IEA for purity and reason

How to make the energy future bright

"The world's leading policymakers need to change the future of energy decisively and urgently," said Claude Mandil, head of the International Energy Agency (IEA), as he launched the World Energy Outlook 2006 in early November. This extensive research document shows that if the global energy industry continues on current trends, the energy supply of the future will be, as Mr. Mandil puts it, “dirty, unreliable and expensive.” At the same time, the agency's forecasters provide recommendations that, according to the views of their authors, are designed to help humanity avoid such an unenviable prospect. Energy of Europe correspondent Yuri ShPAKOV got acquainted with the main provisions of the report.

Two-Faced Threat

The world faces a double threat to the energy industry. On the one hand, there is a danger that sufficient and reliable energy supply at affordable prices cannot be provided. On the other hand, excessive energy consumption causes damage to the environment. Soaring energy prices and current geopolitical events have reminded us of the critical role affordable energy plays in economic growth and human development, and how responsive the global energy system is to supply disruptions. Thus, securing energy supply is once again at the top of the international agenda. With the current energy supply structure, however, there is a risk of severe and irreversible damage to the environment, including changes in global climate conditions. Bringing energy security goals into line with environmental goals requires consistent, concentrated action by governments, as well as public support.

It is more important than ever to curb the growth of fossil fuel consumption, achieve greater geographic and energy diversification, and reduce climate-damaging emissions. The heads of state and government of the G8 countries, who met in July 2005 in Gleneagles and in July 2006 in St. Petersburg with the leaders of many large developing countries and international organizations, incl. and the International Energy Agency -- commissioned the IEA to outline its views on "alternative energy scenarios and strategies for achieving a 'clean, smart and competitive energy future'."

This year's World Energy Outlook is a response to this mandate. This document confirms the fact that the development of consumption and trade of combustible energy resources, as well as associated emissions, will continue unevenly until 2030 if governments do not take appropriate measures. This is the premise of the “base case” scenario outlined in the IEA’s annual document. In an alternative “political scenario,” the publication demonstrates that the level of energy consumption, as well as emissions of harmful substances into the atmosphere, can be reduced if a set of actions that are currently planned throughout the world are actually implemented. The decisive factor is the need for the economic benefits of efficient use and production of energy to outweigh the economic costs of these activities.

99 million barrels per day, and that's not the limit

Under the baseline scenario, global primary energy consumption will increase by slightly more than half between now and 2030, equating to an annual growth rate of 1.6%. By 2015 alone, consumption will increase by more than a quarter. Moreover, over 70% of the expected growth in consumption over the period of time under review will occur in developing countries, primarily China (about 30% of the increase in global appetite). In these countries, the economy and population are growing much more rapidly than in countries that are members of the Organization for Economic Cooperation and Development. Thus, there is a shift in the center of gravity in global energy consumption. Almost half of the increase in global primary energy consumption comes from electricity production, and about 1/5 of it comes from the transport sector, almost exclusively in the form of petroleum-based combustibles.

In general, in both scenarios, combustible energy sources will remain the most important energy sources until 2030. Under the baseline scenario, they will account for 83% of total energy consumption growth between 2004 and 2030. Thus, their share in global energy consumption will increase from 80 to 81%. At the same time, the share of oil will decrease, although oil will retain its position as the most important ingredient in the global “energy cocktail” until 2030. Global oil consumption will rise to 99 million barrels per day by 2015, and will increase further to 116 million barrels per day by 2030, up from 84 million barrels per day in 2005. Unlike last year's World Energy Outlook, this time the IEA notes that the most intensive growth in absolute terms will come from hard coal, which will be used mainly for electricity generation. Almost 4/5 of the increase in coal consumption will occur in China and India. Coal will continue to be the second most important source of primary energy, while its role in the world will increase slightly. The share of natural gas consumption will also increase. However, due to high prices for this energy carrier, the growth in its consumption will not be as fast as IEA experts saw quite recently. The share of hydropower in primary energy production will increase only slightly. At the same time, the share of nuclear energy will decrease. No boom is expected in the production of Europe's other "hope" for energy independence - biomass energy - due to the fact that developing countries will increasingly switch to modern commercial energy sources. As a consequence, the growing use of biomass will be for the production of biofuels, as well as for the generation of electricity and heat. The strongest growth - albeit compared to a lower baseline - will be seen in other renewable energy sources (excluding hydropower), particularly wind and solar.

With crude oil and refined product markets expected to see further tensions, oil price estimates in the new report have been adjusted upward. Key market data points to the prospect of modest declines in these prices due to new oil production capacity coming online and lower consumption growth. New geopolitical tensions, or worse, a significant supply disruption, could push prices even higher. The authors of the 2006 document assume that the average price for oil imports in IEA member countries in the first half of the next decade will again drop to $47 per barrel, but then will continue to increase continuously until 2030. Natural gas prices, due to their link to oil prices, as implied by long-term supply agreements, and competition between individual energy sources, will generally follow oil prices. Coal prices will change proportionately little over time, but will develop in line with oil and gas trends.

