The energy world faces unprecedented uncertainty, according to the World Energy Outlook 2010 (WEO 2010), launched by the International Energy Agency (IEA) on 9 November. Among the major uncertainties is how governments will implement recent policies to tackle climate change. The IEA has introduced a New Policies Scenario in this year’s WEO to present a realistic picture of how energy demand will evolve as governments implement tough environmental pledges in the face of economic realities. David Knott reports from London.

IEA Executive Director Nobuo Tanaka said that recent global economic events have cast a veil over our energy future: “In the wake of the global recession the pace of recovery promises to impact energy markets for the next few years. In the longer term the energy outlook depends increasingly on how governments implement energy policies to combat climate change.” Mr Tanaka said WEO 2010’s New Policies Scenario assumes that governments will actually implement recent climate change pledges, albeit in a cautious manner. In this scenario global primary energy demand rises by 36% or 1.2% a year on average between 2008 and 2035, compared with the average 2% a year growth in the previous 27-year period.

IEA Chief Economist Fatih Birol said that, while the energy market is always surrounded by uncertainty, the current level is unprecedented. He identified five key factors: how the global economy will develop; how oil markets will develop – “We believe the age of cheap oil is over. The demand and supply sides need to find an equilibrium, and this may need higher prices than in the past”; the pace of natural gas growth; whether or not countries will fulfil their Copenhagen climate agreement pledges; and how Chinese energy policies will evolve.

Three Scenarios

Dr Birol said that WEO 2010 presents three scenarios. “The first is the Current Policies Scenario, in which there is no change in government plans agreed to date,” he said. “Then we have the 450 Scenario, which looks at the implications of limiting greenhouse gases in the atmosphere to 450 ppm and limiting the temperature rise to only 2°C, as set out in last year’s WEO (MEES, 16 November 2009). But for sure some governments will changes their policies, and the 450 Scenario is very difficult to meet. So we have gone for a new benchmark scenario – the New Policies Scenario – which takes into account not only legally enacted policies, but also a careful analysis of pledges. In all scenarios, we see oil prices being higher than now.”

IEA World Primary Oil Demand* Outlook By Scenario (Mn B/D)

Source: IEA World Energy Outlook 2010.

* Excludes biofuels demand, projected to rise from 1.1mn b/d in 2009 to 2.3mn b/d in 2020 and 4.4mn b/d in 2035 in the New Policies Scenario.

† Includes international marine and aviation fuel.

New Policies Scenario

In the New Policies Scenario, average IEA crude oil prices rise from just over $60/B in 2009 to $113/B (in 2009 dollars) in 2035. The IEA said: “Oil demand continues to grow steadily, reaching about 99mn b/d by 2035 – 15mn b/d higher than in 2009. All of the net growth comes from non-OECD countries, almost half from China alone. Demand in the OECD actually falls by over 6mn b/d. Crude oil output reaches an undulating plateau of just under 69mn b/d by 2020 while production of NGLs and unconventional oil – notably Canadian oil sands – grows strongly. OPEC countries account for a growing share of global production, with the biggest increases coming from Saudi Arabia and Iraq. Production in and exports of oil (and gas) from the Caspian region also grow substantially.”

IEA New Policies Scenario, Primary Oil Demand* By Region (Mn B/D)

Source: IEA World Energy Outlook 2010.

* Excludes biofuels demand, projected to rise from 1.1mn b/d in 2009 to 2.3mn b/d in 2020 and 4.4mn b/d in 2035.

† Includes international marine and aviation fuel.

WEO 2010 says that total OPEC production rises continually through to 2035 in the New Policies Scenario, boosting its share of global output from 41% to 52%. Dr Birol observed: “The OPEC share at the end of this projection period is at a level seen only before the first oil shock. This is worth underlining.” While crude oil output never regains its all-time peak of 70mn b/d in 2006 in this scenario, unconventional oil is set to play an increasingly important role, regardless of what governments do to curb demand. WEO 2010 says unconventional oil “meets about 10% of world oil demand in all three scenarios by 2035 compared with less than 3% today. In the New Policies Scenario, output of unconventional oil in aggregate rises from 2.3mn b/d in 2009 to 9.5mn b/d in 2035. Canadian oil sands and Venezuelan extra-heavy oil dominate the mix, but coal-to-liquids, gas-to-liquids and, to a lesser extent, oil shales also make a growing contribution in the second half of the outlook period.

Oil Price Considerations

WEO 2010 says that “the oil price needed to balance oil markets is set to rise, reflecting the growing insensitivity of both demand and supply to price.” This statement comes after OPEC, which had unofficially identified $70-80/B as its preferred price range, has recently talked of $75-85/B as a range that would not hinder economic growth (MEES, 25 October) and seen some members argue for prices as high as $100/B (MEES, 18 October), because of concerns over the weakness of the dollar.

Dr Birol told MEES: “We hear views expressed about higher oil price expectations in the years to come, but this desire is from the oil producers’ perspective. There are two issues to consider here. Firstly, if oil producers receive this level or higher, there may well be a problem for the economic recovery of oil importing nations inside and outside the OECD. Oil demand recovery is still fragile, and any deficits may strangle economic recovery. Secondly, if consumer nations start to believe that the oil prices asked for by producers will stay for a long time, they may well look to alternatives, especially in transportation. High oil prices may justify lots of new government policies to push alternative transportation technologies, including electric and plug-in hybrid vehicles.”