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Conference report
New energy frontiers: what role for hydrocarbons in
global energy security?
Wednesday 15 – Friday 17 June 2011 | WP1111
In association with the Federal Government of Canada and Alberta
Government
Conference report
New energy frontiers: what role for hydrocarbons in
global energy security?
Wednesday 15 – Friday 17 June 2011 | WP1111
Key points
▪
Despite the aspirations to reduce the use of hydrocarbons and increase renewables
with a view to minimising CO2 emissions, hydrocarbons will dominate the energy mix at
least until 2035.
▪
Unconventional fossil fuels such as oil from sands and shale, shale gas and gas from
coal (through underground coal gasification) have challenged the concept of “peak oil”.
▪
The geographical distribution of unconventional sources is wide and technological
developments, particularly drilling techniques, are enabling extraction at an economic
price. These have the potential to significantly alter the current understanding about
energy security.
▪
The need to reduce carbon emissions poses considerable challenges to the
development of unconventional fossil fuels. If coal is substituted by gas, carbon
emissions may decrease. If gas is substituted for nuclear energy, increased carbon
emissions may result. All fossil fuel use can be linked to carbon capture and storage
(CCS), to whatever degree is rewarded by the market.
▪
The need to protect the environment, reduce greenhouse gas emissions and protect
the public is a sine qua non for the successful future development of the sector. To that
end, innovative technology and energy education are necessary in order to allow
governments, regulators and the industry to cooperate effectively.
Assessing current energy demands and supplies and the future global
energy security
1. According to the 2010 International Energy Agency (IEA) World Energy Outlook1 world
energy demand will grow by 2035, China and developing countries being mainly
responsible for this increase. Fossil fuels will dominate the energy mix in all energy policy
scenarios.2 Oil prices are expected to rise by 2035, since oil production from fields currently
producing is declining. However, the development of unconventional oil may offset the
effects of this decline. Canadian oil sands and Venezuelan Orinoco extra-heavy oil are
expected to dominate the global unconventional oil market by 2035. On the other hand, the
levels of current CO2 emissions are very far from where they should be to achieve the 2050
goals.
2. The nuclear crisis in Japan, the Middle East unrest and China’s 12th Five-Year Plan may
affect the demand for gas.3 Despite significant infrastructure needs, global demand for gas
is expected to grow in every energy scenario, but it is unclear how fast it will grow and
whether it will peak before 2035. Arguably, a “Golden Age for Gas” may arrive due to: (a)
the widespread development of unconventional gas, (b) the dramatic expansion of
Liquified-Natural Gas (LNG) trade, (c) lower gas prices, (d) China’s 12th Five-Year Plan, (e)
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the reduced growth of nuclear energy, especially after the 2011 Fukushima incident, (f)
policy uncertainty, (g) the deployment of natural gas vehicles. In fact, gas may compete
with nuclear in terms of investment as gas power stations are built faster than nuclear.
Furthermore, gas may grow twice as fast as coal and reduce (albeit not significantly) CO2
emissions. The development of unconventional gas raises serious environmental concerns.
Nevertheless, regulation (on hydraulic fracturing and greenhouse gas (GHG))4 and
operational best practices can mitigate risks.5
The broader context: future climate change negotiations
3. There is pessimism about the conclusion of a treaty on climate change binding on all
major emitters in the coming years. The total CO2 emissions from the state parties to the
Kyoto Protocol6 account for only 27%, while the protocol allows non-parties to increase
CO2 emissions (‘free-rider effect’). Japan perceives the Kyoto Protocol as ineffective and
has clearly stated that it will not participate in the 2nd commitment period of the Kyoto
Protocol. For Japan, despite the non-binding character of the Cancun Agreement its
implementation and mutual monitoring mechanism constitute a more effective framework
than the Kyoto Protocol. A bottom-up approach, with each state adopting its own measures,
in combination with international, regional and bilateral cooperation is more pragmatic and
effective.
Canadian oil sands: assessing the future role and global impact
4. In 2010, Canada ranked third in crude oil reserves in the world and sixth among world
crude oil producers, representing 60% of global accessible markets. Two of Alberta’s
discovered oil sands sites will support 200 years of extraction. While Canada currently
exports to the US, Canadian oil sands may penetrate Asian markets thanks to competitive
travel distances. However, the conversion of conventional gas to LNG, which may be
transported to these markets, may prevent significant exports of oil from oil sands to Asia.
5. The oil sands sector is projected to produce considerable economic benefits for Canada:
over 2010-2035 $2.1 trillion (Canadian dollars) across Canada will be generated.7 But the
development of oil sands, which enjoys strong government support, depends on
sustainability and management of relevant infrastructure; regulation, including on carbon
capture and storage (‘CCS’), and technology are key for the success of oil sands policy.
