My theories on Energy – for 2016, & beyond.

June 8, 2016

I have been studying trends, and forecasting, since 1985. Every year. On several subjects. And sharing my forecasts with friends and family. More often than not, these forecasts have been accurate, sometimes frighteningly so. When oil touched $140, and reputed analysts were predicting $200 oil, I said it will fall to sub $50 in a few months – it did. At the beginning of 2015, with oil at around $ 90, I said it will end the year below $40 – it did. In 2005, I predicted $20 oil, and I am now predicting $10 oil. I just discovered that one of my friends actually took me seriously, and invested, and greatly profited. Therefore, this document.

I intend to create this document every year, specifically for the following year, but also talk about future trends.

I am a wannabee futurologist – untrained.

Caveats, & Cautions, & the “Please Note”:

• My forecasts are at the end of this paper, not at the beginning, because I want you to read some of my theories first.
• I will also talk about a few areas where I do have commercial interests. My firm is a shareholder in a US based LNG liquefaction project – Fairwood Peninsula Energy.
• I am not soliciting. Clearly, people who are foolhardy enough to make any investments, based on my theories, do so at their own risk.
• I have been wrong, sometimes.
• I base my forecasts on many unconnected influences that, I believe, impact future trends – social, economic, behavioral, climatic, strategic, demographic, accidental, conflict, and political ambitions. Therefore, the price of a commodity will not simply change because of supply and demand, and historical trends. Most analysts will base their forecasts on verifiable numbers. Most will be, and have been, wrong. The history of market forecasts is littered with the corpses of catastrophic mistakes.
• Sometimes, I use the SWAG method – Scientific Wild Ass Guess!
• I look at the “Long Term”. Safer. If I am wrong, most people would have forgotten what I said 10 years earlier. But seriously, the long term will indicate what happens in the near term, and vice versa.
• I have been influenced by the writings, and stories, of other futurologists/thinkers – Nostradamus, Leonardo, Tesla, H.G.Wells, Walt Disney, Arthur C. Clarke, Sagan, Toffler, Friedman, Geoffrey West, Michio Kaku, and several others. I might expound on something that could bear resemblance to others’ theories, without acknowledgements to anyone, simply because I have created my own scenarios, despite these influences.

So, having gotten the Caveats and Cautions out of the way, I am going to talk about:

Energy

Recent history – late 1800s to the present day – has been substantially shaped by the quest for energy, and other resources. As profoundly as the last 30 years have been shaped by  digital development. The Industrial Revolution, in the West, was shaped by, and enabled with, the development of abundant and cheap energy. Railways, Steel, Cement, Electricity, Cars, Planes, and much much more, would not have happened if one man had not surmised that the black oily substance, used by the Red Indians (Native Americans now), scraped from the surface and burned, could be drilled. Like water could be drilled. He found the oil just the day before he was about to become bankrupt. Maybe, we would still have been burning whale oil and twigs, if he had given up a day later.

Since then, virtually every mass human conflict has happened due a quest for Energy.

But we are again at an inflection point that the world was at ~150 years ago. The universe of Energy is going to change dramatically, even in the next decade, and will completely be transformed in the next two. Some impending major trends, and influences:

• Collapsing of “Big Energy” – Emergence of “Distributive Energy”.
• Rejection of Dirty Energy
• Development of Renewable & Alternative Energy
• Development of Energy Storage
• Energy Efficiency technologies

It is really time that Big Energy begins to decline. We are not quite there in terms of the “World
is Flat” scenario, but new entrants, necessarily smaller, are increasingly beginning to make an impact in the incestuous world of Energy. The new players will never resemble the Standard Oil of John D. Rockerfeller, the Seven Sisters, and the smaller sisters (still gigantic) like national oil companies of many countries. The days of big mining and big drilling will decline. The days of major shipping  of oil & coal & gas will decline slowly. The days of big refining will decline slowly. The days of major, long distance pipelines will begin to decline. The whole concept of producing energy resources in one part of the world, and shipping it to the other end of the world, either in raw or finished form, will decline. The world will not accept a cost differential of over 4 times between the well-head and the burner tip – the rest accounted for as refining, transportation, and Big Energy” profits. The days of $5 per barrel (or less) at production point, $ 150 at trading point, and $200 (or more) at burner point are already over. Same for coal and for gas.

 And this trend will rapidly gain momentum. Mega power plants of multi-thousand Megawatts each, and massive Power Grids will also begin to decline.

