30/01/2018 |

Davos-Klosters |

Highlights

• OPEC-Non-OPEC cooperation will continue throughout 2018 and perhaps beyond
• EVs alone will not lead to peak oil demand
• Future energy systems will be decentralized, decarbonized, and digitalized
• Uncertainty exists about the US departure from the Paris Agreement
• Technologies exist for energy transition but little known on how to finance them

From oil and gas to renewables, electric mobility, and climate change, the energy theme has been a major topic present this year at the Annual Meeting of the World Economic Forum taking place in the Swiss Alps in Davos. The meeting started with a message from the Indian prime minister that Climate Change is a global challenge and four different energy-focused sessions were organised throughout Davos. Discussions were centred around four key topics;

OPEC-Non-OPEC and the Shale Revolution:

The OPEC-Non-OPEC agreement formed a major part of the Davos annual meeting this year with concerns over the oil supply and demand and the future of the oil industry in a carbon-constrained world. The impact of OPEC-Non-OPEC agreement led to a jump in oil prices from less $40/bbl to above $60/bbl in 2017. The continued cooperation between Saudi Arabia and Russia in 2018 has been an issue of uncertainty for the energy markets. Another issue of significant concern is the rising production of shale oil which, according to the EIA, will reach 10.5 mbbl/d in 2018. The shale revolution in the United States will have a significant impact on the global energy landscape, turning the United States from an importer into an exporter of oil and gas while making the US having the largest production of hydrocarbons in the world. Shale oil is currently 6 mbbl/day and it could rise to 14 mbbl/day in 2021.

However, most of the US oil will be consumed nationally, and the United States will not be the largest exporter of hydrocarbons. OPEC countries led by Saudi Arabia will continue to be the largest suppliers of oil to the Asian markets.

Ministers from Saudi Arabia, US, Russia, and India expressed different opinions. It was agreed that shale oil will not be a major issue given the continued increase in global oil demand of which shale will account for only 6% by 2021. The aim of the OPEC-Non-OPEC agreement was not to elevate the oil price, but to reduce the global inventories to a five-year average. These views were highlighted by both the Saudi and Russian Energy Ministers. Current global inventories are slightly above 100 mbbl. Continuing the OPEC-Non-OPEC agreement was highlighted as strategically important until full market balance is reached which will be followed by a gradual exit of the agreement in a way that will not shock the markets. The rise in the US shale oil production is coming at a period of production decline in Venezuela and Canada, and a global increase in demand which could reach 120 mbbl/d in the next 25 years. The current price environment should enable returning flow of investments into the oil industry, which saw declined investment over the past few years due to low prices.

Overall, ministers confirmed that moderate increase in shale oil production, 6-8%, is welcomed but not that which could re-flood the market. Minister Alfalih stated that “the price is an outcome of the efforts being taken to achieve that targets”. He also pointed towards further discussions on specifying the exact five-year period next June in Vienna, which will determine the stock target necessary to balance the markets. The US shale gas revolution may lead also to reduced gas prices making it necessary for gas producers to diversify their economy.

EV and Peak Demand:

Although there has been much momentum about electric mobility especially in Europe, the IEA states that EVs cannot on itself lead to a global peak oil demand as light-duty vehicles account for only 25% of global demand for oil. Most of the growth in oil demand is originating from heavy trucks, jet fuels, and most importantly the petrochemical industry.

The fact that ICE vehicles will not be displaced by electric mobility was endorsed by ministers of both the US, and India. This is due to the huge size of the fleet, 1.3 billion cars reaching 2 billion cars in 2040. Yet gradual penetration of electric Cars will take place. The issues of battery storage and costs continue to be a major issue of uncertainty which determines the future of electric mobility.

Demand growth for oil may slow down but it will continue, and fuel efficiency standards will be more important than EV over the next years. India, for instance, despite their investment in renewables announced by Prime Minister Modi, will continue to rely on conventional energy over the next 20 years. A major reason for the low impact of EV in the Indian economy is the fact that 80% of the population do not own vehicles, unlike the OECD countries. Furthermore, they do not think that the oil price will pinch their domestic economy given the strong consumer-producer dialogue between India and Saudi Arabia.

