Fatih Birol Presents the IEA World Energy Outlook 2007

Fatih Birol Presents the IEA World Energy Outlook 2007

Posted by Chris Vernon on December 7, 2007 - 10:00am in The Oil Drum: Europe
Topic: Supply/Production
Tags: carbon dioxide, coal, fatih birol, growth, iea, oil(list all tags)

On 5th December 2007 Fatih Birol, Chief Economist and Head of the Economic Analysis Division of the International Energy Agency (IEA) gave a presentation in London at the Shell Centre, hosted by the British Institute of Energy Economics (BIEE). Mike Pepler attended the meeting and took the following notes (his personal comments are in italics):

Introduction

 We are on the eve of a new world energy order.

 On the supply side, we have oil production outside the core OPEC countries reaching a peak, which is not good news for the International Oil Companies (IOCs). The National Oil Companies (NOCs) will determine future oil supply.

 On the demand side, China and India are transforming global energy markets through their sheer size and rate of economic growth.

 Between now and 2030, China and India will account for 70% of new global oil demand, and 80% of new coal demand.

Approach

 Chinese and Indian experts joined the IEA team to write WEO 2007, and extensive peer reviews from their countries were used.

 Three scenarios are used:

oReference scenario. All government policies and economic developments continue as they are at present. This leads to two threats: risks in security of supply for oil and gas, and climate change.

oAlternative scenario. 1,500 policies currently under discussion across the world are put into practice in 2008. This scenario also includes an option to stabilise atmospheric CO2 levels at 450ppm.

oHigh growth scenario. Economic growth in China and India is the biggest unknown in these studies. The predictions have been wrong in the past, underestimating the growth. This scenario assumes an increased rate of growth for China and India.

 The analysis of China and India’s impact on the global economy, environment and energy market is a key part of WEO 2007.

Reference scenario

 The continuation of existing policy leads to a fossil-fuel future.

Coal will see the biggest increase in use.

China and India are responsible for 45% of total energy demand growth from 2005 to 2030, and 80% of coal demand growth.

By 2010, China will be the world’s largest energy consumer, overtaking the USA.

 Oil supply projection to 2015:

o The supply/demand balance will remain tight.

o By 2015, an extra 37.5 mb/d (million barrels per day) of production will be required. 13.6 mb/d of this is to meet new demand, while 23.9 mb/d is to replace declines in existing oil fields – a factor that is often overlooked.

o Oil producing countries have policies that should lead to an extra 25 mb/d by 2015. A further 12.5 mb/d will be required, or a supply crunch can not be ruled out.

o As well as finding new production, we will also need to find ways to curb demand for oil.

o The top 5 IOCs have had reserve replacement ratios declining steadily between 2001 and 2006. If they do not redefine their business strategies to move away from oil they will have serious difficulties.

Vehicle sales in China

China will be importing 13 mb/d of oil by 2030, as car ownership rises from 20 per thousand people to 140 per thousand.

Car sales in China are predicted to overtake those of the USA in 2016.

 However, Western countries should not criticise China for this – car ownership in the EU is 680 per thousand people, and 860 per thousand in the USA.

Coal demand in China and India

 In 2005, China exported coal, while India imported, so the net import for the two together was close to zero.

China is now importing coal as well, and the global coal price has doubled in the past year.

By 2015, China and India will be importing 170 Mtce (million tonnes coal equivalent), and by 2030 they will be importing 330 Mtce. (figures are approximate, as they were read from a graph)

 Before criticising these imports, we should remember that in India there are 420 million people with no access to electricity. How can we tell them not to use coal, which is the cheapest way of providing electricity?

CO2 emissions from China and India

 It is worth looking at the cumulative emissions from 1900 to 2005. The USA emitted 340 Gt (Gigatonnes), the EU 240 Gt, China 90 Gt and India 25 Gt. (figures are approximate, as they were read from a graph)

 The projection in the reference scenario brings China’s cumulative emissions close to those of the EU by 2030.

 On a per capita basis, China deserves to be allowed higher emissions, although by 2030 they could be similar to those of the EU.

 The top five CO2 emitters are predicted as follows:

o 2005: USA, China, Russia, Japan, India.

o 2015: China, USA, Russia/India, Japan

o 2030: China, USA, India, Russia, Japan

 By 2030, China, India and the USA will together emit more than 50% of global CO2.

CO2 from coal power plants in China and India

China and India will add 800 GW of electrical generation capacity between 2006 and 2015. This is equivalent to all capacity built in Europe between 1945 and 2006. 90% of the new capacity will be coal fired.

 Coal power plants have an economic lifetime of 60 years. Once built, it is unlikely that these power plants will be closed early. We would not do this in the West, so can not ask China and India to do so either.

Energy efficiency

 At present, half of all new building is in China, measured on a square meter basis. The energy efficiency standards of the new buildings are generally not good. As with the coal power plants, once these buildings are there, they will continue to be used for many years.

Investment

$22 trillion is needed between 2006 and 2030. Half of this is in developing countries, with 17% in China and 6% in India.