The assessment of the cost of different Energy usually, and mistakenly, is done based on a comparison of the cost of different fuels. All Governments, and bureaucrats, and analysts, will make generalized statements like “Coal is cheaper than Solar”, without factoring in the long distance transmission costs needed for electricity produced in a mega coal based power project. Or factoring in the massive transportation cost of moving refined products over long distances. Or even the cost of delivering Energy to places where conventional transportation cannot reach, such as the thousands of Indonesian islands, or the mountainous regions in the Himalayas. These are areas where transmission lines cannot reach, or ports and quality roads do not exist. Much less, in the factoring, is the cost of the damage to the environment.

I would like to state unequivocally that watt for watt, or mmbtu for mmbtu, or whatever unit you might want to adopt, Big Energy is more expensive than “Distributive Energy” – or Energy produced where Energy is consumed – if all parts of the cost chain are fairly evaluated, on a weighted average basis.

But this will not happen easily.  Why? Because of the tyranny of vested interests in  mature investments in legacy infrastructure. Big oil, big power, big T&D, big transportation, big auto, and so on.

And the situation is even worse when Governments (Indian, as an example), try to administer pricing of energy, and create unnatural markets by inexplicably  attempting to artificially create demand, by building in cross-subsidies. Scarce national resources are, believe it or not, burnt away!

Anyway, back to “Distributive Energy”. Solar can be distrbutive energy if we move towards small solar – maybe roof-top. Or wind. Or small hydro – run of the river. Or small thermal – Cuba is a great example. Or waste-to-energy. Or hydrogen (this needs discussion, if anyone is interested). In short, produce where you need it. Don’t ship it from 5,000 kms away, then refine, then transport over 1,000 kms, then distribute over a few hundred kms. Doesn’t make sense anymore.

So, when will this happen? Many developments will influence this, as I will attempt to discuss later on, in this document. I believe the decline of Big Energy has just begun. This festive season would not have been too festive for these guys. There is consternation, and some pretty radical forecasts. The Saudis are hoping for an oil price recovery to $70, while a former Chairman of BP talks about $20 oil. The World Bank, the IMF, and the Economist have a penchant for linearity – the problem is, their linear price forecasts change constantly, as the previous 3 months line (before their new forecast) also keeps radically deviating from their earlier forecast. There are many others – the big banks, the big consulting firms and, of course, the Energy firms – who keep us entertained. One of these – very reputed firms – had forecasted $200 oil, then changed to $50 within a few weeks.

I am deviating from the main point, which was talking about decline of Big Energy. I predict some major casualties in the next 5 years, across the globe. Some will attempt a restructuring at great cost. A lot of expensive assets and infrastructure will begin to waste away, with no buyers even at significantly discounted prices. In 15 years, there will be a very different energy scene. Many new companies will emerge, and grow rapidly with new technology, new energy plays, new markets, new consumers – a very different, but much smaller, form of  Energy. Some will of course be Big, but not in the traditional energy businesses. A churning, if you will – something that happens with increasing frequency these days.

Dirty Energy has fortunately become more prominent as a talking point – though most times the dialogue is aimed at the users of Dirty Energy, rather than the producers and sellers. So, an Indian Oil Corporation can claim to produce cleaner fuel, but shift the dirt into another product, Petroleum Coke, and sell it to burn in brick kilns next door – still putting out the same dirt into the air we breathe. Rather than cleaning up the fuel they produce, and disposing the waste products in a careful way – easily done within a fraction of the cost of the environmental damage they cause. The new investment needed in the refineries, for cleaning up the fuel, is a fraction of the cost of the damage caused by dirty fuel.

I do not wish to focus on any one company, because most are guilty of this.  Big Auto resists every attempt to bring in more stringent emission controls on a continuous basis. Hybrid cars, fuel cell cars, electric cars, gas fueled cars are all deliberately suppressed, despite the fact that the technology, prototypes, proof of-concept, actual models, etc, have existed for years. All because there is too much invested in legacy infrastructure for auto fuel marketing. The reason that Tesla has succeeded in creating quite a buzz is the fact that now public sensitivities are beginning to demand cleaner options. The ground swell of sustainability in mobility hasn’t quite happened as yet, but it is on its’ way.

Big Tobacco was diminished rapidly because of public sensitivities to the dangers of tobacco use. I foresee a similar movement, in fairly short order, against dirty transport. I am thrilled that the Indian Government recently decided to move directly from Euro IV to Euro VI emission standards in the next couple of years.