Climate Change and the Paris Agreement:

The United States, despite leaving Paris, will continue to be committed to its carbon reduction targets with 40% of the US economy pursuing their climate agenda through the climate alliance. Furthermore, the practicality of the US leaving the Paris Agreement cannot be legally achieved before the end of President Trump’s term which raises uncertainty if the US will actually leave Paris or not. Secretary Perry emphasized the role of the US in producing Wind energy in Texas which exceeded total production of five countries. This was associated with a continued reduction in CO₂, NOx, and SOx emissions without compromising economic growth. Furthermore, LNG will lead the future of the fossil fuel industry supplemented by new technologies to produce new combustion fuels. Germany which has the largest coal fleet in Europe will abandon coal by 2030.

President Emanuel Macron, announced in his speech that France will be a global model for climate change mitigation with a plan to phase all coal plants by 2021. He highlighted France’s latest initiative on “Make Our Planet Great Again” aiming to attract the brightest minds from all around the world to work on climate research, while also attracting startups and investing in R&D. President Macron also highlighted the need to specify a floor price on carbon in Europe and the need for green financial models to achieve development goals. The unity of Europe is essential for clean energy transition in the European region which indicates the importance of regional integration.

There continues to be a lack of unifying global interests around the issue of climate. For instance, China and India are pushing renewables, not because of climate change but to minimize city pollution. There is a need to unify the concerns of all countries. The future may lead to a new revolution of green opportunities, solar, EV, batteries, while companies need to relate their corporate strategies to the 2 ^oC climate targets. But it is ultimately the people who will need to adapt to the change and save the planet, while technology remains only an enabler.

Energy Systems Transition:

The decrease in the prices of renewables has led to reducing the capital requirements to make energy transition, but the problems of scaling, change of thinking, move to modern technology, and change in management continue to slow a faster transition. Solar technology is becoming the cheapest in many countries and is competing with fossil fuels. China has already installed 100 GW of solar capacity. Recent IEA reports show that electricity demand is growing faster than energy consumption, leading to more electrification, digitalization, electric vehicles. The energy system is becoming more distributed, and customers becoming more powerful with more digitalized systems. They can generate, store, choose, and even sell their own energy. A democratization of the energy system will be the cheapest and easiest way of having clean and affordable energy services, and policymakers are starting to embrace that change. President Trump’s speech also highlighted the removal of governmental bureaucracy to enable more independent energy producers to generate affordable domestic power to enhance national energy security. However, despite technological improvements, fossil fuels continue to account for 80% of the global energy mix, and political measures are important for a major change in the energy system.

Clean hydrocarbon fuels (LPG, ethanol, Natural Gas) will also be the most important form of energy the area of clean cooking, as stated the UN Sustainable Energy for All Chief. There are currently 3 billion people around the globe, including 100 families in India, who need clean cooking fuels and there has been a major lack of investment over the past years. New business models for clean cooking fuels are needed to enable investments and financing mechanisms in this sector.

In China, President Xi’s blue sky initiative has led to capping coal and importing LNG which doubled the prices of LNG from $6 to $11/mmBTU. China may also export nuclear technology as they are leading the way in minimizing the cost of nuclear technology, due to their large nuclear generation capacity. However, this is not the case in India which has one world’s largest regions with no access to energy. Indian policymakers perceive the lack of security in renewables as a major motive to their continued dependence on Coal.

Natural gas will form an important transition fuel on the journey towards electrification of the energy system in many parts around the World. While technologies do exist for electrification of the energy system, there is a lack of understanding how they are going to be financed which brings a need for new technology business models and financing schemes. The challenges laying for the energy system will also be the leadership and human capital, according to the CEO of the UN Sustainable Energy for All Initiative. Future energy systems will be decentralized, decarbonized, and digitalized, and there is an immediate need to train the leaders of tomorrow on dealing with blockchain and AI-based energy systems. There is also a danger in trying to change energy system faster than the technological learning curve which leads to a very expensive transition and that what needs to be taken into account.

In order for the transition to happen, there is a need for a real energy policy in most countries. These policies should address such key questions as; What is going to be the demand? How will it be met? What investments are required? How is it going to pay? How is it going to be financed?