Rapidly shifting international energy dynamics impact EA uptake, supply

The annual BP Statistical Review of World Energy 2013 report summarises what has been happening recently in the global energy and supply with focus on 2012.

The report demonstrates the extent of the global energy mix shift and the dynamics at play. Whatever is happening globally has direct and indirect impacts on our region as consumers of imported energy and also as prospective exporters of oil and gas.

In mid 2000s, the world was trying to contend with an unthinkable eventuality of “peak oil”. China had all of a sudden substantially increased its demands for oil against the background of stagnant global oil reserves and production.

The supply and demand imbalance caused by a surge of Chinese demands, created a fertile ground for oil price speculators resulting in prices finally going over the $ 100 levels which have so far been sustained.

The global economies also appear to have gradually established resilience to oil prices above $ 100 per barrel.

The high oil prices had a double effect on supply and demand balance. As always happens when prices substantially go up, consumers moderate their uptake of oil through efficiencies, conservation, alternative fuels, and new technologies.

All these reactive measures have slowed down oil demands especially in Europe and US. In the developing world, however, demand for oil continues to grow at levels above four per cent.

Secondly, as oil prices remained high, investor appetite for high risk and high cost exploration for oil and gas in the more remote areas increased.

Helped mostly by new technologies, deep sea exploration and production increased. Non-conventional sources like shale oil, and oil sands all of a sudden became economically attractive.

Areas like East Africa which were hitherto considered marginal became attractive to upstream investors. As search for oil intensified, more and more natural gas was discovered.

Technologies for moving this gas to the markets were developed, thus increasing natural gas global primary energy market share. This was happening when emphasis on low carbon emissions was in fashion, and this made natural gas a preferred fuel.

Liquefied Natural Gas (LNG) exports to markets in the Far East became attractive, making LNG a fuel of choice for power generation. It is the LNG that has recently enabled Japan to restructure its energy mix to minimise use of nuclear energy after the Fukushima incident in 2011.

Increased oil supply and generally reduced consumption have left the world with sufficient buffer to cushion against geopolitical upsets. That is why when Libya, Sudan, and Iran (boycotted by the West) decreased their exports, there was hardly any noticeable impact on the global oil supply lines, and prices remained in the same range of $ 105-115.

The biggest oil supply surprise came from the US where large increases in oil and gas production have been developed out of shale in recent years.

US has since significantly reduced reliance on imported oil, and at nearly 9,000 barrels per day (bpd), US is closing in on Saudi Arabia, the largest oil producer at about 11,500 bpd.

As US reduces dependence on imports of oil and gas, production from the West Africa which has traditionally targeted US markets will have to compete with the Middle East for the exports to the Far East and Europe.

Reduced dependence on imported energy by US will certainly shift its global political strategy. The Middle East as a key source of oil will become less and less significant to the US.

China and other industrial giants of Asia will remain dependent on oil and gas imports for some time to come, and hence will need to diplomatically keep closer to the oil producers in the Middle East and Africa.

Europe on the hand will remain dependent on energy imports, both oil and gas, until they venture into the exploration of the Arctic regions. North Sea resources have been on a declining curve.

In the mid 1970s the OPEC used to control about 75 per cent of oil global production, but this share now stands at 43 per cent. As OPEC defends their market share, the rest of the world is discovering and producing more oil.

The share of oil among the primary energy sources has been declining over the past 13 years to 33 per cent in 2012. Coal has shown resurgence especially in the areas of power generation to its highest level at 30 per cent share.

In the USA however natural gas from the shale has been replacing coal as the preferred form of primary energy. In Europe the reverse is happening and coal is regaining prominence.

All the above global energy supply and demand shifts are taking place as the Eastern parts of Africa experience successes in hydrocarbon discoveries.

Natural gas has been discovered in large quantities in the Mozambique and Tanzanian coastal areas, while the onshore Rift Valley areas of Uganda and Kenya have discovered liquid oil. The region is therefore seen as a net exporter of oil and gas within this decade.

Locally here in Kenya, new dynamics are directing the future energy mix, especially in areas of power generation.

It appears that renewable geothermal energy will be the preferred base load source of electricity, supported by locally produced coal, and with peak support from Wind generation. This will see reduced use of oil for power generation.

Mr Wachira is director, Petroleum Focus Consultants [email protected]