energy perspectives - winter 2012.aspx

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12The Challengeof Transition

Lord John Browne o

Madingley on the

current energytransition and the

challenges ahead

18Energy

Transition

Why oil and gas companies

are in a prime position to

capitalize on alternativesources o energy

24Sustainably Managinga Strategic Resource

Water issues carry

signifcant business risk

and must be integratedinto the strategic planning

o energy companies

PLUS

30 IEAs Fatih Birol on thenew energy landscape

36 Waste gas: a crucial pieceof the energy poverty dilemma

42 The importance of R&D andwhat oil and gas companiesneed to prepare for

Energy PerspectivesWinter 2012 Published by Schlumberger Business Consulting

SBCEnergyPerspectives

Winter2012

An introduction to

low-carbon energy

technologies PAGE 4

Leadingthe EnergyTransition


2/52

EnErgy PErsPEctivEs

Managing Editors

Hermes Alvarez

Opoku Danquah

Board of Editors

Muqsit Ashraf

Olivier Perrin

Antoine Rostand

Arnold Volkenborn

Stephen WhittakerSchlumberger Director o Corporate

Communications, Energy Perspectives

Editor-in-Chie

associatE Editors

Amy Donahue

Kathryn Hite

Christopher Khoo

Laurent De La Porte

Peter von Campe

contriButing authors

Hermes Alvarez

Antoine Aris

Muqsit Ashraf

Renaud Brimont

Vivek Chidambaram

Rakesh Jaggi

Amy Long

Antoine Rostand

Tamas Seregi

Olivier Soupa

Peter von Campe

dEsign

The Pohly Company

Energy Perspectivesis managed by Schlumberger Business Consulting (SBC). SBC is the management consulting arm o Schlumberger.

The two entities do not share condential client inormation, and they implement strict inormation security measures to protect client

data. Views expressed in Energy Perspectivesbear no impact on day-to-day SBC or Schlumberger business, represent the current judg-

ment o the authors at the date o publication, and do not necessarily refect the opinions o Schlumberger.

Printed on recycled paper.

aBout EnErgy PErsPEctivEs

Energy Perspectivesis published by Schlumberger Business Consulting

to communicate business solutions and innovative viewpoints on todays

biggest strategic, operational, and organizational issues acing energy

industry decision makers and thought leaders. Energy Perspectivesis

distributed by Schlumberger Business Consulting to the energy industrys

most prominent decision makers and thought leaders globally. For

inormation on how to receive Energy Perspectives, request permission

to republish an article, or comment on an article, please email

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Welcome

A World in Need of Transition

A century ago, the worlds population stood at

approximately 1.75 billion about a quarter

o what it is now. The gas turbine had just been

invented and global primary energy consump-tion was a raction o current levels. Energy

sources were limited, power-consuming

appliances were ew and ar between, and oil

and gas were not the dominant energy sources.

Fast orward to today, the world population

has surpassed the 7 billion milestone and

could touch 8 billion by 2035. Primary energy

consumption has grown roughly 23 times and

uture demand is set to increase substantially,

particularly in rapidly developing economies.

In spite o this rapid growth, about 1.3 billion

people still do not have access to electricity or

live in energy poverty. Overcoming this energy

gap will not only require an increase in supply

but will also necessitate a metamorphosis in

the global energy mix. And the need or an

energy transition that will decarbonize the

global economy is becoming more critical as

more evidence o the impact o greenhouseemissions on climate change comes to light.

The rate o transition is highly inuenced by

the price and aordability o the energy source.

Oil, although no longer cheap, will continue

to play a major role in transportation as more

tight oil resources are exploited. The abundance

o unconventional gas reservoirs dispersed

around the globe confrms the longevity o

natural gas. Furthermore, coal will requirecarbon capture and storage (CCS) technologies

to be cleaner and environmentally acceptable.

Efcient technologies needed or a move

toward a decarbonized economy and diversifed

energy mix are known, but making this unda-

mental transormation possible requires a more

mature debate on the economic trade-os. For

example, is it reasonable to subsidize oshore

wind at around $200 per ton o CO2 avoided

when we could avoid atmospheric CO2 emissions

with CCS at a much lower cost?

Instead o pitting one energy source against

another, we should ocus the debate on how to

navigate the energy transition in the mosteconomical and rational way. As Lord John

Browne o Madingley points out, energy

transition implies smart, long-term policies that

address all possible solutions and encompass all

stakeholders so that no resource goes to waste.

It is about making the right decisions, not solely

based on past experience and ideas, but through

a thorough comprehension o where we want to

go and how we can get there.

At Schlumberger Business Consulting, we

provide insights on the possibilities or energy

companies to capitalize on the energy transi-

tion while taking into consideration, among

other actors, the current state and uture

potential o the technologies driving this

change. This issue oEnergy Perspectives

touches on the evolution o low-carbon energy

technologies, the positioning o oil and gas

companies, and the sustainability o theindustrys resources through the transition.

The energy transition is well under way, but

capitalizing on it requires the capability and

exibility to navigate through increased uncer-

tainty due to market volatility, changing policies

and geopolitical agendas, and rapid technologi-

cal change. We believe that todays energy

companies have the balance sheet strength,

technical and project management know-how,and the long-term vision and courage to be the

drivers o this historic transition.

Regards,

Antoine Rostand

SBC, Global Managing Director


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2 SBC Energy Perspectives | Winter 2012

Leading the Energy Transition

An introduction tolow-carbon energy technologies, howR&D investment in power generation methods with renewables

and support of CO2 emission reductions will lead the way toward

a new era in the worlds energy system.

By Olivier Soupa and Amy Long

Energy Transition: Oil and Gas

in a Prime Position to CapitalizeAs the world seeksenergy securityand alternative energy

sources produced in more environmentally sustainable ways,

theoil and gas industry stands well preparedto unlock

supplies, reduce emissions, and monetize the transition.

By Antoine Rostand

For synopses of articles in this issue, see page 48.

Sustainably Managinga Strategic ResourceWateris critically important for the energy industry, especially

for oil and gas extraction. Water issues carry signifcant

business riskand must be integrated into the strategic

planning of energy companies.

By Muqsit Ashraf, Hermes Alvarez, and Rakesh Jaggi

4

18

24

thought pieces

executive summaries

Energy Perspectives


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ContentsWinter 2012

Waste Gas: a Crucial Component

of the Energy Poverty DilemmaRecapturing orreducing levelsof waste gas could help

bottom lines while proving to be a greatbeneft to energy-

poor countries.

By Renaud Brimont, Antoine Aris, and Peter von Campe

Preparing for OpportunityIn order for companies toideally positionthemselves for theenergy transition, optimal managementwith an integrated

approach toward technology and innovation will be essential

inovercoming R&D challenges.

By Vivek Chidambaram and Tamas Seregi

The Challengeof TransitionLord John Browne o Madingley

on the current energy transition

and the challenges ahead

By Antoine Rostand

12

EmergingMarketsAn interview withDr. Fatih Birol

of the International Energy Agency on

energy poverty and emerging markets

By Olivier Soupa and Amy Long

30

36

42

interviews

sbc.slb.com | SBC Energy Perspectives 3


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4 SBC Enery Perspectves | W 2012

his article is an extract rom SBC

Energy Institutes 2011 survey,

Leading the Energy Transition.

The ull report will be accessible on

SBCs website, sbc.slb.com, in January 2012.

R&D work is instrumental in ensuring

that critical low-carbon emitting technologies

reach commercialization. The Schlumberger

Business Consulting (SBC) Energy Institute,

a nonproft energy research oundation, seeks

to better understand the specifc challenges,

priorities, and practices o companies devel-

oping low-carbon energies (LCEs) like solar,

wind, biouels, carbon capture and storage

(CCS), geothermal, as well as smart grids, en-

ergy storage and energy efciency.

On the basis o analysis and interviews

with more than 70 experts and companies

rom all regions and various industries, the

survey Leading the Energy Transition com-

prises a high level annual status o RD&D

(research, development, and demonstration)

rom public and private sources in all LCE

technologies, alongside a detailed ocus on

specifc technologies. The 2011 survey has

assessed the maturity o LCE technologies,

unding requirements, role o public and pri-

vate actors, with a ocus on carbon capture

and storage and enhanced geothermal

systems (EGS), and sets orth suggestions or

increasing activity.

