The roundtable debate opened at London’s ESCP Business School and Research Centre for Energy Management (RCEM) on Monday 17th February.

 

Academics and experts discussed to what extent the previous mistakes can be a stimulus for new models better designed to forecast supply and demand. “In the past, we have always been wrong,” said Dr Patrick Gougeon.  “Yes, uncertainty is a challenge, but we need to make some scenarios. Models and predictions based on information available at a time t, even if it’s not 100% accurate, can help energy policymakers and watchdogs to assess the risks in each country and therefore make valuable investment decisions," answered the organizer of the conference, Valsios Voudouris.

 

 

Indeed, urgent decisions need to be made over the energy related infrastructure projects across Europe. According to Dr Voudouris, countries are lacking gas and electricity connections in order to achieve a single European market. He went on to say, ‘I don’t see any obstacles arising by 2035 in terms of natural gas supply. I believe we’ll be able to meet these demands at a global level, with less dependence on the Middle East’s supply.’ However, Dr Voudouris illuminated that there are some supply access inequalities and unbalances at regional levels. This is because not enough investors are participating in qualitative gas infrastructure development. Investigating the current infrastructure landscape, depressed economies such as Greece, Italy, Spain and Portugal need priority investments.

 

On 14 October 2013, the European Commission has allocated a €5.85 billion funding budget for a list of 248 qualified key energy infrastructure ‘projects of common interest’, including gas infrastructure projects. Dr Voudouris argued that there is a serious need for a central pipeline network in these southern Mediterranean countries. ‘We need to think of connecting Western Europe with Southern Europe through Serbia and Croatia.’

 

Recently new gas producers in the East Mediterranean regions have sprung forth including Cyprus, Syria, Lebanon,Israel and Egypt. These countries feel under pressure to boost domestic natural gas discoveries before natural gas prices fall further. A study from the US Energy Information Administration (EIA) published in August 2013 underlined the investment needed for these countries with the assumption of an expected 32% population growth between 2012 and 2030. However, these countries represent less than 1% of the world’s total proven reserves of oil and gas.

 

 

Dr Voudouris discussed how important technology is in the process of forecasting energy demand and supply, but that it should not be overvalued in the forecast models. His intervention opened the door to the discussion of recent papers about the gas markets.

 

John V. Mitchell and Beth Mitchell, in their paper Structural Crisis in the Oil and Gas Industry, presented at the roundtable, said that the natural gas industry has been restructured on new discoveries, especially in North America, but at the regional level, markets remain isolated on high transport costs and varying pricing systems.

 

One participant under the Chatham House rule (participants are free to use the information received, but cannot reveal the identity of certain speakers) commented on the limit of fracking activity, ‘By 2016-2017 the available space for drilling will be saturated.’  According to the drilling industry, in 2009 the US counted more than 493,000 active natural-gas wells, almost twice the number of wells in 1990.

 

Christophe McGlade and Paul Ekin in their paper Un-burnable Oil: An Examination of Oil Resource Utilisation in a Decarbonised Energy System suggest that forecasters should consider the maximum amount of oil that can be burnt and therefore used, which in turn limits oil production. This is because of the low-carbon energy restriction. According to their paper,  without considering the carbon capture and storage (CCS) development, about 600 billion barrels of existing 2P oil reserve could remain unused by 2035.

 

 

The conventional model of economic growth considers that there are three main factors of production: labour, capital and useful energy. However, the cost share of useful energy, which represents about 4%, should increase as a pre-condition for economic growth in the 21st century. This was discussed in the paper by Robert Ayes and Vlasios Voudouris, who also pointed to a lack of linear relationship between capital, labour and useful energy in economic growth measurement. Perhaps economists should revisit their theory and reconsider the impact of energy when evaluating economic growth.

 

In this context, an expert commented on energy prices in Europe, which will never be the same as in the US according to him: ‘North Dakota is flaring 1/3 of their gas. They are wasting energy because gas is so cheap. It’s five times cheaper [than in Europe].’ Energy efficiency is a key context, especially in Europe where flaring and other kind of wastes would be unconceivable.

 

High energy prices in general don’t come without risks. According to one panellist, energy could deeply impact on the aerospace industry. And these ripple effects are clear signs of structural problems. More specifically, the speaker stated that if in the future oil prices reach $200/barrel, it would be the end of the aerospace industry. This is because they are so heavily reliant on fuel oil. He added, ‘The transport sector is driving the energy business. If the transport sector cannot afford to pay for its energy, then there is a problem.’

 

On the gas price issue, Jonathan Stern, from Oxford Institute for Energy Studies, argued that the problem is not the price level (whether cheap or expensive) but is in fact a problem of the price mechanism, which needs to be updated. ‘There is a gap between the evolving economic fundamentals, and the traditional price mechanism. In Europe, price mechanisms have slowly evolved into hub pricing for the last five years, whilst in Asia it might take a minimum of ten years.’

 

One participant said that energy economics can be measured in terms of strategic competitive advantage. Successful companies will have a strategic competitive advantage based on energy cost and quality. These companies will measure the impact of their business’ energy savings and will then assess this economic benefit compared with their competitors.

 

‘Germany is the country which takes more national economic risks by decommissioning nuclear plants and by investing totally in renewables’, stated Dr Voudouris on the side of the roundtable. ‘If ever the German model succeeds, it will bring a new energy economic model to Europe. 

 

 

Key challenges also lie in the fact that data from certain countries is so difficult to obtain. ‘I have given up trying to predict oil prices,’ said a panellist, blaming the lack of transparency in the oil and gas industry. ‘Outside of North America, information on international gas prices is still difficult to obtain through the public domain’, agreed Stern.

 

The line between conventional and unconventional oil and gas exploration and production is being pushed. As a consequence of this, the relevance of Peak Oil is frequently discussed by experts who consider technological advancements as the solution to increase energy supply. A panellist said that the data used to support these beliefs is too optimistic and therefore unreliable; there is still an urgent need to respond to decreasing supplies.

 

For certain countries, information is a state secret. ‘It is impossible to get real data when it is needed. Therefore we have to estimate,’ commented Voudouris.

 

 

There was general agreement among the fifty oil and gas professionals at the roundtable that the main hurdle for forecasters on energy policy was the human factor. Human behaviour is as complex as it is unpredictable. Not only can people slow down reform process, they are not necessarily ready to give up their lifestyle for the sake of energy savings. They also make decisions driven by emotions. Leaving some margin for error in energy predictions is key. Stern highlighted the idea that current energy predictions rely too much on maths and not enough on behavioural studies.

 

‘What’s happened recently in the US [shale gas discovery and lower energy prices] is not going to spread to Europe because there are political constraints,’ said Justin-Damien Guenette, co-author of A Blessing in Disguise: The Implications of High Global Oil Prices for the North American Market. ‘Nobody can predict what will happen in the energy field in twenty, ten or even five years because of the human factor,’ Dr Gougeon concluded.

 

Will energy costs, technology or human behaviour drive energy prices in the 21st century? Dr Voudouris acknowledged that there may be disagreements about fundamental inputs when making predictions, ‘We need to respect  the uncertainty in the forecasts, despite the frustrations they might cause. Hence, we need to capture this uncertainty when designing a model.’

 LR