has sparked speculation that either Shell has new technology or is securing the resource with the confidence it will develop new technology.

Traditionalists in oil companies had to be convinced that mining tar-soaked dirt could provide returns to shareholders Anywhere from C$45bn to C$100bn of oil-sands investment is expected over the next five years for expansions of existing operations and for grassroots integrated mine/upgraders, in situ schemes, standalone upgraders and new pipelines to transport the output to markets. Although less than 7% of the resource is in the shallow mining zone, it contains about 20% of the reserves and is the focus of much development. Outside this area the bitumen can only be recovered using some form of stimulus. Cyclic steam stimulation (CSS), or huff and puff, is used in the Cold Lake OSA. The formation is subjected to repeated cycles lasting several months of high-pressure steam injection followed by heat soaking then pumping of steam condensate and bitumen. Imperial Oil produces about 140,000 b/d using this method. The technique favoured by most new operators is steam-assisted gravity drainage (SAGD). Sets of horizontal well pairs are placed near the bottom of the bitumen-bearing zone. Steam is injected in both wells until bitumen is mobile between the wells. Steam is then injected only in the upper well. A steam chamber gradually develops above as melted bitumen drains under gravity to the lower well where it is pumped to the surface.

Unconventional oil

These in situ techniques rely on natural gas as the fuel to generate steam. CSS has steam:oil ratios (SOR) of 3:5; SAGD from 2:3 (barrels of water raised to steam to produce one barrel of bitumen). Total production from the oil sands is nearly 1.4m b/d, of which 0.67m b/d is synthetic crude. The rest, raw bitumen, must be diluted with crude condensate, or increasingly with synthetic crude, in order to pipe it to markets and to offer refiners a more desirable feedstock. If all known proposals were to come to fruition, oil-sands output could approach 3.5m b/d by 2015 (see Figure 1). In general, however, projects rarely come on stream on time and to budget. Why invest in the oil sands? Company executives list many reasons for investing in the oil sands. Principal among these is the opportunity to book significant reserves. Oil sands offer the kind of materiality that, as noted above, is proving increasingly elusive elsewhere in the world. Other reasons include: u Low finding and development costs; u Long-term predictable growth – unlike conventional fields that start declining almost as soon as they begin production, oil-sands projects tend to ramp up in steps as new phases are added, resembling a manufacturing production profile, or that of an LNG project; u Technology upside – technological complexity offers the possibility of improvements and breakthroughs that generate significant returns on the large volumes produced; u Repeatability – with expanding production, knowledge and improvements can be applied to incremental or duplicate projects; u Amortisation of costs over very large reserves; u Sustaining capital for these projects once started is not significant; and u Attractive fiscal and royalty regimes allow industry early recovery of the investment before government’s share is taken – the regime also encourages expansion. The supply costs for the oil sands vary depending on which technology is used and assumptions made, but recent estimates indicate that oil sands are certainly economic when crude oil (WTI) prices are above $30 a barrel. The key, however, is to capture the value presented by the widening differential between raw bitumen and light crude. Challenges ahead Oil-sands development involves large-scale, complex engineering projects carried out in a relatively remote, hostile climate where temperatures can reach 40°C in summer and drop to –40°C in winter. Marshalling the equipment, major vessels, labour and materials has led to major cost overruns on most of the recent projects and expansions. The workforce challenge is about to intensify. The next wave of projects will require 25,000 additional

skilled and semi-skilled workers. This boomtown atmosphere poses serious social and economic challenges for the nearby town of Fort McMurray. Operating oil-sands plants can be challenging. A breakdown or fire in winter can knock out production for weeks. For example, a series of fires and upsets in all three oil sands plants decreased synthetic crude supply in late 2004 by more than 200,000 b/d. Some of the in situ projects use synthetic crude to dilute their bitumen. Diluent prices spiked, resulting in negative netbacks for bitumen. The damage did not stop there. Under the US Security and Exchange Commission’s (SEC) arbitrary and perverse requirement to report reserves based on year-end prices, nearly 1bn barrels of bitumen reserves had to be de-booked. Figure 1: Forecast uncoventional oil supply million b/d 8 7 6 5 4 3 2 1 0

Canada: syncrude and bitumen Venezuela: syncrude from heavy oil GTL Biofuels Other

2003

2006

2009

2012

2015

Source – Author's assessment based on data from company websites and annual reports

There is no question that Alberta’s oil sands constitute a mammoth hydrocarbons resource. But their full exploitation must address some major issues all along the value chain. Processes and technologies can and will be continuously improved. Stepjump technological advances cannot be ruled out. Other industries have been transformed by unconventional thinking, so why not the oil sands? Few conventional oil projects can match the recovery rates achieved by the mining projects – more than 90% of bitumen in place (making a mockery of the SEC’s disallowing the booking of minedoil reserves). Most of the remaining 10% ends up in the tailings, so recovering another 5-6% would have environmental benefits. For every cubic metre (cm) of synthetic crude produced, the mining operations must excavate, transport and eventually reclaim 6cm of sand and 1.5cm of fine tailings. This requires the use of 2-3cm of water. Besides reducing withdrawal of water from the Athabasca River, mining operations must accelerate the rate of dewatering and settling of tailings, and reclamation of mined areas and hopefully develop continuous mine-face processing technology. In situ recovery leaves a much smaller surface footprint than mining. SAGD is expected to recover up to 70% of the bitumen within the steam chamber

25

World Energy in 2006

– CSS recovers much less. For every unit of bitumen produced, up to four units of water are required. Water is becoming a serious issue in the province: reduce, recycle and reuse is the industry’s goal. Critical to the future of all forms of unconventional oil is the need to reduce the energy used in their transformation into useful products. In essence, extracting hydrocarbon liquids from oil sands, shale and coal involves either reversing or accelerating the effects of geological heat and pressure and biodegradation over millions of years. A great deal of energy and other inputs of water and materials are needed to extract, crack and re-hydrogenate the long, carbon-chain molecules of bitumen. Emissions given off in the process are significant. Up to 30% of the full fuel-cycle emissions from bitumen-derived gasoline are released during its production – threeto-four times more than for gasoline from conventional crude. The oil-sands industry is Canada’s fastest growing source of carbon emissions.

Unconventional hydrocarbons will be an increasingly important feature of the oil story Natural gas is the fuel of choice for steam and power production. Given the declining supply of gas in North America, using this resource to boil water to melt bitumen is not sustainable. Alternative technologies are being developed and deployed including: u Partial oxidation (POX) of refinery coke and asphaltenes: a technology used in dozens of refineries around the world, POX applied to asphaltenes stripped from the bitumen will provide both fuel for SAGD steam and hydrogen for hydrocracking at Opti and Nexen’s Long Lake project; u Multiphase Superfine Atomised Residue (MSAR™): involves burning a mist of oil-water emulsion where the oil component is derived from the bitumen; u Vapex™: propane/butane solvent is injected into SAGD-configured well pairs. In theory, this process results in some of the asphaltenes being left underground and a slightly lighter bitumen; u Toe-to-heel air injection (Thai™): involves a vertical air-injection well at the toe of a second, but horizontal well. The air maintains an advancing front of ignited bitumen, which melts bitumen that drains to the horizontal producing well. In theory, this process leaves a coke layer in the formation; and u Nuclear power has been evaluated as a source of steam, electricity and hydrogen. While the shift from gas to bitumen-derived fuel sources, or perhaps coal, will increase emissions per barrel, the POX-based fuel systems (of coke or asphaltenes) open a path to carbon sequestration. Proposals are under consideration for devel-

