The Electric Utopia is coming.
Not any time soon, probably not in our lifetimes, but sometime late this century or early next, most of the energy powering the global economy will be electricity generated by renewable energy technologies like wind, solar, geothermal, tidal and that old faithful, hydro. Fossil fuels - coal, natural gas, and oil - will still be used as industrial feedstocks to create plastics or high-strength composite materials or nitrogen fertilizer or any of a million products that are a higher-end use than burning for fuel. Already, about a quarter of all oil and natural gas humans produce is used by industry to make things. That percentage is likely to rise as high strength synthetic materials replace steel in products requiring light weight and high strength.
In the meantime, just because the global economy has begun the Energy Transition doesn’t mean it won’t need more energy between the present and the coming of the Electric Utopia, or that much of that energy in the short-term will be fossil fuels.
The International Energy Agency (IEA) produces global energy studies and forecasts. Its latest, World Energy Outlook (WEO) 2016, estimates energy demand and supply to 2040 and the future doesn't look that much different from the present, except that it uses a great deal more energy.
Total energy consumption will grow by 30 per cent, driven by industrializing and urbanizing India, Southeast Asia and China, as well as parts of Africa, Latin America and the Middle East. But the benefits of more energy are not distributed equally. According to WEO 2016, more than half a billion people, most of them concentrated in rural areas of Sub-Saharan Africa, will still not have access to electricity in 2040, compared to 1.2 billion today.
“We see clear winners for the next 25 years – natural gas, but especially wind and solar – replacing the champion of the previous 25 years, coal,” said Dr Fatih Birol, IEA executive director, in a press release.
While King Coal may be dethroned, that only means consumption “barely grows in the next 25 years,” mostly because of China’s efforts to fight air pollution and diversify its power generation fuel mix.
The demand for oil could rise from its current level of 95 million b/d to as much as 113 million b/d, depending upon the set of IEA assumptions. And depending upon auto sales, which are expected to double the global auto fleet to 2.2 billion by 2040. Even if electric vehicle (EVs) accelerate quickly in the next few years - a very unlikely event without a technical or business model breakthrough - most of the global auto fleet will be ICE vehicles 23 years from now, which guarantees a long future for oil demand into the 2050s or 2060s or beyond.
But natural gas truly is the big winner. The IEA forecasts that even near the end of the century, when coal and oil consumption has fallen drastically - perhaps entirely - gas will still retain a significant share of the global energy market. Some of natural gas’ resilience is due to the emergence of liquefied natural gas (LNG), which the IEA expects will make up more than half of the global long-distance gas trade, up from a quarter in 2000. While Australia and the United States have a head start, British Columbia is hoping for a big boom in its nascent LNG industry.
Coal is cheap, abundant and remains the world’s number one fuel for generating electricity, producing steel and making cement. In fact, coal provides almost 30 per cent of global primary energy, which the IEA predicts will decline to 27% by 2021. Coal is also responsible for 45% of all energy-related carbon emissions and is a significant contributor to other types of pollution.
Despite coal’s outsized contributions to pollution and climate change, Keisuke Sadamori, the director of the IEA’s energy markets and security directorate, says it is still too early to predict the end of coal.
“Coal demand is moving to Asia, where emerging economies with growing populations are seeking affordable and secure energy sources to power their economies. This is the contradiction of coal — while it can provide essential new power generation, it can also lock-in large amounts of carbon emissions for decades to come,” said Sadamori.
The US Energy Information Administration estimates in its reference case that world coal production rises from 9 billion tons in 2012 to 10 billion tons in 2040, with much of the growth occurring in India, China, and Australia.
In Canada, coal production fell by 12 per cent between 2013 and 2016, according to the National Energy Board. Thanks to coal-powered plant phase-out in Alberta, Canadian coal production in 2040 will decline to 34 metric tonnes, of which 32 tonnes will be metallurgical and the remainder will be thermal coal burned in power plants.
Of the fossil fuels, natural gas will fare best as the global economy decarbonizes during this century because it is relatively clean.
