|World Energy, v8n1|
The United Kingdom Leads Europe’s Growing Import Demand
by Lee R. Raymond
Oil companies have many responsibilities, and our impact on society is evident in a large number of ways. We employ people, we help communities, we earn money for our shareholders and our operations and products affect the natural environment. But the most important thing we do is to provide commodities that are vital to the mobility, comfort and prosperity of people everywhere – even those who don’t use our products directly.
For our industry, that responsibility is Job One, and ultimately the job that is of most interest and concern to the public.
We are not always successful in communicating to the public how challenging that basic job is. In particular, I don’t think the public has a very good understanding of the size – indeed, the immensity – of the energy industry and the global market we serve.
This can lead to some serious misperceptions and misunderstandings. Without a sense of the scale of the energy business, people can be led to underestimate the technical and economic challenges involved with change, and the very long time frames that will be required for any changes to be developed and deployed. People can forget that for change to be effective and significant, it must ultimately be applicable on a large scale and able to benefit societies that are extremely poor as well as those that are economically prosperous.
Each year my company updates our outlook for future energy demand and supply. We test our views against those of others, including the International Energy Agency and the U.S. Department of Energy. This allows us to identify areas where we agree and where we diverge from others’ views. We are convinced that these comparisons are essential to helping us understand the key energy issues.
A Glance into the Future
As we look a quarter century ahead to the year 2030, the three most important elements in how much energy the world will need are population, economic growth and the development and penetration of advanced technologies. As global population increases and economies expand, so will energy needs, moderated primarily by progress made in the efficiency of energy use.
By 2030, the world’s population will likely be about 8 billion people, 30 percent higher than today’s level. And 95 percent of this growth will occur in countries with developing economies.
At the same time, we expect continuing economic growth will create a global economy that will be twice the size of today’s, further adding to the need for energy. The combination of economic growth and population increases can be expected to lead to a rise in primary energy demand of about 50 percent. This means that by 2030, overall global energy demand will be the equivalent of about 335 million barrels per day (MBD) oil-equivalent.
This is a rise from today of more than 100 MBD, a huge figure. To put this in perspective, a 100 MBD increase is about 10 times Saudi Arabia’s current production.
This growth will be considerably higher if we as energy consumers do not continue to make wise choices and effective investments to improve the efficiency with which we use energy.
We estimate that four-fifths of the energy needs in 2030 will be met by fossil fuels, reflecting the scale of these resources, their flexibility in application and their cost-competitive nature.
While large fossil fuel resources exist to meet this enlarged need, when we look more closely into how future energy will be supplied, the challenge of ensuring adequate energy is quite daunting even for those of us who have witnessed our industry’s remarkable progress and success over time.
Factoring in the natural decline of current fields, about 80 percent of the oil that will be needed in 2030 will have to come from new production. Finding and producing this energy will obviously be a tremendous challenge, one that will occupy our industry for at least the next generation.
It is very likely that alternative forms of energy will begin to make more of a contribution to energy supply over this period. But here is where an understanding of the scale is so important.
For example, even with an expected rapid growth rate for wind and solar energy, driven in large measure by public subsidies, their contribution to global energy will still be in the 1 percent range in 2030. That is because they start from a very low base and because the global energy market is so huge.
What all of this means (and without disparaging the importance of working on alternative energy approaches) is that for many decades the key issue in energy will be how to find and produce enough conventional energy to support global economic activity and prosperity for a growing world population.
There will also continue to be important environmental implications that arise from growth in energy. Even so, the size of the world’s energy need, and more importantly its fundamental contribution to people’s well-being, will impose an inevitable reality on efforts to manage the environmental implications of energy use. History shows that economic prosperity is vital to improving living standards and environmental conditions. We must not lose sight of this basic understanding, particularly in the policy-making arena where trade-offs must be weighed and hard choices made.
I have been painting the energy picture in very broad strokes in order to set the stage for a closer look at where we think energy use will be heading in Europe and the United Kingdom.
Import Growth in Europe
Overall, the key change that will emerge is that Europe will provide less and less of its own energy and will become a larger and larger importer, dependent even more than it is today on the global energy marketplace.
In today’s Europe, only Denmark, the Netherlands, Norway and the United Kingdom are net exporters of either oil or gas. Perhaps by around the middle of the next decade, only Norway is likely to still be in this position. In the meantime, the import dependence of most other European countries will continue to grow.
