Comments on paper in World Energy Investment Outlook by Hisham Khatib (and response)

(1) by Carmen de Figlio

Concerning Oil Demand Growth

The methodology to project oil demand growth in the World Energy Outlook is not to assume that past growth will continue into the future. IEA's projection of oil demand is based on a detailed regional and sectoral analysis that has resulted in expectations of higher growth than we have experienced since the 70s. Therefore, our methodology permits a growth projection that is different than has occurred in the past and a difference, per se, is not evidence that the projection is wrong.

But it is fair to ask, why is the growth different? The lower growth rate in the past 20 years was largely the results of the oil price shocks we have experienced in the 70's. From this detailed analysis, growth in the coming decades will be mainly driven by developing countries - they will represent 75 % of global oil demand growth. Oil demand in transport will increase particularly rapidly, by 3.6% from 2000 to 2030. Oil demand in OECD countries will grow at a much lower pace (0.8%). But this won't be enough to compensate the increase in developing countries.

Concerning Energy Investment

As far as oil investment is concerned, oil demand growth represents only a small share of total oil investment. About a quarter of upstream investment will be needed to meet rising demand. The rest will be needed to counter the natural decline in production from wells already in production and those that will start producing in the future. At a global level, investment needs are, in fact, far more sensitive to changes in decline rates than to the rate of growth of oil demand.

Investment in power generation is based on a mix of power plants with different capital costs. Gas-fired generation has low investment costs (about $500/kW for a CCGT plant, less for an open cycle turbine) but coal plants cost twice as much. Hydro and nuclear plants are 3-4 times more expensive than CCGT plants. The average investment cost ($870/kW) is lower than it has been in the past, when most capacity was based on coal and nuclear. Note that decentralized options are not necessarily cheaper: a small size gas turbine used for on-site generation is likely to be more expensive on a per kW basis than a large size turbine used in a central power station. Photvoltaics and fuel cells have definitely much higher capital costs than a CCGT plant.

The projected lower generation investment cost per kW also explains to a large extent why the share of T&D will be higher in the future. While you need less capital to build a CCGT plant (compared for example to a coal plant) you still need about the same investment in T&D. This obviously raises the share of T&D. A second reason for the high share of T&D is that in several regions in the world investment in T&D has not matched investment in generation. Countries like China and India have been increasing spending on T&D relative to power generation. Regarding the role of distributed generation, this has been taken into account in the T&D investment calculations. Distributed generation reduces the need for investment in transmission networks (see Figure 7.9) but it does not necessarily eliminate the need for distribution investment.

Summary

I hope this addresses the concerns raised by Dr. Khatib. I don't expect that all energy experts will agree on the same expectations for future energy use and needs for energy investment. That is fair. But to say that the World Energy Investment Outlook projections have "loopholes" simply because they differ from past experience or that they do not correspond to one's expectations is not a fair assessment.

Judge for Yourself

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(2) From Adnan Shihab Eldin, Research Director OPEC

Colleagues

I also have read with great interest Dr. Khatib's comment published in MEES. Dr Khatib is, of course, a well known and highly respected international energy expert. I have known Dr. Hisham personally since the seventies. We have become over the years friends and have had many discussions on broad number of topics. We hold similar views most of the time, though we do also, naturally, differ sometimes. I have benefited immensely over the years from the insightful and disciplined analysis of Dr. Hisham on broad number of topics dealing with energy and development issues, among other things.

I have therefore examined the analysis and conclusions of Dr. Hisham carefully. And while he raises a legitimate concern as to why we should expect that future growth in demand for oil and energy be different than the recent past, I would nevertheless suggest that the figures for oil and energy demand growth that he cites are somewhat misleading. World oil demand growth in the 1980s was clearly dampened by the 1979/80 oil price rise. Furthermore, the collapse of the FSU and the ensuing dramatic drop in GDP and energy consumption distorts any average world figure for the 1990s. For example, if we recalculate the world oil demand growth but remove the FSU and eastern Europe, average growth rates are 1.6% for 1982-92 and 1.9% for 1992-2002, which contradicts the thesis proposed by Khatib. Equally important, as mentioned by Carmen (from IEA) below, the expected powerful growth in demand for oil in developing countries (in the transportation sector in particular) is a major driving force that would easily be overlooked if one simply projects historical trends.

