scenarios white paper 2010

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White Paper:Scenarios

World Energy Council 2010


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Officers of the World Energy Council

Pierre GadonneixChair

Francisco Barns de CastroVice Chair, North America

Norberto Franco de MedeirosVice Chair, Latin America/Caribbean

Richard DrouinVice Chair, Montral Congress 2010

C.P. JainChair, Studies Committee

Younghoon David KimVice Chair, Asia Pacific & South Asia

Jorge FerioliChair, Programme Committee

Marie-Jos NadeauVice Chair, Communications & Outreach Committee

Abubakar SamboVice Chair, Africa

Johannes TeyssenVice Chair, Europe

Abbas Ali NaqiVice Chair, Special Responsibility for Middle East &Gulf States

Graham Ward, CBEVice Chair, Finance

Zhang GuobaoVice Chair, Asia

Christoph FreiSecretary General

White Paper: ScenariosWorld Energy Council 2010

Copyright 2010 World Energy Council

All rights reserved. All or part of this publication may be used orreproduced as long as the following citation is included on eachcopy or transmission: Used by permission of the World EnergyCouncil, London, www.worldenergy.org

Published 2010 by:

World Energy CouncilRegency House 1-4 Warwick StreetLondon W1B 5LT United Kingdom

White Paper:Scenarios


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White Paper: Scenarios World Energy Council 2010

1

Foreword 2

Section IIntroduction 3

What are Scenarios? 3 Scenarios as an aid to decision making 4Four facets of Scenario methodology 5

Section IIScenarios and the World Energy Council 7

Global Energy Perspectives 2000-2020 (1989) 7Energy for Tomorrows World (1993) 7Global Energy Perspectives to 2050 8

and Beyond (1995)Global Energy Perspectives (WEC-IIASA, 1998) 9Energy for Tomorrows World Acting Now (2000) 10Drivers of the Energy Scene (2003) 11Deciding the Future:Energy Policy Scenarios to 2050 (2007) 12

Section IIIThe new WEC Energy & Strategy Scenariosto 2050: turning critical uncertainties intostrategies for the future 13

The WEC scenario approach 13The concept of open-source architecture forquantification and modelling 14Project organization and governance 14Process and project timeline 15

Section IVEmbedded Reality: Potential impact of recentheadline events on energy 18

Copenhagen and its consequences 18The impact of the financial recession on energyinvestments 21The emergence of unconventional gas 22The BP Gulf of Mexico oil spilland its consequences 24

Section VMessages and their significance 26

Key Messages from WEC Studies(2008-2010 Study Cycle) 26Significance of external/internal messages to WEC 27

entries found.

Contents


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2

The wish to know the future is as old as mankinditself. Unfortunately, we are not able to predict thefuture, which does not necessarily mean that thefuture must always be unknown. The main purposeof this White Paper is to introduce readers to theconcept of scenario thinking and the idea of a newset of scenarios that the World Energy Councilwants to develop after the Montreal Congress.It briefly outlines the generic process of makingscenarios and how they can be used. It alsosummarises the proposed structure and process ofthis new WEC flagship project, as presented by theSenior Fellow for Scenarios to the WEC StudiesCommittee in Beijing on June 9th, 2010. To providea historical reference, a summary of the energyscenarios work done by the World Energy Councilsince 1989 is provided. The White Paper ends withillustrative examples of headline events that haveinfluenced the energy space in recent times andwhich raise important questions that are best dealtwith in a scenario context. Finally, it is also hopedthat this document will provoke and stimulate

debate and discussion around the future of energyand meeting the demands of the world in asustainable manner.

Foreword


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5

Four facets of scenariomethodology

The individual steps of scenario construction areloosely sequential and at the same time iterative it is necessary to continuously return to previouswork and incorporate what has been learnt. Thesteps are,

Uncovering and widening perspectives

Understanding interactions

Crystallising insights into stories

Generating and testing

People can make assumptions without everimagining that their view may be inconsistent withthe views of others, or for that matter, inconsistentwith reality. Assumptions are rooted in peoplesown histories. Sometimes it is almost by accident,that these assumptions are revealed.

One important element of scenario methodology is,therefore, to make assumptions explicit: tounderstand the current perspectives of relevantstake holders who are most likely decision-makers.In particular, it is critical to understand what isconsidered to be important, and beyond that,assumptions about what is likely to persist andwhat is likely to change.

Pierre Wack recommended separating the futureinto predetermined and uncertain elements 3.Predetermined elements are those events whichare already in the pipeline and can be expected topersist.

This first stage of scenario building is very intensiveand requires careful studying to determine what ispredetermined and what is uncertain. This helps incomprehending the driving forces of anenvironments future which often fall under five

categories society, technology, economics,politics, and environment. After determining anenvironments predetermined elements the planneris faced with the challenge of identifying criticaluncertainties whose resolution results in themanifestation of different futures or scenarios.When we can distinguish between what mightpersist and what might change, this knowledge canbe used to expand our understanding of how theworld works. This is important for both activists andentrepreneurs, as Ged Davis, former head of

scenario planning at Royal Dutch Shell puts it, ...atrend is a trend until it bends..., and at the bendsare risks and opportunities for change.

Immediately following the identification ofpredetermined trends and critical uncertainties, it isimportant to make interactions explicit. It is oftenhere where the greatest opportunity for learninglies. In the context of scenarios as opposed tochemistry, interactions are not always consistentover time. The possibility of interactions changingcould form the very basis for alternative scenariosof the future.

3 Wack, P. Scenarios: shooting the rapids, Harvard Business Review . November - December 1985


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This facet of the scenario method requires stronganalytical skills and a capacity to understandsystems. Specialist knowledge of subject matter isa crucial input in this work, although a multi-disciplinary approach is also needed to cover thebreadth of issues at hand. Insight is also requiredto distil the mass of detail now available, into a fewthemes upon which the scenario stories will bebased. The outcome is a set of explicitassumptions about how relevant systems work andhow they may change in the future.

