Many of the long-held tenets of the energy sector are being rewritten. Major importers are becoming exporters, while countries long-defined as major energy exporters are also becoming leading centres of global demand growth.
The rise of unconventional oil and gas and of renewables is transforming our understanding of the distribution of the world’s energy resources. Awareness of the dynamics underpinning energy markets is essential for decision-makers attempting to reconcile economic, energy and environmental objectives.
The centre of gravity of energy demand is switching decisively to the emerging economies, particularly China, India and the Middle East, which drive global energy use one-third higher. China is about to become the largest oil-importing country, while India becomes the largest importer of coal by the early 2020s. Southeast Asia likewise is emerging as an expanding demand centre. The US moves steadily towards meeting all of its energy needs from domestic resources by 2035. Together, these changes represent a re-orientation of energy trade from the Atlantic basin to the Asia-Pacific region.
High oil prices, persistent differences in gas and electricity prices between regions and rising energy import bills in many countries focus attention on the relationship between energy and the broader economy. The links between energy and development are illustrated clearly in Africa, where, despite a wealth of resources, energy use per capita is less than one-third of the global average in 2035.
As the source of two-thirds of global greenhouse-gas emissions, the energy sector will be pivotal in determining whether or not climate change goals are achieved. Although some carbon abatement schemes have come under pressure, initiatives such as the President’s Climate Action Plan in the United States, the Chinese plan to limit the share of coal in the domestic energy mix, the European debate on 2030 energy and climate targets and Japan’s discussions on a new energy plan all have the potential to limit the growth in energy-related CO2 emissions.
WHO HAS THE ENERGY TO COMPETE?
Large differences in regional energy prices have sparked a debate about the role of energy in economic growth. Brent crude oil has averaged $110 per barrel in real terms since 2011. But prices of other fuels have been subject to significant regional variations. Although gas price differentials have come down from the extraordinary levels seen in mid-2012, natural gas in the US still trades at one-third of import prices to Europe and one-fifth of those to Japan. Energy costs can be of crucial importance to energy-intensive industries, such as chemicals, aluminium, cement, and oil refining. Energy-intensive sectors worldwide account for around one-fifth of industrial value added, one-quarter of industrial employment and 70% of industrial energy use.
SEARCHING FOR AN ENERGY BOOST TO THE ECONOMY
Countries can reduce the impact of high prices by promoting more efficient, competitive and interconnected energy markets. Cost differentials between regional gas markets could be narrowed further by more rapid movement towards a global gas market. In a Gas Price Convergence Case, this would require a loosening of the current rigidity of liquefied natural gas (LNG) contracting structures and oil-indexed pricing mechanisms, spurred by accelerated gas market reforms in the Asia-Pacific region and LNG exports from North America. There is also potential in some regions, notably China, parts of Latin America and even parts of Europe, to replicate at smaller scale the US success in developing its unconventional gas resources.
Enhancing energy competitiveness does not mean diminishing efforts to tackle climate change. The WEO Special Report: Redrawing the Energy-Climate Map, published in June 2013 identified four pragmatic measures – improving efficiency, limiting the construction and use of the least-efficient coal-fired power plants, minimising methane emissions in upstream oil and gas, and reforming fossil-fuel subsidies – that could halt the increase in emissions by 2020 without harming economic growth.
LIGHT TIGHT OIL
The capacity of technologies to unlock new types of resources, such as light tight oil (LTO) and ultra-deepwater fields, and to improve recovery rates in existing fields is pushing up estimates of the amount of oil that remains to be produced. But this does not mean that the world is on the cusp of a new era of oil abundance. The rise of unconventional oil (including LTO) and natural gas liquids meets the growing gap between global oil demand, which rises by 14 mb/d to reach 101 mb/d in 2035, and production of conventional crude oil, which falls back slightly to 65 mb/d.
The Middle East remains at the centre of the longer-term oil outlook. The role of OPEC countries in quenching the world’s thirst for oil is reduced temporarily over the next ten years by rising output from the United States, from oil sands in Canada, from deepwater production in Brazil and from natural gas liquids from all over the world. But, by the mid-2020s, non-OPEC production starts to fall back and countries in the Middle East provide most of the increase in global supply. Overall, national oil companies and their host governments control some 80% of the world’s proven-plus-probable oil reserves.
The need to compensate for declining output from existing oil fields is the major driver for upstream oil investment to 2035.
THE GREAT MIGRATION IN OIL REFINING AND TRADE
Major changes in the composition of oil supply and demand confront the world’s refiners with an ever-more complex set of challenges. Rising output of natural gas liquids, biofuels and coal- or gas-to-liquids technologies means that a larger share of liquid fuels reaches consumers without having to pass through the refinery system. Refiners, nonetheless, need to invest to meet a surge of more than 5 mb/d in demand for diesel that is almost triple the increase in gasoline use. The shift in the balance of oil consumption towards Asia and the Middle East sees a continued build-up of refining capacity in these regions; but, in many OECD countries, declining demand and competition in product export markets intensify pressure to shut capacity. Over the period to 2035, we estimate that nearly 10 mb/d of global refinery capacity is at risk, with refineries in OECD countries, and Europe in particular, among the most vulnerable.
The role of OPEC countries in quenching the world’s thirst for oil is reduced temporarily over the next ten years by rising output from the United States, from oil sands in Canada, from deepwater production in Brazil and from natural gas liquids from all over the world.
The new geography of demand and supply means a re-ordering of global oil trade flows towards Asian markets, with implications for cooperative efforts to ensure oil security. The net North American requirement for crude imports all but disappears by 2035 and the region becomes a larger exporter of oil products. Asia becomes the unrivalled centre of global oil trade as the region draws in a rising share of the available crude oil. Deliveries to Asia come not only from the Middle East but also from Russia, the Caspian, Africa, Latin America and Canada.
A NEW LIFE WITH WIND AND SOLAR
Renewables account for nearly half of the increase in global power generation to 2035. China sees the biggest absolute increase in generation from renewable sources, more than the increase in the EU, the US and Japan combined. The increase in generation from renewables takes its share in the global power mix above 30%, drawing ahead of natural gas in the next few years and all but reaching coal as the leading fuel for power generation in 2035. The current rate of construction of nuclear power plants has been slowed by reviews of safety regulations, but output from nuclear eventually increases by two-thirds, led by China, Korea, India and Russia. Widespread deployment of carbon capture and storage (CCS) technology would be a way to accelerate the anticipated decline in the CO2 emissions intensity of the power sector, but only around 1% of global fossil fuel-fired power plants are equipped with CCS by 2035.
ECONOMICS AND POLICIES: KEY TO THE OUTLOOK
Coal remains a cheaper option than gas for generating electricity in many regions, but policy interventions to improve efficiency, curtail local air pollution and mitigate climate change will be critical in determining its longer-term prospects. Policy choices in China will be particularly important as China now uses as much coal as the rest of the world combined. Global coal demand increases by 17% to 2035, with two-thirds of the increase occurring by 2020. Coal use declines in OECD countries. By contrast, coal demand expands by one-third in non-OECD countries – predominantly in India, China and Southeast Asia – despite China reaching a plateau around 2025. India, Indonesia and China account for 90% of the growth in coal production.
Growth is strongest in emerging markets, notably China, where gas use quadruples by 2035, and in the Middle East. But in the European Union, gas remains squeezed between a growing share of renewables and a weak competitive position versus coal in power generation. North America continues to benefit from ample production of unconventional gas, with a small but significant share of this gas finding its way to other markets as LNG.