EIA estimate of the pounds of carbon dioxide emitted per million British thermal units (Btu) of energy:
Coal (anthracite) 228.6
Coal (bituminous) 205.7
Coal (lignite) 215.4
Coal (subbituminous) 214.3
Diesel fuel and heating oil 161.3
Natural gas 117.0
Global consumption of natural gas is expected to rise by 50 per cent by 2040, according to the IEA.
BC Natural Gas Production and LNG
Northeastern British Columbia is home to the Montney formation, one of the largest natural gas reservoirs in the world, with 449 trillion cubic feet of recoverable gas, 14.5 billion barrels of marketable natural gas liquids and 1.125 billion barrels of oil. The Montney produces about 3.5 Bcf/d), 25 percent of natural gas production in the Western Canadian Sedimentary Basin, according to Alberta Oil Magazine.
Cheap natural gas is the prerequisite to getting into the LNG game, says energy economist Michal C. Moore, but Canada suffers by being next door to American shale basins, whose producers have driven down costs and driven up production. Giant gas basins like the Marcellus and the Utica in the northeast, as well as the Permian Basin in West Texas/southeast New Mexico, have given the United States a huge advantage.
“I just finished a course at Cornell with a senior engineer who came in to lecture on the technical changes to fracking and well life extension. Contrary to what I might've said two years ago, they're extending the life of these unconventional natural gas wells by a factor of maybe four, and with more improvements to come,” he said in an interview.
“They're not only extracting more out of the existing wells, but they're doing it in a more paced manner that is giving them a lot more confidence and predictability about the delivery of that gas.”
Five years ago, British Columbia missed the first significant window to develop LNG exports when Japan increased imports.
“I think we missed that window back when the differential in the Japanese market got up to about $16.80 per million Btu and then fell down in the $12 range delivered, which is right at the marginal cost level for shipping at $11 or so. So all the incentives to develop BC LNG pretty much disappeared,” said Moore.
To date, BC’s LNG industry has landed the modestly-sized $1.6 billion Woodfibre plant near Squamish, which is licensed to export 2.1 million tonnes of LNG per year for 25 years, a $400 million expansion to the Fortis BC LNG Tillbury facility in Delta and a conditional final investment decision on the $27 billion Pacific NorthWest LNG.
While there are another 15 or so proposals on the books, experts think only two or three will ever be built and probably not for another five to 10 years.
“These are slow-moving industries because of the cost that it takes to build a liquefaction facility and so there’s a lot of in-depth analysis to make sure that it is the right decision for companies,” Prof. Jennifer Winter, Dept. of Economics, University of Calgary, said in an interview.
Winter argues that British Columbia does offer some advantages to global LNG producers.
“We’re politically stable and you don’t have to worry about governments expropriating asset or corruption, things like that,” says Winter. “The further north you go, the cooler it is, and that means the conversion of natural gas to LNG is also cheaper. So, there are lots of pros and cons associated with BC relative to the rest of the world.”
And British Columbians shouldn’t expect the much-touted China market to materialize any time, soon, she says, noting that China’s intentions about building out electrical infrastructure aren’t entirely clear yet.
“China tends to be a lot more strategic in their energy choices. I think the fact that they would have to import quite a bit of natural gas could mean that they still go with coal, just invest really heavily in carbon capture and storage in order to reduce emissions from coal-based electricity.”
That said, a visit to China by US President Donald Trump netted US LNG exporters some juicy 22 to 24-year contracts, a staple of the industry that China avoided until recently. The Americans have a head start on British Columbia because they were able to convert re-gasification (import) facilities fairly quickly into liquefaction plants for export. And Gulf Coast LNG facilities – like Cheniere Energy’s huge Sabine Pass, which is two years ahead of schedule – also benefit from the recent installation of new locks on the Panama Canal that allow bigger ships.
“The world of natural gas is still turning on a contract basis. At the end of the day, the market is going to be dominated by the first-movers,” said Moore. “Right now, the combination of getting easy shipping access and a head-start on construction down in the Gulf Coast is certainly favouring the US shippers.”
The Christy Clark BC Liberal government was a vocal supporter of LNG expansion. However, post-May 9 election, the immediate future for LNG is hard to know. The BC NDP and Green Party minority government agreement addressed a number of economic issues, including fighting construction of Kinder Morgan’s Trans Mountain Expansion pipeline, but no mention of LNG.
