Concerning oil, we can note that oil depletion, forcing a rapid increase in extreme depth offshore oil, increased land condensates production, increased syncrude and tertiary solvents-based extraction, has led to ‘The Lighter Barrel’, now averaging about 1165 litres-per-ton, compared with under 1100 l/ton in the 1970s and early 1980s. Not unassociated, but in fact physically and geologically linked with this, we have the so-called ‘Gas Bridge’ or continuing very fast growth of world gas production, network interconnection, and fast increased dependence on the very few major suppliers – notably Russia for European consumers. Cynics can call this a bridge to nowhere because Peak Gas is as sure and certain as Peak Oil. In addition, gas reservoir depletion is not at all like oil reservoir depletion, with a fast and unpredictable decay rate or decline after peak is attained. Peak Gas is probable by as early as 2015-2018.

This essentially leaves coal and uranium as fossil energy sources for the post-2025 world underlining, if needed, how vital it is to develop ROU, rational gas utilisation, energy conservation and the renewable sources. It is sure that ‘clean coal’ technology exists, if expensive, and that uranium reserves at acceptable extraction prices certainly exist, but the growth rate of demand on these relatively static reserves will determine to what extent they can palliate decline of oil and natural gas reserves. Regarding nuclear electricity, and other than its extreme financial cost, almost every day brings further proof there is no ‘firewall’ or barrier between so-called ‘civil nuclear’, and real ‘military nuclear’. Every single nuclear reactor among the approx. 445 ‘civil’ reactors in service worldwide is a potential Chernobyl.

Changing forecasts: If w turn to official and ‘consensus’ forecasts for the changing energy mix these are easy to obtain and view, for example the imaginative projections published in the IEA ‘World Energy Outlook’ series of publications. The best way to appreciate these impressionist rather than impressive artwoks, and their unimpressive predictive capabilities is to compare energy mix forecasts produced at certain dates, say 1990, 1995, 2000 and 2005 for the same future dates, say 2010, 2015, 2020 and 2025. The constant large change of forecast mixes, for the same date in the future will leap from the page.

Consensus views: Consensus views, or claimed consensus views are in fact mobile and changing. One example is the 1990s ‘consensus’ view used by IEA and other institutions, claiming that Saudi Arabia, Iraq, UAE and Kuwait could or would produce a total of about 40 Mbd in 2020. This kind of ‘consensus view’ has totally disappeared from currently published artworks, or energy mix forecasts of the IEA. A better and more reasonable forecast would be 16 or 17 Mbd, with domestic oil consumption of the four exporters at about 4 Mbd, and net export capacity around 12 or 13 Mbd.

Current ‘consensus views’ on the world energy mix of the 2010-2020 period include:

 

• Certain but perhaps only short-term ‘Gas Bridge’, ie. fast growth of gas utilisation
• Certain but relatively low growth of coal utilisation, mostly ‘dirty’
• Official consensus view that currents fast rates of electrification (about 9% pa growth of electricity demand) will be sustained for at least 10 years
• Certain but rarely admitted decline of OECD country oil intensity, perhaps rapid
• Certain and rapid growth of renewable energy production
• Continuing uncertainty regarding the role of nuclear energy

Gas Bridge and Electrification: Most of these views can be criticised, and especially the Gas Bridge theory, and continued very fast electrification in OECD countries as well as nonOECD countries. We should first note that many countries, eg. practically all countries in Asia and the Mid East, are increasing their gas consumption at over 10% pa, and some like China and India at more than 13% pa. World demand trends for gas are very comparable to world oil in the period of fastest growth, that is about 1960-1975, immediately preceding the first Oil Shock. World gas reserves are far from limitless, and gas transport infrastructures, especially LNG, are expensive. Gas reserves in the Middle East and Central Asia, we can note, are already the focus of intense geopolitical rivalry. The potential for “gas shock”, much stronger than that of January 2006, is most certainly real and possible.

Electrification was a favoured theme of Lenin, for communising the masses, and also a founding idea of the European Community, but thermodynamically it is an aberration. Study of what electrification does to the energy economy is a ‘worst of all worlds’ story, notably ratcheting up economy-wide energy intensity, including oil intensity, and especially during periods or phases of strong economic growth. The capital costs of electricity production, especially if we project fast growths of wind and nuclear electricity, will themselves act to depress future growth of electrification.

Top-down and Bottom-up: official consensus energy mix forecasts are almost exclusively ‘top-down’ views of the energy economy, the economy, and society. From the ‘bottom-up’ we get different, more flexible, and above all real world responses and signals for change of the energy mix, in responses to the same cluster of causes. These causes include resource, technology, financial, economic, political, legislative, environmental, associative and social determinant, factors, demands and constraints. Spanning a range of these ‘motors for change’ we have the Kyoto Treaty, and various ‘Kyoto processes’ for attaining national target obligations in the 35 or so ratifying countries.