 We are not running out of energy, or out of money, but we are running out of time.

Alternative scenario

 Assume that 1,500 current draft policies are put into place in 2008. These include energy efficiency, building renewable energy and building nuclear power.

 The result is lower growth in net oil imports, leading to growth being reduced by 14 mb/d by 2030. (note that this is still a rise in demand, it’s just a smaller rise than in the reference scenario)

 In the reference scenario, CO2 emissions rise by 57% by 2030, ending up at 42 Gt per year and possibly causing a global temperature rise of 6C, which would be disastrous. The alternative scenario results in emissions levelling off at 34 Gt, possibly leading to a 3C temperature rise, which could still be too much.

 The cost effectiveness of this scenario is important. For example, by 2030 China could save 170 TWh/year simply through the use of more efficient refrigerators and air conditioning, as the current standards are low. This is equivalent to twice the annual output of the Three Gorges Dam.

To achieve stabilisation of atmospheric CO2 levels at 450 ppm, for a 2C rise in global temperature, emissions need to drop from 27 Gt per year today, to 23 Gt by 2030. This is 19 Gt less than the reference scenario, and to achieve it requires:

oAll power plants built after 2012 to emit no CO2.

oEarly retirement of coal plant in OECD countries.

o CCS (carbon capture and storage) to be economically viable within 10 years.

o Improvement in efficiency (energy intensity of economies) to increase from 1.6% per year to 2.7% per year.

oAll the countries in the world to agree on a framework and put it in place within 5 years.

High growth scenario

 The reference scenario has Chinese economic growth at 7.5% for the next few years, falling to 6% up to 2030.

 The high growth scenario has Chinese growth at 9.5% initially, falling to 7.5%.

 The result is more than 20% increase in oil demand by 2030.

Summary

 The global energy system is on an increasingly unsustainable path.

China and India are transforming global energy markets.

All countries need to transition to a more secure, low-carbon energy system.

 New policies now being considered could have a major impact.

The next 10 years are critical

o Significant generating capacity is being built.

o Technology lock-in means what we choose now will be there for decades.

o There will be growing tightness in oil and gas markets.

 These are global challenges, and we need global solutions.

 The OECD countries must show leadership.

Question and answer session

Where will the projected extra 25 mb/d oil production come from?

 We know of approved projects around the world that will bring 25 mb/d by 2015 (note that this is still less than the 37.5 mb/d actually required). If the supply turns out to be less than this, we are in serious trouble. If these projects do not come online, the wheels will fall off our energy system. (Yes, those were his exact words)

What oil price is required to cause a reduction in demand, and how will this reduction manifest itself?

 The bad news is that the price elasticity of oil is declining, so that a rise in price only produces a small reduction demand. The reasons for this are:

oOil use is becoming more and more focused on transport, where there are no significant alternative fuels to substitute.

oThe OECD is wealthier than during the last oil price shocks, and can afford to keep buying fuel at much higher prices.

o Much of the current oil demand growth is coming from subsidised markets, such as China, India and the Middle East, so oil market price rises do not impact demand.

 We currently expect WTI crude oil to be at or above $65 a barrel in real terms, and this is not enough to reduce demand. If consumers perceive that prices above this level are here to stay, then there will be some impact on demand. However, this price mechanism will not act fast enough, and government policies are also needed to reduce demand. For example, we would like to see fuel subsidies reduced.

 Also, we do not believe that high oil prices hurt the global economy, which is more than just the USA and EU. Some countries may be hurt by high prices, but others benefit.

 Note that in the last few years Africa has lost 3% of GDP growth to rising oil prices, but this does not even make headline news, while slight falls in USA growth get everyone worried.

High oil prices are on the way, which will incentivise efficiency – do you anticipate any surprises?

 We expect high prices for the next decade, and maybe even higher after that.

 In the developing world $250bn in energy subsidies is paid out each year. If subsidies were removed for energy, then the payback on efficiency measures would be extremely rapid – at present there is little incentive as energy is too cheap. However, subsidies can not be quickly removed in some cases, due to the effect on people. In practice we have found that energy subsidies in India actually divert more money to the upper and middle classes than to poor people.

 Regulations on efficiency are needed in developing countries.

We need a lot of investment in oil production – what constraints do you see?

 There is currently a problem in the availability of manpower. However, this can be resolved over a few years simply by increasing the pay of the engineers.

 Willingness to invest – the Middle East has the money, but is not necessarily willing to invest it in new oil production.

 Iran doesn’t have the domestic capital to invest, and also has challenging geology in its oil fields, leading to production declines of up to 20% a year in some fields. However, Iran does not have access to international capital in the way that other countries do.

 The rapidly declining production in OECD countries is clearly a constraint.

CCS leads to reduced efficiency in power stations – is this included in your assessment?

 I am not strongly in favour of CCS. In normal circumstances CCS would have little impact in the next 10 years as it is expensive and not yet commercially proven. There are also regulatory issues on where the CO2 is stored.

 I would look at other technologies, such as nuclear power, ahead of CCS.