“At the end of the day, it’s companies making an investment and deciding on whether or not that’s the best use of their dollars. Sure, it’s fine for the government to say that the future is bright for LNG, but Clark has also done some things since the 2013 election that have made the investment environment more challenging, like the introduction of that special LNG income tax,” says Winter.
There are no large-scale substitutes for oil. The IEA’s various modelling scenarios forecast global oil consumption to rise from 92.5 million b/d in 2015 to between 103 and 117 million b/d, depending upon a variety of factors that include government policies, electric vehicle adoption, increasing use of biofuels, and the pace of economic growth.
"The difficulty of finding alternatives to oil in road freight, aviation and petrochemicals means that, up to 2040, the growth in these three sectors alone is greater than the growth in global oil demand," the IEA said in the 2016 World Energy Outlook.
India will be the leading source of demand growth, while China will overtake the United States to become the single largest oil-consuming nation.
Canadian oil production, led by the Alberta oil sands, is expected to expand significantly by 2030. In its 2016 oil production forecast, CAPP estimated that more than 850,000 b/d of oil sands are scheduled to come online by 2021. Then over the following nine years, oil sands production is forecast to grow another 700,000 b/d, for a total Canadian production of 4.9 million b/d, a 28% increase over 2015. But total supply including diluent to allow the gooey bitumen to flow in a pipeline will increase to 5.5 million b/d by 2030.
That oil sands expansion is predicated on a significant reduction of greenhouse gases triggered by the Alberta government’s Climate Leadership Plan, specifically the emissions cap, carbon levy, and “output-based allocations” for producers.
The 100 million megatonnes cap (emissions are currently 70 million Mt/year) “is a big, significant factor in driving adoption of the next suite of technologies that will significantly reduce the environmental footprint of the oil sands,” said Dinara Millington, VP of research for the Canadian Energy Research Institute (CERI). “How quickly they will reach that emissions cap if nothing else is done has created urgency among the producers.”
Millington says the emissions cap will be reached by 2028 in a business as usual scenario. But if industry takes advantage of new technologies that use solvent to replace or reduce steam for in situ production, CERI estimates that “fuel-derived emissions” can be reduced by more than 80 per cent and that oil sands crude will one day have the same GHG-intensity as conventional oil.
“Industry will come to the metrics where we see oil sands bitumen has the same – or even lower – intensity than a conventional barrel of oil. I think industry is moving towards that and I think that’s what drives the innovation from companies, industry organizations, and federal and provincial governments,” she said.
GHG-intensity of bitumen is a big issue for opponents of more pipelines for the Alberta oil sands. The current transport capacity of Canadian pipelines is four million b/d, leaving Canada short by at least 1.5 million b/d by 2030. In November 2016, Prime Minister Justin Trudeau approved the replacement of Enbridge’s Line 3 (an additional 370,000 b/d) and the construction of the hugely controversial 525,000 b/d Trans Mountain Expansion pipeline from Alberta to Burnaby, BC.
The Kinder Morgan project is slated to begin construction in September 2017, but the prospect of an NDP minority government in British Columbia has created political uncertainty, even though the Canadian government is understood to have absolute legal jurisdiction over the approval and regulation of inter-provincial pipelines.
The BC NDP and Green Party signed an agreement to co-operate in the Legislature, and that included a pledge to “immediately employ every tool available to the new government to stop the expansion of the Kinder Morgan pipeline, the seven-fold increase in tanker traffic on our coast, and the transportation of raw bitumen through our province.”
Tony Seba and the Death of Oil
When statistics agencies model oil demand decades out, they make conservative assumptions based on the technologies already on the market and the likely evolution of new ones just getting established. What they don’t do well, because sudden change is inherently difficult to predict, is model technical or business model disruptions like the kind Standford lecturer Tony Seba described in his 2017 study, Rethinking Transportation 2020-2030: The Disruption of Transportation and the Collapse of the ICE Vehicle and Oil Industries.
While we focused on TaaS as a driver of radical transportation change in Section 4, we didn’t spend much time on Seba’s predictions about what would happen if consumers abandoned internal combustion engine cars and oil demand plummeted. As it turns out, the consequences of TaaS for the global oil industry would be as revolutionary as for transportation.