Once scenarios are built, they face acommunications challenge. How can thecomplexity of alternative futures be madetransparent and the insights contained therein, beconveyed? How can the breadth of alternativefutures be captured whilst maintaining relevance tothe practical questions at hand? How can storiesbe made challenging and compelling without a lossof credibility? Depending on the subject matter andthe audience, the answer usually lies in a

combination of words, pictures, and numbers.The last stage of scenario building is the evaluationof implications and the generating and testing ofoptions. Scenarios are very useful in helping todraw out discontinuities and insights, which canthen be turned into new strategies. Looking atimplications is therefore part-and-parcel of anyscenario process, but not part of the scenarioplanning methodology as such.


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The World Energy Council (WEC) has beeninvolved with energy futures for more than twodecades. WEC`s first energy futures study, Energy 2000-2020: World Prospects and Regional Stresses (ed. J-R Frisch), was commissioned forthe 1983 New Delhi World Energy Congress.Following the enthusiastic reception for this study,a second study was conducted from 1986 to 1989under the aegis of the WEC Conservation andStudies Committee. The summary of this study,World Energy Horizons: 2000-2020 , was publishedin 1989 under the title Global Energy Perspectives 2000-2020.

Global Energy Perspectives2000 - 2020 (1989)

This study was published in the context of oilmarket volatility, the Chernobyl disaster, and arising demand for energy which was not reflected inprice. The study was a top-down effort where atotal of 30 experts from 18 Member Committeesand 9 international organisations supported acentrally located project team. This was a global,decentralised, and coordinated consultationapproach. The energy system was not consideredin isolation but was linked to the development ofrelated systems, e.g. financial, economic,demographic, geological, atmospheric, etc.,through a variety of quantified indicators. Twoscenarios were drawn up based on levels ofeconomic development. The key conclusionsenvisioned under these two scenarios are pertinent

even today, more than 20 years later.

Energy for Tomorrows World(1993)

This energy scenarios study is perhaps WECslandmark energy futures publication. It was aimedat policy makers, industry players, and was lucidenough for the general public. Its purpose was toachieve changes in energy policy which bringabout realistic and desired goals in the mosteffective ways.

Following the presentation of the Global Energy Perspectives 2000-2020 study at the 14th WorldEnergy Congress at Montral, it was felt that thestudys supply and demand projections wereobjective, and that a division of the world into fiveregions was needed in order to highlight regionalperceptions and concerns. Additionally, a moredetailed examination of the parameters relevant tofuture energy developments was called for. As aresult of these decisions, a commission was set upto develop the next set of energy scenarios.

The commission set up to produce the 1993 studywas guided by a board of 50 energy experts drawnfrom all over the world. The methodology adoptedfor this study was a combination of a top-down andbottom-up approach. The bottom-up approach wasimplemented through the formation of 8 regionalgroups which were led by regional coordinatorsand produced regional reports.

The report is divided into two sections, detailing the

global and regional perspectives of the energysystem leading up to 2020. The 1993 study placesemphasis on the fact that energy issues should beviewed in their total, global, social, and institutional,

Section II Scenarios and the WorldEnergy Council


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as well as economic and environmentalperspective. This has been interpreted by thecommission as follows, what people demand isnot energy as such but the services which energycan provide heating, cooling, cooking, lighting,mobility, and motive power. The four energycases (or scenarios) in this study representeddifferent assumptions in terms of economicdevelopment, energy efficiencies, technologytransfer, and the financing of development aroundthe world.

The 1993 study was a landmark study since itdivided future energy perspectives into two parts global and regional. This helped serve as abalancing factor for global perspectives whichcould be checked against regional priorities, todetermine whether envisioned goals were realisticin the set time frame and whether suggestedsolutions were workable at all.

Global Energy Perspectives to2050 and Beyond (1995)This study was conducted by WEC in collaborationwith IIASA (International Institute for AppliedSystems Analysis). The scenarios detailed in thisstudy are based on the scenarios produced in the1993 study, Energy for Tomorrows World . Whilethe 1993 study looked ahead till 2020 using fourscenarios, the 1995 study looks ahead till 2050using six scenarios.

The study makes use of five factors whichdetermine at a fundamental level, the future ofenergy systems. The first three factors aredescribed as human driving forces population

growth, economic growth, and technologicalchange & energy intensity improvements. Theremaining two factors account for natures role resource base, and the environment. Worldpopulation is expected to increase across allscenarios, and most of the growth is expected totake place in the global South 4. According to thenavailable World Bank projections, the population ofthe world is expected to double from 5.3 billion(1990) to 10.6 billion by 2060. This study holds thatbeyond 2050 world population is expected to slowdown and stabilise around 12 billion. Across thescenarios, a weak relationship between populationgrowth and economic growth is expected. Theeconomic take-off is visualised to be the mainstayof developing countries, with the world looking verydifferent by 2100. Economic growth is projected tooccur across all countries, in all regions around theworld. However, the growth rates for OECDcountries are expected to decline, while those ofnon-OECD developing countries mirror the trendexperienced by OECD countries in the past.

The study makes explicit implications facing theenergy industries. Coal faces an uncertain futureranging from an absolute boom to a total bust. Thisuncertainty is in part due to technological progressand in part due to environmental policy. That coalhas the largest reserves of all conventional fossilfuels is its Achilles heel, both its strength andweakness. The oil industry appears to have a longfuture ahead of it. Oil products will continue to holdtheir own for decades to come due to their highenergy density and existing infrastructure. Naturalgas has the best prospects among the fossil fuels.

4 Developing economies and economies in transition today.


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Gas production at least doubles in all thescenarios, and could increase as much as four orfive times. This however depends on thedevelopment of infrastructure ranging fromproduction to storage, to re-gasification, toshipping. The potential for renewables is high, witha significant expansion across all scenarios.A model of slow initial growth, followed by rapidexpansion is expected. OECD countries willdominate this market, and the South will only adoptthese technologies if investment and technologytransfer is made from the North. Finally, the rangefor nuclear development remains broad. Whatdetermines its fate will ultimately depend on whenand how proliferation, waste, and safety concernsare resolved, and whether the climate issue willadd additional weight to nuclear powerscharacteristic as zero carbon.