The UK has, of course, been a net exporter of oil for more than two decades and a net exporter of natural gas since 1997, thanks to a vigorous and successful effort to develop the British sector of the North Sea. But this is on the cusp of change, as local production is in decline and exploration activity has, until recently, been at a relatively low level.
Our industry’s focus for the UK is to meet the growing demand for energy while moderating the rate of production decline. Doing so will mean ensuring that exploration continues to be conducted and that production from existing brownfield resources is maximized. For these goals to be accomplished, there must be a willingness to take steps to control costs on remaining production, including those related to taxes and regulatory requirements, as the United Kingdom has to compete with other jurisdictions around the world for investment funds.
The costs of operating in the UK Continental Shelf are among the highest in the world, and we should not be distracted by the current rise in oil prices, which have as recently as a few years ago been as low as $10 per barrel. While there are some who think that today’s prices mean that our industry can and should pay higher taxes, I would remind them that ours is a long-term business, and that project lives often exceed 20 years.
We have only to look back to the tax changes made in the North Sea in 2002 to see the interruption that subsequently took place in exploration. Three years later, we are just beginning to see some pickup in confidence and activity. Nevertheless, the trend in production levels is down and likely to remain so due to geologic reasons.
Adjusting to this expected decline in oil production can be fairly readily achieved with additional imports through existing infrastructure. Some new facilities may be needed, but these will not be unusual either in size or character. There may need to be some psychological adjustment to having to rely on the world market for most oil supplies, but the major increase in imports should pose no extraordinary challenges.
The natural gas story, however, is a bit different.
Even with some new discoveries, we anticipate that gas production in the area around the UK will decline from a current level of about 10 billion cubic feet per day to about 7 BCF/D by the end of this decade, and then to less than 3 BCF/D by 2020.
Consumption of natural gas will continue to rise, and it will need to rise if the UK is to continue to meet its Kyoto obligations and the challenging additional carbon dioxide reduction targets it has set itself. The only option for satisfying this demand will be from a large and rapid increase in imported gas.
There is simply no other logical way forward. Accelerated conservation will be insufficient, a large expansion of nuclear energy would probably be unpopular, expensive and unattainable in the time frame we are considering and renewable energy simply does not have the scale required. So the United Kingdom rapidly becomes a net importer with growing requirements of both oil and gas, and the increase in demand will require substantial investments.
Because this will be a significant change in circumstances and will come about quite quickly, it will mean that this country will have to adjust in a way that has not been necessary for more than three decades. It is widely understood today that the central challenge is to ensure that government policies promote a business climate that attracts needed energy investments. But where will the gas come from?
Four Major Sources
Fundamentally, there will be four major sources of gas for the United Kingdom: mainland Europe, including Norway; Africa; the Middle East and Russia. Gas sources in the Asia Pacific region are simply too far away to be competitive, though they will obviously influence the global market.
Africa and the Middle East are not pipeline-connected to European markets, with the exception of gas that flows from Algeria. This means that for supplies to flow to the UK from Africa and the Middle East there will need to be significant investment in new liquefied natural gas (LNG) infrastructure.
This is already in process at Milford Haven in Wales where ExxonMobil and Qatar Gas have begun construction of an LNG regasification terminal. This terminal will be the access point for the Qatar II LNG project, which delivers nearly 16 million tons annually. Additional LNG terminal projects are also well advanced, including the Isle of Grain and a second terminal planned for Milford Haven. The sources of the LNG for these projects include Qatar, Egypt, Algeria and West Africa, where new projects have been announced and others are being developed.
If these expansions are built, the capacity of the new UK import terminals has the potential to supply about 4-5 BCF/D of market demand by 2020, which will contribute around 40 percent of expected UK demand at that time.
We also expect that there will be much greater production from gas fields in Russia and the countries of the former Soviet Union. The gas from these fields will tend to move to European markets through pipelines.
With more than 35 BCF/D of new gas that we expect will become available by 2020 from Africa, the Middle East and the former Soviet Union, it would appear that the UK should be able to meet its natural gas needs through imports. But a key consideration is that the UK will not be alone in needing more gas. Rather, it will face international competition for available supplies.
Let me portray this same picture a slightly different way. Overall, we expect total gas demand in Europe to approach 80 BCF/D by 2020. Due to declining local production, imports will need to rise from close to 20 BCF/D to more than 50 BCF/D in this period.