Lo-Carbon Enery Tecnoloes(LCETs) Are VtalThe worlds energy system is at the onset o a

new era. For over a century, hydrocarbons

coal, oil, and gas have underpinned modern

economic development and today account or

80% o global primary energy demand. Tensions

in this energy system are mounting. The threat

Leading the

Energy TransitionAn introduction tolow-carbon energy technologies

Olver Sopa

an Amy Lon

T


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c..cm | SBC Enery Perspectves 5

o climate change, concerns over energy securi-

ty, increasing competition over nite resources,

and widespread energy poverty highlight the ur-

gency o reaching a new, more sustainable ener-

gy system. According to the International Energy

Agencys (IEA) New Policies Scenario, which

takes into account recently announced commit-

ments and plans to reduce emissions, by 2035

ossil uels will still account or 75% o the worlds

primary energy (see gure 1, page 6) and related

CO2 emissions will increase by 26% compared to

2009 levels. All the growth is attributed to devel-

oping, non-OECD countries that rely heavily on

ossil uels to meet their energy needs.

In particular, avoiding climate change is in-

creasingly seen as an issue or which time is run-

ning out. The IEA recently warned that global

temperature is on course to rise by more than

3.5C in the New Policies Scenario,1 and the

Intergovernmental Panel on Climate Change

(IPCC) estimates that on the present course,

we could reach a tipping point by 2020 ater

which the eects o climate change would be-

come widespread and disruptive. Atmospheric

CO2 concentrations above 450 ppm could result

in global temperatures rising 2C above prein-

dustrial levels,2 in turn setting o a chain o

disruption in weather and water patterns that

would have devastating eects on ood produc-

tion, ecosystems, and coastal communities (see

gure 2, page 7). Disturbingly, both CO2 concen-

trations and global temperatures hit record

highs in 2010, and the past decade was the

warmest on record since the late 19th century,

when global temperature measurements began.

The energy transition rom hydrocarbon-

based economies to a more sustainable model

requires coordinating a set osolutions (indi-

vidual technologies) across severalindustries

(power, manuacturing, and transport) andillust

ration

by

Gordon

studer


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Lean te

Enery Transton

levels (international, national, company, house-

hold), via instruments that appeal to inter-

sections o the above (regulation, emission

restrictions, taxes, and incentives). Action on

three main levers, each comprising dozens o

LCETs and behavioral changes, is needed.

These levers are low-emissions energy genera-

tion, end-use, and decarbonization.

The IEA estimates that preventing the 2C

tipping point is possible i we start to reduce

our annual CO2 emissions beore the end o

the decade. As described in the IEAs 450 Sce-

nario, which minimizes costs to stabilize CO2

concentrations at 450 ppm and limits global

warming to 2C, the least-cost option requires

actions on all three ronts, with end-use e-

ciency and uel switching contributing 48%,

low-carbon energy generation 30%, and decar-

bonization 22% (see gure 3, page 7).

Yet Many LCETs Are NotCommercally ReayOne measure o commercial readiness or pow-

er generation technologies is how close they

come to achieving grid parity, or economic

competitiveness, with hydrocarbons the in-

cumbent source o energy. It should be noted

that without pricing in the negative externali-

ties o CO2 emissions, incumbent uels are not

playing on a level eld with LCETs. Addition-

ally, LCET costs are being compared with costs

or technologies that have experienced 100

years o testing and improvement. Neverthe-

less, the persistent gap between the levelized

cost o electricity3 (LCOE) o hydrocarbons

versus LCETs shows that, by and large, the

electricity generated rom the latter is simply

more expensive (see gure 4, page 8) that

is without accounting or the cost o building

new transmission inrastructure, which will be

required or large scale deployment o LCETs.

Until LCETs reach grid parity, they will be

dependent on public-sector subsidies and con-

sumers willingness to pay more or electricity.

Another key measure o LCET attractive-

ness is the cost o CO2 avoided or abatement

cost, which is a tool or governments rather

than or private investors. It measures the ad-

ditional cost required to avoid emitting one

ton o CO2 by using an LCET instead o an

FiguRE 1: ShARE OF wORLd PRiMARY ENERgY dEMANd BY ENERgY TYPE

n: Pjc i egy agcy C Pcy sc World Energy Outlook2011.

bgy c m, w, w.

SourceS: VaclaV Smil energy TranSiTionS (2010), BP STaTiSTical reView, iea weo 2010 and weo 2011;

SchlumBerger BuSineSS conSulTing (SBc) energy inSTiTuTe analySiS

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

New PoliciesScenario

2035

100%

60%

20%

80%

40%

0

Bioenergy

Other renewablesHydroNuclear

Gas

Oil

Coal


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FiguRE 2: ATMOSPhERiC CO2 CONCENTRATiONS ANd POSSiBLE CONSEquENCES

SourceS: SchlumBerger BuSineSS conSulTing (SBc) energy inSTiTuTe; relaTion BeTween co2 concenTraTion

and TemPeraTure increaSe are from iPcc working grouP iii (2007); relaTion BeTween TemPeraTure increaSe

and PoSSiBle conSequenceS are from STern reView on economicS of climaTe change (2006).

+0C +1C +2C +3C +4C +5C

450 ppm

Food

Water

Ecosystem

Weather

Climate Change

Severe impactsin Sahel

Rising number of peopleat risk from hunger

Major declinesin crop yields

Mountain glaciersdisappear

Watershortage

Sea level risethreatens major cities

Coral reefdamaged Collapse ofAmazonian rainforest

Rising intensity of storms, forest fires,droughts, flooding and heatwaves

Melting ofGreenland ice sheet

Increasing risk of abrupt,large-scale shifts in climate system

parts per m on ppm

550

650

750

emission intensive technology. Coal is taken as

the reerence plant4 because is the most emit-

ting power generation technology. The cost o

CO2 avoided can be negative, implying that

the LCET is more cost eective than coal, even

without considering the emissions impact.

This is the case or hydropower and conven-

tional geothermal power.

Figure 5 (on page 9) illustrates the large

variations between LCETs abatement costs in

the United States. Apart rom hydro and geother-

mal, wind onshore, nuclear, and biomass appear

as the most aordable technologies to decrease

CO2 emissions. Interestingly, the cost o carbon

capture and storage (CCS) abatement is well be-

low other technologies that attract much more

attention, like wind oshore or solar, whose cost

o CO2 avoided can exceed $200 per ton.

The second insight rom gure 5 is that the

potential o low-carbon technologies to address

climate change diers substantially. As repre-

sented by the width o the bars in gure 5, we can

see that technologies like nuclear or CCS applied

to power generation could represent up to 22%

Source: iea weo 2011

FiguRE 3: CO2 EMiSSiONS REduCTiONS NEEdEd BY LCET AREA BY 2035

2010 2015 2020 2025 2030 2035

New Policies Scenario

450 Scenario

38

36

30

32

34

26

24

22

28

20

Gt

2020 2035

Efficiency 72% 44%

Renewables 17% 21%

Biofuels 2% 4%

Nuclear 5% 9%

CCS 3% 22%Total (Gt CO2) 2.5 14.8


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Lean te

Enery Transton

and 37% o CO2 abatement in 2050 respectively,

according to the IEAs 450 Scenario (the least

costly pathway to a 2C increase).

Abatement costs are not xed in time, and

the role o R&D is to make it decrease. There-

ore it is important to understand where invest-

ments are currently directed to identiy gaps

between the potential o LCETs in terms o CO2

abatement and the level o RD&D investments.

investment Levels May

Forecast LCET ProressFor most LCETs, reaching grid parity is a mat-ter o more projects and/or more R&D. The

experience o many industries, such as ship-

building and semiconductors, has shown that

unit costs all with capacity installed. This is

because over time, and with successive proj-

ects, companies make incremental reductions

in the cost structure through operational

improvements (learning by doing), and can

take advantage o supply chain economies o

scale. For other LCETs, more R&D is needed

or breakthrough technologies that can change

the cost structure itsel.

In either situation, the level o investment

may serve as a orecast o relative rates o prog-

ress between LCETs. In 2010, new investments

in LCETs or energy generation (renewables

and CCS)5 totaled $219 billion, an increase o

32% rom 2009 (see gure 6, page 10). This

refects the strength o investment rom devel-

oping countries, the boom in household solar

PV installations in Europe, and the rebound

rom the 2008 recession. Despite this histori-

cally high number, investment alls short o the

$750 billion per year through 20306 that the IEA

estimates is needed to achieve the 450 Scenar-

io. O the total investment, the IEA estimates

that $1428 billion a year is needed or RD&D

in renewables and CCS.7 In contrast, SBC En-

ergy Institute estimates indicate that RD&D

levels in 2010 or these technologies totaled

approximately $10 billion, refecting a sizable

Coal

Nucle

arGa

s

Coal(C

CS)

Gas(CC

S)

LargeH

ydro

Geothe

rmal

Solid

Biom

ass

OnshoreW

ind

Offsh

oreW

ind

Small

Hydro

Wave

Solar

Thermal(STE)

Solar

PV

1000

600

200

800

400

0

The goal:grid parity

Current LCET positions(global average)

LCOE (USD per MWh)

n: s PV c hv mcy cm w v h p w y c h iea vy w cc,

wh ste c hv gy y h m. th c h h h PV w g pc ste h mk. a, c PV mch m cy h u.s., kg g v-g kw PV lCoe pw. ly, h ste h iea vy w m h p, whchmy y c h hgh c ste m c. th m m 10% c .

