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THE FUEL CONTINUUM Shaping policy to ensure seamless fuel supply continuity  Richard K Shepherd and Maarten van Mourik 2020 ENERGY

Summary Oil squeeze threatens fuel continuum World oil supply faces a capacity squeeze within five years and a long term downturn within a decade Most energy planning assumes no downturn before 2030 Most alternative fuel options cannot achieve the scale for a global transport fuel continuum within two decades Therefore energy security demands the use of liquids that can fuel the current transport infrastructure within a decade Only alcohol fuels and bio-diesels can achieve that goal Key strategy is to manage gas for highest value markets

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Ground rules for new energy evaluation To impact the energy market in 2015, any new fuel or power source must be LARGE SCALE AND SOON Fuel cells, hydrogen and  many other options can make NO significant  impact  before 2020. The key issues are SCALE, TIMING and PROFIT Remember, big new technologies always bring large numbers of business failures because of technical risk, competition and changing markets Significant energy market changes must use current manufacturing and distribution infrastructure

FUEL SUPPLY the determining factors Nature: are the resources there? Technology: can we get at them? Scale: can we make a difference? Timing: before it’s too late Economics: where are best profits? Policy: what’s best for the people? Availability issues Incentive issues

FUEL DEMAND the determining factors Population = Consumers Wealth = Appetite Technology = Efficiency Infrastructure = Access Price = Choice Determines volume potential Determines limits to potential

Energy players and their conflicting duties

Hydrocarbons will peak soon Even if unconventional supplies do soften the blow Beyond oil from the Persian Gulf and FSU, most or all growth in liquid hydrocarbons demand can and will be met from gas liquids, alcohols or deep water oil rather than from conventional crude oil While liquids from gas can grow further with current fuels and new GTL technologies, some alternative oil is costly, risky and uncertain An orderly transition to new energies will be too little, too late because of huge existing industrial and distribution infrastructure Evolutionary transportation fuels are a large scale, viable, accessible option right now Change comes easiest in response to crisis rather than reason, but is not the planners’ best option

All hydrocarbons production  2002 Base Case scenario by Colin Campbell of ASPO

OIL SUPPLY RISKS Once demand gets going again, new oil must come mainly from the Persian Gulf, the FSU or deep water Oil supply delays mean high prices and high spending Field by field “bottom-up” research suggests, any or all 3 sources may deliver too little too late to balance demand Deep water is already late and cannot compensate for decline in old fields outside Persian Gulf The Persian Gulf has the oil but new capacity cannot keep pace with new demand and old oil The heralded Russian oil recovery may not last long

Deep water production potential slips back Impeded by equipment markets, economics and ownership

THE PERSIAN GULF ……. almost all new growth must come  from here and perhaps the FSU

US oil production and imports Crude oil and condensates

Energy dependence grows again ….so policy initiatives will be well received Both old worlds and new worlds are swinging into severe imported energy dependence, especially for oil and particularly for transportation fuels But slower economic growth and slower oil demand opens a time window for vigorous new energy policies, especially in nations with high consumer fuel prices and a fuel tax share of +/- 80% of pump price Good policy is the art of the possible, not of wishful thinking

NO CHANGE IN POLICY MEANS CAPACITY SQUEEZE BY 2007-9 A probable oil supply scenario derived from “bottom-up” modelling Oil production capacity expansion in the Persian Gulf cannot physically grow fast enough 2010 through 2020 But decline will accelerate elsewhere except FSU Remaining non-OPEC growth prospects are fragile A global capacity squeeze arrives by 2007-8 if oil demand resumes a 1.5-2.0% growth rate during 2004-2006 Without policy change, high oil prices follow for 3-5 years Capacity expands by 2012, briefly allowing softer prices Another price spike risk after 2015, much longer this time

Demand growth slows with GDP …..and could do so for the long term if we want it enough The opportunity for flexible fuel energy policy is enhanced by slower demand growth because there is more time to act Economic growth in the “old” economies (Europe and Japan) still leaves oil demand growth at virtually zero Yet the global automotive market still grows yearly Mature market fuel growth can be curbed by simple and current fuel efficiency policies, within reach of everybody It takes very small policy adjustments to reduce oil demand, without damaging economic growth But most policy changes come through reaction to crisis

Economic growth drives global oil demand ….but not in mature old world economies

FUEL THIRSTY NEW WORLD Fuel demand and oil supply may go separate ways from 2010

The liquid fuel continuum We CAN reduce dependence on crude oil for liquid fuels There is NO global shortage of energy, only an absence of far-sighted and courageous state policies The major and ONLY medium term energy bottleneck is for liquid transportation fuels The energy supply threat is not primarily from resource shortage, nor technology, nor economics, but from vested and valid commercial and financial interests Liquid fuel supply CAN grow without changes to transport manufacturing and distribution infrastructure Demand will later level out worldwide as it has in Europe