Energy consumers in the urban markets of the OECD countries, and in nonOECD urban markets more simply react and respond to the following perceptions: energy prices are high and set to rise further; energy security is declining; urgent action is needed to reduce environment deterioration and to slow climate change. Combined with Kyoto Treaty obligations in the ratifying countries, this results in a powerful number of levers for change of the energy mix.

Kyoto Treaty and the changing energy mix: The mediatised promise of the Kyoto Treaty, to almost painlessly stop or limit what is essentially runaway climate change, must be separated from actual and real provisions of the Treaty, as negotiated and modified over the last 10 years. In the ratifying countries, however, it is sure that 2007 will be a hinge year for energy policies, investment, energy pricing, the regulatory framework, because from 2008 compliance will be programmed into the 2008-2012 period. The Group B Associated Countries, currently only covered by low-impact measures such as Clean Development Mechanism (CDM) credits, may quickly widen Kyoto-related their energy sector investment potentials, depending on ongoing discussions and negotiations. The ‘reverse application’ of CDM programmes in the ratifying countries, and extended to cover urban habitat, energy, transport and food supply development, offers very large potentials in the near-term.

ENERGY TRANSITION

Energy Transition means the large and structural change of national energy mixes. At the world level, if there is rational oil and gas utilisation, and rapid worldwide development of renewables, it is likely the tapering-down of world oil consumption can be manageable, rather than catastrophic. This will notably include long-term and continued decline of oil intensity in the OECD countries, the relatively short-term ‘Gas Bridge’, and other changes within a context that will however remain unsure and unwilling.

NonOECD transition: The four-fifths of the world’s population outside the OECD countries will experience a very different trajectory. Taking notably the cases of China and India, these two supergiant economies will firstly and surely transit towards the OECD oil intensive and energy intensive economic model. Their current extreme low oil intensities can be compared with those of South Korea, Taiwan, Singapore – the Asian Tigers – when these countries launched their copybook and fast economic expansion they sustained from the early 1970s. Today South Korea has an oil intensity of about 16.5 bcy.

It is surely significant that China, today, uses about 1.1 Billion tons of coal per year and that reduction of this coal burn, together with the US coal burn of about 0.9 Billion tons/year would be desirable to reduce the rate of climate change. However, if China was to start a switch away from coal, reducing its annual coal burn by 50%, and substitute this with oil, China’s oil demand would increase by about 45% above its current oil demand. China is already the world’s second biggest oil consumer, and third biggest oil importer country, after the USA whose import demand, at about 13.5 Mbd, is about 25% more than the combined total of Chinese and Indian oil consumption. Any argument that high oil prices will penalize the economic growth of countries such as China and India, causing them to reduce oil imports, is totally discredited by economic and financial data regarding China and India, whose current (mid year 2006) foreign exchange reserves stand at a combined figure of about 1400 Billion USD.

Energy Transition must therefore be discussed, agreed and planned taking account of such realities. I have made various proposals to this end, recently published by ’Global Cement and Global Fuels’ magazine. No acceptable plan or programme will be possible without full participation by world oil and gas producers, with powers in the setting of prices and decision on supplies.

INVESTOR STRATEGIES AND THE IET FUND

We can surely hope there will be ‘top-down’ responses to what is a worldwide problem, or crisis, but we will surely not ignore existing and emerging ‘ground-up’ investor opportunities generated by Energy Transition on today’s real world. At present these opportunities are concentrated, or most easily exploited in urban markets of the OECD countries and certain non-OECD countries.

These Energy Transition-linked and –driven opportunities arise from a few, widely stated consumer and user perceptions, amplified and structured in many cases by community association, NGOs, municipal and urban authorities, private business owners, and other economic players large and mature urban markets.

These drivers of the IET Fund concept can be summarised as below:

 

• Energy prices are high and set to rise further, due to opaque and unsure supply systems, to resource depletion, and to fiscal and tax burdens set by the State
• Habitat, transport and food supplies and services are of rising cost and declining quality, with decreasing autonomy and freedom of choice for ‘captive’ consumers
• Environment deterioration and climate change are serious issues, requiring individual and citizen action
• All or most market solutions offered are high-cost and/or ineffective, not consumer friendly

The IET Fund proposal addresses this new and emerging cluster of consumer and business needs, with a range of proposed investor vehicles spanning the key sectors of energy, habitat, transport and food supplies and services in urban markets. The strategy is above all low cost and local supply, tapping into and complementing local associative, community and collective action in the domains considered.

This paper was presented at the ‘OIL AND GAS INVESTING’ forum in Geneva on November 3, 2006.

To join in on the conversation or to subscribe or visit this site go to:  http://www.energypulse.net

Copyright 2005 CyberTech, Inc.