Europe will have to compete to attract the increased imported gas that it will need. Asian countries and the United States will also be looking for additional gas during this period. Especially when considering ship-borne LNG, a global competitive marketplace will likely arise for available supplies. The UK and the rest of Europe will need to pay world market prices for gas and encourage the investment in new facilities that will be necessary if the gas is to be made available to consumers.
The Consequences of Policy Inaction
Of course, one could ask about what would happen if policies were not put in place to encourage investments and permit consumers to compete for global supplies of gas.
No one is likely to run out of energy, but I would expect that there would be even greater demand for energy forms, including oil, coal and nuclear, that benefit from existing infrastructure. This would place upward price pressures on these fuels, which would have economic effects.
Moreover, limiting the fuel choices for consumers would tend to place a damper on economic efficiency and on the possibilities for optimum economic growth.
I also expect that the carbon emissions from the fuels that would be used in place of natural gas would be greater than if the energy had come from natural gas. I do not see importantly different political implications simply because most of the added energy would need to come from the same places – namely, the Middle East and the former Soviet Union.
So a failure to accommodate increased use of natural gas would not be a policy catastrophe, but it would put increased pressure on other energy forms and it would complicate further progress toward both economic and environmental goals.
Sensible Permitting and Expansion
The best way to address potential concerns is to help facilitate energy capacity investments through sensible permitting and expansion policies and stable fiscal policies. We must avoid the potentially damaging consequences of attempting to manage energy markets through targeted interventions.
The energy market is capital intensive and it is complex. Change comes slowly, and any attempt to manipulate one portion of it can have unexpected and unwelcome consequences. When misallocations of resources are signaled in the marketplace through the price system, there will be corrections. Refraining from possibly damaging intervention requires that we retain confidence in the power of competitive markets. Overregulation can be counterproductive, and we are far better advised to place our reliance on market forces.
The same is true of technology. One of the most powerful tools that we have is the ability over the longer term to change the dynamics and the costs of the energy market through the application of technology. This tool is most effectively used when market signals are allowed to operate.
Along with our commitment to technology, we need a sense of realism about environmental targets. While Europe’s political commitment to Kyoto’s process and targets is quite strong, attaining those targets will be very challenging, given the energy supply and demand realities. We may, then, need a reality check regarding the attainment of those targets.
Change Is Inevitable
In summary, the United Kingdom (and Europe more generally) is entering a period where the energy structure that has existed for several decades will see increasing and rapid change. Those changes will challenge our industry as we seek to find and deliver needed supplies, and they will challenge European governments as these governments seek to maintain local production and to establish the framework for new energy investments.
I anticipate that this period will witness some real tensions. Resolving the matters that give rise to these tensions will take time, money and new technologies. At the same time, resolution also means facing up to the hard truths regarding energy, finding the political courage to enact wise policies and restructuring some expectations. None of these tasks will be easy nor will their course run entirely smoothly. But as history proves, our industry has met past challenges successfully and we will do so now also.
Lee R. Raymond is the chairman and chief executive officer of Exxon Mobil Corporation. Before the merger of Exxon and Mobil on November 30, 1999, Mr. Raymond was chairman and chief executive officer of Exxon Corporation.
A native of Watertown, South Dakota, Mr. Raymond graduated in 1960 from the University of Wisconsin with a bachelor’s degree in chemical engineering. In 1963, he received a Ph.D. in the same discipline from the University of Minnesota. He joined Exxon that year as a production research engineer in Tulsa, Oklahoma. Over the next 16 years, he held positions of increasing responsibility with Exxon Company U.S.A., Creole Petroleum Corporation, the former Exxon International Company and Lago Oil & Transport Company, Limited, the Exxon affiliate in Aruba. He became president of Exxon Nuclear Company, Inc. in 1979 and moved to New York in 1981, when he was named executive vice president of Exxon Enterprises. In 1983, Mr. Raymond was named president and director of Esso Inter-America Inc., with responsibilities for Exxon’s operations in the Caribbean and Central and South America. Mr. Raymond was named a senior vice president and was elected to the board of directors of the corporation in 1984. He became president of the corporation in 1987.
Mr. Raymond is a director of J. P. Morgan Chase & Co. and the United Negro College Fund. He is chairman of the board, a director and member of the Executive Committee and Policy Committee of the American Petroleum Institute and a member of the President’s Export Council.