February 14, 2012
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№ 11 (November 2011)

Global Energy 2012: Deloitte’s View

   Without any doubt, the world today is feeling the pinch of global energy resource shortages, while those available are distributed very unevenly. This urgent problem was the theme of the UN-sponsored “Sustainable Energy for All” international conference that opened in Oslo, Norway on October 10.

By Elena Rubinova, Vasily Beilin

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   While energy resources are, indeed, in short supply, the world has no shortage of all manner of predictions and scenarios for the future of the global energy sector. While some try to look far into the coming decades and paint brave, and sometimes futuristic, pictures of global energy transformed, others address that which is of immediate concern to people today and formulate shorter-term and articulate forecasts and assessments. At a recent presentation in Moscow, Deloitte Touche Tohmatsu Limited, an international audit, tax and consulting company announced the launch of its third energy predictions report.
Energy industry predictions are developed by numerous organizations and institutes of various statuses. For instance, each year in November, the International Energy Agency (IEA) publishes its own global energy report with forecasts made. Among the more respected are also the analytical studies prepared by such major regional and industry-wide players as the International Atomic Energy Agency (IAEA) and the U.S. Energy Information Administration (EIA).

   It should be said, however, that the major international business players in the energy industry are not overly inclined to trust the others’ opinions concerning the global development trends in that sector and have long since engaged in making their own predictions and assessments of the supply and demand trends in the field of energy commodities. For instance, last spring, the Shell Corporation published its analytical survey of global energy trends up to the year 2050 under a symbolic title “Signals and Signposts”. While very few companies themselves engage in such in-depth research and investigation, the near-term outlook and possible practical conclusions are of profound interest to practically all of the market players, without exception.

   That is exactly why Deloitte which provides consulting and advisory services in more than 150 countries, for a third year running now, has presented its forecast of the global energy development trends for the next year. The forecast made by Deloitte is both practical and specific, given that the company’s main objective has always been to help its main clients, the investors and businessmen, better to orient themselves in the rapidly changing global energy market. Deloitte’s Carl Hughes, Global Head, Energy & Resources said, “This year, our conclusions are somewhat broader than they used to be in the past. More precisely, we are looking at what has been taking place from a somewhat unusual angle of view in order to select the processes that are bound, slowly but surely, to impact the energy sector.”

   That is exactly why the company’s research findings are not so much forecasts, per se, as analyses of some of the processes that are not so obvious to see, at first sight. The company’s just released report lists ten such trends and phenomena, with five of them dealing directly with the oil and gas sector.
According to Deloitte’s analysts, in the past 50 years or so, the predominant model of a typical  company was a vertically-integrated corporation. This model has served the industry well but, given the current high oil prices some and the desire to look for new development opportunities, some corporations are now challenging the status quo by splitting their upstream and downstream operations into separate units. Such structural changes are already taking place and there is a great likelihood that, in the next two to three years, such splits or demergers will occur in a number of major oil corporations. By splitting up their assets, the companies most affected by the recent financial crisis could, among other things, create additional value, given that some of the newly demerged units may be worth more than the whole of the old company being split up in the process. ConocoPhillips was one such corporation that announced its plans to split up its business into two independent companies, one dealing with its upstream and the other with its downstream operations. The U.S. oil giant is planning to complete its restructuring in the first half of 2012.

   Deloitte’s analysts’ assessments concerning the current trends in the global gas market proved to be no of surprise and mostly concurred with predictions made by other observers and experts. “It is quite obvious that we are steadily moving toward the ‘Golden Age of Gas’, both natural and non-conventional. What will accelerate those processes, in particular, will be the markets of India, China, Central Europe and Britain,” said Carl Hughes presenting that chapter of the report.

   The CIS gas market will not be an exception. Russell Banham, Deloitte’s CIS Industry Leader for Energy & Resources, said “The ever growing importance of gas and other mineral resources should keep the region at the forefront of the international energy and resources markets and could even act as a protection mechanism for the CIS against the possibility of a double dip recession.” According to the report, gas will become the fuel of choice for several reasons: tightening environmental regulations, expectations of ample supply at competitive prices, and the need to back up intermittent renewable sources such as wind and solar to ensure reliability.