The coal industry destroys pristine forests. If you fly over the vast coal producing regions of Indonesia – as I have – you will see the landscape scarred with shallow, dirty holes, where open cast mining has happened, and abandoned after extracting the surface deposits. This landscape has not been restored after mining, and will probably never be. Coal India, the largest coal miner in the world, produces less than 1% of its coal from underground mines, and continues to destroy pristine forests, and desecrate India’s environment. The Government of India has taken baby steps to shift the focus to underground mining, based on the new round of public auctions of coal mining licenses. But coal is dirty. Unquestionably! Most people I speak to, including in the Government of India, say categorically that coal will remain the biggest fuel in the energy mix in India, for the “foreseeable” future. I see “foreseeable” as 20 years, they see “foreseeable” as 50 years. It is a cost of fuel issue, but the comparisons are wrong.

The 2 largest economies in the world – USA and China – have significantly begun to shift from coal to gas based power. Both are large producers, and users, of coal. One of them – China – has very limited supply of Natural Gas, but has boldly moved to the more “expensive” fuel. India has also announced that gas based power will be 20% of the future basket, instead of the current 12%. I will discuss the relative costs of fuel, and the comparison criteria adopted later on in this note.

India is still stuck on UMPPs (Ultra Mega Power Plants) of 4,000 MWs each. And, based on more expensive imported coal. Someone has to realize that this type of decision locks India into a polluted future for at least another 40 to 50 years. Borders on the criminal, as it will result in scores of future fatalities.

Renewable and Alternate Energy  is not only the rainbow in the sky, but also the pot of gold. It’s amazing to see the rapidly increasing numbers of converts, both among enlightened Governments and users. But I guess this had to happen. We have been pushed onto the brink of disaster before realization has begun to dawn. Global  warming with melting polar ice-caps polluted earth water and air. Most city dwellers marvel at seeing stars in the night sky, when travelling into the countryside.

But renewables and alternate energy are often dismissed as being marginal solutions, or too expensive, or too experimental, or too unreliable. Some of this has elements of truth, but what is forgotten is that the world is changing at breakneck speed. Research-to-prototypes-to-commercialisation is now a matter of months rather than years, or decades, in the past. A glaring example is Smart phones – they become obsolete before you get used to the one you have. Not quite the same speed of development in new energy.

But the big change that I have noticed is the increasing amalgam of technologies from hitherto unrelated fields. So Solar, for example, is increasingly using micro etching techniques in cells – used in microchip production. Or using new materials. Or using new comms technology to monitor and control. And much better storage. And better demand and supply management. And reverse metering systems that can theoretically create a billion virtual power plants. Not just about the sun and a solar panel anymore.

It is pertinent to remind us that the sun is free, and the energy generated from  the land area of the Sahara desert can power the whole planet. Yes, impractical, but underscores the point that the sun delivers huge quantities of free energy to planet Earth.

A look at the range of Renewables and Alternates shows some very interesting developments on the way, apart from the the standard ones – solar, wind, small hydro, geothermal. Below are some that will certainly come, or expand, and will become big and disruptive:

• The most abundant element in the Universe. Two problems though – how to produce it cheaply, how to store it, and then how to transport it. There is a lot of work and research happening in all these areas and the commercial solutions are imminent in short order. A couple of global majors have bet heavily on the “Age of Hydrogen”. Uses are pretty well known, and are currently being used. Liquid hydrogen is the fuel that propels rockets into space. Hydrogen fuel cells are used in many applications. Hydrogen and carbon are the basic elements in all fuels, and in all things organic. Arnold Swarzeneggar, the former Governor of California started a Hydrogen Highway in that state, a little ahead of the times – but easily done with huge envoronmental benefits. India, with great foresight (at the beginning of the millenium) fixed a target of 2 million hydrogen fuelled vehicles, and 10,000 MWs of hydrogen fuelled power, by 2020. Regretably, even the person incharge of this program in the Government of India thinks this is a pipe-dream.

Converting Waste Into Energy Erskine Mdone -2015

• Waste-to-Energy. I like to often say “its not waste, until it’s wasted”. Clichéd, but true. All organic matter is fuel – vegetation, food waste, human bodies, human waste, agricultural waste.

As we become more affluent, we buy more, we consume more, we waste more. We create more fuel for use. Unfortunately

most waste is burned, or unscientifically dumped – instead of being recycled.  In some parts of the world, some recycling happens, but only plastics, paper, and metals, but this is a small fraction of the waste we produce – I am sure less than 1%. Enormous energy wasted, and the environment damaged. There are existing technologies that can ensure Zero waste and Zero discharge. We plan to use these in our new city projects, as a template. This is already happening in parts of the world, but in limited applications, not as a complete solution.