Global Energy Perspectives(WEC-IIASA, 1998)

This study presents the output of the second phaseof the WEC-IIASA scenarios study that began in1993. The first phase, from 1993 to 1995,developed 6 scenarios which were detailed in thepreceding study, Global Energy Perspectives to 2050 and Beyond . The second phase, from 1995 to1998 involved an extensive review of the 1995study, and also incorporated a regional outlook thatlent further granularity to the global outputsspecified in the first phase study.

The 1998 study details the implications of thesescenarios on 6 areas: investments and financing,international trade, energy costs, technology,energy industries, and the environment.

The study arrives at the following conclusions:

World energy needs will increase.

Energy intensities will improve considerably.

Resource availability will not be a major globalconstraint.

Quality of energy services and forms willincreasingly shape future energy systems.

Energy end-use patterns will converge, even asenergy supply structures diverge.

Technological change will be crucial for futureenergy systems.

Rates of change in global energy systems willremain slow.

Interconnectivity will enhance cooperation,systems flexibility, and resilience.

Capital requirements will present major

challenges for all energy strategies.

Regional differences will persist in global energysystems.

Local environmental impacts will takeprecedence over global change.

De-carbonization will improve the environment atlocal, regional, and global levels.


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Energy for Tomorrows World Acting Now (2000)

This study revisited the original Energy for Tomorrows World (ETW), 1993 study. In 1998 aWEC Commission Board was set up to take a freshlook at the conclusions drawn in the ETW 1993study in light of developments over the past 7years.

ETWAN ( Energy for Tomorrows World Acting Now ) focussed ten policy actions based on theoutcomes of looking again at the ETW study andkeeping in mind WECs three core energy goals ofaccessibility, availability, and acceptability.

1. Governments should withdraw from directlymanaging energy markets and should reap thebenefits of market reform and appropriateregulation.

2. All energy options should be kept open, viz.

energy diversification, regional integration ofenergy systems, and enhanced trade in energyservices. It should be kept in mind that marketcriteria must prevail in the development of allenergy resources.

3. The political risk of key energy projectinvestments must be reduced, for example, bycontemplating the modalities of a global coinsurance scheme.

4. Energy must be priced to cover costs and ensurepayment. Removing energy subsidies and crosssubsidies, especially in transport and electricitysectors, should be a priority, along with aconsistent energy taxation system.

5. Greater energy efficiency must be promoted,using policies that use direct or indirect pricemechanisms.

6. Financing partnerships linked to environmentalgoals should be fostered.

7. Affordable energy for the worlds poor must bemade a reality through economic and socialpolicies aimed at equitable income distribution.

8. RD&D must be funded in the following areas:a. Energy efficiency in production and end useb. Renewables at the development stagec. Cleaner fossil fuel systemsd. LWR nuclear plantse. Superconductivity (to reduce transmission

costs and increase storage)f. Integrated decentralised energy systems

9. The advancement of education and publicinformation.

10. The incorporation of ethics as a strongcomponent in the governance of energysystems.


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Drivers of the Energy Scene(2003)

Drivers of the Energy Scene was the first report ofthe WEC Work Programme for 2002-2004. Thisstudy is different from all previous WEC energyfuture studies, in that it looks at the drivers of theenergy system and does not attempt to propose anenergy model or projection about the future - butaims instead to stimulate a reflection on how the

energy system has worked in practice, what thedynamics of the energy markets have been, andhow energy availability has impacted GDP growthand accessibility. The study aims to determinewhether the impacts of these drivers in the futurewould be consistent with past and presentdevelopments. It also seeks to highlight theimportant economic, social, environmental, andtechnological feedbacks. The report concentrateson oil and natural gas markets due to theirimportance in energy supply and pricing as awhole.

This study examines the role of energy in economicdevelopment, the evolution of the demand forincreasingly sophisticated and acceptable energyservices, and the availability of primary energy interms of quantity and quality. They are studiedunder three groups of drivers: GDP, energydemand, and energy supply. The GDP driver is inturn studied under three components: demographictrends, institutional capacity, and technology.Energy demand is examined with respect to the

trends experienced by services for electricity,mobility, and stationary fossil fuels.

The study concluded the following:

Based on economic trends and feedback over 30years, annual GDP growth is posited to besubstantially below 3% in comparison to mostscenarios which assume an average GDP growthrate of 3% to 2030.

The evolution of the energy scene is likely to becharacterised by stop and go episodes in whichthe price of energy declines and then rises withpositive and negative feedback effects on GDPgrowth and new technology.

Real progress in providing commercial energyaccess for the poor will depend on nationalgovernments who will have to create an investor-friendly environment, promote regional trade, andfoster links with the international community.

The study also raised the following questions itconsidered critical for the future of the worldsenergy security and sustainability:

If hydrocarbon supplies do not grow much, whatwill the sources of new energy be, and how soonmight they shift once again among oil, naturalgas, coal, nuclear power, hydro, and otherrenewables?

In a world of lower global economic growth andhigher real energy prices, what is the precisenature of the climate change threat, and if itrequires further action, what are the least costcarbon mitigation strategies, technologies orregulations to address it?


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Deciding the Future: EnergyPolicy Scenarios to 2050 (2007)

This study is the latest energy scenarios studyproduced by the World Energy Council. At theSydney Congress in 2004, WEC decided tocommission a new scenarios study with thefollowing three important aims in mind:

1. The scenarios will be based on policy and on the

bottom-up regional and specialist work of theWEC member committees.

2. The storylines developed in the study should bemeasured against the 3 WEC goals of energyaccessibility, availability, and acceptability.

3. The scenarios developed should have asufficiently long-term focus to underpin clearrecommendations on policies and actions that willachieve targeted results by 2050.