   The report singles out, as a separate new trend, the still developing but highly promising technology of solar-enhanced oil recovery (SeOR). Deloitte’s experts believe that SeOR has the potential of revolutionizing enhanced oil recovery due to the low estimated cost of glasshouses and the price of producing steam. The new technology is expected to show the most promise in areas where there is an abundance of sunlight and oil is heavy in nature. That is exactly why Coalinga Field, with exactly that type of oil in place, has been chosen by Chevron as the site of its pilot project in the use of that technology. By increasing the field potential through steam injection which preheats crude oil, the company reduces its viscosity and simplifies the production process. The project should help evaluate the commercial viability of using solar energy for steam generation.
The analysts have also noted the various geopolitical risks of which the oil companies have seen plenty in the past year and which could pose a serious problem in the future. In a separate report chapter titled “Who owns the Arctic and the South China Sea?” the study addresses the issues dealing with exploration in areas without well-defined borders. Nevertheless, the report suggests that, whilst there are risks to establishing operations in these areas, the potential rewards could be immense.

   Concerning the oil field services, based on 40 Deloitte interviews with executives of offshore  companies, the report predicts that the complexity of the offshore value chain will continue to grow substantially in the next decade and increasing complexity may very well trigger a new round of industry consolidation. The report outlines four factors that it suggests will drive this trend.

   The report’s other sections deal with the more general technology development processes and how those indirectly impact the energy sector. Mark Robinson, Deloitte US, Market and Communications for Energy, speaking at the report launching session in Moscow, addressed the issue of coming energy breakthroughs using nanotechnologies. The report suggests that their impact will be far-reaching, predicting a $1 trillion global market for nanoproducts over the next 10 to 15 years, with major implications for the energy sector. Roof-top solar panels could become obsolete simply by converting sunlight into electricity via a paint-like substance that can be sprayed on rooftops. Researchers have already proven that nanocrystals could be as efficient as the most expensive solar cells, for a fraction of the cost.

   With a view to identifying possible developments in 2012, the report’s authors also examined two other important trends developing in the past year. All energy companies have, for a long time now, tried to reduce the corporate water footprint. According to Deloitte’s experts, now is the time for the next “tipping point” for energy companies in terms of reducing their corporate water footprint. To date, 147 of the world’s leading companies have submitted their corporate water footprint reports as part of the international water information disclosure project. Deloitte’s analysts believe that this is only the beginning of a new phase in streamlining corporate practices with a view to optimizing the consumption of water resources.

   The International Energy Agency (IEA) presented its next annual report World Energy Outlook 2011 first in London and then, on November 11, at Moscow Energy School in Skolkovo, thus emphasizing Russia’s growing importance on the global energy market.

   The New Policies Scenario, which constitutes the WEO report’s main part, addresses all principal energy resources and provides key forecasts through the year 2035. “Growth, prosperity and rising population will inevitably push up energy needs over the coming decades” said IEA Executive Director Maria van der Hoeven presenting the report in Moscow. “Short-term pressures on oil markets are easing with the economic slowdown and the expected return of Libyan supply,” the report suggested.  The expected average oil price would remain high, approaching $120/barrel (in year-2010 dollars) in 2035. Oil demand would rise from 87 million barrels per day in 2010 to 99 million barrels per day in 2035, with all the net growth coming from the transport sector in emerging economies.

   A special in-depth study in WEO-2011 examines Russia, with the report seeing it as one country set to benefit most from increased demand for gas in what most experts see as the world entering a “Golden Age of Gas”, with the share of unconventional gas in the total natural gas production rising to one-fifth by the year 2035. According to the report, key challenges for Russia are to finance a new generation of higher-cost oil and gas fields and to improve its energy efficiency. Russia’s shift in its fossil fuel exports towards China and the Asia-Pacific gathering momentum is seen in the report as an important strategic trend.

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