26

opment of a carbon dioxide gathering system to sequester the industry’s emissions in depleted oil and gas reservoirs deeper in the basin. The industry also needs to improve the quality of synthetic crude and find better ways of diluting the raw bitumen in order to pipe it to market. The holy grail of the tar sands is a major breakthrough in upgrading technology. The ideal technology would be quick-to-build, modular, re-deployable and would significantly reduce emissions, especially of carbon dioxide, and use far less energy than today’s technologies. Meanwhile, the upgrading technologies used are delayed coking, fluid coking and hydrogen addition (LC-Fining). The marketing challenge Marketing the output from the oil sands has been a chronic challenge. Given its undesirable characteristics, refiners must blend synthetic crude with other crudes. So, they can only handle a relatively small share in their feedstock. The bitumen blends require coking and refiners have been reluctant to make the necessary investments to handle large quantities of heavy sour blends. There are at least three proposals to construct stand-alone upgraders in Alberta at the major refining centre east of Edmonton. While these would retain a greater share of the value addition in Alberta, to increase optionality new markets are needed or more creative approaches should be pursued by the industry to marketing the various heavy grades. A recent reversal of a pipeline in the southern US makes it possible to move Canadian crude to refineries in Texas and Oklahoma. At the same time, the industry is looking to the US west coast and to important growth markets, such as China. A future of difficult oil The sea change in interest and investment in the oil sands might be interpreted as a sign that the world is nearing a peak in oil production. However, the world is only running out of easy oil and is now having to exploit the broad base of difficult oil in the hydrocarbons resource pyramid. These include oil sands, ultra-heavy crude, such as in Venezuela’s Orinoco oil belt, and oil from shales and coal. While not on the pyramid in the traditional sense, these liquids also include GTLs and biofuels. Long considered tomorrow’s oil, these are rapidly becoming today’s opportunities. These unconventional hydrocarbons will be an increasingly important feature of the oil story. They are supplying about 2.5m b/d today and could exceed 6m b/d by 2015, but this is a small reflection of their full potential as new, clean and energy efficient ways are developed to produce them. Leading the way among these new sources of liquid fuels are the oil sands of Alberta. u

Sustainable energy

Inga – powering Africa’s future Thulani Gcabashe, Chief Executive, Eskom The Grand Inga hydro-electric project aims to successfully harness the full hydropower potential of the Congo River. The world’s largest hydro-electric scheme, Inga could fulfil the energy needs of the entire African continent Africa is a continent of diversity and contrasts. Its land, climate, people, and unique and spectacular wildlife are testament to this. With landmass covering some 30m square km, the African continent is a land of giants. In the north and parts of coastal areas along the west and east there is plenty of oil and gas, while in South Africa there is a thriving economy with a diversified energy mix, including coal and nuclear power. Africa’s massive and powerful rivers sculpt the landscape, forming impressive valleys and waterways that are home to all manners of impressive and potent inhabitants. The Nile and the Congo are Africa’s two major rivers. Electricity is a bridge to sustainable development. On its own, electricity is not sufficient for creating the conditions for sustainable development, but it is a prerequisite. It is the cornerstone for economic progress, social development, harnessing technological progress and environmental sustainability. The World Energy Council, in its Millennium Statement in 2000, and the International Energy Agency, in its World Energy Outlook, 2004, reported that about 0.5 billion people in subSaharan Africa do not have access to electricity, which has contributed to the continued poverty and underdevelopment that ravages the continent. A largely untapped resource Hydropower is, by far, the single-largest source of electricity in a number of African countries, but it remains a largely untapped resource. Sub-Saharan Africa possesses some of the largest water resources in the world, but while access to electricity has improved in some regions of Africa, it has not done so in the sub-Saharan region. The Congo River lies mostly in Democratic Republic of Congo (DRC). It contains lakes, waterfalls, confluences, and rapids that pass through the central western part of the continent. Known as the river that swallows all rivers, the Congo has the second-largest flow and watershed of any river in the world. Only the Amazon is bigger. Because it crosses the equator, at least one section of the river is always experiencing a rainy season, making its flow very stable. The Congo River is a potentially rich source for hydro-electric power generation. At Inga, a series of rapids merge over a distance of 15 km between Sikila Island and the mouth of the Bundi tributary. The site has a natural altitude drop of 102 metres, making this the most prolific potential source of hydropower in the world that is concentrated at a

single point. Of the big rivers of the world, only the Congo has a significant slope in its lower course. The Inga site has the potential to generate 370 terawatt hours a year (TWh/y) of electricity, while Eskom, Africa’s largest power utility, produces 200 TWh/y. The Inga hydro-electric project offers a unique opportunity to move the African continent closer to achieving its sustainable-development goals. Such huge potential could have been a major obstacle to the construction of a hydro scheme if the topography were not so remarkably suitable for development in progressive stages. It is possible that the topography will allow a partial and progressive implementation of the project, enabling DRC to start harnessing this potential.

A lack of access to electricity has contributed to the continued poverty and underdevelopment that ravages the African continent The Inga site has two power stations, with a combined capacity of 1.775 gigawatts (GW). Inga I, commissioned in 1972, has a capacity of 351 megawatts (MW) and Inga II, commissioned in 1982, 1.424 GW. Société Nationale d’Electricité (SNEL) owns and operates the stations, which supply electricity to DRC and its northern neighbour, Congo Brazzaville. The remaining power is transmitted along a high-voltage, direct-current (HVDC) line to Kolwezi, in the south of DRC, then south into the Zambian power grid and on to Botswana, Zimbabwe and South Africa. Inga I and Inga II are operating at below capacity. But plans are in place to refurbish the plants, allowing SNEL to increase electricity exports to the Southern Africa Power Pool (SAPP) – $180m of World Bank funding has been approved for the rehabilitation. Regional cooperation A primary objective of harnessing the hydro potential of the Congo River is to assist in the electrification of Africa, which would require the completion of power interconnectors between the various countries with the view to creating the PanAfrican transmission grid. While some countries and/or regions have excess generating capacity, others are experiencing shortages with serious consequences for their economic and social development. While it is technically possible for each country to develop sufficient energy resources to

27

World Energy in 2006

meet their needs in the medium-to-longer term, economic and environmental efficiencies can be achieved through regional cooperation and the creation of a Pan-African grid. Five member utilities from SAPP have joined forces to deliver the Inga project. Established in 1995, SAPP is an association of 12 national power utilities of member countries of the Southern African Development Community (SADC). SAPP’s objectives include increasing regional generating capacity, achieving greater efficiencies in power production and supply, enhanced reliability of supply and interconnectivity to promote cross-border power trading. Environmentally friendly, renewable, energy The Inga project is intended to harness the environmentally friendly, renewable, hydro-electric energy of the Congo River at the Inga rapid site, 225 km downstream from Kinshasa. The Western Power Corridor (Westcor) is an SADC initiative, with five member utilities: Empresa Nacional de Electricidade, of Angola; Botswana Power; SNEL; Nampower, of Namibia; and South Africa’s Eskom. Westcor will build, operate and own the envisaged infrastructure. Inter-governmental and interutility memoranda of understanding were signed in October 2004 paving the way for the formation of the joint-venture (JV) company. Each of the five participating utilities has a 20% equity shareholding after contributing $100,000 to the start-up capital to fund the early phase of the project. The balance of the capital to finance the project will be raised from local and international financial institutions. Westcor’s plans have been identified as a flagship project for the New Partnership for Africa’s Development (NEPAD). It has the support of the African Union, the Association of Unions of Power Distributors of Energy in Africa, the African Development Bank and other financial institutions, which appreciate the project will unlock existing energy constraints and significantly contribute to the region’s sustainable development. The project aims to: u Build the 3.5 GW Inga III hydropower station in DRC and to construct a hybrid of 500 kilovolt (kV), HVDC/400 kV, high-voltage alternatingcurrent (HVAC) interconnections of transmission lines to supply the five Westcor countries; u Develop hydropower plants with a potential capacity of 6.7 GW on the Kwanza River in Angola and other plants in Namibia; u Build interconnections stringed with fibreoptic cable for broadband telecommunications links to be leased to operators; and u Increase trade in electricity by investing in JVs that will allow sharing of capital costs. Inga III will have minimal environmental impact, because the plant will be built on the runof-the river and requires no damming. Initially, electricity produced will go to the five participating countries, with the ultimate objective of sup-