The gas economy Dry gas is hard to move, still hidden or locked up in coal

GAS: The wasted resource FLARED GAS: We burn the equivalent of nearly 3 million barrels of oil a day as waste STRANDED GAS: Much of the world’s gas resource is out of reach of the market POWER: About 40% of all new power generation capacity 2000-2030 will burn the natural gas we badly need for other uses USA: The world’s largest energy market is running out of gas now WAKE UP

Time for big oil to switch to gas Oil companies cannot grow from oil production

Gas as liquid fuel Concentrate on the early, large scale applications Outside the USA, there is no early gas supply threat and much wasted production or unused reserves There are many routes to convert methane to liquid fuel from methanol through GTL technologies There are also many abundant resources for electrical power generation, so use gas to resolve the transportation fuel shortfall The key enabling factors are use of existing automotive and distribution infrastructures tax incentives applied through energy policy A fuel continuum with no apparent switchover

The liquid fuel economy No one moves without them The old liquids the real expansion is not in conventional crude oil supply but in various gas liquids and unconventional oil Natural gas liquids (NGL) Liquids from gas plants (LGP) Liquefied petroleum gases (LPG) Liquefied natural gas (LNG) The new liquids There plenty of other liquid fuels. Share is a matter of policy and commercial strategy, not just technology Methanol from gas Ethanol from biomass Coal liquefaction to M Hydrogen fuel Biodiesels Gas to liquids (GTL)

The automotive fuel solution No change to infrastructure is necessary to achieve major and early crude demand savings Methanol is well to wheel cost competitive with gasoline and diesel, probably cheaper over next 10-20 years Gasoline blending with ethanol and methanol works well Most current gasoline engines can tolerate a 10% methanol content without any modification Modern electronic engine management systems can enable varying fuel blends and variable calorific values +/-20% Diesel engines will burn bio-diesels or methanol easily THERE IS NO BARRIER TO PRODUCTION OR DISTRIBUTION OF THESE FUELS EXCEPT CAPACITY AND VESTED COMMERCIAL INTEREST An automotive fuel continuum is viable, immediate policy

BARRIERS/INCENTIVES FOR ALCOHOL FUELS The possible must be enhanced by the profitable 1. Feedstock 2. Cost 3. Capacity 4. Interchangeability 5. Delivery 6. Industry incentive 7. Consumer incentive 8. Policy 1. Abundant gas for methanol, agri-feedstock for ethanol, coal for the brave 2. Broadly gasoline equivalent outside the USA 3. Four year lead time, 10-15 year build-up 4. Gasoline and diesel mix or swap using same engines 5. Existing filling station network 6. None without tax break for current players, but opportunity for new investment players 7. Tax-enabled price break like French diesel 8. Energy supply security, investment can enable bold policy initiative with green packaging

Brazil’s alcohol fuel test: We can do it if we try

The transportation fuel challenge It is possible to relieve 10% of transportation fuel demand growth by 2020 assuming policy decisions on alcohol fuel blending soon Fuel taxation and other efficiency policies could remove at least another 10% of demand

The fuel gap Alcohols and synthetics have the scale and timing to fill it

Methanol An acorn that needs to be a mighty oak We need to replace at least 10% of transport fuel demand by 2020 to make a significant difference or 5 Mbdoe World methanol capacity is tiny in oil supply terms It would take one half of currently committed global capacity just to satisfy 3% of European transport fuel demand in 2010 (the allowable methanol content now) A fivefold capacity hike is needed to meet 10% of transport fuel demand ex-USA ten years from now or 225 million tonnes of new annual production capacity An investment of about $7 billion for 3 Mbdoe

World methanol capacity has far to go  Needs to grow at least fivefold in a decade

The hydrogen economy “Hydrogen will displace fossil fuels as the blood of our future energy infrastructure” Amory Lovins, Rocky Mountain Institute

High on hydrogen Nobody now in today’s energy business is threatened by hydrogen fuel switching if it is still 20 years away Nice work for researchers on fuel cells , but no payback for today’s investors Next generation nuclear power is needed first to shift valuable gas away from power markets Coal liquefaction and coal methane are big goals too Hydrogen is beautiful but remote, a next generation fuel source like fast breeder reactors, hydrates and oil shales

The fuel continuum Same transport infrastructure, evolving fuel mix

Money will follow policy, fast Oil companies are ready for switch to gas Policy is the catalyst, but the driver is money Oil companies are making a strategic investment shift to gas, already well under way Because returns on oil are weaker, investment lags They will stay in the transport fuel business They will choose the most profitable option Methanol fuel offers scale, profit and early returns Once begun, the trend will be large scale

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2020ENERGY