Authorities and industry acknowledge the need for a ‘social contract’, which involves the
participation of aboriginals as well as environmental protection.
6. Oil sands production, particularly open cast mining, may seem contradictory to green
energy. However, since hydrocarbons remain in all energy policy scenarios until 2035, and
the global energy mix is moving towards unconventional supplies (see IEA World Energy
Outlook discussed in section 1), Canadian authorities and industry are concentrating on
cleaning oil sands to meet environmentally sensitive demands along with the need for
source diversification. In the future, only 20% of oil sands will be extractable from the
surface (less than 200m from the surface) by open cast mining, while 80% is expected to
come from drilling, which nonetheless consumes more energy and may affect groundwater.
It will be necessary to have adequate ground-water mapping and a good knowledge of the
local hydrology to ensure that local waters are not contaminated by the extraction process.
7. Technology, responsible environmental development and transparency are critical for
the development of oil sands. Cooperation on research and development with universities
is very important. The government of Alberta consistently funds technological research on
GHG and CCS with industrial focus and with a view to coordinating production with
environmental research.8 Industry has also participated, recognising the sectoral nature of
the problems. In order to manage regional cumulative effects authorities regulate particular
projects by inter alia requiring environmental impact assessments (EIAs), oversight,
inspections and compulsory reclamation at the end of the project. A new plan, which sets
specific limits and outcomes in terms of water and air quality, water quantity, ground water
and biodiversity, is under consultation. The plan also sets triggers for management action
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to be taken and excludes some areas from oil sands development. Industry, governments
and universities are working in concert to achieve extraction with a lighter environmental
footprint and at a lower cost. Energy education is indispensable for the proper development
of such projects.
8. Production of oil from Canadian oil sands emits more greenhouse gas than that of most
conventional oils; however, on a “well-to-wheels” basis the difference is typically only 515%. To meet its energy needs and GHG emission targets, Canada is undertaking
significant public investments - federal, provincial and municipal - in clean energy
technology, including funding of clean energy initiatives, such as the Clean Energy Fund.
Additionally, in 2007, Alberta became the first province in North America to regulate large
industrial GHG emissions. Technology, responsible environmental development and
transparency have enabled the decrease of GHG emissions from Canadian oil sands by
29% from 1990 to 2009.
Shale gas: assessing the future role and geopolitical impact
9. Shale gas is produced by the combination of two oil and gas extraction techniques:
fracture stimulations and horizontal drilling. The latter leaves small surface footprints,
because it is possible to access multiple wells from a single surface location. Several
claims surrounding the development of shale gas have either not been proven or are
proven wrong. Europe has enough rigs and services, while it is too early to estimate the
economic costs of shale gas. Whilst hydraulic fracturing is a water-intensive procedure,
water flowing back from hydraulic fracture stimulation can be recycled. There is no
evidence that hydraulic fracturing has opened up a direct contamination pathway from the
target formation to the underground sources of drinking water. Nonetheless, although deep
extraction and steel and concrete isolation of drilling may prevent groundwater
contamination, structurally weak cement may allow contamination. For that reason,
frequent inspections and new technologies are needed. Importantly, hydraulic fracturing
may trigger seismicity necessitating seismic monitoring. When different activities relating to
shale gas development are taken together the latter contributes to air pollution. In the US,
there are proposals to aggregate all small sources of air pollution together for the purpose
of determining whether their emissions should be regulated.
10. Shale gas production allows leakage of methane, which is 25 times more potent than
CO2 on a 100 years basis and 72 times more potent than CO2 on a 20 years basis. Recent
studies indicate that methane emissions associated with natural gas development could
make natural gas dirtier than coal. Since the comparison between gas and coal in terms of
GHG is a critical factor for policy-making concerning gas, new research is urgently needed
to clarify the contribution of methane leakage from shale gas development to GHG
emissions.
The US experience
11. In the US shale gas is perceived to contribute to energy security: although initial
production rates are very high,9 deposits are onshore, drilling times are short and wells are
expected to produce for the next 30 to 40 years (with the life of any individual well being 1-5
years). If the necessary expansion of pipelines takes place, because the North-American
energy market is substantially integrated and oil and gas prices are decoupled,
developments in the shale gas sector may have considerable impact on prices. Different
scenarios may evolve from US shale gas production. Available or future LNG terminals and
storage capacity may allow US shale gas exports to the world market, Europe in particular.
Nonetheless, one cannot overlook the amount of shale gas imported to Europe from other
sources. Another scenario envisages the coverage of Europe’s shale gas demands from
non-US sources, since the US will be self-sufficient in shale gas production in the next
years.
