Hart Energy Publishing

CERAWeek: Big opportunities, big challenges

China, Russia, and the Middle East will be key energy players going forward.

By Rhonda Duey, Senior Editor
March 9, 2010
Word Count: 919
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Three of the world’s most prolific provinces will face some tough decisions in the future, according to a panel of experts speaking at CERAWeek 2010 Energy Conference in Houston.

During a session on world drivers, Xizhou Zhou, an IHS CERA associate, and Thane Gustafson and Bhushan Bahree, both senior directors, discussed the challenges and opportunities in China, Russia, and the Middle East over the next several decades.

Zhou talked about Asia but focused primarily on China. “It’s a new demand center,” he said. “That’s the biggest story today, and I believe that will continue to be the case.”

To feed the gaping maw that is energy demand in China will require all forms of energy, not just oil, gas, and coal. The country’s indigenous resources will not be enough.

The key drivers behind the demand increase, he said, are income and urbanization. “If you move people into urban areas, they consume energy like an urbanite,” he said. “That will increase the demand for infrastructure.”

To give an idea of the kind of effect Chinese energy demand has on the global mix, Zhou said that total energy demand has doubled over the past 35 years, and China is responsible for one-fourth of that demand growth.

Right now the country’s economy is being fueled by coal, a vast resource there, but recently it has been importing even that fossil fuel from other sources. Oil, gas, hydroelectric, and nuclear sources are also going to be needed.

At the same time that demand is growing, China is also attempting to curb its CO2 emissions. It’s already the world’s largest wind generator and supplies one-third of the world’s solar photovoltaic panels.

Russia

Russia has had its share of ups and downs, said Gustafson, and its economy has crashed three times in the last 30 years. “Nothing concentrates the mind like going broke,” he said. The crash of the 1980s saw the country move to a private market economy. The crash of 1998 caused the government to adopt new policies. This recession is likely to cause Russia to modernize and diversify, he said.

“They need to get away from a one-crop economy,” Gustafson said. “They are dependent on hydrocarbons. They need to move toward a value-added economy.

“But it’s hard for them to outrun their past or their fate.”

His prediction is that, despite the “sincere efforts” of Russian leadership, the country will still be dependent on hydrocarbons in 2030. To meet its demand, it will have to change a few things about the way it does business.

First of all, it will need to better handle foreign investments. “Money rolls into Russia and rolls right back out,” he said. Secondly, it will have to take advantage of the value of its hydrocarbon reserves in the face of stiff competition, particularly from China. Already, he said, the two countries’ oil service industries are competing, and Chinese rigs are moving into Russia.

Finally, the Soviet-era legacy is ending, meaning that cheap production will soon be a thing of the past. “The next generation of Russia’s oil and gas industry will be more expensive,” he said.

Developing these new fields will require the country to partner with foreign companies, and the willingness of those companies to partner will depend on government policy, which currently restricts foreign investment. It would also be in Russia’s best interest to partner not just with majors but with smaller companies that are adept at revitalizing older fields.

“The country could produce 8 MMbo/d indefinitely,” Gustafson said. “But their policies will have to change.”

Middle East

While most Middle Eastern countries have bountiful reserves, they might find their OPEC quotas being squeezed once Iraq begins producing its potential.

That, of course, depends on the results of the latest election, said Bahree. But whichever party wins “must be decisive in how their oil policy plan progresses,” he said.

He added that many OPEC countries have the potential to increase their supply and production capacity but that quotas hold them back. With Iraq needing a bigger share of the limited pie, this could cause discord within the organization.

The country has enormous potential. Bahree said that of all of the OPEC countries, Iraq has been a “laggard” but that there’s no geological reason for that. The country’s outlook for production capacity is about 11 to 12 MMbo/d in six to seven years, but Bahree said that “seems very optimistic.” His prediction is that Iraq will be producing 6 MMbo/d by 2020 and 8 MMbo/d by 2025.

Saudi Arabia has considerable unused capacity, he said, and if Iraq’s production rises, it could be a problem. However, if demand increases, it’s possible that OPEC will raise its quotas.

“The timing is important,” he said.

By 2020, he added, much of the oil produced in the Middle East will be consumed in the Middle East. “It will be interesting to see if the big members of OPEC have the potential to exploit more oil or higher prices,” he said.

Currently North America, Europe, and Asia are the main sources of investment dollars in the region, and there are unlikely to be any financial constraints going forward. However, these countries will face choices when it comes to how that money is used. For instance, “going green” will require investment in nuclear power plans or renewables, which are very capital-intensive compared to gas- or coal-fired generation. “There’s a lot of capital, but there are competing uses,” Bahree said.

CERAWeek runs through March 12 at the Hilton Americas Hotel in Houston.