Source: SBc energy inSTiTuTe creaTed gloBal aVerageS uSing The ieaS ProjecTed coST of generaTing

elecTriciTy (2010)

FiguRE 4: AVERAgE gLOBAL LCOE ESTiMATES FOR VARiOuS SOuRCESOF ELECTRiCiTY


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RD&D gap. Although historically corporate

RD&D investment levels have been higher than

that o the public sector, this trend reversed in

2010, refecting the impact o the recession and

stimulus spending.

Historically, the wind sector has attracted

the highest investment among energy genera-

tion LCETs. However, the rapid growth in

small-capacity distributed solar projects has

been remarkable (up 93% in 2010 over 2009),

to the extent that the solar sector now attracts

almost as much investment as the wind sector.

Investments in biomass and biouels have all-

en with oil prices.

In terms o R&D investment, solar is the

clear winner among energy generating LCETs.

The proportions o R&D spend to project invest-

ment and between private and public sector

RD&D spending varies dramatically by technol-

ogy and are due to industry-specic drivers. For

example, governments are investing heavily

in biouels, driven by energy security concerns

and high oil prices. In contrast, the private

sector is investing heavily in solar R&D, be-

cause the market is booming, solar is tantaliz-

ingly close to reaching grid parity, and urther

improvements needed are manuacturing and

process optimization in nature, which bears

relatively low technology risk. As a proportion

o total R&D investment, most solar and CCS

R&D investments are made by the private sec-

tor. In contrast, geothermal and biouels R&D

are largely sponsored by the public sector (see

gure 7, page 10).

It should be noted that in addition to direct

unding o R&D activity, the public sector also

supports renewables via public support mecha-

nisms such as renewable portolio mandates,

eed-in taris, tax incentives, and so on. The

IEA estimates that worldwide public support

mechanisms or renewables which excludes

CCS were worth approximately $57 billion in

2009, but need to be increased to $205 billion

through 2035.8 Consistent breakdowns or the

level o public support mechanisms and gap or

each technology were not available but appear

to be highest or the bioenergy sector. Due in

part to this uneven level o investment in proj-

ects and R&D, some LCETs are racing ahead

o the 450 Scenario in terms o growth rates and

installed capacity, others are alling behind (see

gure 8, page 11).

FiguRE 5: CO2 ABATEMENT CuRVE FOR POwER gENERATiON LCETS

n: C Co2 v CCs (g) v -f pw p. o fg m iea PjcC eccy (2010) h vy xc; gv m c y $23 p c.

SourceS: SchlumBerger BuSineSS conSulTing (SBc) energy inSTiTuTe. The coSTS of co2 aVoided are for Tech-

nologieS oPeraTing in The uniTed STaTeS wiTh currenT aVailaBle TechnologieS and deriVe from 21 STudieS

gaThered By The gloBal ccS inSTiTuTe in The coSTS of ccS and oTher low-carBon TechnologieS, iSSueS Brief,

no. 2 (2011); ccS co2 reducTion PoTenTial comeS from iea energy Technology PerSPecTiVeS (2010)

4%

18

49

9

53

100%

92106

67

90

139

176

203

239

182

WindOnshore

CCS(coal)

CCS(gas)WindOnshore

SolarPV

SolarCSPGeoth.

Nuclear BiomassHydro

-8 -7-27

-37

22%800

2%

2%

33%4%

5%

8%

11%

9%

250

100

0

200

150

50

Range of cost of CO2 avoided relative to coal (coal = 0)Share of emissionsreduction potential (%)


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Lean te

Enery Transton

2006 2007 2008 2009 2010

91

132

164 163

219

96

30

60

12883

03

74

28

31

128

44

02

64

37

21

19

12

6

02

2

52

24

13

13

20

2

20

5

12

30

9

11

21

1

21

4

MarineGeothermalSmall HydroCCSBiofuelsBiomassBiomass

Solar small distributed capacity

Solar (excl. small capacity)

Wind

CAGR+2

4%

SourceS: Bnef daTaBaSe; SchlumBerger BuSineSS conSulTing (SBc) energy inSTiTuTe analySiS

FiguRE 6: hiSTORY OF TOTAL NEw iNVESTMENTS iN LCETS FOR ENERgYgENERATiON, BY LCETS

SourceS: figureS for renewaBleS were Taken from uneP gloBal Trend in renewaBle energy inVeSTmenT

(2011); for ccS daTa, eSTimaTeS are By SchlumBerger BuSineSS conSulTing (SBc) energy inSTiTuTe BaSed ondaTa from Bnef, iea, and commiSSion of The euroPean communiTieS (2009)

FiguRE 7: TOTAL NEw iNVESTMENTS ANd R&d iNVESTMENT iN ENERgYgENERATiON LCETS iN 2010 (uSd BiLLiONS)

Wind

Solar

Biomass

Biofuels

CCS

Small Hydro

Geothermal

Marine Marine

Asset Finance

PV Small Distributed Capacity

R&D

Corporate R&D

Government R&D

Corporate R&D

Government R&D

Total new investments in 2010 R&D investments in 2010

1.50

Solar 3.61.52.1

96

1.3

95

Biofuels2

2.3

0.3

6090

3.6

26

CCS

0.54

1.54

1

12

11

Wind0.8

1.3

0.5

2.3

8

6

Biomass0.3

0.6

0.3

8

Geothermal0.4

0.43

0.03

3 Small Hydro0.1

0.13

0.03

2.4

0.010.1

.6

1.5

7


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ConclsonUltimately, the exact mix o LCETs, not to men-

tion the extent o climate change avoided,

will be a question or historians. With the con-

tinuing economic ragility, many uncertainties

continue to make the road towards emission

reduction a long and dicult journey. All actors

contribute in positive and negative ways. Most

governments have adopted inconsistent energy

policies, ghting climate change in one bill and

supporting CO2-intensive industries in the next.

For a variety o motivations, companies have be-

gun to change their approach to energy con-

sumption, but others also lobby against more

stringent environmental regulation. Public opin-

ion also plays an ambiguous role towards carbon

emissions reduction by encouraging the use o

certain renewables such as solar and wind, but

also preventing instrumental initiatives like on-

shore CCS in continental Europe. LCETs are

moving orward, some at a reasonable pace, but

others are clearly lagging behind.

All analyses are available in the SBC Ener-

gy Institutes reportLeading the Energy Tran-

sition (2011).

Olver Sopa Amy Lon wk schmg

b Cg (c..cm). W wcm y

cmm h c: [email protected]

Cpygh 2012 schmg b Cg. a gh v.

1. i egy agcy, New Policies Scenario

World Energy Outlook(2011).

2. iPCC Fh am rp: Cm Chg 2007.

3. th vz c ccy m h

cpx, vm, px, q g

ccy v h m pw p, xp v-

g g (MWh KWh) ccy.

4. t. Jm Jh Kh, lg Cv egy

tchgy: Cc am (2007). th h

h h PV y h xpc g cv

h h w, wh h v p

h w y.

5. thgh h p, lCet gy g c

w (w, , m , m hy,

ghm, c) CCs.

6. iea, egy tchgy Ppcv (2010).

7. iea, G Gp C egy rd&d (2010).8. iea, W egy ok (2010).

FiguRE 8: TOTAL NEw iNVESTMENTS iN ENERgY gENERATiON LCETS iN 2010

Current growth rate

(5 year average)*

Required growth ratein the 450 scenario

Current status (GW)

Blue Map target 2020 (GW)

Current status (GW)

Blue Map target 2020 (GW)

Gap in annual growth rate required%

Gap in capacity installed by 2010GW installed

1219980

512430

575195

8254

12621

CCSPower 3 GW per year required

Hydro 2%5%

Nuclear4%3%

Wind12%

27%

Biomasspower 4%

7%

SolarPV 19%

60%

Geothermalpower 7%4%

CSP 8%50%

2111

421

280

n: th c w h vg gwh m 2005 2010. F PV, m, ghm, CsP h p 20042009. th c c ccpcy cc p 2015.