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The Polish experience
12. In view of Poland’s dependency on gas from Russia (89%), domestic production of
shale gas is central in the debate about energy security. Since 2007 Poland has granted 91
concessions for prospection and exploration.10 The costs and benefits of shale gas
production for the region are not yet clear. Low public acceptance is mainly due to the lack
of knowledge and information. Environmental impact is the main concern, particularly after
the moratorium imposed by France. In Europe, the development of shale gas poses
particular challenges due to the density of the population, which differs considerably from
North America, as well as the limited supplies of water and Natura 2000. 11
13. However, currently most sites where concessions have been awarded are not densely
populated and are not covered by Natura 2000. The real challenge is infrastructure
(production and transport, particularly towards the Eastern part of the country), which calls
for an investment-friendly regime.12
The Economic and Geopolitical Impact in Europe
14. EU member states depend greatly on oil and gas imports. The 2009 gas disruption
from Russia through Ukraine emphasised the need for source and route diversification.
Reserves of unconventional gas in Europe are abundant and can be produced at costs
similar to those in North America.13
15. According to Article 194 of the Treaty on the Functioning of the European Union
(TFEU), widely known as ‘the Lisbon Treaty’, the Union’s competences in the energy sector
should (a) ensure the functioning of the energy market; (b) ensure security of energy supply
in the Union; (c) promote energy efficiency and energy saving and the development of new
and renewable forms of energy; and (d) promote the interconnection of energy networks.
Member States retain the right to determine the conditions for exploiting their energy
resources, their choice between different energy sources and the general structure of their
energy supply. On this legal basis, the European Commission has taken steps to assess
the economic impact of unconventional gas on European energy markets and the
appropriateness of existing legislation on shale gas.14 The challenges faced include interservice cooperation, the adequacy of the legal framework and the urgency of realising the
internal market. The debate on shale gas currently focuses on domestic production and is
starkly polarised due to the scarcity of accessible data.
16. Importing shale gas, particularly in the form of LNG from the USA could curb high gas
prices in Europe and its dependence on Russian conventional gas. This is particularly
attractive to states which import energy, less so for those which produce it. Moreover, the
potential of gas as transportation fuel will have considerable impact on the relevant use of
oil with wider geostrategic implications. Whether the US will become a big exporter of
shale gas however is questioned.
Other sources of hydrocarbons
17. Coal is the most abundant fossil fuel and has powered the world for 300 years.
However, when burnt it is the least-environmentally friendly fossil fuel. Coal gasification,
which is a well-established technology today, offers an attractive alternative. Coal mining
also has severe environmental impacts (waste and ash). Today the solution lies in
Underground Coal Gasification (UCG), which leaves a small surface footprint, allows waste
and ash to stay underground and prevents methane leakage or water contamination, since
no fracturing takes place, as opposed to shale gas.15 UCG allows 20 times the energy
recovery of Coal Bed Methane (CBM) and Coal Seam Gas (CSG), which contrary to UCG
require extensive use of water and often fracture.
18. Extracting oil from shale is also being developed. Shale is the most abundant
sedimentary rock with wide world distribution, the US, China, Russia and Israel having the
largest known reserves. Nevertheless, fracturing is essential to shale oil production. New
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technology (In-Situ Conversion Process (ICP)) allows electric resistance heaters to
gradually heat shale in the subsurface.16 The use of substantial amounts of water remains
necessary and the need to protect local aquifers remains. But there are potential
technology options to reduce that use as well as to protect groundwater.
Market regulation, energy security and dealing with the broader
environmental and carbon questions
19. Regulation is a critical factor in the development of unconventional hydrocarbons.
Regulation should respect the nature of the unconventional hydrocarbons sector and of the
resource, in addition to the needs of the local community and international policies
concerning, for example, environmental standards. There is a difference between
unnecessary regulatory burdens and necessary regulatory requirements. The government,
regulatory agencies and the industry should share best practices if unconventional
hydrocarbon projects are to succeed. Energy education as well as ensuring that regulators
are up to speed with existing technology and have equal access to information is of
particular importance. Branding the shale gas industry as a new technology may allow it to
escape the regulators’ reach.
20. Even if unconventional hydrocarbons are produced, exports and transportation may
pose considerable constraints to the industry’s future development; for instance, long-term
supply contracts, which are widely used in Europe and the need to use pipelines, which are
already used for transporting conventional gas. Features of long-term supply contracts may
lead to market closure and breach EU competition law. In Europe, third-party access to
energy networks is mandatory and transparency standards about available capacity have
been set. While pessimism about the adoption of an international regime for GHG has been
voiced, the success of other international treaties on energy efficiency, such as the Energy
Charter Protocol on Energy Efficiency and Related Environmental Aspects (PEEREA),
should not be overlooked. Educating consumers as well as the industry and regulators
about unconventional hydrocarbons and energy security is of particular importance.
