ORACLE’S RESPONSE

Global coal demand could peak much sooner than what the major reference scenarios of the US Energy Information Administration and International Energy Agency currently show. China’s and India’s changed outlooks for coal demand would be the biggest factor in demand peaking sooner, driven by China’s clean air concerns, falling energy intensity of economic growth in China and India, and rapidly expanding supplies of natural gas around the world. If that’s the case, it’s plausible CO2 emissions could also peak in the next 10 years. Increased momentum will develop for the policies that contributed to reaching this tipping point. A new economic system for electricity will emerge in the next 15 years, but no one can predict what the dynamics of that system will be because of the uncertainties. China and India could emerge as the global leaders on energy and the environment if they’re able to achieve economic success without the energy intensity required by OECD countries.

RECENT SIGNALS OF CHANGE

Demand for electricity in Asia is surprising stagnant and this is affecting coal demand. Apparently, the falling energy intensity of economic growth wasn’t taken into account very well.

• Asia accounts for two thirds of the world’s coal demand, but that demand may be falling and sooner than everyone’s base-case scenarios show. In China in 2016, coal consumption fell 4.7 percent. This was the third year in a row of declining use. Coal currently supplies about 70 percent of China’s electricity, but the Chinese government is focused on cutting coal’s use, and succeeding. Coal-fired plant capacity in China is still being added—in November 2016, China’s National Energy Administration announced it is raising coal-fired power capacity as much as 20 percent by 2020, from 900 gigawatts in 2015 to as much as 1,100 gigawatts by 2020—but capacity utilization of coal plants has fallen steadily in China from around 60 percent in 2010 to around 50 percent in 2016. It appears coal will only provide 55 percent of China’s electricity mix in 2020.
• Primary energy demand in China declined in 2015, the first fall in 20 years. Despite recent years of little or no growth in demand for power in China, the government is forecasting growth of between 3.8 percent and 4.6 percent by 2020. China continues to dominate major industries that use a lot of electricity, but environmental problems from heavy manufacturing are influencing national government policies. China’s aluminum production accounts for more than 50 percent of world production. China’s production grew 60 percent from 2011 to 2016, reaching 31 million tons in 2016. Aluminum production is an energy-intensive process and China’s aluminum smelters receive 90 percent of their power from coal. In the world steel industry with global oversupply, China, the world’s number one steel producer, has been producing steel at a record pace.
• Coal makes up 61 percent of India’s power-generating capacity, but India has announced it doesn’t need any new coal-fired power stations in the next decade beyond what it is currently building. Capacity utilization of coal plants has fallen steadily in India from over 75 percent in 2010 to less than 60 percent in 2016. Even with the rapid economic growth of the last decade, about 40 percent of India’s coal-fired power plants are now idle because of weaknesses in the distribution system and because government planners overestimated the growth in demand.

The coal reference case in US Energy Information Administration’s (EIA) International Energy Outlook 2016 has world coal consumption increasing from 2012 to 2040 at an average rate of 0.6 percent/year. Much of that increase is from India. What if China’s coal consumption is peaking now and not in 2025? And what if India’s large increase in demand for coal over the next 25 years doesn’t materialize?

Plenty of oil and gas is around and few limitations to producing more.

