Demand for all forms of energy, including oil and natural gas, will grow significantly in the next 26 years – but political and regulatory uncertainties create risks that may constrain the private-sector investments needed to meet the demand.
That’s the message found in several recent analyses of the global energy market, which could shed light on patterns of energy growth and issues constraining industry’s ability to meet the growing demands.
In November, the International Energy Agency (IEA) released its 2014 World Energy Outlook (WEO), providing projections on the future growth of energy demand.
(This article quotes modeling results for IEA’s central scenario that includes existing and proposed emissions reduction policies in the United States, the European Union and India, but does not include possible policies to keep atmospheric CO2 below 450 parts per million).
IEA’s projections include:
♦ Global energy demand will grow 37 percent by 2040, even as the rate of growth is projected to fall from the current 2 percent per year to 1 percent per year after 2025.
This growth will occur primarily in the developing world, especially China and India. Demand will be essentially flat through 2040 in most Organization for Economic Cooperation and Development (OECD) countries. (OECD includes 34 developed countries, primarily in North America, Europe and Asia-Pacific.)
♦ The 2040 energy mix will be almost equally divided among oil, natural gas, coal and low-carbon sources. This mix reflects a decline in the proportion of global consumption (but not the total volumes) of coal and oil; a 50 percent growth in natural gas demand; and a 90 percent growth in renewable energy demand.
♦ Given few economic alternatives to oil for transportation and petrochemicals, oil demand will continue to grow by 14 million barrels per day (bpd), to 104 million bpd by 2040.
Oil demand declines in the OECD countries but surges in non-OECD countries, driven by growth in middle-class demand for vehicles.
♦ Low-carbon energies, nuclear and renewables will grow from 19 to 26 percent of the energy supply. Nuclear power grows just one percentage point to 12 percent of global electricity generation. This is accomplished through major additions in China and India, as the European Union, the United States and Japan retire over a third of their current capacity.
Renewable energy share of primary energy rises from 13 percent to 19 percent, and renewable energy grows to one-third of power generation.
♦ Energy efficiency is one of the fastest growing “energy sources,” and is a valuable mechanism to reduce pressure on global energy supply.
By 2040 new efficiency efforts will reduce oil demand by 23 million bpd (more than the current production of Saudi Arabia and Russia, combined) and gas demand by 33 trillion cubic feet (more than current U.S. production).
The financial investments necessary to provide energy to global consumers are huge according to the IEA 2014 report, World Energy Investment Outlook (WEIO) and the WEO.
♦ More than $1.6 trillion was invested in 2013 to provide the world’s consumers with energy.
This amount is double the 2000 investment, and by 2035 the annual investment required will be $2 trillion.
♦ Upstream oil and natural gas spending is projected to grow by a quarter, to $850 billion per year in 2035.
Most of the growth will be in natural gas, and North America will host most of this investment.
♦ The 2014 to 2040 capital investment requirement is distributed among:
- Fossil fuels – $30 trillion.
- Energy efficiency – $14.5 trillion.
- Power sector – $21 trillion, of which $7.4 is for renewable power generation.
(Figures are for capital expenditures, such as material and labor to install a facility or drill a well. Operating costs and abandonment or decommissioning are excluded.)
Risks Facing Energy Investment
Total energy expenditures are projected to rise at about half the rate of the global economy, as many economies become less energy intense and energy efficiencies take hold (WEIO). This gives some degree of confidence in maintaining adequate levels of investment.
However, as non-OPEC oil supply growth starts declining in the 2020s, incremental supply will need to come from the Middle East, the region with the largest undeveloped oil resources.
WEIO divides investment risks into three categories:
♦ Economic risks include market changes such as commodity prices, inflation rates or changes in exchange rates. Another financial constraint is reduced lending by the banking sector in response to regulations imposed in the aftermath of the financial crisis.
♦ Political risks include civil unrest, the quality of the legal system and political institutions, the complexity of permitting and licensing, and future emissions standards.
♦ Project-specific risks include geological and technical risk that the producible resources or efficiency gains are less than projected, risk of construction delays and environmental constraints or community opposition.
This month’s column will primarily consider the political risks – one of which is the dominance of state-owned companies, which own nearly half of the world’s power generation assets, and together with their host governments own more than 70 percent of global oil and gas reserves (proven plus probable).
Many states impose social goals on these companies – for example, subsidizing consumer fuel prices – that can reduce funds available for energy investment.
Also, many states that own large shares of the energy sector face growing demands for social services as their population grows – and that also reduces the availability of state funding for energy and creates requirements for private as well as state investment.
Investment needs grow more quickly in areas outside OECD and China, areas where financial institutions are weaker and capital needs are a larger share of the economy. For example, the Middle East and Africa hold a large share of future energy supplies but face several risks that may limit needed investments:
♦ Civil unrest and military conflicts.
♦ Weakly developed financial or regulatory institutions.
♦ Growing obligations to social programs as young populations enter the job market.
♦ Fossil fuel subsidies that consume a large share of state revenues, limiting funds available for energy investments. These subsidies also discourage energy-efficient vehicles or electricity generation. Many countries are currently working to reduce these subsidies.
♦ Energy investment will require a large share of these economies – over 3 percent of GDP in the Middle East, Africa and Russia. (Energy investment will be slightly over 1 percent of the United States and the European Union economies.)
OECD countries’ investment climates have different but also negative investment risks. Licensing and permitting are slow and complex, and environmental policies are rapidly changing.
One area where change may occur is in global subsidies for renewable energy. Renewable energy subsidies, which are more common in OECD countries, were $121 billion in 2013, and fossil fuel subsidies were $548 billion. The renewable subsidy is larger per unit of energy even though it is much smaller overall.
As mentioned, all the projections are based on IEA’s middle scenario, which assumes only existing and proposed emissions requirements. Slightly smaller but different investments – as well as new government policies – will be needed if countries choose to reduce CO2 emissions by 7 percent per year, the level the Intergovernmental Panel on Climate Change assumes is necessary to keep global warming at or below 2 degrees Celsius.
For additional information on the constraints to adequately fund the global energy needs of the future, check out the World Energy Council’s “World Energy Trilemma 2014: Time to get real – the myths and realities of financing energy systems.”
The energy trilemma involves tradeoffs between energy security, energy equity (access and affordability) and environmental sustainability. And as the title suggests, this issue of the annual study considers the constraints to mobilizing the financing necessary to supply the energy demands in 2035.