• New fuels. Some re-jigged from hydro-carbons like gas and coal, but infinitely better. One that is particularly exciting is DME (Di-MethylEther) That is easily made from feedstock such as coal, or gas, or, agriwaste. Al Gore was a DME champion, Volvo engineered the first engine conversions ($12,000 for a truck). China now produces more than 11 mmtpa, and is expanding this rapidly, from a cold start about 6 or 7 years ago. DME meets all current, and the foreseeable future, emission standards.

• This is a little further away. Might not happen in my lifetime, but it is certainly on its way, and on its’ arrival will make all other energy passé. Huge investments already made in research. “The world is getting warmer with emissions getting from bad to worse, it is hopeful that alternative sources of energy such as fusion technology can provide electricity worldwide by the middle of this century,” said Steve Cowley, Director of the Culham Centre for Fusion Energy in the United Kingdom. Fusion is the new frontier.

Among the standard renewables, wind and solar have made huge strides in the last few years, as is evident from the figures   (in GWs – and projections – several sources) below:

Year                Wind              Solar  

2000                  17.4                   1.2

2010                 198.0                40.3

2014                 425.0              178.0

2020                1750.0              650.0

 2030  3900.0      –  2050      –  4600.0

 Two things are evident – spectacular growth till now, and continuing growth for another 35 years. If we added the two energy forms above, in 2050 they will together provide almost half of global power needs. Solar is growing 5 times faster than wind – growth of more than 500 times in only 20 years, and a projected growth of 3800 times projected in 50 years ending 2050. The rate of change is spectacular. It is also a rapid change away from coal & oil, which the mandarins do not seem to notice.

Before I give my views on forecasts and speed of change, I would like to mention that the pace of change has been spurred by a dramatic fall in the capital cost of solar power – from US$ 76/w in 1977 to US$ 0.30/w in 2015, a fall of over 99% in 38 years. And it is continuing. Very soon – maybe 2019 – the price of solar power will become cheaper than coal power. This rapid fall in costs/prices is driving the very fast shift to renewables. I would like to suggest that the speed of change in the energy basket – from hydro-carbons to renewables – will be far more rapid than anyone imagines currently. Very few industry pundits look at the entire energy mix when creating forecasts. Their tendency is to look at their own specialised area, in their comfort zone, and form opinions on the future, typically through rose tinted glasses.

I digress again.

There is probably more research being done in Energy Storage than in any other field of energy. Energy produced must be consumed immediately, because storage of energy is not possible in any significant, or cheap, way. Storage devices, typically batteries, are small and expensive. And inadequate for any application beyond the home, or shop, or car. There are of course other larger technologies for energy storage – thermal storage, fuel cells, flywheels, pumped storage hydroelectricity, etc., etc. – but they are all for specialised applications, or are cumbersome, and are not portable. There are probably dozens of energy storage technologies, but none can be applied universally for large applications.

Development of inexpensive and large capacity battery technology will change the energy landscape forever. It will speed up the development of distributive energy. It will lead on to far more efficient use of energy. And it will reduce wasteage of energy – a very major issue. This will be the game changer, that will change the home, the car, and virtually every space that we stay in. I would venture to say that this will be as revolutionary as mobile telephony or the internet. We already carry stored energy in our cell phones, and in every battery operated device. Not inconceivable that you could carry energy for your vacation house, as luggage in your trunk, in a few years.

A revolution has already begun in Energy Efficiency. Match supply with demand. Use less for the same purpose. Smart Appliances, Smart Buildings, Home Automation, Intelligent Transportation, Sustainable Design, Conservation by management, and Energy Demand Reduction, etc., are already changing the world rapidly. The developing world –  China, India, Indonesia, Africa, and others – will consume much more energy than the rest in the not too distant future. But it can be more fleetfooted and adaptive in this change, again due to lesser pressure from legacy infrastucture.

Aggregation of energy demand, now possible due to concentrated and large scale new urban development, is creating new models, such as District Energy. This itself conserves over 20% of energy needs in heating and cooling.

A study suggests that global energy demand growth can be reduced from 2.2 % annualy, to just 1 %. This process is already underway and will accellerate geometrically. What this means is that the developed economies will reduce energy use, and the developing economies will use much less.

“Lovins’ Rocky Mountain Institute points out that in industrial settings, “there are abundant opportunities to save 70% to 90% of the energy and cost for lighting, fan, and pump systems; 50% for electric motors; and 60% in areas such as heating, cooling, office equipment, and appliances.” In general, up to 75% of the electricity used in the U.S. today could be saved with efficiency measures that cost less than the electricity itself.”

