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Dawn of the gas economy

THE UN has salvaged scraps of progress from the wreck of Copenhagen: 55 of its 194 member countries – including the US, China, India and the EU – say they'll meet voluntary national carbon emissions targets by 2020 (see p30).

But the December climate-change summit in the Danish capital was, broadly speaking, a failure and achieving substantial progress by the Mexico conference at the end of this year seems a tall order. Not only are governments struggling to establish a coherent international strategy for combating rising greenhouse-gas emissions, but the status of the climate-change debate is under threat from a swelling chorus of doubters and wasn't helped by last month's resignation by Yvo de Boer as executive secretary of the UN Framework Convention on Climate Change.

Yet the oil industry and free markets may yet accomplish what politicians at Copenhagen couldn't – by making the world a gassier place.

There are robust environmental, strategic and economic reasons to reduce oil consumption. Assuming it's replaced by a less carbon-intensive alternative, it would reduce carbon-dioxide pollution. For importers, lowering oil consumption usually means reducing reliance on other countries; the US, where plenty of energy savings are to be had, is forthright in its desire to reduce its dependency on foreign oil suppliers to improve its energy security. Doing so would also strengthen its economy.

The foreign-oil rhetoric – as Opec secretary-general Abdalla El-Badri points out (see p4) – is old hat. "I've been hearing this since President Nixon," he says. And experience shows that climate objectives usually fizzle away when governments have economic ones to consider. In addition, oil has long been affordable – historically, considering what it can do for you, it has been an absolute bargain – and hasn't caused enough sustained financial pain to force a permanent, structural change in the way energy is consumed.

But this may be changing. Oil prices are high by historical standards, even though Opec has a fluffy 6m-7m barrels a day (b/d) spare-capacity cushion.

The cartel sounds a little worried about the demand outlook. In order to justify the upstream investments required to bring new production capacity on stream, it needs greater assurance that the market will be there in the future, says El-Badri. Demand for Opec crude in 2020 could reach 37m b/d, compared with 28.8m b/d now, the organisation says. But it also frets that it may not rise any higher than 29m b/d. That amounts to considerable uncertainty.

Its concern is warranted. There is evidence that oil-demand erosion has already begun and that a structural change in oil consumption is occurring, stressing conservation, alternative energy supply and energy efficiency. The OECD won't ever consume as much oil or products as it did in 2007, say the IEA and BP (see Figure 1). Some of the slack will be taken up by emerging economies – particularly China – but how much? Perhaps not enough for the big oil producers.

An oil-demand peak in the OECD is a compelling theory for two reasons. First, it is likely that a strong, sustained price signal encouraging conservation and alternative energy will prevail. Second, a realistic alternative – unconventional gas – has been established (ironically thanks to persistently high oil prices), presenting consumers with an attractive opportunity to cut carbon emissions and oil imports.

Some companies see the incipient unconventional-gas business as a revolutionary event in energy supply and have reacted accordingly. After spinning off its oil business last year, Canada's EnCana has reinvented itself as a pure gas company to capitalise on shale-gas prospects in North America (see p15). Canada's Talisman Energy, which is also rapidly expanding in the North America shale-gas sector, talks of unconventional gas as a "seismic transition". ExxonMobil has bet heavily on shale gas, with its recent $41bn acquisition of XTO Energy. Schlumberger is spending $11bn to acquire Smith Industries, partly because of Smith's exposure to the US shale-gas sector.

Getting gas into the mainstream of the US transportation system would have a significant effect on oil demand, halving US imports of oil from Opec members. Replicating the process outside North America could propel the global economy into the gas age.

Gasifying the US

Gasifying the US is a compelling idea for strategic, economic and environmental reasons, but it won't be easy: it's a long-term objective and one that will require considerable investment in infrastructure. And a phased approach. The industry will have to overcome resistance from coal-producing states, whose industries would be threatened by a rapidly growing gas sector – especially if, as unconventional gas producers want, the government introduces a carbon tax.

Like Opec, Russia, as another supplier of conventional hydrocarbons, is worried. Again, with good reason. Technology has, over the years, kept various energy crises at bay and has now repeated the trick with unconventional gas, not only making production possible, but lowering costs to levels that are competitive with conventional gas. It creates the conditions for a renaissance of private-sector energy companies, for which access to oil reserves had become a problem. They have a new dimension for growth – and one that could eventually weaken the influence of the mighty national oil companies.

Oil demand is being affected in other ways too. Expensive oil is encouraging conservation. In the US, in parallel with the development of non-oil energy sources, there is a growing emphasis on energy efficiency and conservation – battery optimisation, energy-efficient building materials, LED lighting, or software that tracks and manages energy used at home and in offices (see p40), for example.

And although the biofuels industry has suffered a setback because of the recession and the flawed UN Copenhagen meeting, there are signs that government support and improving economic conditions are reviving the influential US market. Again, it is a technology leap that will make the difference: the sector's viability would be greatly enhanced by progress with cellulosic processing, which enables the use of a much wider variety of plants – and more parts of them – to produce fuel than is possible with established biofuels (see p24).

If the West reduces its dependency on oil, garnering competitive advantages and economic efficiencies in the process, China would be likely to follow suit. The world could be in its biggest energy-transition phase since the start of the oil economy. 

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