Source: iea inPuT To The clean energy miniSTerial (2011)


14/52

12 SBC Enery Perspecves | Winter 2012

Though change is constant, especially in the energy industry, transitions are slow. The energy

transition will play out over the next decades rather than the next couple o years and requires

leaders who are capable o combining a long-term vision o the energy uture, with a rm grasp

o the complexities and realities o execution. In this sense, ormer CEO o BP, Lord Browne o

Madingley, has been a prototype leader in the energy industry. With his role in transorming BP

and putting it on the renewables map, he was not only anticipating the changing landscape o the

energy system in the 21st century, but actively driving that change. In his current role as Partner

and Managing Director o Riverstone Holdings LLC, an energy and power ocused private equity

rm, Lord Browne continues to push or a more mature debate on the energy transition, which

aims to put all energy options on a level playing eld. At the Riverstone oces in London, SBC

Global Managing Director Antoine Rostand recently discussed the current challenges that the

energy sector aces, and how stakeholders can be more successul in navigating this change.

The Challengeof TransitionLord John Browne of Madingleyon the current energy transition

and the challenges and targets ahead

By Anone Rosand

Energy Perspectives:Lets start with your views

on the current energy transition including

climate change and the need to decarbonize the

energy mix. What can energy companies do?

Lord Browne of Madingley:The rst thing to

remember is that there is no such thing as a

risk-ree source o energy. Sometimes people

argue that one source o energy is better than

another because its less risky, weve done it

beore, or it appears to be cheaper. All these

ways o thinking need to be thrown up in the

air and people need to start again.

Ive recently been asked a lot about subsidies

or renewable energy. I remind people to think

about the real cost o a liter o gasoline and the

price. The price is roughly three times the cost,

and the dierence goes to the government in tax.

A tax is just a negative subsidy, but no one really

To see video of our interview with Lord John Browne of Madingley,visit our website: www.sbc.slb.com


15/52


16/52


17/52


18/52

16 SBC Enery Perspecves | Winter 2012

inervew w

lord Browne

understand why Germans believe its the right

decision. There are lots o things that we need

to do to keep the political process moving

orward. The biggest issue to be tackled is

whether or not we do something to reduce

the probability o climate change. That is an

open question at the moment.

EP:In a recent SBC study we ound that oil

and gas companies had invested more in

specifc renewable energies, or example

Exxon in algae and Total in solar. They are

investing a signifcant amount o money in

these orms o energy, because they want to

position themselves more as energy compa-

nies. Is there a market and are there opportu-

nities or entrepreneurs or private equity to

participate in a new Internet boom around

clean energy and decarbonization?

LBM:There is always an ecosystem around

any part o this gigantic industry called

energy the biggest industry in the world.

Whether its shale gas, where most o the

action took place on the entrepreneurial

level, to be rolled up into larger companies

later, or whether it is tertiary recovery in oil

elds, which rolls down to the entrepreneurial

company rom the major, everyone has a role.

Everyone gets better by allowing multiple

players. There are lots o entrepreneurs doing

algae; there is also Exxon. There are plenty o

big companies doing wind, which you need big

balance sheets or, but there are also small

companies, private equity companies, and

single entrepreneurs. There are people doing

electric cars, all part o the same thing, rom

the scale o Great Wall Motors and GM

through to Fisker and Tesla. I think that is

the sign o a healthy industry. I it were in the

hands o just big companies, it could get very

plodding; i it were in the hands o just small

companies, it could probably never deliver. In

the end you need strength, muscle, and big

balance sheets to deliver, but you need many

small players to create.

EP:From your past experience as CEO o BP,

what would be your advice to an executive

o a large player today?

LBM:To always remember that the energy

industry is not static and to understand too

that to give up or release yoursel rom your

heritage is a really dicult thing to do. In oil and

gas and in energy we deal with inrastructure-

like projects that are very deeply rooted and

require high up-ront capital, so legacy what

happened in the past anchors the uture. You

cant throw away everything every year and start

again. But you really need to look on the margin

and ask, Is that really what I need to be doing?

Should I, or example, be thinking where real

integration is? In the past in the OECD, we

used to integrate upstream with rening and

marketing. But when I joined the industry there

was a very big surplus o crude oil and it was in

the hands o the majors, and the only dierentia-

tion was how you sold it as a rened product in a

growing market. This has all changed now in the

OECD, so people have to move somewhere else

and think about what they are doing on the

integration in the OECD.

Equally, changes in the electric power

business, notably with gas and renewables,

mean that those who control gas and renew-

ables need to think careully about what goes

on beyond their gate and how they change

their attitude whether it is getting into the

business or changing the way they contract,

a lot o changes are taking place. Gas in parti-

cular, which weve now identied as more

ubiquitous than we ever thought: its every-

where, be it in the eastern Mediterranean or

shale gas in Europe, North America, or China.

That changes the way the energy business has

to think in the uture contracts, utilization,

electric power, all sorts o things.

EP:We talked about the legacy o oil and gas

companies. Besides that and we all know

that the weight o the investment means that

you cannot change that overnight what else


19/52


20/52

18 SBC Eerg Perspectives | Wn 2012


21/52

..m | SBC Eerg Perspectives 19

he energy industry is at a critical

juncture, at a tipping point where

tough decisions will need to be made.

By 2035, global primary energy de-

mand is projected to increase by more than

40% rom current levels. This step-change in

demand will be driven largely (more than

90% o the growth) by rapidly industrializing

non-OECD countries with booming economic

development.

At the same time, there is a strong need to

mitigate the environmental impacts that will

result rom this unprecedented rise in energy

demand. By 2035, energy-related CO2 emis-

sions are projected to rise by more than 20%

rom current levels, and although OECD emis-

sions will drop rom current levels, the rise in

non-OECD emissions will more than oset

OECD declines. The key challenge or the en-

ergy industry in the 21st century i not or

the world will be to overcome this nexus

between energy security and environmental

sustainability, and transition the energy sys-

tem in the most optimal way.

Eerg Trasitis Take TimeThere are no silver bullet solutions to the

worlds energy challenges. While lots o studies

prove that quick mass-adoption o large-scale,

carbon-ree energy technologies is possible,

they all ignore one historical inconvenient truth

energy transitions take a long time to play

out. An energy transition is defned as the

length o time that elapses between the intro-illust

rationbyWalterVasconcelos

Energy Transition: Oiland Gas in a Prime

Position to CapitalizeAs the world seeksenergy securityand alternative energy sources

produced in more environmentally sustainable ways, theoil and gas

industry stands well preparedto unlock supplies, reduce emissions,

and monetize the transition.

B Atie Rsta

T


22/52


Eerg

Trasiti

duction o a new primary energy source or tech-

nology and its rise to attaining signifcant mar-

ket share (typically 2030%). The history o

liquefed natural gas technology highlights the

reality o energy transitions. It took roughly

60 years between the scientifc discovery o liq-

ueaction to the frst LNG shipping patent, an-

other 50 years to the frst commercial delivery

o LNG, and then another 50 years or LNG

to account or roughly 30% o all natural gas

traded globally (see fgure 1, below).

As another example, it took oil roughly 60

years, rom the frst commercial production in

the late 1800s, to capture a 10% global market

share, and then another 20 years to reach a

30% market share. Similar time spans are seen

historically or the maturation o other prima-

ry energy sources. Currently, there is a lot o

hope pinned on alternative energy sources to

come to the rescue in the next 10 to 20 years,

yet none o these alternatives has yet to reach

a 5% global market share. History points to at

least another hal-century beore these alter-

natives even begin to have a material impact

on the global energy system (see fgure 2, op-

posite page) and that assumes the technol-

ogy lives up to its potential.

In the 1970s, promoters o nuclear energy

promised that the United States would gen-

erate 100% o its electricity rom nuclear is-

sion by the year 2000, orever banishing coal

plants. By the year 2000, however, coal was

still generating 50% o all power, while nu-

clear power had yet to crack 20%. Its impor-

tant to be realistic about the time it takes

or new energy technologies to reach critical

mass, especially during unprecedented lev-

els o global energy demand growth. Just as

dangerous as doing nothing at all about the

energy systems looming challenges is bank-

ing on unrealistic expectations.

