Drastic Changes in Energy Markets

9 november 2016

Experts expect that new technologies will soon drive pivotal changes in global energy markets. Rather than discovering fundamentally new energy sources, this means new ways of exploiting existing sources and profound structural shifts in energy markets, i. e. drastic changes in the market environment, evident signs of upcoming markets repartition. Authors of 'Global and Russian Energy Outlook 2016' have detailed key current trends during the report’s presentation at the Analytical Center.

Experts of the Analytical Center and the Energy Research Institute of the Russian Academy of Sciences (ERIRAS) prepare annual forecasts covering the period up to 2040. Two reports were published in 2013 and 2014, while no report was issued in 2015 due to high uncertainty. Experts believe that it was during that period that new global energy trends became apparent. It should be noted that the outlook is unique in that it is prepared by the authors at their own initiative and expense, with no external request or funding, which makes it 100% independent. "It is already our third Outlook. The topic is very important as it affects the life of the country on the whole: incomes, employment, inflation, territorial development. All these things depend to some extent on how the energy industry will evolve in the coming decades,” said Vladislav Onishchenko, First Deputy Head of the Analytical Center, opening the event.

"We cannot disregard geopolitics, and for this reason we have built three scenarios: upside (economic growth with zero political risks), the most likely (based on the current situation) and downside (economic downturn, aggravated local conflicts and broken diplomatic relations between countries). But all these forecasts rely on the same baseline U.N. projections of population growth, which is particularly noticeable in Africa, with an extra 900 million people aged 20 on average – and no attempts to at least approach the problem,” said Tatiana Mitrova, Head of Science at ERIRAS. “This population cannot afford energy, but can affect how the energy industry and the global economy on the whole will evolve in general.”

"Even under the upside scenario, Africa might slow down economic growth and bring much trouble in the future,” Leonid Grigoriev, Chief Adviser to Head of the Analytical Center, says in her support, “primarily due to migrants, most of them heading to Europe... The biggest issue under the most likely scenario is a slowdown in China, as it will become the world’s biggest economy, while the U.S. and other OECD countries will see their shares decline.” As to groundbreaking technologies, they will keep emerging, but, according to the expert, it will take them from 10 to 20 years to become commercially viable, so, until 2040 there will be no new fundamental breakthroughs in energy development, although there are active preparations for this. Moreover, a number of technology breakthroughs of the shale revolution type will abruptly increase availability of existing resources.

As to the actual outlook, Mrs Mitrova emphasized that economic growth was “decoupled” from energy consumption. In developed countries, the energy consumption is on the decline after a peak, with Japan, one of the most solvent markets in the world, providing a perfect example. Asia is a totally different story: higher incomes lead to higher energy consumption per capita that will keep growing in the longer range, especially in China and India. This fact must be taken into account when developing economic strategies.

According to Mrs Mitrova, the shares of oil, gas, coal and non-fuel sources are equalizing, with energy balances in world regions growing more diversified and predictable. Although markets will still be dominated by fossil fuels, all regions will enjoy higher electrification rates, with non-fuel energy sources performing the strongest. The electricity generation sector will remain diversified: e. g. developed countries are abandoning coal, while Asia will see higher coal consumption. But most important, according to the expert, are qualitative changes in the way the market itself operates. There are three drivers that are currently converging to reshape the power industry: higher performance and lower cost of renewable energy; drastic cost cuts and proliferation of mobile battery-based power storage technologies (the newest trend); and adoption of new energy management principles driven by advanced AI-enabled information technologies.

Ekaterina Grushevenko, researcher at ERIRAS, told us about outlooks of the liquid fuel market. "None of the three scenarios provide for lower oil demand, but the more developed is the economy, the lower is the demand, Grushevenko said. “For instance, energy efficiency technologies are so advanced in Japan, that its demand for liquid fuels has declined twofold, while China will see a peak in oil consumption under all scenarios, with the transportation sector being the key growth driver of demand for liquid fuels.” The expert believes that the global conventional oil production peak is to be expected by 2020, with unconventional sources coming to the fore from then on (e.g., slate oil, with the U.S. remaining its key producer). The upside case provides that Canada, China and Russia will also discover shale oil deposits.

The oil market will be rather stable. No disruptive changes are expected in the structure of international oil trade, with Middle East staying its key supplier. Oil prices are not expected to rise rapidly (let alone drastically) until 2020, but will soar in the 2030s (indicatively to US$100 per bbl). For this reason, we need to invest in exploration and development of new oil sources as soon as possible.

"Demand for gas is steadily growing – in the next 25 years it will increase by roughly 10%, but not everywhere,” said Vyacheslav Kulagin, Head of Global and Russian Energy Research at ERIRAS, when presenting the relevant chapter of the Outlook. “Much of the increase will also come from India and China.” The expert claims that by 2040 unconventional gas, including shale, will account for 23% of global production (under the most likely scenario). Mexico, Canada, and Argentina will be building up their gas production. All scenarios provide for a strong rise in LNG trading from 330 bcm in 2015 to 740 bcm in 2040. “Russia cannot avoid competition, and the fight will be fierce,” Kulagin says. Prices are not expected to recover to the levels of 2012 and 2013 even by 2040.

In general, coal consumption growth rates are slowing down globally. China accounts for more than half of that growth, but although it was coal that drove Chinese economic growth energy-wise, its consumption peak in China will be over between 2021 and 2024. India will be the world’s second largest coal consumer. At current consumption rates, global coal reserves are forecast to last for more than 100 years.