On November 10^th, the International Energy Agency (IEA) released its annual World Energy Outlook, regarded as a high quality information source by most governments, companies and associations. The 2009 edition provides updated projections that take into account the “implications of the global credit crisis, the economic slowdown and the recent slump in the prices of oil and other forms of energy”. One of the main conclusions is that a tremendous growth of the gas market is in the make, building upon the upcoming growth of the oil market. This prediction would take place independent of a –highly desired – Clean New Energy Deal. Whereas the basis of this prediction is based on extremely qualitative research, some elements need to be added to complete this picture.

Oil growth, Increased efficiency… and the Natural gas glut

Each year, the IEA provides a quantitative outlook for energy supply and demand in the medium term (2010-2015) and longer-term (2015-2030) and draws lessons for energy security, investment and the environment.

This year’s forecasts are based on a ‘Reference Scenario’, which assumes that governments make no changes to their existing energy policies and measures. They also have a ‘450 Scenario’, whereby world leaders collectively act to reduce the concentration of CO2 and alikes in the atmosphere to 450 parts per million. This could, for example, be initiated during the Copenhagen conference and structured next year in the Mexico summit. For both scenarios, it assumes that general economic climate will pick up again in 2010.

The predictions in the 700 pages of the World Energy Outlook 2009 can be summarised in the following bullets:

- The financial crisis created a temporary break from rising fossil energy use. But once the economy back on track, demand will steeply rise again. If countries agree upon a –crucial- more carbon conscious approach, oil use is supposed to peak in 2020.

-  For a balanced carbon/consumption, the price of carbon in industrialised countries will need to reach $50/ton by 2020 and $110 by 2030. In developing countries the price of carbon would need to reach $30 by 2020 and $50 by 2030. [the current carbon price is below $20]

- Better energy efficiency [carbon markets, cap & trade, international sectoral standards, and national policies], rapid growth in renewable energy, and increased use of nuclear power will be the key elements to switch to a low oil scenario. Measures in the transport sector to improve fuel economy, expand biofuels and promote the uptake of new vehicle technologies (hybrid and electric) will be the biggest driver in the reduction of oil demand.

-  A natural gas glut is looming – according to IEA’s predictions even independent of the policy landscape. Although predictions differ, the main message is the gas will become the next big thing. Gas resources are indeed huge but exploiting them will be challenging, because of its high costs.

- The ten ASEAN countries are set to play an increasingly important role in global energy markets in the decades ahead (= Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam). The presence of neighbouring China and India will be an additional catalyst. In the same time, many hurdles will need to be overcome if Southeast Asia is to secure access to the energy required to meet its growing needs at affordable prices and in a sustainable manner.

Gas: potential energy

 

Let’s have now a closer look to this upcoming gas glut. Worldwide reserves are large enough to cover increasing demand:

‘Proven gas reserves at the end of 2008 totalled more than 180 tcm globally — equal to about 60 years of production at current rates. Over half of these reserves are located in just three countries: Russia, Iran and Qatar. Estimated remaining recoverable gas resources are much larger. The long-term global recoverable gas resource base is estimated at more than 850 tcm (including only those categories of resource with currently demonstrated commercial production). Unconventional gas resources — mainly coalbed methane, tight gas (from low-permeability reservoirs) and shale gas — make up about 45% of this total. To date, only 66 tcm of gas has been produced (or flared).’

 

The regions with the biggest potential are the US & Canada with their shale gas reserves, and, closer to Europe, the Middle East, with still very large reserves and… one of the lowest production costs, especially when the gas is produced in association with oil.  So far so good.

The picture is less straightforward though when cross border issues are tackled. According to the IEA’s report, inter-regional gas trade is projected to grow substantially [from 30%-60%].

OECD Europe and Asia-Pacific would be expected to see their imports rise in volume terms in both scenarios. Currently, Europe can even be reassured: it has plenty of supply routes for this gas, be it through pipelines or for transport as LNG.

 

That’s where the problem starts. Firstly, new routes will have to be built to cover a part of this increase, and secondly, the IEA scenario doesn’t take the drawbacks of political tensions into account.

Gas: kinetic energy

Transporting fuels in tanker ships or by pipelines is not a random choice. The availability of pipelines is not the only condition to fuel this gas glut, neither will it make the move from oil to gas look as a straightforward – we need to be green – switch.  A few physical and financial constraints…

For shorter distances, gas usually seems cheaper to transmit by high-pressure pipelines, compared to transport as a liquid in refrigerated tanker ships. By contrast, crude oil is usually cheaper to transport by tanker than by pipeline, which is why approximately 60% of all crude oil is transported by tanker ships.

Moreover, some pipelines need higher safety standards than others and are therefore more expensive to build. When taking into account that gas contains less energy per unit than oil, one can clearly tell that new gas pipelines are not necessarily the most profitable nor the most logical options.

In general, the quality of an option highly depends on the geographical characteristics. In the Gulf, for example, distance between oil wells and tanker terminals are rarely longer than several hundred km. By contrast, in Russia and its peripheral territories, the average distance for oil transmission is over 1500km.

Gas: political energy

In addition to physics and fuel demand, geopolitical bottlenecks play an important role as well. For Europe, this is especially true for gas where transport through transnational pipelines may be prevented from functioning in case of conflicts. The most striking example is the recurring tension between Russian and Ukraine.

We have already highlighted the core elements of this case in a previous post, summarizing on the causes, evolutions and general context of the Russian gas problem and its impact on the European supply. In other words: despite a potential positive spirit in international collaboration, business remains business, and power remains power.

Overall, one can thus conclude that the Gas Era announced by the IEA might well come true, but with more challenges along the road due the price tag matrix of oil versus gas, geophysical elements and, above all, important political bottlenecks.