Trasitiig i the MstEcmical a Ratial WaThe right path to a low-carbon energy uture

involves shiting the energy mix in the most

practical way. The challenge lies in reducing

emissions in an economically attractive, low-

FIGURE 1: HISToRy oF TRAnSITIon To LnG TECHnoLoGy

SourceS: VaclaV Smil energy TranSiTionS (2010); Schlumberger buSineSS conSulTing (Sbc)

1850 1900 1950 2000 2050

43 years 44 years 46 years

Breakthroughin gas

liquefaction

Laboratory scaleliquefaction of gas

Methane Pioneer(first trial LNG delivery)

Modern LNG carrier

Airliquefaction

patent

First trialLNG

delivery

Firstcommercial

LNG deliveries

First LNGshippingpatent

LNG accountsfor ~30% of

natural gas trade


23/52


risk, and technically easible manner. One way

to achieve this is to decarbonize the power

generation sector by switching rom coal to gas.

Gas will be vital because it

has relatively low CO2 emis-

sions, is abundant, requires

low investments, and is a re-

liable and proven technolo-

gy. The uel is gaining a lot

o momentum or decarbon-

ization in places such as

Europe, a region with ambi-

tious emissions reduction

targets.

For example, a recent

study presented to the EU

Commission highlights the

beneits o transitioning

the European energy sys-

tem by using more natural

gas.1 The study outlines a renewable energy

build-out period rom 20102030 that is

complemented by natural gas. The build-out

would progressively replace coal-ired ca-

pacity and help Europe achieve its ambi-

tious 2050 target an 80% greenhouse gas

emission reduction.

The approach reduces implementation risk

by reducing dependence on

technological developments

rom emerging technologies

and by placing more reliance

on gas inrastructure that

is already in place. The ben-

efts o transitioning the Eu-

ropean energy system in this

way are ar-reaching lead-

ing to signifcantly lower in-

vestments, less risk, and a

reliable and secure energy

system (see fgure 3, page

22). A similar approach has

to be taken on a global scale,

especially in high-impact

countries such as China.

Plic Acti Likel t Alterthe Eerg LascapeA practical and sustainable path to a low-

carbon energy uture is needed and despite

FIGURE 2: SHARE oF GLoBAL PRIMARy EnERGy dEMAnd By FUEL TyPE

1940 20101900 1910

*Biofuels includes waste and wood

1920 1930 1990 20001950 1960 1970 1980

60%

50%

30%

10%

40%

20%

0

Oil

Coal

Gas

Biofuels*

NuclearHydroOther Renewables

Energy transition critical mass

SourceS: VaclaV Smil energy TranSiTionS (2010); bP STaTiSTical reView; iea; Schlumberger buSineSS conSulTing

The right path to a

low-carbon energyfuture involves shifting

the energy mix in the

most practical way.

The challenge lies in

reducing emissions

in an economically

attractive, low-risk,

and technically fea-

sible manner.


24/52


Eerg

Trasiti

current uncertainties, positive signs are emerg-

ing. The outcome o the United Nations land-

mark Copenhagen climate conerence in 2009,

in which several countries recognized the need

to limit global temperatures to no more than

2C above preindustrial levels, is a step in the

right direction. The 2010 UN climate coner-

ence in Cancun urther afrmed the worlds

commitment to the cause by recognizing that

current emissions pledges need to rise. In addi-

tion, a und was created to help developing

countries adopt low-carbon technologies. These

events hint to a uture where new policies will

undamentally change the way oil and gas com-

panies operate.

Fossil uels, even under the most ambi-

tious IEA decarbonization scenarios, will

still capture the majority o global primary

energy demand by 2035 (ranging rom more

than a 60% share under aggressive emissions

reductions targets to as high as an 80% share

i no change in government policies takes

place). By 2035, the share o global primary

energy demand taken up by renewable en-

ergy, excluding hydropower, could range

rom around 3% to as high as 7%, depending

on the policies enacted. All sources o

primary energy ossil uels, nuclear, bio-

uels, and renewables will rise signii-

cantly in absolute terms to meet the worlds

growing hunger or energy, but the energy

mix will shit. Oil and coal will lose share,

while natural gas, nuclear, biouels, and

renewables will pick up share. These chang-

es will engender opportunities or oil and

gas companies.

oil a Gas Iustri Prime PsitiWhen it comes to the energy transition, the

oil and gas industry is in a great position to

capitalize. Transitioning the global energy

system in the most optimal way will not only

involve the expansion o all economic supply

sources (e.g., ossil uels and renewables),

but also require the development o new

technologies that unlock new sources o sup-

ply and mitigate environmental impacts.

Employ all economic

sources of supply

The world will need to expand all economic

sources o supply just to keep up with the

step-change in energy demand growth. This

opens up attractive opportunities or oil and

gas companies in areas such as unconven-

Source: euroPean gaS adVocacy orum

FIGURE 3: BEnEFITS oF TRAnSITIonInG THE EU EnERGy MIx By USInG MoRE GAS

Lower CostsLower risks and easier

impLementation

robust, reLiabLe, and

seCure energy system

up t 450550 ssvstt ss

s t tss t- kts

St s spp tt svs, spsstt, s spps

150250 stp s

as tss s ccS t t pt

rst p sst t

t x t ttttts

510% s pfts v tsv sts

lss ssv v s p q

l t tp- t q-ts ss-tt


25/52


tional oil and gas, the deepwater, and even

biouels and renewable energies as econom-

ics improve. This is especially relevant or

decarbonization o the power sector, where

natural gas is emerging as an abundant and

low-carbon supply source. Also, the rise o

abundant unconventional gas helps bolster

the case or decarbonization by switching

rom coal to gas.

Develop new technologies to unlock

supply and reduce emissions

New technologies will be needed to unlock

supply and mitigate environmental impacts.

Renewable energy and de-

carbonization technologies

such as carbon capture and

storage (CCS) will be criti-

cal, although most are

currently in the capital-

intensive R&D stage. Oil and

gas companies, unlike most

venture capital frms and

utilities, have the balance-

sheet strength, patience,

and project management

savvy needed to drive these

large, long-timeline technol-

ogy projects.

We are already seeing the industry taking

action. For example, ExxonMobil recently

invested $600 million to develop next-gener-

ation algae-based biouels with biotech-

nology company Synthetic Genomics. Then

theres the Chevron-led Gorgon gas project

in Australia, which will capture roughly 40%

o the projects CO2 emissions and store it

2.5 kilometers below ground. The $2 billion

CCS project will be equivalent to taking two-

thirds o Australian vehicles o the road.

Companies such as these that take the ini-

tiative now to identiy uture opportunities

and learn the technology will gain signifcant

frst-mover advantages as the energy transi-

tion plays out.

A new Lascape: frm IoC t IECThe worlds energy system will experience

signifcant change over the coming decades.

A step-change in energy demand growth,

coupled with policy action that encourages

low-carbon energy, will dramatically change

the energy landscape. Battle lines will be

redrawn and there may be a convergence

o several industries oil and gas, power,

mining, conglomerates, venture capital

jostling to take a piece o the energy transi-

tion pie.

The good news or oil and gas companies

is that ossil uels will remain relevant

or decades to come. Fur-

thermore, oil and gas com-

panies have the capital,

project management exper-

tise, and R&D capabilities

needed to capture a signif-

cant portion o the uture

growth in renewable energy

and low-carbon technology.

Just a decade ago it would

have been inconceivable or

an oil company to make a

major investment in a true

renewable energy such as so-

lar power. I Totals recent

$1.4 billion investment in SunPower Corpora-

tion, one o the largest investments ever made

by an oil company in renewable energy, is any

indication, then oil and gas companies are des-

tined to become an even bigger component o

the worlds energy system as they themselves

transition rom IOCs to IECs or international

energy companies.

Atie Rsta wk f shumg bun

cnung (..m). W wm yu mmn

n h : [email protected].

cpygh 2012 shumg bun cnung. a gh vd.

1. eupn G advy Fum, opmzd Phwy

rh 2050 amn tg wh lw c nd impvdFy (F. 2011).

The world will need to

expand all economic

sources of supply just

to keep up with the

step-change in energy

demand growth. This

opens up attractive

opportunities for oiland gas companies.


26/52

24 SBC Eergy Perspecties | Wte 2012

ater is critical to the oil and

gas industry. First, several

important emerging supply

sources such as oil sands con-

sume large amounts o water. Second, water

is a large by-product, and some experts argue

that the oil industry is eectively a water in-

dustry that delivers oil as a secondary output.