• Global oil supply has steadily risen—almost 20 percent—since the year 2000 to over 95 million b/d in 2016, with non-OPEC producers leading the charge, competing strongly with OPEC producers for market share. In 1995, proven oil reserves (i.e., oil discovered and economic to produce) in the world were 120 trillion cubic meters. In 2015, proven oil reserves were 187 trn cubic meters.
• Fueled by commodity prices, particularly oil exports, sovereign-wealth funds—financial vehicles owned by governments—doubled in size from 2007 to 2015 to $7.2 trillion. Since 2007, the number of sovereign funds increased by 44 percent to 79, many in Africa and Asia. Nearly 60 percent of sovereign wealth fund assets are related to energy exports. Many sovereign-wealth funds, including most likely several from the Middle-Eastern oil exporters, came to the aid of the Russian Direct Investment Fund when US and European sanctions restricted business between the Russian fund and Western companies.
• Developing economies account for 43 percent of global GDP but 65 percent of crony wealth. Crony capitalism is where an individual’s wealth stems from a special relationship with the government. Since globalization took off in the 1990s, the wealth of billionaires in high-crony industries, like natural resources, real estate, construction, telecoms, and defense where there’s a lot of interaction with the state or are licensed by it, grew substantially in developing countries. Russia’s crony industries represents approximately 18 percent of Russia’s GDP.
• The world’s seas are becoming more efficient in moving hydrocarbons. The major Panama Canal expansion, opened in June 2016, more than doubles the canal’s capacity and includes a third lane to accommodate ships large enough to carry 14,000 TEU. A key market of the future for the canal could be LNG carrier traffic. Also, Russia’s US$27 billion Yamal LNG project within the Arctic Circle will begin operation in 2017. This remarkable project will use West-designed and Far East-built ice-class LNG tankers to enable year-round export shipments from northwest Siberia to European and Asian markets. The LNG tankers are intended for navigation both westbound and eastbound along the Northern Sea Route (NSR), the Arctic seaway along Russia’s coast linking the Atlantic and Pacific. The Russian company, Novatek, has a 50.1% interest in Yamal LNG; China National Petroleum Corporation and France’s Total Group both have a 20% holding; and the Chinese state-owned Silk Road Fund has a 9.1% interest.
• Gas is turning into a better opportunity than oil for producers. The technology of shale oil production is rapidly advancing despite current cost constraints. Over the last five years, production well productivity has risen more than 400%, 40% in the last year. US exports of natural gas have just exceeded US gas imports for the first time in 60 years with most of the export increases going to Mexico and Canada. From 2000 to 2015, the percentage of total energy production of natural gas in Shell, Eni, Total, ExxonMobil, ConocoPhillips, and Chevron went up significantly. Only in BP did it go down slightly. In Shell, Eni, and Total the share of natural gas is almost 50 percent.
• However, new environmental risks from natural gas operations are coming to light. Recent figures indicate that around a third of the annual methane emissions in the United States can be traced to the natural gas industry. While methane doesn’t remain in the atmosphere as long as carbon dioxide (12 years compared to 500 years), it is about 25 times more potent as a cause of global warming. The Environmental Defense Fund, an American NGO that often works with industry, estimates 2-2.5% of the gas flowing trough the supply chain leaks out.

In developed countries, wind and solar renewables are contributing to the changing the energy supply mix. Will this momentum change with lower hydrocarbon prices? A key signal is that wind and solar renewables are becoming a significant energy source in Texas, the center of the US oil and gas industry. In 2001, renewables (wind, solar, and hydro) accounted for 2% of Texas energy; in 2016 they will account for 16%. One night this past winter, nearly 50% of the power flowing into the Texas grid came from wind turbines in the state. Federal subsidies for renewables have been a big factor, but equally big have been the falling costs of solar and wind technology.

With renewables expected to account for half of the growth in global energy supply over the next 20 years, the costs of the changeover will be huge. The electricity system around the world is fundamentally changing because of the orchestrated growth in the use of renewables largely with subsidies. The costs of these subsidies were modest when the renewables contribution to overall energy supply was marginal, but that’s changing. Since 2008, public subsidies for renewables have been $800 billion. In 2014, the IEA estimated that decarbonizing the global electricity grid will require $20 trillion in investment in the next 20 years, and that still leaves much to be done. A new economic system for electricity is required, but the ecosystem of energy and the economy is too complex for anyone to know what that should be and how to make the changeover efficiently. Source: The Economist, “A world turned upside down,” February 25, 2017, pp. 18-20.

US electricity generation from coal shrank from its peak in 2008 at slightly more than 2 billion megawatt-hours to about 1.3 billion mega-watt hours in 2016.

• In 2016, natural gas’s share of US electricity generation at 33 percent exceeded coal’s share at 32 percent for the first time. Coal’s share has steadily fallen from a high of over 55 percent in the mid-1980s, while natural gas’ share has steadily risen from about 10 percent then. Nuclear remains steady at 19 percent, while renewables, not counting hydro, have risen from zero in the mid-1980s to 8 percent in 2016.
• The Tennessee Valley Authority historically has been a major user of coal plants, but that has changed radically since 2007 because of environmental agreements to reduce coal emissions, the lower prices of natural gas, and increased production from nuclear. In 2007, over 55 percent of TVA’s energy mix was coal; in 2017 a little over 20 percent of the mix will be coal. Since 2011, TVA has shut down 24 coal-fired units out of 59 in its network.

Clean coal technologies are not economic yet, and maybe never will be. Southern Co. also announced in February 2017 that the first of its kind “clean coal” power plant is almost complete, but that it won’t be economic to operate the plant competing against natural gas power plants using today’s low gas prices. The new coal plant that will be able to burn coal and capture the carbon-dioxide output has taken 7 years to complete and cost $7.1 billion to build. If Southern had built a natural-gas power plant of comparable size, it would have cost about $700 million to build—one-tenth the cost of the clean coal plant.