Four key pressures have been covered in thisstudy - supply pressures, demand pressures,environmental pressures, and political pressures.These pressures are collectively analysed with theapplication of two axes which describe the policyenvironment, viz. government engagement andcooperation/integration. Four scenarios result fromthe plotting of engagement and cooperationbetween governments, private sectors, regions,and nations. The study reflects on three aspects ofgovernment engagement in energy development:engagement, involvement, and interference.Cooperation and integration is examined in theform of government to government collaboration,

private-public partnerships, and company tocompany agreements.

The study was carried out across five regions Africa, Asia, Europe, Latin America and theCaribbean, and North America with each regioncarrying out its own analysis. The EnerdataPOLES 5 energy simulation model was used toprovide the regional groups with a consistencycheck on their internal thinking. The model is top-down, aimed at projections, and is also aimed to alarge extent at showing the need to reduce carbonemissions from energy use. During the study, thedefault assumptions made by the POLES modelwere modified based on feedback received fromthe regional groups. Several different alternativeswere explored, e.g. price of oil, amount of nuclearpower, to examine the strength of some variables.

The study ends with a set of policyrecommendations which can be distilled into sevenpolicy areas. Each region will have to promote

energy efficiency, raise public awareness of therole of the transport sector, move towards setting aglobal price for carbon, work towards the closerintegration of energy markets, assist in creating anew international framework for technologytransfer, foster dialogue on security of supply anddemand, and, construct taxation, legal, andcommercial frameworks which lower investmentrisk.

5 The model is a global simulation model with a year-by-yearrecursive simulation and partial equilibrium framework,endogenous international energy prices, and laggedadjustments of supply and demand by region. It has ahierarchical structure of interconnected regional and nationalsub-models.


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The World Energy Council has decided to launch anew global energy scenarios exercise following theCongress in Montral 2010. The last WEC energyscenarios, Energy Policy Scenarios to 2050 werepublished in 2007. WECs energy scenarios areflagship publications, outlining WECs own vision ofdevelopments in global energy. They are meant toincrease visibility for WEC and to allow theinclusion of new developments and insights intoWEC thinking in a structured way. They are also aplatform for engaging policy makers and energizingWEC Member Committees in regular discussionson topics of special interest, e.g. mobility, impact ofrenewable energies, water energy nexus etc.Finally, and most importantly, they are directedtowards policy-makers in government and decision-makers in industry who are faced with choices inan uncertain environment. WEC Scenarios are alsomeant for the general audience who seek to informthemselves of potential risks and opportunities inthe global energy system.

Energy systems, and critical uncertainties liketransport and mobility, are complex issues whoseresolution will be impacted by diverse factors.This high complexity, combined with uncertainty,constrains the predictability of traditional forecasts.By using scenarios to look into the energy future upto 2050, WEC can provide a significant contributionto the important discussions that have to take placecurrently between many different stakeholders, inorder to better prepare us for the future.Extrapolating the past can be highly misleading,especially when looking for new approaches toeffective energy policy and leadership. Drawing onthe wisdom and experience of its globalmembership to develop a small set of distinct but

consistent scenarios plausible stories ofpathways into the future the World EnergyCouncil, in the interest of our sustainable energyfuture, wants to provide a tool for stake-holders totest the robustness of their own assumptions andto benchmark the potential outcome of policies andstrategies in governments and industries.

The WEC scenario approach

The biggest methodological challenge is often tofind the right mixture of methods and approaches(see Figure 3.1). In foresight terms we candifferentiate between qualitative (or explorative)and quantitative (or normative) methods/tools.Classical scenario exercises are mostly explorativein nature and ask the all-important what if?questions. Politicians and decision makers inbusiness, however, often require answers to criticalhow to? questions, underpinned by some form ofquantitative analysis. WEC studies have takenvaried approaches over time, as described in the

previous section, and considering its variedmembership base, WECs customers will need aqualitative view on questions that make adifference, combined with quantitative analysis as abasis for discussion and dialogue. It is therefore theintention that the new WEC Scenarios will providean explorative framework to widen perspectivesand clarify potential options, and also to provide ananalytical and quantitative assessment of thoseoptions based on an open source approach.

Section III The new WEC Energy & StrategyScenarios to 2050: turning criticaluncertainties into strategies forthe future


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The concept of open sourcearchitecture for quantificationand modelling

In order to provide quantification, scenario storiesneed to be translated into assumptions andcaptured in a global energy model. It is ourintention to build a web-accessible open sourceframework/global energy model, which can be usedand expanded on by third parties like companies,

governments, and experts. For this innovativeapproach to be made possible, the framework hasto be structured applying modular architecturewhereby third parties can develop and dock theirown modules as they see fit.

The objective is not to have an extremely detailedenergy systems model, but a big-picture model thatconnects relevant energy system variables andprovides a fully transparent and comparableplatform for dialogue. It is envisioned that anindustrial partner with relevant experience insoftware development and providing web basedsolutions will be a critical partner during this phaseof the project.

Project organisation andgovernance

Energy foresight often tends to focus on expertopinions and future global pictures with little or novisible regional input from affected stake holders.

WECs approach is different - it makes use offeedback from its members in 93 countries aroundthe world (through regional groups), which is then

distilled into important messages that guide thedevelopment of scenario storylines. This bottom-up,multi-stake holder approach has been used for thedevelopment of the most recent WEC Scenarios,(2007) and ensures that critical uncertainties spreadacross the world are well represented. The diversenetwork of motivated and knowledgeable WECmembers, who come together in regional groups toenable the transmission and exchange ofknowledge, ensures that WEC scenarios areunbiased, holistic, well balanced, and mostimportantly, relevant for decision makers and stakeholders. In a world of increasing complexity anduncertainty, this approach is a particularly greatstrength of WEC.

