Oil-Powered Ships could carry more fuel, were faster and could cover a larger patrol area. More so, the German Navy was fast catching up, both in quantity and quality. Among the debaters of the coal and oil camp was Winston Churchill, the First Sea Lord of Admiralty and a supporter of Oil. He argued strongly for the Introduction of Oil-powered engines and a move towards an Oil Navy. His detractors argued that there was little to no oil to be found with the British Isles. Among his supporters for the transition, a major concern was that the only source of oil for the Royal Navy was in Persia, separated from the British Fleet Home Bases by a thousand miles. In event of a looming war, it would become a logistical nightmare to supply the ships with oil, safely and securely. Churchill, however, dismissed all these concerns. Ships powered by Coal were being grossly outperformed in Fleet Readiness Exercises. An American Training Fleet powered by oil has just come out on top of a powerful Coal-Fired British Fleet in a training exercise, embarrassing the British Admiralty. The writing on the wall was clear. The future belonged to faster, more nimble ships which could only be possible with oil engines. But how could the mighty British Fleet rely on a single source of oil, that too thousands of miles away. Could the safety and certainty of oil be guaranteed? To this he said, “Safety and certainty in oil lie in variety and variety alone.” Diversification of Energy sources was the only way out of the dilemma. And those words hold true, even to this date.
Today, is Energy a luxury or a necessity?
India, a home to over 1.2 Billion People and counting, is one of the world’s largest economies and arguably the world’s fastest growing economy. Every year, a sizable chunk of the Indian Population is pulled up from the Below Poverty Line and becomes part of the world’s largest Middle Class Population. Incomes are rising, the economy is growing, workers migrate to the cities in search of work, shops open to cater to increasing number of customers, suburbs become the part of the cities and the Indian Juggernaut lumbers along. The Economists and the Financial Markets look towards India as one the drivers of the Global Economies and the undisputed hub of the Global Services Industry. But in the all the light, lays a gaping hole of darkness, something which has the potential to snuff out all the light and put an end to the Indian/global Growth. And that darkness is akin to dilemma that the Royal Navy faced over a century ago. To fuel the temples of Economic Growth, we need Energy and lots and lots of it. To build roads, provide electricity to the ever growing population, to pump clean water for drinking, to move commerce and food stuff, heck we even need energy to create fertilizers and irrigate fields to grow food. Energy has occupied the most important place in our lives. Energy is no longer a luxury but a necessity of Human Life now. A life with energy is impossible to imagine now.
The Dilemma of Energy Supply
While the demand for Energy continues to grow, Governments and Public Utilities struggle to find ways to cope with the supply-demand equation. Also, with the coming of the 21st century and the horrors it is foretold to bring if we do not become caring for the environment, there is a need to come up with cleaner and greener sources of Energy. India, like most other counties in the world, faces the same issues. How to supply a growing Population with the means for a bountiful living balancing it with supplying the adequate means for the economy to grow while having a next to no impact on the environment? The dilemma of the policy makers is palpable. James Schlesinger, who served as the first US energy secretary, once quipped that Americans have only two ways of thinking about energy: “complacency and panic.” We’ll agree with the sentiment and substitute the word “Americans” for “people” because very few people anywhere in the world think much about where their energy comes from? And the gargantuan swings in energy markets over the past couple of years illustrate Dr. Schlesinger’s basic point. Our foremost challenge today is the need to balance energy security, employment and economic growth with the issue of climate change. While it can be possible, but not without first acknowledging that the real problem lies above ground rather than beneath it. Getting the Policy mix right is the surest way to avoid the traps of complacency and panic. So what underpins energy security? What to do to ensure that the Energy always flows? Is there the need for an out of the box thinking? Maybe. But the solution remains the same as were the words of Churchill; only this time it would be “Safety and certainty of Energy Supply lie in variety and variety alone.”
Safety and certainty of Energy Supply lie in variety and variety alone
Reliable and affordable supplies of energy have laid the foundation for the world’s extraordinary economic progress to date. Coal fuelled power plants provide electricity for factories and mills. The patriotic fervor among the coal miners in the United States was very strong as they were right to believe that the coal mined by them made Steel and that if the Steel failed, the entire country would fail. Oil made faster travel and commerce possible. Famines and food panics have been gradually reduced as markets became interconnected and it become possible to buy and sell and move goods fast. Natural Gas has made cooking a delightful experience compared to the soot filed kitchens of the past. However, these bountiful sources were very taken for granted throughout much of the 20th century. But with the coming of the 21st century is that energy security and climate change have become the defining issues. They are most important components in a complex matrix with strategic, economic and environmental dimensions.
We need to look towards the future to find out what that lays ahead. BP’s projections suggest we’ll need around 45% more energy in 2030 than we what we can consume today – and double that by 2050. That’s the rough equivalent of adding today’s biggest energy user, United States nearly twice over to world energy demand, and meeting it will require an annual investment of more than $1 trillion a year, every year till 2050. The question is so how can we deliver on that demand sustainably? Let’s be clear – there are no silver bullets here to take this big bad wolf.