28

plying the whole SADC sub-region. It is estimated that 3.0 GW will be supplied to South Africa, 500 MW to Namibia, and 500 MW to Botswana. Electricity from both Inga III and the Kwanza plants will be carried using point-to-point 500 kV transmission technologies. Converter stations will be built at predetermined points to minimise power losses during transmission over the long distances. The HVDC circuits will terminate in South Africa. At Inga, a HVAC single circuit will link the project to Kinshasa, supplying the power required for domestic consumption. Additionally, the transmission lines’ fibre-optic communication cables will facilitate a broadband telecommunications network, providing capacity to DRC’s commercial telecommunications operators and aiding the operation and control of the power network. The estimated cost of the Inga III project is $4bn, with the pre-feasibility and feasibility studies including an environmental-impact assessment at an estimated cost of $7m. It is estimated that the project will be commissioned in 2011. Substantial studies; protective measures The preliminary environmental-impact assessment shows there would be minimal effect on ecosystems at the project sites, along the interconnector routes, or to the human population. Interventions to ensure unavoidable effects are reduced and will be targeted at vulnerable areas identified during the studies. Protective measures will be based on substantial studies, conducted by recognised authorities. They will take into account inventories of plant and animal species, specific ecological conditions, chemical composition of water and pollution risks. Once completed, the Grand Inga project will have a larger generating capacity than any African country, with the exception of South Africa. With a capacity of 39 GW, Grand Inga will produce more than twice the electricity generated by China’s Three Gorges project. Total generating capacity at Inga would be more than 43 GW. Eskom has an installed capacity of 42 GW from 19 power stations. The successful harnessing of the full hydropower potential in the Congo River will elevate Inga to the world’s largest hydro-electric scheme, satisfying the energy needs of the entire African continent. With its massive hydro-electric potential, DRC is well poised to power the future energy needs of the African continent. This will undoubtedly give impetus to the NEPAD ideals of eradicating poverty in Africa and to place African countries, both individually and collectively, on a path to sustainable growth and development. The prospects of bringing light and enlightenment to the peoples of our beloved continent continues to inspire the African energy sector to soldier on. u

Alternative energy

Reducing the dependence on oil Ildo Sauer, Gas and Energy Director, Petrobras High oil prices and the introduction of environmental restrictions are leading many countries to alternative energy sources. In Brazil, the developing gas market and growing biofuels industries are set to change the make-up of the country’s primary energy consumption Brazil’s energy sector is following the worldwide tendency towards greater diversification of primary energy sources and the increased use of natural gas and biofuels. There are several reasons for this change. The most important are the environmental restrictions that are gradually being adopted in the world’s principal energy-consuming markets and the need to reduce the dependence on oil, set against a scenario of accelerated depletion in oil reserves and escalating prices. The share of gas in Brazilian primary energy consumption has more than doubled in a short period, increasing from 4.1% in 1999 to 8.9% in 2004 (see Figure 1), and this share is forecast to rise to 12% by 2010. Sugarcane has a higher share (13.5%) than gas, because of government policies that have permitted its consolidation in the nation’s primary energy consumption. The development of biodiesel will further increase the relative importance of biofuels, which are expected to make up 14.0% of primary energy consumption by 2010. The growth of natural gas Over the past two decades, the world gas industry has experienced a structural and regulatory transformation. These changes have altered the strategic behaviour of gas firms, with an intensification of competition, the search for diversification (especially in the case of power generation) and the internationalisation of industry activities. Together, these changes have radically changed the economic environment and the level of competition in the industry. Figure 1: Evolution of Brazilian primary energy consumption 1999

2004 2.7%

2.1% 13.3% 11.7%

13.5% 46.2%

15.1%

0.7% 6.7% 4.1%

Oil and oil products Natural gas Coal and coal products Uranium and products

13.2%

39.1%

14.4%

1.5%

6.7% 8.9%

Hydro and electricity Firewood and charcoal Sugarcane products Other renewables

Source – Ministério de Minas e Energia

Brazil’s gas industry is characterised by its late development, although in recent years, internal supply, imports and demand have grown significantly – the growth trajectory of recent years exceeds that of countries with more mature markets, such as Spain, Argentina, the UK and the US (see Figure 2). And the outlook is positive for continued growth over the next few years, particularly when set against the investment plans already announced in Brazil. The country has a small transportation network concentrated near the coast. The distribution network is concentrated in the major consumption centres. Domestic gas sources are largely offshore in the Campos basin and Bolivia provides imports. Given the degree of gas’ penetration in the country’s primary energy consumption, the industry is poorly developed when compared with other countries (see Figure 3). The industry requires heavy investment in expanding the transport and distribution (T&D) networks, as well as in diversifying and increasing its supplies. Such investments are necessary for realising the industry’s enormous potential.

Brazil’s natural gas industry requires heavy investment in expanding the transport and distribution networks Increased competition among market players, will not necessarily promote the expected sector maturity. Indeed, instead of fostering the development of the sector, it could put a brake on growth. In short, the Brazilian gas industry is in the process of expanding T&D infrastructure and lessons drawn from international experiences should be considered in helping the industry to realise its potential. Changing profile of gas supply Another key industry highlight is the changing profile of gas supply. A large part of the gas produced domestically to date has been associated with oil production, the latter diluting or even totally absorbing the costs of exploiting the gas. In most cases, gas production was feasible only in conjunction with oil production activities. However, the country’s latest gas finds are non-associated. An exclusively dedicated structure must be developed to produce this gas – translating into a significant rise in production costs. This is more significant when analysed against the high costs associated with the market for exploration and production (E&P) sector equipment. In recent years, the leas-

29

World Energy in 2006

ing costs of drilling rigs and E&P equipment have been climbing in parallel with escalating oil prices. This directly affects end-consumer prices. Biodiesel Biodiesel is a biofuel produced from renewable biomass for use in compression-ignition, internalcombustion engines, or for the generation of other types of energy, partially or totally substituting fossil fuels. Generally, biodiesel is produced by the chemical reaction of transterification of triglycerides obtained from vegetable oils or animal fat, with short-chain alcohol, methanol or ethanol. Figure 2: Evolution of Brazilian natural gas consumption consumption index (reference 1980) 20 15 10

Brazil Spain Chile Argentina Italy

Australia UK Colombia US Peru

5 0 1980 1984 1988 1992 1996 2000 2004 Source – BP Statistical Review of World Energy; Petrobras

