Bridging the zone of uncertainty

The financial crash of 2008 altered the immediate parameters of the world’s energy system. It triggered a significant drop in global oil demand, and underlined the continuing shift in oil demand from the West to the East; the fall occurred mainly in the OECD countries while the developing economies continued their strong growth. But will this have an enduring effect on the global energy system?

Last month, Shell’s scenario planning team released a new booklet, Signals & Signposts, that analyses how events have unfolded since the global economic downturn and offers the organisation’s best understanding of the implications.

Global demand is recovering, and, looking ahead to 2050, the report reveals that the team sees a gap between business-as-usual supply and business-as-usual demand of about 400 exajoules (10¹⁸) a year – the size of the entire industry in 2000.

“This gap, the so-called zone of uncertainty, will have to be bridged, and it will take a combination of extraordinary demand moderation and extraordinary production acceleration,” says Jeremy Bentham, Vice President Business Environment, Royal Dutch Shell plc.

The report notes that global markets have been beset by greater economic volatility and cyclicality since the downturn. This turmoil is set to increase and could depress the pace of change and thus limit the developments needed to bridge the vast zone of uncertainty.

Other key recent developments are also analysed. For instance, the global process to negotiate a multilateral agreement on climate change to replace or extend the Kyoto Protocol has slowed considerably since the UN Climate Change Conference in Copenhagen in December 2009.

Although the conference failed to make progress towards achieving an overarching global agreement to cut emissions, five key countries (Brazil, the USA, South Africa, India and China) sketched out the Copenhagen Accord. The Accord sets no real effective targets for emissions reductions and is not legally binding, but it marks a shift for the UN-brokered process and a potentially more politically feasible path forward.

Meanwhile, the worst offshore oil spill in history in the deep waters of the Gulf of Mexico has revived concerns over the safety of producing oil and gas in frontier environments and led to renewed calls for tough regulations and more investment in renewable energy. The broader, longerterm and international ramifications of this tragic event remain to be seen.

More positively, the report notes that the supply picture for natural gas has improved spectacularly in the past few years. The discovered shale-gas resource base in North America has more than doubled in the past three years and production has scaled up dramatically. The total potential resources are now thought to be large enough to meet current consumption levels for about a century.

This boom reaches far beyond North American shores. It has freed supplies of liquefied natural gas destined for the USA for other parts of the world, and it has inspired other nations to search for new gas resources.

In addition, the opening up of investment in the Iraqi energy industry brings significant resources into play. If reasonable stability and security can be achieved, the report suggests that Iraq’s output could double to 5–6 million barrels a day over the next decade under new partnerships between national and international oil and gas companies.

Bentham says that the patchy and fragile recovery from the financial crash, the deepest economic slump in 70 years, combined with the fundamental stresses in the energy system, is changing the world dramatically. “We are entering, I believe, an era of volatile transitions and intensified economic cycles that presents both opportunities and threats,” he says. “So, we must ask: will that zone of uncertainty be one of extraordinary misery, or one of extraordinary opportunity?”