Towards Energy Security
To address it, we must have clarity of thought about where we are, where we want to go and which way to go? There is a need to set out practical pathways which can lead us towards the dreamed destination. And most of all, we need a clear regulatory framework to enable businesses to invest with the confidence in building a lower carbon/ carbon free future. Hydrocarbons have, are and will continue to play the most important role in energy security. Say what the environmentalists and the climate scientists; a future full of energy without hydrocarbon is unimaginable, at least with current available technology and investment base. Despite the entire hullabaloo about renewable, they are unlikely to account for much of the energy basket. Unlike what the proponents of the renewable energy who believe the energy base transition would be as under:
with renewable contributing a significant higher share year on year. As stated, the share of renewable energy will certainly increase, but we have to be realistic about how much it can actually contribute. All of the world’s wind, solar, wave, tide and geothermal power only accounts for around 1% of total consumption. Add up hydropower and the share goes up another 12%. While hydroelectricity can contribute a bigger share of the energy pie, the application is limited by massive population displacements and the ecological impact on the local communities. Projects like the Itaipu Dam (Paraguay) and the Three Gorges Dam (PR China) are becoming fewer to plan and execute and several other projects all across the world are struck in various different stages of construction and the Litigation. Governments are funding newer projects in renewable development and research, although taking at a break neck speed, has yet to come up with a game changer solution, forcing corporate to rely on current generation technology for testing and small scale projects. Given the practical challenges of scaling up such technologies, the International Energy Agency doesn’t see them accounting for much more than 5% of consumption in 2030(excluding Hydropower), even with all the aggressive policy support and governmental funding. Nuclear energy and biofuels will also play a part, and by 2030 carbon capture technology could be deployed at scale in Coal Fired power plants. But there will still be a major role for hydrocarbons, primarily Natural Gas. Indeed, the IEA analysis indicates that even in a low carbon scenario predicated on keeping the atmospheric concentration of CO2 to less than 450ppm, hydrocarbons will remain dominant. Hence, Hydrocarbons, more so, Natural Gas are the most reliable fuel for the future.
Relevance of the Hydrocarbon Sector
So we need hydrocarbons and lots and lots of it, that’s clear. The good news is that we have enough reserves of crude oil – and even more of natural gas – and these reserve estimates are rising as we continuously developing newer ways of unlocking both conventional and unconventional resources. Thereby the cornerstone of ensuring the future’s energy security is the creation of a diverse supply – diverse in the forms it can take and diverse in the places it can come from. The hydrocarbon sector must make investments in both low carbon energy business (the projects for Carbon Capture and Sequestration) and the carbon intensive programs (the production from Heavy Oils and Tar Sands) and mate them together. It’s not so much about not emitting the carbon into the system, its more about minimizing the carbon footprint of the energy. Both programs can be a part of a broad and sustainable energy basket mix that embraces oil, gas, coal and renewable, producing and using them all with innovation and efficiency.
However, the building of such a future demands action both from hydrocarbon sector and from Government. The Hydrocarbon Sector can provide the building blocks and tools – but there is a need for them to work within the architecture provided by governments. This appears to be the most logical way in which the current energy security architecture can – and it should – be strengthened.
There is however a set of unique challenges ahead. First, with continuously increasing pressure on the supply side, it’s important to develop energy resources as efficiently as possible. For the Government, this means opening up areas that had previously been closed for exploration and allowing competitive bidding for operations. Offering access permits to a group of potential operators encourages them to come up with the most efficient solutions and often involves partnerships that develop new and innovative combinations of skills, lest they try it going in alone and losing it all. The key to producing unconventional and stranded conventional resources efficiently lies in application of advanced technology. The prime example of this thought school is the US revolution in shale gas over the past decade that has been made possible thanks to new drilling and fracturing technology. This is a real game-changer when it comes to energy security.
The second area in which policy is critical is in addressing climate change. The hydrocarbon sector along with the government can play a major role, arguably via creating a price for carbon trading through conventional market mechanisms. Needless to stress upon but only an open competition will encourage the most efficient ways of cutting emissions. The Hydrocarbon sector must factor a carbon cost into both, their investment choices and their engineering design of new projects. This is only way of ensuring that their investments are competitive not only in today’s world, but also in a future where carbon has a more robust price.
The question of Climate Change?
There are a lot of detractors and proponents of the role of hydrocarbons in the climate change but the fact remains that the world is going to use a lot more energy in the coming decades and there is a need to take urgent action to mitigate the effects of such an increase. All across the globe, millions of people are leaving poverty behind and enjoying a much better standard of living. While there are some clear signs that governments around the world are sensitive to this and are beginning to do something about it, the process remains disjointed and sometimes even frustrating for the Hydrocarbon Sector to do something positive in this regard. The key to real progress being made is alignment, rather than simple agreements – moving in the same direction, may or may not necessarily in lock-step. If the government provides a clear, stable and sustainable framework for investment, it will start to flow. But if they don’t, they run the risk that spare capacity will dwindle – and ‘complacency’ will give way to ‘panic.’
The quickest way to ensure a low carbon fuel for the future while ensuring minimum investment and with the existing infrastructure and technology is Natural Gas. Gas offers the greatest potential to achieve the largest CO2 reductions – at the lowest possible cost and in the shortest time duration all this, by using technology that is available today. It’s easily the cleanest burning fossil fuel – around 50 percent cleaner than coal. It’s very efficient, and combined-cycle turbines fuelled by natural gas are both quicker and relatively cheaper to build. More so, a lots of it is available and sometimes, more readily so.
The creation of a low-carbon economy will be far from easy and over-time, will require the whole-scale re-engineering of the global economy. It will demand a very significant investment by industry, which in turn requires a clear regulatory regime. There is a need to ensure that our children and grandchildren are not left with the unknown hazards of climate change and can keep their lights on in the future. If both these challenges can be met, it is only then has the Hydrocarbon Sector played a crucial role in this changing energy scenario.