Seba argues that the widespread shift away from individual ownership of ICE vehicles ”will be catastrophic.” Global oil demand will peak at 100 million b/d by 2020 - just three short years from now - dropping to 70 million b/d by 2030.
Oil prices could plummet to $25USD/b as soon as 2021. Countries with low cost oil reserves, such as Saudi Arabia, will not notice much difference, says Seba. But high cost producers - such as the Alberta oil sands - will be devastated: “…countries with a larger share of shale oil, oil sands and offshore oil will see higher proportions of their oil rendered commercially unviable. High-cost oil fields will be completely stranded,” says Rethinking Transportation 2020-2030: The Disruption of Transportation and the Collapse of the ICE Vehicle and Oil Industries.
Low cost shale producers in the Permian Basin, which have production costs higher than most Persian Gulf countries but still much lower than deep water or oil sands, will survive. But Seba thinks an estimated “65 per cent of shale oil and tight oil — which under a ‘business as usual’ scenario could make up over 70 percent of the U.S. supply in 2030 — would no longer be commercially viable.”
The Keystone XL and Dakota Access pipelines would be “stranded.” Presumably the same fate would befall Kinder Morgan’s Trans Mountain Expansion pipeline - approved by the Canadian government and ready to start construction this fall - which is designed to carry 525,000 b/d diluted bitumen from Alberta to Burnaby, BC where it would be loaded onto tankers for transport to Asian markets.
Other areas facing large-scale volume disruption include offshore sites in the United Kingdom, Norway and Nigeria; Venezuelan heavy-crude fields; and the Canadian tar sands.
“While these projections may seem radical because they differ from mainstream and incumbent industry projections, they are really quite conservative because they are based on assumptions that in some cases have already been bested by new technologies and plummeting prices,” said report co-author Bryan Hansel, CEO of Chanje Energy.
How quickly might TaaS affect the health of the global oil industry, particularly the Alberta oil sands? In Section 4 we discussed the relative strengths of the Accelerators and Constraints, concluding that even 2040 was optimistic, but 2050 or 2060 would be more reasonable.
Even that extended timeline is much quicker than corporate and government planners have estimated.
If change comes that quickly, hundreds and hundreds of billions worth of oil sands plant and infrastructure - like the Trans Mountain Expansion pipeline - will be stranded.
The future of fossil fuels can be divided into two eras for our purpose: now until 2040, and 2040 until 2100.
During the first era, governments will try to slow the growth of coal, natural gas and oil consumption. During the second era, governments will try to end coal consumption altogether, gradually electrify transportation as batteries become better and cheaper to eliminate oil consumption, and reduce natural gas consumption as much as possible.
Will policymakers succeed? Will humankind reach the Electric Utopia by 2100?
The answers are maybe and it will be difficult.
A report from Copenhagen Economics for the Energy Transitions Commission that was released in early 2017 paints a bleak picture. Co-author Carl von Utfall Danielsson discussed the report on the organization’s blog.
“The world’s population is set to grow from 7.4 billion people today, to nearly 9 billion in 2040,” wrote von Utfall Danielsson, adding that each person will twice as wealthy as we are today, meaning energy consumption will rise dramatically.
“The demand for transport increases with industrialization, urbanization, and international trade. More buildings and larger homes will be filled with appliances, heated and cooled. The demand for steel, chemicals and cement will increase as more people consume more goods and require infrastructure to be built.”
Microsoft billionaire Bill Gates says the world needs an “energy miracle,” one or two big energy technology breakthroughs that transform the humans generate and consume energy. Maybe the commercialization of nuclear fission or some other futuristic, science fiction-type technology.
The opposing view, one held by Prof. Fred Beach of the Energy Institute in Texas, is that most of the technologies required to achieve the Electric Utopia already exist, are currently being developed in laboratories, or we understand what they must look like even if we can’t yet build them. We just need to time to get them to market, have them mature and climb up the diffusion S-curve until they become the dominant technology.
Beach says that different regions will experience the Energy Transition differently, with Europe and North America transitioning off fossil fuels in as few as 30 years, while the developing world will take the rest of the century.
“I think that on a global scale, I agree with the hundred-year timeframe for the Energy Transition,” he said.