For example, in North America, nearly eight

barrels o water are produced or every barrel

o oil. Global produced water volumes high-

light the importance o water, especially in

the U.S. (see gure 1a, page 26). The industry

is currently experiencing a shit to more water-

intensive supply sources, which will come at a

signicant cost. For example, North American

water expenditures are projected to increase

60% this decade (see gure 1b, page 27).

The Growig Importace of WaterGlobal population growth and economic expan-

sion will not only create tremendous upward

momentum or energy demand, but also drive

signicant increases in the need or water. Fur-

ther compounding this challenge is the interde-

pendency and requent competition between

water and energy large amounts o water are

consumed to generate energy, and a vast amount

o energy is consumed to extract, process, and

deliver clean water. As a result, an intense com-

petition or water, both rom the agricultural and

industrial sectors, is expected to ampliy an al-

ready growing problem: global water scarcity.

These water issues pose a signicant business

risk to oil and gas companies seeking to achieve

sustainable supply growth.

The ollowing are some o the major chal-

lenges aced by the industry: (1) mature oilelds

increasingly require water-based EOR methods

and produce signicantly more water over time;

(2) increasing E&P complexity rom emerging

supply sources such as unconventional gas is

driving up water usage; (3) and greater environ-

mental and regulatory pressures related to wa-

Sustainably Managinga Strategic ResourceWateris critically important or the energy industry, especially or oil and

gas extraction. Water issues carry signifcant business riskand must

be integrated into the strategic planning o energy companies.

By Muqsit Ashraf,

Hermes Aarez,

a Rakesh Jaggi

W


27/52

c.l.cm | SBC Eergy Perspecties 25

ter management and water scarcity will create

hurdles or operators (see gure 2, page 28). Oil

and gas companies must view water as a strate-

gic component o their value chain. Water is no

longer just an environmental issue; it will in-

creasingly be levered to production growth and

generate material incremental costs. As a result,

water necessitates a strategic approach that el-

evates its status as a critical component to cor-

porate viability in the oil and gas industry.

Water Chaeges Facigthe Eergy IustryAs global competition or water intensies and

environmental scrutiny grows, so will the stra-

tegic implications o water on the oil and gas

business. The ollowing are examples o water

challenges acing the industry:

Oil sands

Much progress has been made since the 1973

1974 oil crisis to mitigate the impacts o sup-

ply disruptions. Yet, events like Hurricane Ka-

trina in 2005 and geopolitical unrest in Libya

in 2011 highlight just how susceptible the

market still is to supply shut-ins. Oil sands

resources, primarily ound in Canada, will

play a critical role in bolstering supply secu-

rity. However, oil sands extraction methods,

both or mining and in-situ, require large

amounts o water and ace high regulatory

scrutiny due to environmental concerns over

produced water. (For mining extraction, 12 bar-

rels o water are required to recover one barrel

o bitumen versus three barrels o water or in-

situ extraction.)

Unconventional gas

The unlocking o large unconventional gas

resources in the United States is oten de-

scribed as a game-changing event. From 2005

to 2010, the U.S. went rom expecting a gas

shortage and the need or ambitious LNG

import capacity expansion to the discovery oillust

ration

by

jon

krause


28/52


29/52


30/52

28 SBC Eergy Perspecties | Wte 2012

Sustaiaby Maagig

a Strategic Resource

(e.g., solvent assisted production, once-through

cooling towers or upgraders). Water reuse in-

volves the reinjection o produced water and

the injection o water or uture use through

aquier storage and recovery. For oil sands, re-

use involves technologies that improve recy-

cling in in-situ extraction (e.g., evaporators,

drum boilers) and technologies that improve

recycling in mining operations (e.g., injecting

CO2 into tailing ponds to accelerate separa-

tion). Water treatment technologies are a key

enabler o water reuse.

Lastly, the disposal o produced water is

relevant when reuse is not a viable option.

The water usually requires treatment beore

it is discharged and the discharge method

depends on the situation: oshore produced

water is discharged into the ocean in compli-

ance with regulatory standards; onshore and

coastal produced water is typically prohibited

rom being discharged and is either evapo-

rated or injected underground; and produced

water rom coal bed methane operations can

be discharged to surace waters under regu-

latory limits.

Environmental sustainability

In general terms environmental sustainabili-

ty involves carrying out a comprehensive en-

vironmental risk assessment that determines

i operations can have any impact on existing

water users or the environment. It also in-

volves establishing a monitoring and report-

ing system that ensures sustainability. For

unconventional gas, environmental sustain-

ability requires the use o advanced technolo-

gies such as sel-healing cement to ensure

the integrity o the well and the use o eco-

riendly racturing chemicals to reduce the

risks o an accidental release.

FIGURE 2: GlOBAl WATER SCARCITY And ExAMPlES OFOIl & GAS WATER ISSUES

Oil sands extraction

methods require large

amounts of water.

Regulators are mandating

optimal sourcing and

disposal methods

Mature production in the

water scarce Middle East

increasingly requireswater-based EOR methods

and produces more water

volumes over time

Coal bed methane

holds big promise for

Australia, yet issueswith handling of

produced water have

to be addressed

Unconventional gas resources

in gas-hungry China and India

show big potential, yet both

countries experience signicant

degrees of water scarcity

Shale gas success in promising

Eastern European countries like

Poland will depend on whether

operators can successfully source

water in densely populated areas

Shale oil exploration

in France was initiallyput on hold by

regulators due to

concerns over water

contamination

Shale gas basins like

the Haynesville

require increased

water volumes for

fracking operations

Little or no scarcity

Physical scarcityApproaching physical scarcity

Economic scarcity

Not estimated

SourceS: World reSourceS InStItute; SchlumberGer buSIneSS conSultInG (Sbc) analySIS


31/52

c.l.cm | SBC Eergy Perspecties 29

Business planning

Integrating water issues into the business plan-

ning process is becoming vital or the oil and gas

industry. It should begin with measuring the

companys water ootprint along the entire val-

ue chain. Water issues will need to be integrated

into the governance structure, with appropriate

roles and responsibilities and close unctional

collaboration. For example, operations person-

nel may have the primary responsibility or pro-

duced water management, but will have to work

with the commercial group to understand the

economic implications o various strategies.

The business will also have to assess the

physical, regulatory, and reputational risks as-

sociated with the water ootprint and, conse-

quently, engage the key stakeholders (e.g., local

communities, non-governmental organizations,

government bodies, suppliers, and employees)

as part o the water risk assessment, long-term

planning, and implementation activities. Finally,

companies will have to become more proactive

in disclosing and communicating water peror-

mance and associated risks. Best-in-class com-

panies will establish an integrated system that

ties together all the elements o a sustainable

water strategy (e.g., sourcing, produced water

management, environment, and planning).

Sustaiaby Maagig a ResourceAddressing the water challenge will be a stra-

tegic imperative or the oil and gas industry.

Water issues are on par with the other major

challenges acing the industry, including

carbon emissions, the big crew change, lim-

ited resource access, geopolitical instability,

and increasing technological complexity.

Collaboration between industry stakeholders

(e.g., operators, service companies, regula-

tors) will be critical to connecting the dots

and sustainably addressing the implications

o a changing E&P landscape. Water is a limited

and critical resource that will infuence the

way oil and gas companies do business.

Muqsit Ashraf d Hermes Aarez wk f

schlumege bue Cultg (c.l.cm),

d Rakesh Jaggi wk f schlumege (l

.cm/wte). We welcme yu cmmet th

tcle t: [email protected].

Cpyght 2011 schlumege bue Cultg. all ght eeved.

1. Gll Wte itellgece, Pduced Wte Mket:

opptute the ol, shle, d G sect nth

amec (2011).

2. j. M, et l., Wte sccty & Clmte Chge:

Gwg rk f buee & ivet (Fe. 2009).

3. b. blck, et l., Mgg Pecu reuce,Oilfeld Review(summe 2008).

FIGURE 3: SUSTAInABlE APPROACH TO WATER MAnAGEMEnTIn THE OIl And GAS IndUSTRY

Source: SchlumberGer buSIneSS conSultInG (Sbc) analySIS

WaterChallenge

OptimalSourcing

Produced Water Management EnvironmentalSustainability

BusinessPlanning

Reduction Reuse Disposal

Oil Sands

UnconventionalGas

Mature

Production

Si ii w g Si is f i v w g


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30 SBC Eney Pespecves | Winter 2012

With the fallout from Fukushima, the rapid developments o unconventional oil and gas

resources, oil prices still above $100 a barrel despite the recent global economic slowdown,

limited progress on the renewable energies ront, and the perseverance o energy poverty or

over 20% o the global population, the inuence and guidance o the International Energy

Agency (IEA) has become more important than ever. Navigating the energy transition not only

requires a global perspective o the energy sector, but also a skilled and strong hand to inuence

global policies that will oster long-term commitment and investments. Dr. Fatih Birol, Chie

Economist o the IEA, recently spoke with Olivier Soupa and Amy Long o SBC at the IEA Head-

quarters in Paris regarding the state o the energy sector, especially in emerging markets, the

global implications o current policies, and the ways to move orward in the energy transition.