Europe is the largest source of biodiesel production, having reported continual year-on-year growth to reach 2.5bn litres in 2005. European demand for biodiesel is forecast to rise to 10bn litres a year (l/y) by 2010. Under Law 11,097 (January 2005), from 2008, diesel sold in Brazil must contain 2% biodiesel rising to 5% in 2013 – demand in these years is forecast at 0.8bn l/y and 2.6bn l/y, respectively. The use of biodiesel has social, strategic, economic and environmental advantages: U Greater diversification of Brazilian primary energy consumption; U Reduction of dependence on non-renewable fossil fuels; U Reduced emissions of pollutants into the atmosphere; and U Generation of employment and income, reducing regional-development disparities. Brazil could become one of the world’s largest biodiesel producers. It has a favourable soil and climate for growing the required oleaginous crops, including in the country’s semi-arid regions where conditions do not favour food crops. A range of oleaginous plants can be used for the production of biodiesel, among them, castor seeds, babassu, oil palm, cotton, soybeans, Swedish turnip, sun flower, peanuts and canola. With one of the larg-

30

est cattle herds in the world, tallow is also an abundant source of raw material in Brazil. Soybeans are Brazil’s most widely available source of oleaginous seeds. Their use has logistical advantages, as well as reducing production costs. However, although the castor seed plant is well adapted to the Brazilian northeastern semi-arid region, given its resistance to drought and with an oil content of about 50%, the high price commanded by castor oil on the international market is a factor limiting its use in biodiesel production. The agricultural area needed to meet the domestic 2% biodiesel mix requirement is 1.5m hectares – 1% of the 150m hectares available for agriculture in Brazil. Technology for the production of biodiesel on a commercial scale at a quality acceptable to the international market is available from major suppliers. European engine manufacturers recommend the use of the 5% mixture of biodiesel with mineral oilbased diesel in automobiles, while Brazilian motor manufacturers tend to maintain equipment guarantees without the need for engine adaptations.

The use of biodiesel is environmentally friendly. Sulphur and aromatic compounds are almost totally absent Soybean producers have indicated an interest in using biodiesel in tractors and agricultural equipment. As well as reducing fuel costs, biodiesel increases the production of soybean meal, which has a high commercial value. (The Brazilian agricultural sector accounts for 21% of the country’s diesel oil consumption – a measure of the importance of the use of biodiesel in agriculture.) Another important use of biodiesel is in electricity generation for small communities in the north and northeast regions, where the cost of diesel oil is high because of their distance from the refineries. Brazil’s biodiesel plants have a capacity of 176m l/y. Investments are planned for the installation of three new plants in Montes Claros, Candeias and Quixadá, each with a capacity of 40,000 tonnes a year (t/y) of biodiesel from oleaginous seeds and more than 4,000 t/y of biodiesel from castor seeds. Although demand for biodiesel in Brazil is still small, over the next few years the country has the potential to develop a market similar to the one that exists for sugarcane alcohol. In addition to meeting its own needs, Brazil is a potential exporter of this fuel, which is widely commercialised in the US and in the European Union (EU). Biodiesel manufacturing produces by-products, one of which is glycerin, widely used in the cosmetics, soap, food and pharmaceuticals industries. For every 100 kilograms (kg) of biodiesel, 10 kg of glycerin is produced. Glycerin sales can be a decisive factor in the economic feasibility of biodiesel production. Another by-product is the cake that results from the extraction of oil from the seeds of oleaginous plants. This is used as animal feed, in the case of edible

Alternative energy

oleaginous seeds such as soybeans, and as fertiliser, in the case of oleaginous plants, such as castor seeds. It is now considered possible to remove the toxic elements from castor-seed cake, which have prevented their use in animal feed – this would enhance the plant’s commercial value, making the manufacture of castor-seed-based biodiesel more attractive. The use of biodiesel is environmentally friendly. Sulphur and aromatic compounds – pollutants and carcinogens – are almost totally absent. Biodiesel combustion also reduces carbon dioxide emissions. Additionally, biodiesel production from oleaginous plants, grown on a family agriculture basis and in agrarian reform settlements, is a sustainable form of job creation, providing incomes for small farmers. Alcohol World demand for fuel ethanol has been expanding rapidly and is likely to grow even faster in the near future, principally in more developed countries. This reflects a combination of the following: u A desire for a reduction in the dependence on oil products in primary energy consumption; u  The substitution of methyl tertiary butyl ether as a gasoline additive, because of its negative environmental effect; u A desire for a reduction of greenhouse gas emissions; and u A desire to boost local agriculture and industry. Developed countries, such as the US, already use the alcohol-gasoline mixture pioneered by Brazil in the 1970s. Japan and some EU countries are also considering adding ethanol to the gasoline pool. These developments are encouraging the creation of an international market in fuel alcohol. Brazil is the world’s largest and lowest-cost ethanol producer, having developed its own technology. The Japanese market is particularly promising, because of: u The declared governmental objective of making the addition of ethanol to gasoline compulsory; u The absence of indigenous production capac-

ity, resulting in the need to import; u The country’s strong commitment to the Kyoto Protocol on climate change; u The interest of the country’s government in diversifying energy sources; and u The country’s wish to reduce exposure to Middle East risks. The attractive overseas alcohol market and the competitiveness of domestic producers may lead to new domestic entrants in the Brazilian market in the form of partnerships. And by-products of the industrial process, such as vinasse, lignin, sugarcane wax, straw and bagasse, can also be used, improving the economics of sugar/alcohol projects.

Brazil is the world’s largest and lowest-cost ethanol producer, having developed its own technology in the 1970s Genetic improvements in sugarcane – thanks to the technological developments over recent years – have resulted in the launching of 24 new strains with a higher sacarose content. This has improved productivity and optimised the fermentation process and distillation, and contributed to the reduction in final-product costs. In a world of primary energy consumption diversification, of greater environmental restrictions and the reduced dependence on oil, Brazil has been seeking to develop alternative energy sources – principally natural gas and biofuels. The gas industry holds enormous potential for Brazil, although there is still a long way to go before it reaches maturity and major investment is required. The increasing use of biofuels (biodiesel and sugarcane alcohol) provides environmental, strategic, economic and social benefits – the focus is on identifying new markets, and leveraging the competitiveness of the Brazilian sugarcane industry. u

Figure 3: Comparison of the Brazilian gas industry with other countries sector-development index* 8 7 6 5 4 3 2 1 0

Emerging

Uruguay

In transition

Brazil Peru

Bolivia Chile

Spain

Mature

Colombia Argentina Italy US France Australia Germany

UK

*Index calculated based on take-up of natural gas in primary energy consumption; extension and density of gas network; the degree of gas-sector diversification; and the number of sector players