The new WEC Scenarios exercise will also bebottom-up, harnessing the knowledge embeddedwithin the WEC network of Member Committees.The proposed governance and organisationalstructure (see Figure 3.2) has been kept similar toother flagship projects, like the Policy Assessmentstudy. The project core team will consist of two

staff members in London, supplemented by 6-8regional members. It is planned that in each region,a scenario team is set up. WEC is also indiscussion with potential industrial partners andresearch institutions to obtain additional resourcesfor the scenario exercise. Energy companies,Saudi Aramco and Petrobras have alreadyconfirmed their participation and will commit staffresources to the scenario effort.

An Expert Advisory group will act as a soundingboard for the project team, and will consist ofsenior WEC members that have been involved insome of the previous scenario efforts, pluspotentially, some external experts.

Figure 3.1

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Process and project timeline

The scenario creation process will follow the stepsof orientation and research, scenario building,affirmation and challenge, and the final step oflooking at implications and strategic options (seeFigure 3.3). In the beginning, the core team willframe the scenario exercise and identify the keyquestions that need to be addressed (what isimportant). Once that is agreed by the WECStudies Committee, the main predetermined trendsand critical uncertainties and drivers will beidentified. The project team will then analyzeinteractions and describe the potential future end-states of those key drivers, which together, inlogical combinations form the scenario space.

It is planned to hold at least five scenarioworkshops and several meetings on topics ofspecial interests and concerns for WEC members,like urbanization and mobility, access to energyand water/energy linkage etc. The workshops andmeetings will be evenly spread across WECregions and special topics will be chosen based on

current significance for the region. This will allowfor the deepening of regional insights and optionsfor action. The chart below (see Figure 3.4) shows

a tentative timeline for the scenario process

following the Montreal Congress.It is also important to note that at the end of eachstage, the WEC Studies Committee will beapprised of the projects progress. This will ensurethat the project is on course and is in-keeping withWEC guidelines and policy.

Figure 3.2Proposed governance and organisation new WEC Scenarios exercise

Regional Scenario Groups6-8 representatives each

1 focal point

Expert Advisory Group?

5-12 leading expertswith special skills andhigh recognition

Project Networkincluding all MCs, patrons, etc,(possibly includingregional groups)

Project Core Team2 WEC London (Senior Fellow,Project Manager)5 Regional focal pointsex officio (WEC): Chair StudiesCommittee, SGSeconded staff (Saudi Aramco,Petrobras)

StudiesCommittee

ResearchInstitution(s) andProject Partners

Project Core Team Project engine drives the project Proposes and implements methodology Sources and analyses data / information on issues and key drivers Delivers content/publications Facilitates input from Regional Scenario Groups and wider Project

Network inputs Joint management between WEC and potential project partners Senior Fellow Scenarios reports back to Studies Committee and SG Potential for inclusion of 2 seconded staff to scenario exercise

Project Partners and Research Institution (unconfirmed) Partners with complementary skill sets that can provide input into

scenario exercise IBM on energy modelling (unconfirmed) Energy company (unconfirmed) on joint development of key

drivers of energy landscape/process facilitation Research institute to provide contracted input on scenario modelling

(unconfirmed)

Regional Scenario Groups Provide input to the scenario exercise regarding methodology,

developments on the ground, country aspects, policies, and reportmessaging

Individual members to provide specialist support as required Regional focal points part of Project Core Team Arbitration to be undertaken by Senior Fellow Scenarios in collaboratio

with Chair of Studies Committee, Secretary General

Studies Committee Signs off the report Note: Project partners will have their own sign-off requirements

Expert Advisory Group? Supports Chair/Secretary General in quality assurance

Project Network MCs to provide inputs to the research MCs to review draft report


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17

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Since the publication of the EPS 2050 Scenarios in2007, major events have occurred that may have asignificant impact on the way the future of energyunfolds. In this section we want to briefly review thesignificance of four major events, namely:

Copenhagen and its consequences for industryand global climate policy

The impact of the 2007/08 financial recession onenergy investments

The emergence of unconventional gas and itsimpact on global gas markets

The BP Gulf of Mexico oil spill and its impact onthe oil & gas industry

The chosen topics are only a small and illustrativesample of the type of uncertainties we are facing inthe energy space on a regular basis, and are notmeant to represent all or even the most importantfactors determining potential pathways into the

energy future. Those will be the subject of muchdeeper and wider analyses work, as outlined inprevious sections of this paper. They areexamples, however, of the type of uncertaintieswhose resolution is best dealt with in the form ofscenarios.

Copenhagen and itsconsequences

The multilateral negotiating process at theCopenhagen conference failed to produce anagreement and the conference was deadlockedwhen the heads of governments arrived for its final

two days. Unprecedented for such an internationalconference, an accord was produced by a series ofbilateral and multilateral negotiations by the leadersof 5 countries (United States, China, India, Brazil,and South Africa). It was then endorsed by most but not all parties of the UNFCCC, with 5countries (Bolivia, Cuba, Nicaragua, Sudan, andVenezuela) challenging the accord and only takingnote of it.

Not only did the negotiating process break from the

past, so did the accords architecture. It abandonsthe top-down Kyoto-style targets and timetablesenforced through a legally binding agreement. Intheir place are now unilateral pledges of emissionreductions and mitigation actions that will beverified through a mixture of domestic andinternational compliance measures. The HarvardProject on International Climate Agreements hascalled this a 6portfolio of domestic commitmentsapproach. It is also similar to the bottom-up,pledge-and-review model that Japan had

proposed before the Kyoto conference and theschedule approach recently proposed byAustralia. It also very importantly producedpronouncements on energy security, poverty, andthe economy, for the first time in the UNFCCCprocess.

Although Copenhagen did not result in a legallybinding agreement, the ensuing developmentshave shown that climate change is firmly on theglobal political agenda. Industry will be challenged

6 Robert Stavins, A Portfolio of Domestic Commitments:Implementing Common but Differentiated Responsibilities,Belfer Center, Kennedy School of Government, HarvardUniversity, 19 October 2009.

Section IV Embedded Reality:Potential impact of recent headlineevents on energy


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to reduce their own emissions, as well asunderstand key issues, such as adaptation andgeo-engineering that will impact the public andprivate sector.