Emerging

MarketsAn interview withDr. Fatih Birolof the International Energy Agency

By Olve Soupa

and Amy Lon

Energy Perspectives:In the World Energy

Outlook 2010 (WEO 2010), you made waves

by declaring that conventional oil supplies

will peak in 2020. Has any new evidence

emerged to change this assessment?

Dr. Fatih Birol:We ollow the oil markets closely,

we look at the supply side, we look at the de-

mand side, we look at what will happen with

technology, and what will happen with govern-

ment policies. The global oil peak, i there is

one, will be a unction o dierent actors

prices, policies, technologies, and so on.

Ater [this years] WEO, regarding peak oil

or the decline issue, I can give you two major

messages. The frst message is i our price

assumptions are correct or the next 1015

years, which are a little higher than $100 (per

barrel) in real terms, then conventional crude

oil peaked around 2008 and more and more

unconventional oil will come into the picture.

To see video of our interview with Dr. Fatih Birol,visit our website: www.sbc.slb.com


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sbc.slb.com | SBC Eney Pespecves 31

The second message, which I think is

crucial and is oten missed, is that many

existing felds, especially outside o OPEC,

are in a steep decline. According to the WEO,

in the next 25 years about 47 million barrels

per day o todays production will go into

decline. That means that in order to compen-

sate or this decline in the next 25 years, we

have to fnd and develop two Middle Eastern

regions, such as a Saudi Arabia plus Iran plus

Iraq, etc. This is critical just to compensate

or the decline in existing felds. The decline

will be a major challenge in addition to the

growth in oil demand, and thereore there

is a need or signifcant investments.

EP:How do you see investors and govern-

ments balancing the increasing development

o unconventional oil and gas and the

implications or climate change?

FB:Interest in unconventional oil and gas

is growing throughout the world and there is

one major driver price, which translates

to proft. With current oil and gas prices, it

makes perect sense in many cases to increase

unconventional production. When we look at

the United States, in terms o unconventionals,

higher oil prices are driving a second revo-

lution in tight oil. We will see more and more

unconventional oil come to market.

In terms o natural gas, we have just pub-

lished a major report calledAre We Entering

a Golden Age o Gas?, and we see that a major

driver o this likely new golden age is not

only the increase in unconventional gas rom

North America, but also rom Australia,

China, and other countries. Global growth

or natural gas is expected to be very strong.

However, it would be wrong to say that

the increase in natural gas will be enough

I expect strong oil demand

growth in the years to come,

mainly, if not exclusively, driven

by the emerging countries.

CArEEr highLightS:

PhD in energy economics from the Technical

University of Vienna

Chief Economist of the IEA

Member of UN Secretary-Generals High-level

Group on Sustainable Energy for All

Chairman of the World Economic Forums (Davos)

Energy Advisory Board

Founder and Chair of the IEA Energy Business Council

D. Fa Bol

Chief Economist at the

International Energy Agency


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32 SBC Eney Pespecves | Winter 2012

inevew w

D. Fa Bol

to address our climate change problems.

Although natural gas emits less CO2 than coal,

it is not completely innocent. We will still need

renewable energies; we will still need nuclear

power; we will still need to use energy more

efciently; and we will need carbon capture

and storage (CCS) to address the issue o

sequestering carbon rom natural gas and coal.

EP:Turning to oil demand, this years World

Energy Outlook (WEO 2011) examines

booming vehicle demand in emerging

countries. Do you think that countries like

China and India will ollow the same high

oil consumption pattern as in developed

economies, or will they ollow a dierent path?

FB:I hope they dont ollow what we have

done because we did not do extremely well,

otherwise we would not be in our current

situation in terms o the energy markets,

in terms o climate change, in terms o air

pollution, in terms o trafc congestion,

and so on.

But the bad news is that they are ollowing

us. When you look at the trends highlighted

in the WEO 2011, almost all the growth in

oil demand is coming rom the emerging

countries and specifcally rom the transpor-

tation sector: cars, trucks, jets, and so on.

Yet, to be honest, this trend is justifed. In

China, 30 people out o 1,000 own a car,

whereas in Europe 500 out o 1,000 own a

car. In the United States, 700 people out o

1,000 own a car. In China, India, and other

countries, when individual incomes rise

which is happening now because they are

growing strongly one o the frst things

is to buy a car or convenience and perhaps

prestige. This, in turn, uels oil demand

growth. I thereore expect strong oil demand

growth in the years to come, mainly, i not

exclusively, driven by the emerging countries.

EP:Looking at OECD countries, it appears

that oil demand has reached a plateau, i not

a decline. Do you think that oil demand in

the OECD has peaked, and i so, is it due to

energy efciency, or just a temporary eect

o the (20082009) recession?

FB:This is one o the fndings in the WEO

2011. We think that in OECD countries oil

demand has probably reached a peak. There

are a ew reasons, one being saturation. When

you have enough income, you buy a car or

yoursel. When you become richer, you buy a

second car or the household, or the wie or

the husband. When you become richer and

richer you get a third car, but you cant buy

10 cars, so there is a saturation eect. The

second actor is efciency; there are efciency

improvements in many OECD countries

cars, or example, are becoming more

efcient. The third actor is population

growth, which has more or less stabilized in

OECD countries. As a result o these actors,

we do not expect to see OECD oil demand

return to levels seen in 2006/2007.

EP:What do you think will be the consequences

o the Arab Spring on the energy markets,

and will there be any lasting impact?

FB:It may be a very important event or the

energy sector. According to the WEO 2011,

in the next 20 years about 90% o the growth

in global oil production needs to come rom

the Middle East and North Arica because the

bulk o the reserves are there. In addition, oil

reserves outside the Middle East are in decline.

On the other hand, demand is growing, coming

rom China, India, and elsewhere.

What many people have in mind is that

the Arab Spring brings the people their

economic, social, and political reedom as

well as a signifcant increase in the wealth

o these countries as a result o their

natural resources. However, it may well be

the case that some o the countries choose a

dierent way, namely not to increase their

oil production signifcantly, but may leave it

or the next generations. This is also


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sbc.slb.com | SBC Eney Pespecves 33

justifed and legitimate, but it is dierent

rom what people expect. So i the produc-

tion growth in these countries does not

increase as signifcantly as the world

market needs, this would mean higher

prices. This is highlighted in the WEO 2011,

where we have analyzed a delayed invest-

ment case or MENA (Middle East and

North Arica) countries. We see that i

investment in these countries does not take

place in an adequate and timely manner,

or whatever reasons, it

may have substantial

implications or the

international oil market,

which will result in much

higher prices than we

have assumed.

EP:With continuing

economic ragility and

slowing growth in China

and India, should we

consider that end o the

commodities supercycle is

upon us?

FB:I am not a big an o believing in

the oil markets at least that the cycles

are going to take place orever. I believe that

we have entered an era in which cheap oil

is over. What we see today is that oil prices

are rather weak compared with a couple o

months ago, mainly because o the weakness

in the economy. The players in the oil market

see that demand may be weaker because o

a slowdown in the major emerging countries,

China and India, or perhaps the risk o

recession in Europe and maybe in the

United States. Thereore, there is currently

a temporary slowing down in oil prices.

Global economic growth is about 34%,

with OECD countries at about 2% growth,

and emerging countries increasing at 56%,

on average. We will see higher oil prices due

to increasing costs o production, due to the

act that the bulk o growth in oil supply will

need to come rom Middle East countries,

who in turn need higher prices in order to

balance their budgets. Thereore, I believe

that when the economy is back on its eet,

we can have higher prices.

EP:Turning now to clean energy and

climate change, the IEA has published

a number o recommendations aimed

at limiting global warming to 2C or less,

and has stressed that we

need to act soon to avoid

being technologically

locked in. In a post-

Fukushima world, what

trajectory are we on now?

FB: We are not doing well

in terms o climate change.

I you ollow the current

policies in place, the global

temperature will increase

by about 6C, which will

have dramatic implications

or the earth, animals,

human beings, and so on. Two years ago in

Copenhagen, we had hope o an interna-

tional, legally binding agreement, which

unortunately didnt happen. Some countries

have made some pledges, but they are not

legally binding.