Put all the above points together and it is clear that the energy world is under rapid change. Faster than most pundits think. Apply other non-quantifiable influences – lifestyle changes, urbanisation, development pace, new technologies, environmental conciousness, rapid knowledge dissemination, and more – and linearity in price and demand forecasts becomes passé.

Forecasts

So, with much ado, I finally get to my forecasts. First, the trends.

Energy, & related, Industries

Year	2016	2020	2025	2030	2035	2040	2045	2050
Oil	ê	ê	êê	êê	êê	Dead*	Dead	Dead
Gas	è	é	éé	éé	è	ê	ê	êê
Coal	ê	êê	êê	êê	êê	Dead	Dead	Dead
Solar	é	éé	ééé	ééé	éé	éé	é	è
Wind	éé	éé	éé	é	è	è	è	è
Hydro	è	è	ê	ê	êê	Dead	Dead	Dead
Geo-thermal	è	è	è	ê	êê	Dead	Dead	Dead
Nuclear	è	é	ê	êê	Dead	Dead	Dead	Dead
Hydrogen	Ÿ	é	éé	ééé	ééé	éé	éé	è
Fusion	Ÿ	Ÿ	Ÿ	é	éé	ééé	ééé	éé
Powergrids	è	ê	ê	Dead	Dead	Dead	Dead	Dead
Cars – hcf*	è	ê	ê	Dead	Dead	Dead	Dead	Dead
Cars – others^	é	é	éé	è	ê	ê	Dead	Dead
Planes	è	è	ê	ê	ê	ê	ê	ê
Railways	é	éé	éé	ééé	è	è	è	è

*hcf – Hydro-Carbon Fuels – Oil, Gas ^others – electric, fuel cell, etc.

Note –  éGrowth,   ééGood Growth, ééé Excitement,  è Status Quo, ê Decline,   êê Terminal stage, Dead – Indicates no new capacity created. Existing capacity may continue to function – marginally.

A classic example of changing forecasts is indicated in this chart. Notice how the same analyst changed his forecasts, for 2025, in one year – 2014 to 2015 – by an increase in his forecast of solar by 167%, and an increase of over 400% in Battery storage of Energy! This is what is happening today – the rapidly changing world is leaving the experts behind, and baffled at the speed of change.

Big oil has had its’ day. It  transformed the world in just over a century – and with great excitement over the last 50 years – but is now in steep decline, as the numbers in the chart indicate. I don’t agree with the speed of decline shown in the chart – I think the old man will die much sooner.

Natural gas, on the other hand, is a clean fuel, and has many major uses such as chemicals, fertilizers, heating, cooking, transportation, and of course power production (not the major use). Even the Institute of Sustainable Energy Policies suggests that Gas can be the largest fuel used in 2050. Look at oil, in their chart. While I do not entirely agree with their view, but they’ve got the right idea.

One of the problems with natural gas is that a very significant part of the trade is on the water (like oil) in the form of LNG. It takes a minimum of 6 to 8 years to implement a gas liquefaction project, and generally these

projects are big and expensive. The result is that capacity is planned, executed over a long period, and hits the market in large ramp-ups of availability, while demand grows gradually, creating periods of over supply and shortages. This has led to volatile fluctuations in the pricing of gas.

LNG prices have been linked to oil prices historically, because early producers did not know how to price gas. And, for some strange reason, it was assumed that oil and gas were interchangeable fuels, and therefore should have this linkage. Fortunately, in the past few years, most new LNG contracts are not based on this linkage, but on some gas exchange indices. The current availability of cheap LNG is a direct result of long term contracts still linked to the price of oil. These contracts will substantially run out in the next 2 or 4 years, after which LNG should be governed by independent dynamics of the gas industry.

Oil prices are falling, and will not rise again, except for small and temporary surges, that are typical of dying industries. Gas prices will rise, when they are freed from the shackles of oil price linkage. So here is my forecast for oil and gas prices till 2025. It is radical.

(US$s – 2015)  

	Oil Brent – $/b Wt. Avg	Gas H.H. – $/mmbtu Wt.Avg
2016 – 1st Qtr	35	2.20
2016 – 2nd Qtr	30	2.20
2016 – 3rd Qtr	50	2.80
2016 – 4th  Qtr	30	2.60
2017	25	3.00
2018	25	3.25
2019	20	3.25
2020	20	3.50
2021	17	3.50
2022	15	3.75
2023	12	4.00
2024	10	4.25
2025	5	4.50

Don’t take this article seriously, but buy me a beer, if you think I was right – or if you agree with me.