Conclusion: Business and policy implications
21. Hydrocarbons are expected to be a key part of the global energy picture until at least
2035 as a bridge towards renewable energy supplies. While conventional oil and gas are
found in a limited number of countries, unconventional sources are widely distributed in the
world. Arguably their development may change the current picture of world energy security.
However, environmental concerns may limit the drive towards change to unconventional
hydrocarbons. Although no internationally binding standards are yet in force, three
concepts are likely to play a significant role in the future development of oil sands, shale
gas and UCG: (a) the ‘social contract’ of the industry in order to protect the local
community, the environment and ensure reduction of CO2 emissions; (b) technological
innovation; and (c) energy education of consumers, the industry and regulators. The
synergy of industry, authorities, regulators and universities is indispensible to this process
and as a result will be determinative of the success of this sector.
Danae Azaria
Wilton Park | July 2011
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Annex
Japanese experiences in energy security
Prior to the Fukushima incident, the Japanese energy policy as an example of an energy dependent national
policy, was based on low energy self-sufficiency and prioritising energy security, particularly supply diversification
(nuclear, gas and coal). The goals of that energy policy were summarised in the “3Es:” energy security,
environment and economic efficiency. The 2010 Strategic Energy Plan aimed to reduce considerably the use of
fossil fuels and energy-related CO2 emissions. It entailed the reduction of CO2 emissions from the residential
sector, doubling the share of non-fossil fuel in power generation by 2030 by expanding renewables and by
establishing numerous nuclear plants and increasing capacity utilisation from 60% to 90%.
After Fukushima, utilisation of nuclear capacity has dropped 20%, primarily due to strong objections by local
communities which do not allow re-operation of the stations. Higher dependence on fossil fuels is inevitable, but
renewables, energy efficiency technology and regulatory measures are supported. Civil society supports the
combination of geothermal energy, wind mills and a smart-grid system. Japan contributes to the reduction of CO2
emissions by developing coal mining technology. The use of geothermal energy is currently not realistic, the main
obstacle being cultural. Moreover, authorities are considering strengthening the grid system against domestic
emergency. All these policies may lead to considerable costs which will be borne by the public. Hence, a rigorous
cost analysis is necessary
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1
www.iea.org
2
79% in the Current Policies Scenario, 74% in the New Policies Scenario, 62% in the 450 Scenario.
3
The Middle East upheaval should not be underestimated: gas production in that region may be used for domestic development instead of
exports.
4
GHG emissions from shale gas production are only 3.5% higher than from conventional gas.
5
These may include: (a) ensuring that gas, water and chemicals cannot enter other formations, (b) minimising water use, (c) treating and
disposing of water appropriately, (d) limiting gas venting.
6
Kyoto Protocol to the United Nations Framework Convention on Climate Change. Signed on 11 December 1997; entered in force on 16
February 2005.
7
Federal taxes are estimated at $311 billion, provincial taxes at $122 billion and Alberta royalties at $350 billion. Numerous jobs will also be
created (Canadian dollars)
8
The Alberta Technology Fund was established, which is one of the pools for funding focused on climate change and the deployment rather
than research side of technology.
9
Drilling of unconventional gas is twice as expensive as conventional.
10
Investors may apply for production licences after having been awarded a 5 year exploration concession. Production sharing agreements are
not yet in force in this sector.
11
The 1979 Habitats Directive and Birds Directives have created a network of sites called Natura 2000. The Birds Directive requires the
establishment of Special Protection Areas (SPAs) for birds. The Habitats Directive similarly requires Special Areas of Conservation (SACs) to
be designated for other species, and for habitats. Together, SPAs and SACs make up the Natura 2000.
12
For example, Poland is formally exempted from the relevant EU Directive concerning mandatory bidding for prospecting licenses.
13
Estimates ranging from 16 to 173% tcm: IEA (‘Are we Entering a Golden Age for Gas?’), the US Energy Information Administration and IHS
CERA (www.ihs.com).
14
First, it contracted legal experts to survey the application of the European legislation to the licensing of shale gas prospection, exploration and
production in 4 member states, which have granted the highest number of relevant licenses. Second, the European Commission has initiated a
relevant JRC evidence review. The outcomes of both surveys are expected.
15
Nonetheless, ground water has to be monitored. Information on UCG can be found on the website ucg_association
16
The Shell ICP process uses water to the extent that the power comes from a steam electric generation plant which uses water to condense
the steam that drives the turbines. Combined cycle power plants reduce this substantially by using some steam and some direct natural gas
turbine driven generators. The ICP process also uses water to ‘steam clean’ the rock after extraction of hydrocarbons by cycling water through
the hot rock to capture any stranded hydrocarbons and other chemicals out of the rock.
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