 Before China and India can be expected to use CCS, the OECD will need to spend a lot of cash developing it.

 Time is an issue – China and India are building cola power plants now, and retro-fit of CCS will be expensive.

China plans a target of 16% renewable energy by 2020, and higher targets after that.

 It is good to have such targets, but we are not convinced they will reach them.

What do you think on the role of Russia in future?

Russia is very energy rich, and also close to Europe.

 The government in Russia has had a strong influence on energy, both domestically and in exports.

 50% of global proved gas reserves are in Russia and Iran, while Qatar is third.

 There is a significant decline in gas production from several Russian fields, and there is insufficient investment in new production – they may not be able to honour their export commitments in future.

Further comments from Fatih Birol on oil

 The market price of crude is now well above the actual cost of producing it in most fields.

In many countries the tax on fuel is more than the raw material cost.

 In producing countries fuel is very cheap, but their populations often suffer from energy poverty despite this.

* * * * * * * * *

Mike lives in Rye, UK, and works from home for the Ashden Awards for Sustainable Energy (). He is also one of the founding members of PowerSwitch (), and together with his wife Tracy manages eight acres of coppice woodland near Rye.

59 comments on Fatih Birol Presents the IEA World Energy Outlook 2007

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Chris Vernon on December 6, 2007 - 4:17pm | Permalink | Subthread | Comments top

Birol stated that 23.9mbpd is needed to replace declines in existing production by 2015. Assume we are currently producing 85.5mbpd. Losing 23.9mbpd from 85.5mbpd over 7 years leaves just 61.6mbpd and represents a 4.0% decline rate from the fields already in production.

If we assume the 23.9mbpd will come off the 73mbpd crude production rather than the 85.5mbpd all liquids figure, the decline rate is 4.8%.

ace on December 6, 2007 - 11:25pm | Permalink | Subthread | Comments top

Thanks, Mike and Chris! The IEA is sounding the alarm about peak oil. They are admitting that supply will not be able to keep up with demand by the question below.

Where will the projected extra 25 mb/d oil production come from?

We know of approved projects around the world that will bring 25 mb/d by 2015 (note that this is still less than the 37.5 mb/d actually required). If the supply turns out to be less than this, we are in serious trouble. If these projects do not come online, the wheels will fall off our energy system. (Yes, those were his exact words)

I added up all of the peak flows from projects on the soon to be completed . Excluding the unapproved Kashagan project and including a small percentage of 2007 projects, the total new optimistic peak capacity project additions from 2007 to 2012 is just over 27 mbd. This number is close to Birol's 25 mbd.

The IEA has admitted above that non OPEC production is about to peak. Birol says that there are only 25 mbd of approved project capacity. As this is just barely enough to replace lost capacity from his estimate from above of 23.9 mbd for existing field decline, Birol is effectively admitting that world oil production is on a peak plateau now. If a slightly higher underlying decline rate of 4.5%/yr is used then world total liquids supply is in slow decline now, rather than a plateau.

The peak oil plateau is forecast by Sadad al Husseini, ex Exec VP Saudi Aramco, in the chart below

click to enlarge - Oil & Money 2007 Conference, October 31, 2007, London source:

Also an interview with Husseini here

Husseini says "global production has reached its maximum sustainable plateau and that output will start to fall within 15 years"

Wonder if Birol is in communication with Husseini?

garyp on December 7, 2007 - 5:36am | Permalink | Subthread | Comments top

Careful ace, something doesn't add up here.

If you total the megaprojects list then you indeed get ~25Mb by 2015. That comes out at ~4Mbpd addition each year on average. However if you take that 4% decline number then you should be seeing increases each year of 0.5-1Mbpd.

But

This year, according to the table, we should be seeing 4.7Mbpd extra. Take the assumption of that 3.5Mbpd decline rate and we should have seen a good million extra barrels this year. Needless to say, we haven't. So either the table data is wrong, the decline rate is wrong, or someone is holding back on supplies.

I also have to say, something about the megaprojects data for 2008 seems wrong. At 7Mbpd extra we should be swimming in the stuff next year. Its anomalous and even taking into account the time for production to reach peak I'd question if there's not some company spin in there.

Given the numbers for this year, we should also consider that maybe the decline rate of existing wells is not 4% but maybe more like 5%, bringing us to somewhere around 28-29Mbpd required to stand still. That puts us on the other side of break even.

It comes down to where does 23.9Mbpd needed to deal with declines come from? It seems to be to be unsupported and the numbers we see for major fields in decline don't match it. A sneaky way to massage the figures is to do so on the factors that people aren't focused on. Everyone looks to new production, so adjusting the physical decline number can slide by.

westexas on December 7, 2007 - 8:10am | Permalink | Subthread | Comments top

Ask me about the weather, and I talk about net oil exports.

A reminder: Our (Khebab/Brown) middle case is that the top five net oil exporters (about half of current net exports worldwide) hit zero net exports in 2031. Our model and recent case histories, e.g., the UK and Indonesia, show that net export decline rates tend to accelerate with time (worse than an exponential decline rate).