Source – Petrobras; BP Statistical Review of World Energy

31

World Energy in 2006

An integrated policy for India Pradeep Chaturvedi, Chairman, Safety & Quality Forum, Institute of Engineers, India Energy-policy measures can lead the country to meet its soaring energy requirement in an efficient, cost-effective way and set India on a path towards sustainable energy security India must sustain an economic growth rate of at least 8% a year to eradicate poverty and meet its economic and human development goals. To deliver such growth until 2031, the country must increase primary energy supply by three-to-four times and electricity supply by five-to-seven times. Primary energy consumption would rise from 327m tonnes of oil equivalent (toe) in 2003-04, to 1.63bn toe in 2031-32. By 203132, power generation capacity requirements would be 778.1 gigawatts (GW), coal demand would reach 2.04bn tonnes a year (t/y), oil demand 435m t/y and gas 155m toe/y, if no other measures are undertaken to reduce requirements. Along with quantity, the quality of supply must also improve. The energy challenge The energy challenge is fundamental to India’s economic growth. While the medium-to-long-term challenges of ensuring competitive energy supplies are formidable, the immediate problems of power and coal shortages also require policy actions. The abovementioned projections have been included in the Draft Integrated Energy Policy for India. The draft report addresses energy security; accessibility, availability and affordability; pricing; efficiency; research and development (R&D); and climate change issues. An Expert Committee was formed in August 2004 to develop the integrated energy policy. The vision behind the policy is reliably to meet the demand for energy services, including the lifeline needs of vulnerable households, in all parts of the country, with safe and convenient energy sup-

ply, at the least cost, in a technically efficient, economically viable and environmentally sustainable manner. Assured supply of such energy and technology at all times, considering the shocks and disruptions that can be expected, is essential to providing energy security to all. This will require the pursuit of all available fuel options and forms of energy, conventional and non-conventional, as well as new and emerging technologies and sources. The committee has developed an approach to realise cost-effective energy systems and six basic elements have been identified: u Markets that promote competition; u Pricing and resource allocation to take place under market forces, under effective and credible regulatory oversight, as far as possible; u Subsidies to be transparent and targeted; u Improved efficiencies across the energy chain; u Policies that reflect externalities of energy consumption; and u Policies that rely on incentives and are implementable Total commercial primary energy requirements are summarised in Table 1. For cooking, households primarily use non-commercial energy – fuel wood, agriculture wastes and dung. These are termed noncommercial, because most are gathered by users, not traded commercially (household demand for noncommercial energy will rise from around 95m toe in 2000 to around 131m toe in 2031). Total primary energy sources (TPES) required is the sum of total primary commercial energy sources (TPCES) and total

Table 1: Primary energy requirements scenario million toe Hydro- Nuclear Year electric 7% 2003-04 7 5 167 2006-07 9 7 200 2011-12 15 15 253 2016-17 19 29 322 2021-22 24 54 393 2026-27 34 79 517 2031-32 43 115 641 Growth rates 2032 (%) 6.7 12.2 4.9 Per capita consumption 2032 (kgoe) 2004 (kgoe) Ratio 2032:2004

29 6 4.8

78 4 19.5

437 156 2.8

Coal 8% 7% 167 119 204 124 269 151 360 188 456 234 632 294 816 370 5.8 4.1 556 156 3.6

252 111 2.3

Oil 8% 7% 119 29 125 35 157 49 201 67 259 92 334 127 435 175 4.7 7.0

Gas TPES 8% 7% 8% 29 327 327 36 375 381 52 483 508 75 625 684 108 797 901 155 1,051 1,234 224 1,344 1,633 7.6 5.2 5.9

296 111 2.7

153 27 5.7

119 27 4.4

916 1,112 304 304 3.0 3.7

Source for all tables – Draft Report of the Expert Committee on Integrated Energy Policy – Planning Commission, Government of India, December 2005

32

Energy policy

primary non-commercial energy sources (TPNCES). Total commercial energy requirements in different scenarios: A number of scenarios were developed through a linear programming model. These scenarios help to assign the significance of various options. They also suggest India’s likely dependence on energy imports. Utilising reliable assumptions for future domestic coal, oil and gas production, a range of commercial energy requirements, including domestic production and imports for 8% growth for the year 2031-32, have been developed. Table 2: Commercial energy requirement, domestic production and imports (million toe) Domestic Imports as Requirement (R) output Imports %age of R Oil 406-493 35 371-458 91-93 Gas* 114-224 200 0-24 0-11 Coal 1,082 560 13-522 2-48 TCPES 1,378-1,692 na 384-1,004 28-59 *includes coal-bed methane

Energy security issues and import dependence: Energy security is a growing concern for India. From a level of 17.85% of TPCES in 1991, imports accounted for 30% in 2003. Oil imports constitute 72% of total oil consumption and 26% of TPCES. The projections of energy requirements suggest dependence on imported oil and coal will increase. Improvement in energy intensities: India’s energy intensity has been falling and is about half its level in the early 1970s, but there is significant room to improve. India consumes 0.19 kilograms of oil equivalent (kgoe) per dollar of GDP, expressed in purchasing-power parity terms. This compares with 0.21 kgoe in China, 0.22 kgoe in the US and a world average of 0.21 kgoe. Several countries in Europe are at or below 0.12 kgoe, with Brazil at 0.14 kgoe and Japan at 0.15 kgoe. Improvement in energy intensity creates a virtual source of energy by reducing the total requirement for a given level of growth. And while differences in economies’ structures may result in different energy intensities, Table 2 shows that,

with commercially available technologies, energy intensity can and must be reduced significantly. Coal to remain the dominant energy source: Coal emerges as India’s most important energy source, accounting for at least 40% of the energy mix under any scenario and potentially reaching 61% of the energy mix. Even at the 41% level, India would need 1.4bn-2.6bn t/y of coal (over 6.5 times production) from domestic sources. The country could also import 250m-0.5bn t/y of superior coal to reduce local requirements by 375m-0.75bn t/y. Today, about 0.7bn-0.8bn t/y of coal are internationally traded. India must take a lead in seeking clean-coal technology and, given its growing demand, new coal-extraction technologies – such as in-situ gasification – to tap domestic reserves that are difficult to extract economically using conventional technologies. India must focus on unconventional technologies for cost-effective maximum extraction from conventional reserves and improve conventional technologies to tap non-conventional sources. Electricity generation remains mainly thermal, but with an increasing role for hydropower and nuclear energy: One possible energy supply scenario is shown in Table 3. This assumes electricity generation will be based on development of the country’s hydro-electric and nuclear potential and the use of gas to the extent of 20%. India’s hydroelectric resources are estimated to be 84 GW at a 60% load factor. Installed hydro-electric capacity is 30.96 GW and average generation over the 200205 period was 71 terawatt hours (TWh) a year giving a load factor of 29%. At such a load factor, an installed capacity of 150 GW, including 15 GW of mini hydro-electric plants (less than 25 megawatts), may be justified. Such a strategy would ensure hydropower is used to its maximum potential for meeting peak loads and all new projects must be designed with this objective in mind. Development of clean hydropower will be given priority. But the full development of India’s hydro-electric potential, while technically feasible, faces issues of water rights, resettlement of projectaffected people and environmental concerns – issues that can, and must, be resolved.

Table 3: Sources of electricity-generation scenario Year GDP growth 7% 2003-04 633 2006-07 747 2011-12 1,031 2016-17 1,377 2021-22 1,735 2026-27 2,397 2031-32 3,127

Electricity generation (TWh) Fuel needs (million toe) Total Hydro Nuclear Wind Thermal Coal Gas 8% 7% 8% 7% 8% 7% 8% 7% 633 75 18 3 537 537 318 318 13 13 6 761 100 26 5 616 630 366 375 17 18 6 1,097 179 59 8 785 851 455 493 23 25 7 1,524 226 110 12 1,029 1,176 574 656 36 41 8 1,983 283 206 15 1,231 1,479 678 814 48 58 11 2,866 400 301 19 1,677 2,146 885 1,133 69 89 13 3,880 500 441 24 2,162 2,915 1,096 1,478 100 134 15

*Oil 8% 6 6 8 9 12 14 17

Share of coal-based energy generation is projected to fall from 85% in 2003-04 to 78% in 2031-32; gas’s share is forecast to rise to 20% from 12%. *Includes secondary oil consumption for coal-based generation