The accord includes, as an aspirational goal, thelimiting of global warming to below 2 degreesCelsius and commits countries to take action tomeet this objective. It accepts the need forenhanced action on adaptation to climate change,with developed countries committing to provide

adequate financial and other kinds of support todeveloping countries. The accord also recognisesthe importance of Reducing Emissions fromDeforestation and Degradation (the so calledREDD-plus process), and the need to provideincentives for such actions in developing countries.For Latin American and the Caribbean, this is acritical issue, considering that deforestationaccounts for a large percentage of regionalemissions, and countries such as Brazil andGuyana are key negotiators on these issues.

The countries of Latin America, combined, areresponsible for just five per cent of globalemissions of carbon dioxide, due in large part to agreater dependence on hydroelectricity over coal-fired plants, but the region is one of the mostvulnerable to the detrimental effects of carbonemissions. The region's power sector generates40 per cent less CO 2 emissions per unit of energythan the world as a whole. Taking in account thefact that these emissions are 74 per cent less thanthose of China and India, and 50 per cent less than

the average for developing countries, this region isalready at the forefront of low-carbon growth 7.

The core of the accord relates to countrycommitments on mitigation targets and actions onclimate financing. Specific commitments bycountries have been submitted to the UNFCCC byend-January 2010. Developed countries, includingthe transition economies of Central and EasternEurope, will commit to emissions reduction targetsfrom base years that they specify. Developing

countries will commit to implementing mitigationactions but without a quantitative emissionsreduction target.

The emission reductions of developed countrieswill be subject to measurement, reporting andverification (MRV) according to UNFCCCguidelines yet to be established. The actions ofdeveloping countries will be subject to domesticMRV, but subject to international consultation andanalysis. In addition, developed countries pledged

USD 30 billion of new and additional resourcesapproaching between 2010 and 2012 to supportfast-start adaptation and mitigation actions.Conditional on meaningful and transparentmitigation actions by developing countries,developed countries also committed to the goal ofmobilising USD 100 billion annually by 2020 toaddress the needs of developing countries.

Africa in particular is highly vulnerable to the effectsof climate change. In our lifetimes, climate shiftswill likely inflict severe damage to human welfare in

7 Laura Tuck, Director for Sustainable Development LatinAmerica, World Bank, Latin American interests are key atCopenhagen, Miami Herald


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domestic commitments would lead at best to aglobal temperature rise of 3.2 degrees Celsius by2100.

Lastly, the accord is a non-binding politicaldocument rather than a legally binding treaty.Moreover, there are no sanctions specified, ifcountries are found to fail to meet theircommitments.

The impact of the financialrecession on energyinvestments

The size of the economic shock and itstransmission through trade and financial linksacross countries worldwide was much greater thanexpected. This reflects not only the unusuallysevere financial crisis, but also the potential role ofglobal media and information technology incommunicating the collapse in consumer andbusiness confidence and in accelerating outputcuts by producers.

Variations in the pace of economic recovery aresignificant, with the US and China emergingrelatively quickly from the downturn, with theEurozone and possibly India lagging, while theeconomies of the former Soviet Union and LatinAmerica (except Brazil) may remain depressed forlonger. Budgetary stress as a consequence of therecession seems most acute in Venezuela, Mexico,Iran, Iraq, Nigeria and Angola, with Kazakhstan

and Russia also facing abrupt cutbacks in externalfinancing.

The extraordinary policy responses bygovernments and central banks have achievedsignificant short-run success which comes at a veryhigh cost. The associated risks of that continue toloom large. Renewed financial stresses coulddampen or derail recovery. Moreover,governments and central banks must exit from theirextraordinary macroeconomic stimulus andfinancial-sector supports, and the window to do thissuccessfully will be narrow and difficult to judge.

The impact of the crisis on underlying global trendgrowth rates also remains uncertain. Tighterfinancial regulation and greater risk aversion will besome obvious consequences of the crisis.Somewhat less likely, policy makers could seek toprotect domestic industries against a prolongeddownturn by erecting trade barriers, maintainingcompetitive exchange rates, and running externalsurpluses. All in all, compared to the currentpopular sentiment, recovery seems relatively fragileand risks appear slanted to the downside. The

negative implications of further/renewed economiccrisis would be very serious, especially fordeveloping countries. As seen in previous globalrecessions, increased protectionism by developedcountries, rising external interest rates, decline inthe inflow of capital, and an overall deterioration inthe terms of trade, will especially worsen the pooreconomic conditions in places like Sub-SaharanAfrica, for example. In most African countries thevulnerable groups tend to be most affected both bythe impact of recession and reduced economicgrowth and crucially by the consequences ofeconomic recovery measures.


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Also many factors supporting the growth ofeconomies in Latin America in recent years, suchas access to capital markets, foreign investments,remittances from emigrants, the price of naturalresources, depend on the health of the globalmarketplace. Countries that are dependent oncommodities are being severely affected. Nationssuch as Venezuela, Argentina, and Ecuador arenot only heavily reliant on commodities but alsounable to issue debt to raise money, and arealready responding to the adverse conditions withnationalizations and controls.

Given the poor medium-term outlook for publicfinances and public services for many states thereis substantial scope for political controversy in theyears ahead. In this regard, not all countries are inthe same place, and a wide spectrum of politicaland societal developments can be expected overthe coming years as a consequence of recessionand recovery measures There will be value inresponding effectively to emerging regulatory

regimes associated with energy efficiency andgreenhouse gas emissions not only through capitalinvestment but also through trading/arbitrageopportunities. In general there will be acombination of anticipated market and politicalvolatility with the increased capital intensity ofmany energy infrastructure projects.

The recession has shifted global energy demandbackwards by some 2-3 years, with overall 2008demand levels expected to return by 2010-2011.It has also brought uncertainty in expectations forlong term growth in energy demand, as trendeconomic growth is expected to be structurallylower post-recession.

Energy industry responses have been mixed, withsome companies upholding their investment levels,while others have scaled back, notably the smallerand some state owned companies.

