Arunabha Ghosh: A turbulent energy world

For better or worse, the world of energy is in turmoil.  Oil prices have been fluctuating for several months. Since the beginning of 2017, prices traded within a narrow band, thanks to a deal to cut 1.2 million barrels per day (mbpd) between the Organization of the Petroleum Exporting Countries (OPEC) and other major producers such as Russia. Whereas OPEC (particularly Saudi Arabia) had achieved near full compliance, non-OPEC countries had managed only 38 per cent of the promised cuts. Also, rapid increase in US shale oil output meant that non-OPEC oil production increased by 90,000 bpd in February. By mid-March prices once again fell 10 per cent, as oil inventories accumulated.

Low prices discourage long-term upstream investment. But, if prices rise too much, the incentives for consumers to shift to alternative energy sources would increase. This is the dilemma for large oil companies, recognising that the price at which long-term growth in demand could continue would also imply persistent pressure on profit margins. In response, some firms have divested from more expensive reserves (such as Canadian oil sands). Others have increased investment in low-cost shale. Still others have sought to increase efficiency, cut costs and lower the break-even price for new projects. 

Meanwhile, global natural gas consumption is growing faster than all other fossil fuels. It is increasingly proposed as a transition fuel on the pathway towards eventually decarbonising the energy sector later this century. But long-term goals do not easily convert to short-term investment decisions. In some of the fastest growing energy markets (China or India), expensive infrastructure for shipping, piping, or delivering gas is still being built — and prices remain higher than alternatives. 

Even in markets where gas use is widespread, investment is needed in technologies to transition gas to a zero-carbon energy source. One is to shift from natural gas to hydrogen blend fractions by drawing hydrogen from zero-carbon resources such as solar and water. But it would require costly retrofits to pipeline and gas-using infrastructure. Another option — increased use of biomethane (with very low net emissions) – would require a lot of land, water and other resources, competing with agricultural uses. A third option is carbon capture, utilisation and storage (CCUS). But the technology for gas CCUS is different from coal carbon capture. It needs more testing, and does not yet have a clear business case for investors.

For solar energy, prices have fallen rapidly (down to less than three US cents in Chile and the UAE). Some of this is attributable to excess production of panels and modules in China. But a large part of the fall in tariffs is due to cheaper finance available in some countries. India, too, has benefited from technology and new investment, delivering record low tariffs last month, but not to the same extent as elsewhere. So, developers and investors are wondering how much further technology costs would decline versus how much savings would accrue from efficiency improvements, and how much they should focus on reducing the cost of finance.

Beyond energy sources, ongoing developments within countries are adding to uncertainty in policy and investments. The Trump administration has proposed to cut the budget of the Environmental Protection Agency by 31 per cent, threatened to rollback vehicular fuel economy standards, and sent mixed signals on whether it will stay or leave the Paris Agreement on climate change. China, the world’s biggest greenhouse gas (GHG) emitter, is also sending mixed signals. While coal use fell in 2014 and 2015, in January the National Development and Reform Commission proposed that coal consumption would rise to 4.1 billion tonnes in 2020, even as China scales back production from inefficient mines. 

In Europe’s largest economy, Germany, GHG emissions increased by 0.7 per cent in 2016, largely due to increases in transport sector emissions. Although renewable energy now accounts for 30 per cent of Germany’s electricity, coal and lignite still supply 40 per cent. Last week the European Commission’s efforts to regulate the Nord Stream 2 gas pipeline from Russia to Germany were setback when a German regulator argued that EU energy laws would not apply to an offshore pipeline project. The real issue is whether such infrastructure projects increase Europe’s dependence on Russian gas and, by extension, geopolitical worries in central and eastern European countries.

Whether it is the energy source or the major energy consuming regions, long-term energy planning is both imperative and extremely difficult. As India deepens channels of energy cooperation with these regions and countries, it must set its own agenda. Notwithstanding policy and technology uncertainties elsewhere, the complexities of energy markets, energy transitions and energy diplomacy will matter to India the most because its energy demand will grow faster than that of any other country in the G20, at least until 2030.

India must keep its focus on three energy mantras: Energy access for hundreds of millions of deprived citizens; transition to cleaner, more efficient energy (particularly as India urbanises); and energy security (not independence) as India integrates more deeply into global energy markets. These mantras will need technology, trade, finance, partnerships with other governments, private sector and civil society, and effective institutions. This will be a long game and we should not expect easy results.
 

The writer is CEO, Council on Energy, Environment and Water (http://ceew.in), co-author of Energizing India (https://goo.gl/g9eXRX), and member of the World Economic Forum’s Global Future Council on Energy. Twitter: @GhoshArunabha.