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World Energy in 2006

Although nuclear energy can make only a modest contribution over the next 25 years, longer-term consideration of even a modest degree of energy self-sufficiency suggests the need to pursue the development of nuclear power using thorium. India can erect and run nuclear plants to a capacity of 60 GW by 2031-32. The full development of the country’s hydro-electric potential and realisation of the optimistic nuclear scenario by 2031-32 would reduce coal requirements by 120m toe, to 1.08bn toe/y. Renewables to play an important role: Renewable energy sources account for about 33% of India’s primary energy consumption. The major contributor is traditional biomass, followed by electricity generation from hydro-electric plants. A larger contribution from renewables has been built into the policy framework to ensure energy independence. Special policy initiatives have been identified to promote renewables. Specific applications identified are: mini-hydropower; wind power; biodiesel; ethanol; fuelwood plantation; electricity from wood gasification; biogas plants; solar-thermal water heaters; solar-thermal power plants; and solar photovoltaics. An advantage of such applications is that they help to improve the quality of life of the poor and ensure poverty eradication. Major recommendations India’s draft integrated energy policy recommends: u Coal will remain India’s primary energy source until 2031-32; u Power-sector reform must focus on control over aggregate technical and commercial losses; u The cost of power must be reduced, as power tariffs (in terms of purchasing power parity) for industry, commerce and large households are among the highest in the world; u Fuel prices should be rationalised. Prices of different fuels should not be set independently of each other; u Energy efficiency and demand-side management need to be focused to ensure lowering of energy intensity of GDP growth; u Energy resources can be augmented by exploration, or by recovering a higher percentage of in-place reserves; u Hydropower’s contribution will be limited to 5-6% of the energy mix, but its flexibility and peaking-power suitability makes it valuable; u Nuclear power promises to contribute to 5-6% of India’s energy mix by 2031-32, requiring a near 20-fold increase in installed capacity; u Renewables hold greater long-term promise and have an important role to play to maximise development of domestic supply options, as well as the need to diversify energy resources. New renewables can account for around 5-7% of India’s energy mix by 2031-32 ; u Energy security is to be ensured through a strategic 90-day reserve of oil imports; u Energy R&D requires a major boost to ensure

34

sustainable energy supplies in the short- and long-term. A National Energy Fund should be set up by levying a tax on energy companies; u A number of technology missions should be mounted for developing near-commercial technologies and rolling out new technologies; u Household energy security should be ensured through provision of electricity and clean fuels to all, particularly to rural populations; u An independent and informed regulatory regime is to be ensured to realise competitive efficiency, at least until markets mature; and u Greenhouse-gas emissions may be contained through various initiatives. u

Comment Ron Wood, Chair, WEC Programme Committee

It is plausible to expect that Indian primary energy demand could triple in 30 years. China, the US, Brazil and some other countries may exhibit similar increases. Although the concept of demand growth is widely appreciated, the scale of future demand may not be as well understood. Depending on the location, energy supplies may require doubling, tripling, or even greater multiples. Pradeep Chaturvedi’s Indian scenario reinforces a fundamental WEC policy that all energy options must remain open. Energy supply scale must match energy demand scale and all primary energy supply sources will be required to satisfy the overwhelming scale of global energy demand. Supply will largely come from historically proved sources, incorporating, where practicable, technological improvements. Coal will remain an important supply element, but broad implementation of good emissions policies that require clean coal-technology will diminish the efficiency of coal utilisation. Oil will remain an important element, particularly for mobility where liquids will continue to be the dominant solution. In some markets, gas will be an increasingly important supply element as LNG delivery chains mature. The supply contribution from non-hydro-electric renewables will be important, but should not be overstated. Considering the scale of demand, some popular views on renewables’ likely contribution seem optimistic. Finally, the impact of increased energy efficiency to meet demand is important and deserves continued commitment. Strong leadership from both the energy industry and government will be necessary to implement solutions to satisfy the scale of the energy supply challenge.

The future

Looking forward – a global view Jean-Claude Lauzon, Richard Preng, Bojan Pavlovic, Korn/Ferry International Energy supplies will dwindle, demand will rise, but we ought not to worry according to a panel of energy company chief executives, energy analysts and executives of large energy consumers from around the world Energy markets, especially in the West, were relatively stable during the 1980s and the 1990s, in part fuelling the economic and technological growth of the last decade. Since 2002, however, energy markets have exhibited some unnerving behaviour, forcing comparisons to the crises of the 1970s. In addition, global growth in developing countries has led to concerns that energy supplies will dwindle while demand accelerates to an eventual breaking point. Now, more than ever before, energy and the future of energy (in all its forms) is at the forefront of futurist, financial, political and social debate – a debate that has, for the first time, gone global. A number of trends lend to this worrisome scenario according to the International Energy Agency: u Energy demand growth will continue (oil demand is expected to grow by 32% over the next 15 years, while gas will grow by 48%); u Both the first world and the developing world will fuel demand growth. China’s oil demand has increased by 1.6m barrels a day (b/d) over the last two years, and is expected to grow by 7% a year over the next 15 years; and u Over $1 trillion will be invested in non-hydro renewable technologies by 2030. By then, such technologies will triple their share of the world’s power generation to 6%

prices, energy alternatives and sustainable-development options? How will energy companies deal with macroeconomic trends and what are their most pressing issues today? Commissioned by the World Energy Council, Korn/Ferry conducted a series of interviews with 22 global executives to canvass their views on the future of energy. We surveyed energy company chief executives, energy analysts and executives of large energy consumers. To achieve a truly global viewpoint, Korn/Ferry used its international network to engage in conversation across four continents. Three-year outlook Price increases will continue, prompting more investment in infrastructure, but there will be no silver-bullet from alternative sources in the short-term. In homage to some of the more famous elocutions of Alan Greenspan, former chairman of the US Federal Reserve, most executives agree that the near-term outlook for the energy industry is a finely phrased combination of light and gloom. The lack of clear direction is partly caused by uncertainty of supply, underinvestment in infrastructure and the reductions of oil supply capacity cushions. In contrast,

Energy and the future of energy (in all its forms) is at the forefront of futurist, financial, political and social debate Yet despite the doom-and-gloom predictions, a number of positive trends offer a brighter outlook for the future. Energy consumption is a fraction of overall global GDP when compared with the 1970s, infrastructure is becoming more efficient and energy companies are learning new ways to improve production, supply and delivery. Some key questions remain. What is the outlook for the energy industry over the next three-tofive years? What can consumers expect in terms of

Global energy executives are supported by energy analysts in predicting a price range for crude oil to be between $50 and $80 a barrel, over the next three years. © Shell

Korn/Ferry International would like to thank its executive panel for the opportunity to dialogue and exchange ideas. In addition, Korn/Ferry International would like to thank the World Energy Council for providing the forum for debate. Sources: International Energy Agency, 2004; Energy Intelligence Group, 2004; Economist, 2005; World Energy Council; OECD, 2005

35

World Energy in 2006

executives agree that demand will continue to grow steadily, fuelled by China, India and the West. Global energy executives are supported by energy analysts in predicting a price range for oil to be between $50 and $80 a barrel, over the next three years. Uncertainty over security of supply, demand growth and political problems in key oil-producing regions are quoted as price determinants in the near-term. In addition, gas prices are predicted to average between $5 and $10/’000 cubic feet (cf) in the same time period. There is wide agreement, however, that this consistent upward swing in average energy prices will not affect consumption. Our investment decisions must be made, “moving forward, on a forecast long-term price between $50 and $70/b – European ” energy executive. Many companies [in our industry] are “investing on an assumption of $65/b oil ” – European energy executive. We see gas in the $5-8/’000 cf range, with “spikes, and oil in the $40-70/b range with spikes – North American energy analyst. ” Fundamentals do not warrant a $60/b “price, but the geo-political premium pushes it to these levels. The old price model of $18-25/b is gone. Now, a higher band of $50-70/b exists, punctuated by downward spikes … Fortunately, energy is a much smaller percentage of the economy today than it was 30 years ago – North American energy executive.

