Reality check: the global energy mix

The global energy mix never stays still. While one fuel will dominate the world for a period, another will inevitably usurp it. For the last 20 years oil has been king and accounted for 36% of global energy consumption in 2012, according to Deloitte, and this has remained the proportion for the period that oil has ruled. However, now that things are changing the supply and demand sides of the energy industry are making waves.

Supply diversification

The Middle East and Africa were the main regions that accounted for additions to the global reserves of oil and gas until early 2000 and they were also the home of many notable production increases. However, now, only 14 years later the focus has moved over to the west and the Americas have become the stars. The global reserves to production ratio has been impacted dramatically since the 1990s when it was listed as 50 years to 55 years in 2012. This of course is due to the shift west, North America’s unconventional reserves and pre salt and heavy oil discoveries in Latin America. It hasn't taken long for unconventional production to transform the US in to a net natural gas exporter from a major, global importer.

Natural gas has benefitted hugely in the US and has now become a big player in the global energy mix. And the benefits have been so big that other countries around the world are seeking to find their own shale reserves. Also, the proliferation of LNG around the world is impacting supply diversity. According to Deloitte, since 2006 alone, five new countries have begun to export LNG and increased the global supplies by 50% to 237.7 million tpy in 2012.

Energy evolution

When it comes to energy consumption around the world, the pattern in developed economies is becoming more distinctive. The US is becoming energy independent and natural gas focused. When it comes to Europe, it is looking to lead the way with clean fuels and emissions free sources totalled 11% of the region’s energy consumption in 2012. Japan is increasingly diversifying its energy mix and has been since Fukushima. The country is now importing more natural gas and is keeping the percentage of coal in its energy mix to a maximum of 25%.

When it comes to countries that were traditionally energy exporting nations, things are also changing. Russia’s consumption, according to Deloitte, is expected to remain gas heavy in the future due to the ease of availability, low demand levels and the weak renewables market. When looking at the Middle East, there are movements towards natural gas as it is more clean burning. Energy demand in the region is expected to rise sharply due to population growth and increases in income, as well as modernisation plans which will lead to higher demands for energy and electricity. Electricity consumption is also expected to increase in Africa, which will of course end up in an increase of natural gas and renewables in the nation’s energy mix.

China and India are not expected to be the homes of change when it comes to the evolving energy market. The energy sectors in both countries are expected to be dominated by coal in the short term at least. The expense of natural gas and the lack of sufficient distribution net works, especially in India are the reasons Deloitte puts forward as why coal will continue to dominate China and India.

Prices

Oil prices have been relatively stable since 2011 with Brent averaging at US$ 110/bbl. This has been due to rising tight oil supplies in the US and increases in production from Iraq, both of which, Deloitte believes have been acting as a cushion to the industry by counterbalancing tightness and global supply disruptions. Also, the increasing resource to production ratio and increasing diversification of supplies is expected to act as a stabiliser for oil prices in the near term, so much so that the US Energy Information Administration expects prices to range between US$ 90 – 100 until 2020.

Natural gas prices are however expected to be more volatile due to rapid changes that are being experienced in the industry. Gas prices have become decoupled from oil prices in the US and this has, according to Deloitte, pushed European producers back to considering a hub based pricing system in order to remain competitive. Customers in Asia Pacific are also now trying to narrow the divide in gas prices between regions by seeking a greater link to Henry Hub when it comes to new LNG exports from the US.

Trade

As is universally known, the US and Canada are no longer relying on foreign oil to meet demand. Rising consumption in China and India means that they are now more attractive than ever to exporting countries. The Middle East, Africa and Latin America are now sending the cargoes that were once US bound to these Eastern nations. Also, when it comes to oil trade, what was once a global trading market is now becoming more regionalised and natural gas is now becoming the globally traded commodity.

The global trade of LNG has more than doubled between 2000 and 2012 from 14 billion ft³/d to 30 billion ft³/d and it is not likely to stop there. Deloitte believe that global LNG trade is to increase again after 2015 as more capacity comes online in Australia and the US begins exporting. However, there are many negatives associated with LNG which may prevent it becoming a dominant part of the global energy mix. LNG warrants vast upfront capital investment and financing arrangements. It also sees long construction periods and much technical maintenance is needed and there are many regulatory hoops to jump through.

Policy

Energy policy will forever play a part in the global energy mix. When it comes to developed economies such as the US, policy will focus on environmental sustainability and the promotion of energy efficiency and renewables. When it comes to import dependent economies, economic growth and energy access is most likely to impact policy development, but Deloitte do believe that fuel diversification and environmental protection will play a bigger part in the long term.

Deloitte’s view in a nutshell

• ‘The global energy mix is shifting toward cleaner fuels such as natural gas.’
• ‘In North America, natural gas is increasingly being used in power generation, manufacturing and transportation.’
• ‘In Europe, the desire to adopt cleaner fuels will continue despite some recent backtracking on more costly renewable sources, which has temporarily driven the region toward greater consumption of coal.’
• ‘Russia will continue to use natural gas for the lion’s share of its energy needs, and the Middle East can be expected to move gradually towards natural gas as its economy modernises.’
• ‘While natural gas markets are becoming more international, the global oil trade is moving toward regionalisation.’
• ‘The growing surplus of resources in one part of the world and rising demand in the other has led to a major shift in the oil and gas industry.’

Written by Claira Lloyd based on research by Deloitte http://www.deloitte.com/view/en_GB/uk/index.htm

Read the article online at: https://www.hydrocarbonengineering.com/special-reports/07072014/reality_check_global_energy_mix/