Overall, the unprecedented turbulence of the pastyear may have reset many of the parametersshaping the future energy landscape.

The emergence of

unconventional gasNorth American natural gas prices in 2009 were thelowest since 2002 due to a coincidental fall indemand by close to 2% as a result of the financialrecession, and also due to a surge in US domesticgas production. The idea that US gas productionhad passed its peak was thereby proven false by awide margin, bringing a renewed focus on NorthAmerican gas and forcing the market to re-evaluateits assumptions about the relative roles of domesticand imported gas (LNG) in the US gas market inthe years to come.

Growth in gas output has been drivenpredominantly by unconventional sources (shalegas, tight sands, and coal-bed methane (CBM))where there has been extensive developmentalactivity over the past years as a result of higherprices and technological advancements.Significantly more gas may be available than wasapparent a few years ago, potentially supportinghistorical market growth rates through to 2030.

Until recently, many of these unconventionalsources were either uneconomic or marginallyeconomic- recent announcements of new shalegas plays are more of a commerciality declaration


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rather than a discovery of a new play. The futureoutlook for how these existing and emergingunconventional gas plays will evolve is not a simplestory, it is one that could progress on severaldifferent fronts in response to price, technology,and regulatory changes.

With growing confidence in the assumption that theunconventional gas resource base in NorthAmerica will be able to provide sufficientindigenous supply to fulfil demand, Henry Hub gas

prices are likely to be determined by local supply-demand balances, underpinned by the averagecost of marginal long run supply. LNG imports willbe a price-taker in such a market and cargoescould become available for supply into Europe,providing an alternative to Russian gas imports.

The growth in unconventional gas has beenuneven, with shale gas production growing muchfaster than tight gas or coal-bed methane (CBM). Inpart, this reflects the relative maturity levels of

three plays in the United States, with tight gas andCBM being more mature than shale gas, but alsothe impact of the application of different types ofsubsurface technology. Well productivity gains fromnew investment are highest in shale gas, whereasin tight gas and CBM, subsurface technologyimprovements tend to reduce costs rather thanincrease production volumes 11 .

The highest uncertainty in global gas has to do withthe potential growth of unconventional productionbeyond the favourable conditions of North America,

where longer-term resilience still needs to be

11 For more information, please see the WEC Congress reporton Shale Gas.

demonstrated. Some of the success can beattributed to the lack of any significant risk fromregulatory oversight or resource availability, whichisnt necessarily replicable in new shale plays inother basins abroad.

While, in general, there is still a significantunconventional gas resource base available, thereare risks to future production growth from currentlyexisting sources or those that are emerging indifferent basins which could make the future look a

bit different. The main risks for the differentunconventional gas plays are becomingincreasingly apparent:

Water disposal volumes in CBM developments

Environmental and regulatory concerns aboutimpact of closer well spacing in tight sands gasdevelopments

Resource access in shale gas developments

Despite some of the risks above, the US onshoregas supply outlook is promising, although the exacttrajectory for unconventional gas will depend on thestrategies companies choose to employ in differentplays in addition to regulatory challenges. Pricesupport will likely continue for the next severalyears. It is most likely that future production fromexisting unconventional gas plays will be morelinear rather than following the exponential trend ofthe last five years. Washington based energyanalysts, PFC Energy, estimate that onshore gas

production in the United States will continue togrow through the beginning of the next decade as aresult of high prices and technological


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advancements. Driving this is not just the successin North America, but the growing belief thatconditions for unconventional gas are also ripe inareas in Europe, China, and Australia. The scale ofthe prize is difficult to estimate, however technicallyrecoverable volumes could be very significant.Non-US companies have focused on a number ofhotspots such as Queensland (Australia), Poland(Europe), and China. In Queensland, localunconventional gas players and multinationals areteaming up with more than 5 LNG schemes inplanning, whilst in Europe, where only 2-3 smallplayers existed 5 years ago, now over 30companies are chasing unconventional gasopportunities.

The BP Gulf of Mexico oil spilland its consequences

It has been several months since the TransoceanLtd. Deepwater Horizon oil rig exploded on April2010, killing 11 workers and unleashing a torrent ofcrude oil into the Gulf of Mexico: termed by manyas the worst environmental disaster to ever occurin the United States. President Obama evenextended a ban on new deepwater permits andexploration in the Alaskan Arctic for six monthsfollowing the accident. It is a couple of weeks sinceBP eventually succeeded in capping and pluggingthe oil flow and attention has now moved toassessing the permanent damage above, andmore importantly, below the surface of the Gulf ofMexico.

While BP has adequate liquidity and financialheadroom to meet the immediate costs of theclean-up exercise and initial compensation

payments, it is still too early to estimate with anydegree of confidence, the full future impact on BPfrom the spill. The causes of the incident will be thesubject of litigation involving the wells owners andvarious contractors, and will take several years toplay out. The effectiveness of BPs actions tomitigate the environmental impact of the spill will beimportant in the final assessment of the incidentand in minimizing any long-term reputational andfinancial damage to BP.

But what about the rest of the oil & gas industrywho depend on the Gulf of Mexico for theirsuccess? Although many companies say it is tooearly to predict their damages, it is clear thatcompanies are bracing for a variety of losses.There is wide spread expectation that the spillcould prompt new regulations, with unpredictableresults. It is too early to tell how governmentagencies will respond to the incident in detail, andwhether changes in laws and regulationsconcerning operations in the Gulf of Mexico are

forthcoming, including the ability to obtain drillingpermits. However, it seems very likely, that in lightof recent calls from government officials andfederal agencies for increased inspections of deep-water drilling operations in the Gulf, together with apotential extension of the moratorium thatsubstantial cost increases and delays in offshoreexploration can be expected. Stricter regulationmay add $5 a barrel to long-term oil contracts,according to Deutsche Bank, while a one-yearworldwide delay in deepwater drilling may cut asmuch as 500,000 barrels a day from 2013 supplylevels, according to Bernstein analysts.