”

Fifteen years ago, the industry drilled “10,000 wells a year in North America, this

year it will be 40,000 wells, but with no new supply increases. Demand will be stable, but supply will decline steadily – North American energy executive.

”

are not running out of hydrocarbons “…We access to hydrocarbons in the right places, with the right economics is the issue – ” North American energy executive.

Leading energy analysts predict expensive campaigns to improve the profiles of both coal and nuclear power generation Fuelled by oil and gas price increases, investments in clean-coal technology will become more feasible. Global energy executives see a future in new uses of coal energy for industrial consumers, specifically in areas where cleaner emissions are technologically possible. Both coal and nuclear power generation, however, remain long shots in terms of public acceptability. Leading energy analysts predict expensive campaigns to improve the profiles of these two important energy supplies over the next three years, but with limited success. The future for coal looks good. Gas price “volatility will allow coal to play a bigger role, but technology must improve on cleanburning emissions – North American energy executive.

”

Wide agreement among those interviewed exists around the need for continued investment in

Wide agreement among the energy executives interviewed exists around the need for continued investment in infrastructure and energy delivery systems. Photo courtesy Enel

36

The future

infrastructure and energy delivery systems. Striking a balance between oil and gas investment is seen as key to a stable energy market. Additionally, increasing and diversifying pipeline and delivery mechanisms will drive down energy prices in the long term and ensure a more secure supply. However, the way to achieve this and the level of investment required is not clear. Executives agree that more money is needed to ensure less volatility; however some interesting regional discrepancies appear among their varied investment estimates.

ners, while Malaysia’s Petronas and Brazil’s Petrobras are engaged in international partnerships).

On a megawatt basis, Quebec has invested “twice the amount of money on its transmis-

considerations are paramount to “us.Global Chinese growth, Indian growth, these are

sion grid than other areas in North America. Quebec could be 100% renewable energy – Quebec energy executive.

”

Key investments in Europe should be “aimed to reach a balance between energy sources – European energy executive. ” investment is evaluated for Europe “atEnergy a level of €0.69 trillion for energy produc-

tion and €100bn for transportation. It is very difficult to know today whether the level of investment, or the mix of investment is the right one. What is sure, is that investment will be huge and that the price of energy today in France is not high enough to sustain the level of investment required – French energy executive.

”

The world will need $200bn a year of “investment from now until 2030 to supply

oil and gas requirements, only for exploration and production. International oil companies (IOCs) are finally reacting less conservatively, but more cooperation is needed between producers and consumers – Latin American energy executive.

”

As well as increasing price volatility, the energy industry is becoming truly global and, therefore, responsive to shifts in economic, political and public conditions across the globe. Most North American and European executives agree that national oil companies (NOCs) are the awakening giants of the energy world. Western executives view NOCs as increasingly self-assertive and not keen to partner IOCs. Russian, Nigerian, Middle-Eastern and Latin American NOCs are seen as establishing a global presence through strict production-sharing agreements. In addition, working closely with national governments, these companies are seen as having advantageous access to exploration sites. Moreover, they have evolved their upstream business models and are now offering integrated energy solutions, through a number of global partnerships (Russian and Chinese companies are potential part-

will get bigger and more aggressive. “TheNOCs key will be how to partner with them ” – North American energy executive. will play a vital role in the future “ofNOCs energy industry, globally. The key challenge is how to partner with them – French ” energy executive.

all considerations that were not at all part of our discussions just 10 years ago – North American energy executive.

”

oil prices were low, in the mid-1980s “toWhen late-1990s, major oil firms gave away a

competitive advantage by outsourcing technology to the services sector. As a result, a developing country today is not dependent on a major oil firm to provide capital and engineering knowledge – North American energy executive.

”

In the wake of the energy crises in the 1970s, Western governments and organisations invested heavily in alternative energy sources. Despite the efforts, renewable energy amounts to just under 2% of the world’s non-hydro power generation capacity. While executives surveyed generally agree that investment in alternative fuels has not been a waste, they predict no significant increase in their usage over the next 20-30 years. The shortand medium-term future of energy is overwhelmingly in hydrocarbons.

Executives in Europe are more likely to consider alternative energy a viable near-term solution than those elsewhere Interestingly, European executives are more likely to consider alternative energy a viable nearterm solution. Nearly half of European energy executives surveyed expressed interest in alternative energy sources, such as wind, water and solar power; whereas, North American and global executives expressed caution with respect to alternative fuel investment. With the exception of onshore wind power, renewable energy sources were viewed by these respondents as lacking a business case for the foreseeable future. A few North American energy executives predicted some positive developments in terms of fuel-cell technologies, but without any commercial effect for at least 10-15 years. Of the North American executives, those from Quebec were most likely to focus on alternative energy sources as primary drivers in their sustainable development strategy. In general, Quebec-

37

World Energy in 2006

based executives were more likely to agree with their European counterparts in terms of their alternative fuel visions. Another interesting finding was that while most energy executives viewed hydrocarbons as irreplaceable in the near-term, they viewed emissions reductions and the development of alternative fuels as their own companies’ key priorities. energy will be an important “toolRenewable in tackling climate change, but it will

remain a relatively marginal element of the overall energy mix. Its contribution is environmental rather than economic – European energy executive.

”

There is clearly a place for an alternative “source of energy, wind or water. There is a huge potential in France where those energies are not developed as they should be – European energy executive.

”

“

Hydrocarbons will remain the mainstay of energy mix for the next 20-30 years – North American energy executive

”

“

To put it bluntly, no alternatives are feasible in the next 20-30 years. The most ample, cost-efficient energy sources will continue to be oil and gas, followed by coal. By 2025 oil and gas will supply 65% of the world’s energy needs and if we add coal, this figure comes to almost 90% – Latin American energy executive.

”

oil prices have always been the fuel “ofHigh innovation. Twenty years ago, we could

not imagine producing hydrocarbons from some of the areas we are active in today. This trend will continue into the future – North American energy executive.

”

In turn, industrial energy consumers added an interesting point of view to the debate on sustainable development – they accepted their responsibility to reduce wasteful energy consumption. Most industrial energy consumers suggested that dated equipment usage in manufacturing processes, redundant and inefficient packaging solutions as well as a lack of institutionalised recycling systems across industries as key to increasing energy costs. According to these, producers and end-consumers must change their purchasing behaviour and work to simplify product packaging structures to reduce waste.

Most energy executives viewed emissions reductions and the development of alternative fuels as key priorities With respect to packaging, society wastes “a tremendous amount of energy and material – North American industrial energy ” consumer. aluminium industry, some plants use “30%In the more energy than is necessary because of old and inefficient equipment – North ” American industrial energy consumer. With respect to aluminium cans, it takes “only 5% of the energy required to make a

can to recycle it. Unfortunately, some recycling efforts require more than 100% of the energy needed to make the product in the first place. This is wasteful – North American industrial energy consumer.

”

We must educate customers to be more effi“cient ” – North American energy executive. will be the consumers of energy, not “theIt producers, that drive change – North ” American energy consumer.