In the WEO 2011, we have calculated that

even i those countries ulfll their pledges,

global temperatures would still increase

by 3.5C. According to scientists, we have

to limit the increase to 2C. We have

analyzed what needs to be done to limit

the rise to this level, and here the IEA

plays an important role because about

two-thirds o the emissions contributing

to climate change come rom the energy

sector. So what do we have to do? We see

our major policy areas.

First, we need to use energy much more

eiciently. This is very important. We must

Today, 800 million

people in sub-Saharan

Africa consume an

amount of electricityequal to that of the 17

million people in the

New York Metropolitan

Area the same

amount of electricity!


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36 SBC Eerg Perspecties | W 2012

nergy poverty is dened as a lack

o access to electricity, heat, or

other modern orms o power and

it aects about 1.6 billion people

in the world today.1 In addition, the lack o a-

ordable and reliable power supply creates sig-

nicant knock-on eects such as the lack o

industry and other income-generating activi-

ties, thereby impacting economic development

and growth.

Meanwhile, even though gas faring has de-

clined by 22%2 since 2005 (despite a 3.4% in-

crease in oil production over the same period),3

an estimated 130140 billion cubic meters

(bcm)4 o gas is still fared5 globally every year

rom upstream petroleum operations, the equiv-

alent o the total gas consumption o U.S.

households. An estimated additional 100 bcm

o natural gas is vented or lost through ugitive

emissions6 rom the oil and gas sector. The

combined fared, ugitive, and vented gas con-

tributes the equivalent o nearly 1.4 billion

metrictons o CO2 to the atmosphere annually7

(the equivalent o annual emissions rom 192

million cars).

Waste Gas i Areas f Acute Eerg

Pert sub-Saara AfricaA large share o waste gas is produced in some othe most energy-poor regions in the world (see

gure 1, page 38). With a current electrication

rate o 31%, some o the greatest challenges in

terms o energy poverty lie in sub-Saharan Ari-

cas oil and gas producing countries. Today, this

region fares 35 bcm annually, which could gen-

erate nearly 12,000 MW o electricity (hal the

continents power consumption). Nigeria, sub-

Saharan Aricas largest gas producer, has a

Waste Gas:a Crucial Componentof the Energy

Poverty DilemmaReducingwaste gascould help gas-rich regions by adding revenue,

reducing cost, and increasing energy availability, but reduction will take

more than advances in technology it will need a strongpolitical will.

B Reau Brit,

Atie Aris,

a Peter Cape

E


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..m | SBC Eerg Perspecties 37

illust

ration

by

eva

tatcheva

multidecade legacy o faring and is the largest

farer o gas per barrel o oil produced (0.0155

bcm/MMbbl versus 0.005 bcm/MMbbl or Rus-

sia).8 However, Nigerias electrication rate per

capita is particularly low, as recognized in 2010

by President Goodluck Jonathan in his remarks

on the Nigerian power plan:

Today less than half of our citizens have access

to electricity. We expend about $13 billion every

year providing power from diesel generators

when we require only about $10 billion per

year of investment over the next few years to

develop our generation, distribution, and trans-

mission capacities.9

It is estimated that over 30% o Nigerias vent-

ed and ugitive gas emissions could be cap-

tured at a prot ($16.2 billion o sales revenues

annually)10 to directly benet populations su-

ering rom energy poverty. This illustrates the

disconnect between resources in place and

utilization (see gure 2, page 39), and the

complexity and challenge o transorming

waste gas into domestic gas or electricity. Con-

sequently, it is essential to understand the ac-

tors that could help turn waste gas rom an

environmental misortune into a long-term

solution or the alleviation o energy poverty.

Trasfrig Waste Gas it Eerg Tecgica, Ecic, aPitica Caeges fr AfricaWhile marginal routine faring is associated

with the sae conduct o petroleum opera-

tions (pressure release or equipment protec-

tion, emergency faring), most o todays

waste gas is the result o ailing to align gov-


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38 SBC Eerg Perspecties | W 2012

Waste

Gas

Grossg

as

prod

uction G

as

consum

ption

Gasreinject

ion

andv

enting Flared

gas

Gasc

onsumpt

ion,

U.S.

household

s

Gasc

onsumpt

ion,

Africa

3,693 3,169

390

134 132 105

Angola 3%

Rest ofworld 28%

Rest ofWest

Africa6%

Nigeria 11%

Algeria 4%

Iraq 7%

Iran 8%

Libya 3%

Kazakhstan 3%

Russia 26%

OECD

World

Angola

Restof

WestA

frica

Nigeria

Algeria Ira

qIra

nLib

ya

European

Unio

n

Kazakh

stan

Russia

Unite

dStat

es

World Natural Gas 2010billions of cubic meters

Share of Waste Gas 2010billions of cubic meters

Energy Use per Capita 2010kg of oil equivalent

ernments and key industry stakeholders

when addressing the combination o techno-

logical, economic, and regulatory challenges

involved in gas monetization; thereby making

faring the only economically viable option

or operators.

Historical practices, an unsupportive fscal

system, and the weight o legacy

Unlike today, with increased awareness

about global warming, associated gas was

historically viewed as a waste product. Pro-

duction contracts and upstream regulatory

rameworks tolerated faring and, in many

oil productionsharing contracts, no rights

to gas were specied and there was no eco-

nomic incentive to manage (e.g., reinject) or

monetize the gas produced. Project econom-

ics were dictated purely by oil revenues.

While these views are changing both rom

a regulatory standpoint as well as within the

upstream industry, any move to better value

gas has been slow. Reasons or the inertia

include the cost o retrotting production

platorms (mostly oshore elds that have

platorm space constraints, which limit

capability to take gas equipment, especially

i gas recovery was not in the original plat-

orm design); small associated gas volumes

o individual projects that ail to support

monetization considerations; and associated

gas not being seen as a reliable long-term

supply source due to ast depletion and po-

tential damage to the reservoirs oil produc-

tion proles. As such, associated gas cannot

compete with more reliable and cheaper

sources o gas, even i it means importing gas

to meet national energy demand.

FIGURE 1: WASTE GAS ComPARATIvE STATISTICS

SourceS: BP STATISTIcAL reVIeW; NooA; WorLD BANK; SchLumBerger BuSINeSS coNSuLTINg (SBc) ANALYSIS


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42 SBC Eerg Perspectives | Winter 2012

he energy industry is at the onset o

a major transition. First, concerns

over CO2 emissions and supply se-

curity are pushing policy makers

toward energy eciency and renewables. Sec-

ond, consumers are becoming more environ-

mentally conscious, more sensitive to commodity

price spikes, and more prone to conservation.

History shows that energy transitions take de-

cades to play out. For example, it took 160 years

rom the scientic discovery o liqueaction in

1850 to LNG attaining critical mass on a global

scale (approximately 30% o all gas traded in

2010). Similarly, it took nearly 100 years or the

gasoline internal combustion engine to displace

the steam engine and move rom an initial maxi-

mum eciency o approximately 3% in 1860 to

hitting a plateau o approximately 30% by the

1950s. In both o these examples, technology and

costs were not the sole determinants o the out-

come. Externalities such as ease o distribution

and availability o supply also played an impor-

tant role in technology adoption. We are roughly

30 years into this new energy transition. In the

next 1020 years, the environment or invest-

ment will likely become attractive. Furthermore,

oil companies are in prime position to capitalize

when the environment becomes attractive; they,

unlike most venture capital rms, have the bal-

ance sheet strength and project management

savvy needed to drive large, long-timeline tech-

nology projects. Companies that take the initia-

tive now to identiy uture opportunities will

attain signicant rst-mover advantages.

The R&D DiemmOil and gas companies ace an R&D challenge

on two ronts when it comes to the energy tran-

Preparing forOpportunityIn orderfor companies to ideally position themselvesfor

the energy transition, optimal management with an integrated

approach toward technology andinnovation will be essential

in overcoming R&D challenges.

B Vivek Chidmbrm

d Tms Seregi

T


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.l.om | SBC Eerg Perspectives 43

sition. First, most energy agencies predict that

oil and gas will continue to play important roles

decades rom now. However, previous industry

down-cycles prompted oil companies to out-

source signicant parts o their technology and

innovation capability. This outsourcing put oil

companies at a disadvantage when access to

resources decreased and technical complexity

increased. Second, environmental pressures

over CO2 emissions are likely to prompt oil

energy perspectives - winter 2012.aspx

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