Given all the changes and uncertainties, the world’s oil expert forecasters can’t agree on whether oil demand growth will peak in the next 30 years or not. Just another indication of how uncertain is the energy picture around the world and the global economy. A major issue that is perhaps already affecting investment decisions in oil companies is the affects of new technologies for fuel efficiency and electric cars and of future carbon rules on oil consumption in the future. The Wall Street Journal published on May 22, 2017 the results of an informal survey of big oil companies and the International Energy Agency on when they expect global demand for oil to peak. BP and Exxon Mobil don’t foresee a peak in the near future, while BP thought it would peak in the 2040s, Royal Dutch Shell 2025-2030 (so soon!), Statoil 2030, Total as soon as 2040, and the IEA after 2040. In May 2016, Shell’s scenario group published a plausible scenario of the world meeting international climate goals and achieving a net-zero emissions state. Shell described a number of key developments over the next 50 years that could lead to net-zero emissions, including significant investments in solar, wind, and nuclear sources, carbon capture and storage technologies, many country de-carbonization strategies, and a global carbon pricing system—whether through carbon trading, carbon taxes, or mandated carbon-emission standards.

Even if oil demand peaks in the foreseeable future and the world achieves a net-zero emissions state, oil and natural gas will continue to be key energy sources. Shell’s scenario group in May 2016 highlighted that for the future global population of 10 billion people to have a decent quality of life, the global energy needs would have to double by the end of the century. Oil and natural gas would have to remain important energy sources for the next forty years, until solar, wind, and nuclear sources can assume the burden of meeting the global economy’s needs. If the net-zero emissions state is reached, let’s say by the end of the century, the share of oil and gas in the overall energy mix will have fallen from 57 percent to around 15 percent, while the non-fossil-fuel share would be just under 80 percent.

China is rapidly reshaping its energy supply and demand mix and its foreign trade in energy commodities.

• US coal exports to China have recently shrunk to almost nothing. They were almost 6 million short tons in 2011, 10 million tons in 2013, and less than 1 million in 2016. Out of seven West Coast export terminals proposed in the past five years, none has opened.
• In January 2017, Mongolia announced a new deal to sell coal to China. With Chinese coal production falling rapidly because of China-government environmental concerns, the deal effectively transfers China’s pollution to Mongolia. Trucks carrying coal are backed up for nearly 40 miles at Mongolia’s southern border with China. Observers call it the world’s largest traffic jam.
• North Korea’s economy is heavily dependent on China’s purchase of North Korean coal and China’s supply of oil. China is essentially the only importer of North Korean coal. New UN sanctions toward North Korea because of nuclear-weapons development activities have limited North Korean coal exports to China. China has recently supported those sanctions.
• China Petroleum & Chemical, or Sinopec, is attempting to double domestic natural gas production in the next five years by rapidly expanding natural gas production from shale reserves in order to reduce coal usage in the country and reduce China’s need for imported liquefied natural gas. Many investors around the world were counting on sending natural gas to China.

Nuclear energy plants are progressing in many parts of the world, but not in the United States and Germany. Electricity from US nuclear plants at about 1.5 mega-watt hours per year is expected to decline very slowly over the next 25 years. Toshiba’s subsidiary, Westinghouse, recently declared bankruptcy over escalating costs involving billions of dollars to finish Southern Co.’s Vogtle Electric Generating Plant, the first new nuclear plant in the United States in three decades.

The International Energy Agency (IEA) report on CO2 Emissions from Fuel Combustion highlighted that the growth in global CO2 emissions was slowing down. In 2014, the IEA indicated the global CO2 emissions were 32.4 gigatons of carbon dioxide (GtCO2), an increase of 0.8 percent over 2013 levels. The growth in 2013 over 2012 levels was 1.7 percent, while the average annual growth rate since 2000 has been 2.4 percent. Work by the Intergovernmental Panel on Climate Change (IPCC) shows that holding warming to 2°C typically requires global annual emissions to peak sharply around 2020, fall steeply by 50% before 2040, and be close to net zero towards the end of the century. The EIA’s International Energy Outlook 2016 reference case has global energy-related CO2 emissions growing about 1 percent/year from 2012 to 2040, but will CO2 emissions peak much sooner than anyone expected?

CO2 emissions aren’t the only environmental issue of coal. An immediate problem—in developing countries in particular—is particulate emissions. China’s government is actively tackling smog created by burning coal. New instructions were issued in February 2017. These may have a greater impact than previous instructions that are sometimes ignored by local authorities. The concentration of fine particles, or PM2.5, in Beijing’s air—about 65 micrograms per cubic meter in 2016—still exceeds the World Health Organization’s recommended limit of 25 micrograms per cubic meter. Beijing’s fine particulate level is getting better—it was over 100 micrograms per cubic meter in 2013, but still more than double the recommended limit.