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Another aspect will be a general increase ininsurance premiums for offshore operations,potentially leading to increased difficulties for theindustry in obtaining insurance coverage oneconomically manageable terms. What is muchmore difficult to assess is the indirect impact thisincident will have on the overall role of oil, and to alesser extent gas, in the energy mix of the UnitedStates and globally. It is undoubtedly true thatsignificant reputational damage has been suffered,not only by BP, but by the oil industry as such. Itlooks likely to become an iconic event, atouchstone and rallying flag for opposition to the oilindustry across a wide series of fronts and issuesfor years to come.


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Key messages from WECStudies (2008-2010 study cycle)

In addition to reviewing the potential impact onenergy from recent external events, the keymessages of in-house WEC studies were reviewedand are listed below:

Pursuing Sustainability: 2010 Assessmentof country energy and climate policies

The scale and complexity of the energysustainability challenge is increasing. This in turn,has constrained the pursuit of energysustainability measures.

The adoption of the environmental agenda ispatchy across OECD countries, while in non-OECD countries, the take-up is still in earlystages.

Unstable market conditions and national prioritieshave lent themselves to increasing volatility inpolicymaking and policy implementation.

Water for Energy

Agricultural practices and measures are placingstress on the supply of useable water. This willimpact the needs of energy production andconversion.

Increasingly attractive unconventional sources ofenergy (shale gas, oil sands) have a large waterfootprint. Policy makers must ensure adequatewater reserves for maintaining current levels ofhuman activity before committing tounconventional energy projects.

Asia represents the greatest challenge for waterplanners, with its growing population which isembarked on a path of industrialisation. Thepotential for hydropower is untapped in manyareas and should be explored.

Biofuels:Policies, Standards and Technologies

The impact of biofuels on world agriculture needsto be examined in a holistic light. The UNFAOestimated that in 2008, biofuels accounted forapproximately 10% of the food price increases.Other factors like poor agricultural management,distorted agricultural markets, and lack ofproduction and investment capacity havedetrimentally affected the world food situation.

Although land devoted to fuel production couldreduce land available for food cultivation, secondgeneration biofuels, viz. lignocellulosics, whichare based on the conversion of cellulosicresources like grasses, sawdust and fast growingtrees will diminish the requirement for arable land

dedication.

Biofuels cannot transform the transportationsector by themselves. Broader measures will beneeded to transform the transport sector.

Energy and Urban Innovation

Rapid urbanisation is taking place around theworld. In the next 20 years, the equivalent ofseven cities with 10 million people will be addedeach year.

In spite of mature technical solutions which cancombat the negative effects of uncontrolledurbanisation, consideration needs to be given to

Section V Messages and theirsignificance


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building stock, climate, urban shape, culturalbehaviour, and financing possibilities.

Subsidies for the poor have to be subsidised fora long time if access rates to urban services areto improve.

Logistics bottlenecks

From a logistics point of view, the most importantfuels are those whose volumes need to betransported over long distances, viz. coal, oil, and

gas. These three fuels in terms of total volumecarried will dominate through to 2050.

Of critical importance, is the proper managementof oil movement, natural gas and LNGmovement, and electricity movement. It isimperative that significant investments should bemade in infrastructure, e.g. oil/gas pipelines,tanker networks, and smart grids. The figuresshow an average annual outlay of $21.4 billion.

Significance of external/internalmessages to WECMany implications and indicators from the smallsample of external headline events reviewed andmany messages from current WEC studies point toa period of high uncertainty, and potentialtransformation for parts of the energy space.Economic, political and social events are unfoldingthat will impact energy in ways we cannot easilypredict. If one also takes into account the expectedrapid diffusion of technology in areas like energy

efficiency gains or renewable energies, it morethan anything else, stresses the need to take afresh look at the critical uncertainties we face in the

pursuit of supplying energy in a sustainable way topopulations worldwide. The new WEC scenariosexercise will be an important tool, allowing us toshed new light on how to navigate the rapids of thecoming years.

It is the stated intention of the scenario project toprovide strong regional perspectives in close co-operation with the relevant WEC membercommittees, for example, to take note of thesuggestions 12 received from WEC MemberCommittees with regard to focus areas, viz. energyand mobility Sweden, Switzerland, Romania,Austria, Argentina; sustainable biomasstechnologies Brazil; effect of the economic crisis

South Africa.

Finally, it is hoped that this new energy scenarioswork will provoke and stimulate debate anddiscussion around emerging uncertainties and thepotential solutions for meeting the energy demandsof the world in a sustainable manner.

12 Studies Committee Report, Beijing 2010

For more information, please contactPhilip Thomas, Project Manager (Scenarios) [email protected]


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AlbaniaAlgeriaArgentinaAustraliaAustriaBelgiumBotswanaBrazilBulgariaCameroonCanadaChinaColombiaCongo (DemocraticRepublic)Cte d'IvoireCroatiaCyprusCzech RepublicDenmarkEgypt (Arab Republic)EstoniaEthiopiaFinlandFranceGermanyGhanaGreeceHong Kong, China

HungaryIcelandIndia

IndonesiaIran (Islamic Republic)IrelandIsraelItalyJapanJordanKazakhstanKenyaKorea (Rep.)KuwaitLatviaLebanonLibya/GSPLAJLithuaniaLuxembourgMacedonia (Republic)Mexico

MonacoMongoliaMoroccoNamibiaNepalNetherlandsNew ZealandNigerNigeriaNorwayPakistan

ParaguayPeruPhilippines

PolandPortugalQatarRomaniaRussian FederationSaudi ArabiaSenegalSerbiaSlovakiaSloveniaSouth AfricaSpainSri LankaSwazilandSwedenSwitzerlandSyria (Arab Republic)Taiwan, China

TajikistanTanzaniaThailandTrinidad & TobagoTunisiaTurkeyUkraineUnited Arab EmiratesUnited KingdomUnited StatesUruguay

Yemen

Member Committees of the World Energy Council


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scenarios white paper 2010

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