Geopolitics and Energy Transitions - Baker Institute [PDF]

Geopolitics and Energy Transitions

Robert Johnston CEO, Director, Global Energy & Natural Resources

What is driving the energy transition globally? The US is an outlier as our “energy dominance” is about the supply-side Even though our private sector and states are active in decarbonization and clean energy technology, “market” conditions for energy transition in the US are currently poor Yet upstream conditions may have never been better – on a relative basis! Confidential & Proprietary © 2017 Eurasia Group | 2

What is driving the energy transition globally? The necessary conditions for dynamic public and private sector investment into energy transition include: Energy insecurity Climate/air quality policy Industrial policy We expect Asia to lead in these areas, outpacing efforts in the EU Confidential & Proprietary © 2017 Eurasia Group | 3

The global oil investment landscape Global capital flows to the energy sector are at impasse as investors and companies struggle to understand the macro picture

Asia clean tech and industrial policy Oil prices and returns Reliability of Middle East supply

US fracking revolution Confidential & Proprietary © 2017 Eurasia Group | 4

US shale outpacing all rivals for upstream capital…. Change in upstream oil and gas investment, 2017 vs. 2016 60% 50% 40% 30% 20% 10% 0% -10% -20% Africa

Latin America

Middle East

Russia

US Shale

Source: International Energy Agency

Confidential & Proprietary © 2017 Eurasia Group | 5

But US shale oil alone will not be enough to balance markets… ~7 million bpd of new supply by 2022

Demand growth assumptions 2017-2022* 16

~15 million bpd of new supply needed by 2022 Supply growth assumptions 2017-2022* Oil sands and deepwater growth

0

10

Annual declines

6 4

4 2

12

8

8 6

14

US shale growth

2

Demand growth

0


Deepwater break-evens are coming down and producers governments are moving away from resource nationalism (albeit with mixed results…)


Varying predictions of global peak oil demand increase uncertainty

Company/Agency

When will global oil demand peak?

BP

In the 2040s

Chevron

Does not foresee a peak

Exxon Mobil

Does not foresee a peak

Royal Dutch Shell

2025-2030

Statoil

2030

Total

As soon as 2040

IEA

After 2040

Source: IEA, companies, WSJ Confidential & Proprietary © 2017 Eurasia Group | 8

Geopolitics long term- lower for longer losers? The next round of geopolitical shockwaves in the form of ‘peak demand’ (or at least slowing oil demand) will have greatest impact on high political risk, high production cost countries

High cost/longcycle sources of supply and energy-sector political risk will also be challenged

•  •  • 

Risks of regional conflict rise

Orange: At risk in the long-term: Russia, Saudi Arabia, Iran Purple: At risk in the medium-term (due to lost investment): Mexico, Brazil, Colombia, Canada Red: Immediate destabilizing impact: Nigeria, Venezuela Confidential & Proprietary © 2017 Eurasia Group | 9

Supply Shocks

Short-Term Geopolitics: What Happened to the Risk Premium?

• Global populism • NAFTA feud • Brexit

Libya tensions Venezuela crisis Niger Delta Trump-Iran Russia sanctions

• Commodity bust • China deceleration

Demand Shocks

Saudi succession Qatar-GCC crisis KRG-Baghdad


Geopolitics of downstream are intensifying too: Saudi Arabia

Pivot to Asia accelerating— Asian markets, especially China and Japan, are important targets for kingdom’s diversification efforts: •  Saudis are making strategic decisions to invest in Asia downstream to create stability for crude demand in the region •  Other players like Russia, Qatar are also active in the Asia downstream •  US crude exports create uncertainty for OPEC Confidential & Proprietary © 2017 Eurasia Group | 11

LNG supply growth will continue—oversupply will persist


Emerging LNG importers show promise Saturation in traditional markets (Japan, SK) prompt exporters to look to new markets But new Korean government policy against nuclear and coal holds promise for LNG demand lift Indian power sector remains very price sensitive, so gas demand will be focused on industrial and transportation sectors Declining domestic output will increase SE Asia’s call on LNG too Gas and renewables will “dance” in Asia- but who is leading?


Gas geopolitics are on the demand side- government preference for gas vs other fuels is the key variable in growth markets Increase in LNG imports during first four months of 2017* (million tons) Portugal Pakistan

Taiwan India Turkey Japan South Korea China 0 0.5 *Compared to first four months of 2016 Source: Bloomberg

1

1.5

2

2.5


Gas partnership with renewables will shape markets Solar PV and wind energy share of electricity generation capacity


Next revolution: Asian clean tech and the transport sector •  China, Japan, and Korea are the world’s 1st, 4th, and 5th largest crude oil importers •  “Made in China 2025” program

Air quality concerns and climate policy

•  China- Bicycles, rail electrification •  China Belt and Road Initiative- Super-grid •  Japanese zero-emissions and hydrogen fuel cell program •  Korean National Green Growth Strategy •  Smart Cities for emerging Asia- India, ASEAN

Industrial policy and government coordination

Energy insecurity and import dependence

•  Ride-sharing and fleet utilization Confidential & Proprietary © 2017 Eurasia Group | 16

Pace of oil demand growth in transport sector slowing IEA's global oil demand forecast by sector 70

Compound average annual growth rate from 2015-2040 = .6%

60

2000

2015

2040

Million bpd

50

40

Compound average annual growth rate from 2015-2040 = 1.2% (petrochemical feedstocks = 1.5%)

30

20

10

0 Transport

Industry (includes petrochemical feedstocks)

Buildings

Power generation

Other

Source: International Energy Agency Note: Other includes agriculture, transformation, other non-energy use (mainly bitumen and lubircants)


EM growth in the road transportation sector- but what kind of vehicles will these be- and what kind of fuels will they use? Demand in road transportation in the OECD (2015-2040) 25.0

Million bpd

20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 Demand in 2015

Increasing car fleet Improvement in fuel economy

Penetration of alternative fuel vehicles

Declining average VMT

Demand in 2040

Million bpd

Demand in road transportation in developing countries (2015-2040) 35 30 25 20 15 10 5 0 -5 -10 -15 Demand in 2015

Increasing car fleet Improvement in fuel economy

Penetration of alternative fuel vehicles

Declining average VMT

Demand in 2040


Source: OPEC

Conclusions •  Era of peak supply may be over but geopolitical shocks are probably not •  No way to know if peak demand is here- nonetheless demand growth is increasingly fragile and concentrated •  Saudi/US likely to be dominant oil producers; US/Russia will be dominant gas producers- but what does “dominant” mean? •  Politically risk and high cost markets are unlikely to see a meaningful return of upstream capital •  Asia likely to win clean energy technology race in transportation, smart cities, and power generation


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