ORACLE MUSINGS ABOUT THE FUTURE OF COAL AND CO2 EMISSIONS

Global Energy Mix. For the next 20 years, the range of uncertainty on the energy sources used in the world will remain extremely wide. The use of nuclear, the government restrictions on hydrocarbons, the technology innovations in renewables, natural gas development, and clean carbon, etc. all remain uncertain. Still it’s very plausible:

• Nuclear power will gain more advocates and expand.
• Oil demand will remain high because consumers in both developing and developed countries will continue to prefer internal-combustion-engine cars and trucks over alternative-fueled vehicles.
• Renewable power will expand more rapidly than projected in non-OECD countries. For many countries, in ten years more than 50 percent of new power capacity will be from renewables sources. Major investments in infrastructure for using more renewable technologies will be made.

While the demand for oil will increase for the next 20 years, the demand for natural gas is going to explode.

• Natural gas production could grow even more than base case scenarios because of technology innovation, a raft of new government restrictions around the world on use of coal in power generation, and high costs of clean coal technology.
• Technology innovation will likely continue to lower the costs of shale gas development. China and Argentina will see rapid expansion in their natural gas productions.
• The two big hurdles for companies developing the new oil and gas reserves will be the large capital required to explore, develop, and produce oil and gas in hard to reach places, and the liability risk to companies from oil spills and contributing to global warming.

Future of coal: Global coal demand could begin to fall soon.

• The momentum to substitute natural gas for coal in electricity generation will likely accelerate.
• Coal use will continue to decline in the United States. It’s uncertain how Trump administration policies could affect that decline, but in general the trend won’t likely reverse.
• The biggest changes in coal usage will be in China and India. As long as natural gas prices remain low, coal demand will most likely keep falling significantly. In fact, China and India will struggle to keep up with the forces driving those declines.
• Clean coal technologies will struggle to become commercial. Few new coal plants will be built, but retrofitting old facilities with expensive clean coal capabilities is not likely going to happen.

CO2 tipping-point. Global annual CO2 emissions may be peaking and could start to fall, perhaps even sharply, from 2020 to 2030. Momentum will increase to continue the policies that led to more efficient energy usage in the economy, the expansion of nuclear, the substitution of natural gas for coal in electricity generation, etc.

China’s Leadership on Energy and the Environment

• China’s changing policies toward improving the country’s air quality and energy supply in the next ten years will have the greatest impact on global CO2 emissions and the world’s goal of reaching a net zero CO2 emissions state as soon as possible.
• China will ride the wave of coal use reduction and expand its commitments toward global environmental goals. China will assume a much large leadership role on environmental issues in international forums, like the IPCC.
• Chinese corporations will continue to invest heavily toward becoming global leaders in renewable-energy technologies, like solar electricity generation and electric cars.
• China companies will be the industrial leaders around the world in all commodities, including oil, gas, and coal. The Chinese companies will be the biggest, invest the most money, and generally be aggressive to capture the most market share.
• The Chinese government will likely support Chinese companies moving abroad with various means of support to help them penetrate foreign markets and avoid trade and tariff costs.
• In general, transparency of commercial transactions between governments and commodity producers will go down worldwide; corruption levels could increase.
• In many respects, India’s accomplishments will be greater, but they will follow China’s.

The battles over the development and use of fossil fuels could become even more intense.

• Greenhouse gas emissions will continue to accumulate in the atmosphere and ocean for the foreseeable future. CO2 emissions from gas will continue to grow because of the growth in natural gas production.
• NGO’s will continue to object to natural gas and oil development and production activities and the companies that conduct them.
• Gas companies will never be viewed as good world citizens.
• Large private oil and gas companies could experience more protests wherever they operate.
• Russian and Chinese companies will be singled out more and more by NGOs.
• Many western governments will find themselves simultaneously penalizing and sanctioning Russian and Chinese companies involved in oil and gas operations.
  

New economic system for electricity will emerge over the next 15 years: But no one can predict the dynamics of that system because there are too many uncertainties in technology, geopolitics, human behavior, climate change, energy supply sources, energy demand, and economics.

• Major disruptions in energy supply could occur.
• No one can predict what the costs of energy and environmental protection will be. The range of possible outcomes is very wide.
• If CO2 emissions peak, societies will likely place a higher priority on lower costs and more robust economies than on less chance of significant climate change and higher costs.

Energy Industry and the Governments that Depend on It

• A restructuring of the global energy industry is underway.
• Renewable energy will be at the center of the industry, but fossil fuels will still be essential for the global economy.
• The players will change quite a bit, and power will shift to developing-country producers, both state-owned and private ones.
• Sovereign-wealth funds will continue to accumulate wealth and power.