Most executives agree their companies should invest in alternative fuel sources, but also believe more should be done to educate consumers in terms of conservation and efficient energy use

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Outlook for renewable energy Renewable energy is the way of the future, but it may only come after some unwanted pain. With a surge in oil prices from $10/b to $60/b over the last three years, a faster move by consumers to alternative energy sources and renewable energy solutions could have been expected. Unfortunately for a number of fuel-cell technology firms, carmakers’ hybrid-sales projections and windpower concerns, this has not happened. With energy making up a significantly smaller portion

The future

of Western GDP, consumers seem to have more room in their wallets for price increases. But for how long? The executive panel agreed that renewableenergy strategies are required to offset a potential price hike that could not be sustained by consumers. While most executives agree their companies should invest in alternative fuel sources, they also believe more should be done to educate the consumers in terms of conservation and efficient energy use. The panel believes today’s supply/ demand balance is narrow, which is why a focus on a renewable and a sustainable energy policy is of even more importance.

“

Society must get more productive regarding its use of energy. Technology will improve efficiency and upgraded infrastructure will move power around more efficiently – North American energy executive.

”

“

Industry leaders have a responsibility and this energy boom will turn into a boomerang if energy policy and consumer behaviour does not change – North American energy executive.

”

are accepting price increases “andConsumers will not change their behaviour until it starts affecting their overall purchasing power – North American energy executive.

”

We need a forward-looking renewables “strategy that will not depend on doom scenarios in terms of price increases – Euro” pean energy executive. The Asian dragons Asian economies, led by China, will become the world’s largest energy consumer in the next 25 years. They need help to grow, but grow responsibly. All executives surveyed agree that China’s and Asia’s growth over the next 10 years will be the primary driver of energy consumption increases. Over the next decade, Asia is expected to constitute over 50% of all energy demand growth. Simply stated, the global panel named Asia (China and India specifically) as the future energy customer. Executives surveyed believe China and India will take concrete steps in the near future to secure their energy supplies. Russian and Latin American NOCs are seen as the most likely to fuel this growth, while North American and European companies seem more reticent to enter competition in these saturated markets. Nevertheless, most IOCs and NOCs are expected to take active part in the Asian expansion over the next decade, with pipeline and infrastructure projects topping their investment rosters. Even so, most executives agree that China and India will need to grow conservatively and

with stronger emissions controls. Most executives believe these two nations must maintain their growth, but not at the expense of the world’s overall environment. Given the forecast level of economic “growth of several major emerging econo-

mies, and their level of energy consumption per capita, global energy demand growth will increase significantly over the coming years – European energy executive.

”

It is absolutely important to give those “countries [China, India] the capacity to grow,

but, at the same time, we need to maintain this growth under control – European energy executive.

”

Asia represents about 50% of global GDP. “China has doubled its oil consumption in the

past four years. Imports of oil rose by 50% in 2004. In terms of oil and gas, Asia’s emerging economic power only underscores the need to expedite decision making and cooperation to tap oil and gas resources to supply global markets and ease the tight market outlook on a global basis – Latin American executive.

”

Energy regulators Legislation is viewed as important in protecting environmentally sustainable growth, but only if it remains grounded in reality. The global panel agreed that legislation is an important tool used to protect the environment and ensure sustainable development and efficient energy usage. In the wake of the Russia-Ukraine gas crisis, European executives also saw legislation as an institutional instrument to secure supply within a common framework, and specifically within the European Union. In addition, non-US executives saw a great need for global legislation and expressed their wish that the US sign the Kyoto Protocol on climate change.

Legislation is viewed as important in protecting environmentally sustainable growth, but only if it remains grounded in reality On the other hand, the global panel agreed that all legislation must allow market fundamentals to work independently. The executives agreed that hydrocarbons are the staple of the energy industry for some time to come and stifling investment in this area in order to encourage alternative fuel usage would lead to more price volatility. In addition, the global panel agreed that it is the end-consumers, most of whom are voters, who will decide the form of future legislation. Energy price rises until now seem not to have hurt most consumers, especially in Western countries, causing little or no pressure on legislators to alter their

39

World Energy in 2006

course. Even so, more expensive energy will not necessarily swing the pendulum towards environmental concerns, as consumers are more likely to call for cheaper fuel rather than restrictive emissions protocols.

“

Markets must be allowed to work. The main desire is that legislators put in place structures, regulatory frameworks that support the operation of markets – European energy executive.

”

Security of supply is a key issue – Euro“pean ” energy executive. consuming countries, North America “andIn Europe, legislators must ensure and maintain environmentally sound policies ” – Latin American energy executive. oil-producing countries, it is necessary “toInestablish legal and regulatory frameworks

to allow for investment in their industries, while increasing competitive national content and improving corporate social responsibility – Latin American executive.

”

Legislation needs to take into account the “facts. Hydrocarbons are here to stay and we need to work around this – North Ameri” can energy executive.

“toLegislation operate ” executive.

needs to help the market – North American energy

Looking forward Investment in new energy sources, frameworks for a global energy community and environmental responsibility top the executive dashboard. In terms of planning for the future, the global panel identified three most important initiatives as quintessential to the energy industry’s stable growth: u Investment in new energy sources – executives agree price volatility requires continued and strategic investment in new energy sources, efficient production technologies and supply rationalisation and security; u A need for a global framework for cooperation and communication between IOCs, NOCs, governments and consumers; and u Sustainable growth that is economically and environmentally viable. The panel offered a variety of perspectives on a number of important issues that face their industry. Interestingly, despite their varied places of origin, the surveyed executives offered a unified viewpoint on a number of intersecting dimensions. It was the hope of this survey that the opinions expressed in this panel will provide further guidance to the energy community at large. u

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Comment Gerald Doucet, WEC Secretary General

According to Sheik Zaki Yamani, former petroleum minister of Saudi Arabia. “The Stone Age did not end for lack of stone.” To paraphrase Mark Twain, wishful reports of the “death of oil” are decidedly premature. The WEC is revisiting its well-known Scenarios (Global Energy Perspectives), produced in 1995 and updated in 1998. With a policy focus on government engagement in the energy sector, international coooperation and market integration, the WEC is tackling the demographic, technology, institutional, environmental and price drivers of energy supply and demand. The results will be reported at the Rome World Energy Congress in November 2007. Twelve special regional briefings in 2006 are testing the expert thinking on these assumptions and their linkage to the WEC goals of energy accessibility, availability and acceptability. The key to achieving these goals is to keep all energy options open. There are pressures in the market and in the mix that the Korn/Ferry and other WEC work highlight: u The fragility of the US’ consumptiondriven economy, with $60/b oil and $10/’000 cf gas; u The sustainability of China’s economic growth in terms of skills and World Trade Organization rules; u The lack of oil pipeline infrastructure from Russia and the Caspian; u The delays in siting and approvals in the US and Europe for LNG deliveries bumping gas out of electricity generation (mirroring oil in the 1970s?); u Oil and gas demand in the Middle East to support growth and greater prosperity for rapidly increasing populations; u Conflicts in Iraq, Iran and Palestine/Israel and their outcomes; u Sub-Saharan African unrest and delays in financing the Mediterranean Ring; u Longer-term alternatives to oil in mobility (such as coal synthetics); and u  The rebirth of nuclear power in key European countries, the US, and in the new India Energy Policy (with China close behind). Climate change is entwined in several of these issues and the government hand may sting. There is clearly greater scope for coooperation to improve public awareness.