World energy security is under threat

Unless growth in oil and gas consumption is contained, the vulnerability of consuming countries to a major supply disruption and associated price shock will increase. The countries of the Organization for Economic Cooperation and Development and the developing economies of Asia are increasingly dependent on imports, because The growing energy production within these countries cannot keep pace with the increasing demand for it. Conventional oil and natural gas liquids production in non-OECD countries will peak over the next ten years. According to the baseline scenario, in 2030, in the countries of this organization, two thirds of oil needs will be covered by imports, compared to the current 56%. Most of the additional imports will come from the Middle East by sea, which is subject to various supply disruptions. Due to the concentration of oil production in a small group of countries with large reserves, namely OPEC countries and Russia, their dominant position in the market is strengthened. This makes it easier for them to push for higher prices. An increased share of natural gas consumption will presumably also be met by imports via pipelines or liquefied natural gas from increasingly distant producing countries.

Oil prices continue to play an important role in the cause of global economic solidarity. In most oil-importing countries, accelerated economic growth will continue, but it could be even more significant if oil and other energy prices do not increase. In many countries that import primary products, the effect of rising energy prices was at least partially offset by increased exports of non-energy raw materials, the prices of which also increased. What impact rising energy prices will have on the macroeconomic outlook remains uncertain. This occurs, in part, because the effect of rising prices has not recently manifested itself in all parts of the economic system. Signs of inflationary tension are increasing, reflected in higher interest rates. Balance sheets are deteriorating in most OECD countries, especially in the United States.

Who will pay for the investment boom?

To satisfy the world's growing hunger for energy, major investments in energy infrastructure are needed. According to the World Energy Outlook's baseline scenario, $20 trillion (2005 equivalent) of investment will be required in this area over a quarter of a century, from 2005 to 2030. This is almost 3 trillion more than last year’s IEA estimates and is caused by a sharp increase in the cost of capital investments in the fuel and energy sector, especially in the oil and gas industry. The electric power industry will account for 56% of the total investment level. Over 4 trillion dollars will need to be invested in the oil industry during 2005-2030 (and three-quarters of this amount will go to the development of oil production). Over half of the world's energy investment will be spent in developing countries, where energy consumption and production are growing fastest. China alone will be forced to invest about $3.3 trillion, that is, 18% of global investments.

There is no guarantee that the necessary investments will be made. Government policies, geopolitical factors, unexpected price changes, and the introduction of new technologies can all affect the chances and incentives of private and public enterprises to invest in different parts of the energy supply chain. Investment decisions by major oil and gas producing countries are of paramount importance because they will increasingly influence import volumes and prices for consuming countries. Thus, in particular, there are doubts that investments in the Russian gas industry will be sufficient to keep the current volume of exports to Europe unchanged and to ensure the start of supplies to Asia.

The biggest doubt lies in the extent to which major oil and gas producing countries are able and willing to increase their investments to meet growing global energy demand. Investment expenditures of leading oil and gas companies in the first half of this decade in nominal terms increased significantly and, according to the plans of enterprises, will continue to grow until 2010. However, the effect of this increase in costs for capacity development will be tempered by rising prices for their construction. Higher investment in real terms will be needed over the next decade. In one scenario in which investment is delayed, declines in OPEC crude oil production are offset by increases in non-OPEC production. At the same time, oil prices increase by a third.

"Dirty" future

The base case assumes that between 2004 and 2030, carbon dioxide emissions from the energy sector will increase by 55%. Thus, in 2030 it will reach 40 gigatons, which is 14 gigatons more than in 2004.

More than three-quarters of this increase in carbon dioxide emissions would, under the same scenario, come from developing countries. Their share in emissions will be larger than in energy consumption, because their growth in consumption will be more focused on hydrocarbon resources than in the OECD countries and economically developed countries of Asia. Developing countries as a whole consume proportionately more coal and less gas. For example, China will be responsible for approximately 39% of global emissions growth. China's carbon dioxide emissions will more than double between 2004 and 2030, driven by strong economic growth and heavy reliance on coal for electricity and industrial needs. And by 2010, China will take first place in the world, displacing the United States, in terms of carbon dioxide emissions into the atmosphere. Other Asian countries, especially India, will also contribute significantly to the rise in global emissions.

Energy responsibilities of governments

The trends described in the base case are not immutable. It is quite possible that governments will resort to appropriate measures to put the energy system on a more stable basis. The alternative policy scenario takes into account the possibility of implementing currently discussed measures and policies to improve energy security and reduce carbon dioxide emissions. This would result in significantly slower growth in the consumption of combustible energy resources, imports of oil and gas, and carbon dioxide emissions into the atmosphere. In the alternative policy scenario, global primary energy consumption in 2030 is about 10% lower than in the baseline scenario. This difference roughly corresponds to China's total energy consumption.

There are significant obstacles to implementing the “new energy thinking” envisioned in the alternative scenario. In practice, greater political will will be needed to implement these measures, which will inevitably be opposed by some industry and consumer stakeholders. Policy makers will need to clearly express the benefits that these measures bring to the economy and society. In most countries, the public is increasingly aware of the benefits that can be expected from improved security of supply and environmental protection, energy efficiency and the increasing role of renewable energy sources.

More active government action requires support from the private sector, as well as international cooperation. Most energy-related investments, while expected to come from the private sector, will largely depend on the government, which has a critical role in creating the necessary climate for investment. Industrialized nations will need to assist developing nations in making the leap to advanced technologies and efficient equipment and processes. This requires programs to support technology transfer, capital construction of facilities, and joint research and development. In addition, it is necessary to achieve a high level of cooperation between countries, as well as between the economy and the state.