I think that Khatib's position is generally one of encouraging more energy efficiency as a means of reducing energy and oil demand, and it is from that perspective that he suggests a lower growth rate to be more appropriate. The figure that the IEA has published, and indeed OPEC's own "reference case", is not, as we know, a "forecast", but rather a central benchmark from which to test alternative developments. Indeed, more efficient energy use is one of the possible future developments, but one would need to be convinced that this is a likely outcome before using it as a central benchmark, or "reference case". On this basis, I would suggest that the dismissal of IEA, of for that matter others like OPEC's demand growth figures as being exaggerated is incorrect.

Adnan Shihab-Eldin

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Response from: "Hisham Khatib" <khatib@nets.com.jo>



Dear All,

I would like to thank Dr Carmen Difiglio (Head, Energy Technology Policy Division - IEA) for his kind response and explanation of IEA oil demand and investment prediction methodology, based on regional and sectored analysis. But it is in here (where statisticians, econometricians, etc., how have no hands-on-experience of the physical meaning of energy quantities) that the errors start to accumulate. I have been involved in energy (particularly electrical power prediction and simulation) for many years and I saw this happening. Without knowledge of the physical meaning of energy figures, relationships and resource limitations it is easy to go astray.

I am saying this with all due respect to IEA staff whom I consider their IEA-World Energy Outlook to be the major global energy reference book. That is why I am hoping that their energy and oil prediction figures will be rationalized gradually in the WEO 2004 and later in WEO 2006.

I am writing the following with all reluctance and it is not my intention to fuel the argument. I think Christmas is the least suitable time for this, but I hope that Dr Difiglio will kindly consider the following two points:

(1) Limitations of the Resource

BP Statistical Review of World Energy refers to Oil Proved Reserves to equal 1047 thousand million barrels, at end of 2002.

With oil consumption of 25 900 million barrels at 2002 and IEA prediction of 42 400) million barrels in 2030, means that the world will be consuming almost 1000 thousand million barrels between now and 2030. It means that (with IEA oil growth predictions) all world oil reserves will be exhausted. Of course nothing of this sort will ever happen by 2030 or 2050. New reserves will be discovered extraction technologies and non-conventional oil will replenish any deficiencies till the middle of this century. But this shows that there will be reserve limitations and supply shortages. These will cause price escalation leading to rationalization of use, more efficient technologies and proliferation of alternatives.

Most important it will lead to growth limitation which in my humble view will not exceed 1.1% - 1.3% annually.

(2) Other Global Energy Investment Predictions

During the last few years I have been involved with two major global energy investment exercises. The first is IIASA/WEC - Global Energy Perspectives (1998). In this "Case B: Middle Course Scenario" we estimated energy investments to equal $12 trillion (1990-2020) utilizing dollar of 1990. This is almost $14.5 trillion (year 2000 dollar). What is interesting is that when we started the iteration exercise this investment figure was $30 trillion (based on detailed regional and sectorial analysis!!).

The second is a study done for US DOE "Financing Worldwide Electric Power: Can Capital Markets Do the Job?". This detailed intensive study came out with a figure of $2280 billion 1993 dollars for global electric power investment over the period 1995-2010. This is equivalent to $2.6 trillion in year 2000 dollars. Projecting for the future 2000-2030 means that electrical power investments will be around $6-7 trillion (against $10 trillion in the IEA Investment Outlook mainly caused by T&D over investment).

As important generation is estimated to amount to 63% of the investment, transmission and distribution (T&D) to 37% Of course such ratio is not gospel but was realistic at the time After 44 years of experience in the electricity supply industry I cannot foresee a day in the near future in which T&D investments will ever exceed generation figures.
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The Editor
MEES

 Dear Sir,

 I would like to refer to your excellent report and summary on "Global Energy Investment Needs to 2030", MEES, December 8

Since I have been involved in global energy investment I have many misgivings about the results of this important but colossal exercise undertaken by the IEA – World Energy Investment Outlook. However I would like to concentrated on main two important points

The whole investment assessment is based on IEA-World Energy Outlook (WEO – 2002) which predicts global energy requirements till the year 2030. It is from these background figures that most of the over exaggerated investment requirements ensued.

WEO – 2002 estimated word energy requirements to grow at an annual rate of 1.7% between now and 2030 and oil consumption to increase at 1.6% annually. But are these realistic predictions?? We feel that these are grossly over exaggerated in light of past and present trends.

Over the past twenty years energy and oil consumption trends were as fellows
Annual Growth %

      Period                                              Energy                                       Oil             

1982 – 1992                                             2.55                                        1.35

1992 – 2002                                             1.35                                        1.12

 IEA – WEO Predictions

 2002 – 2030                                             1.70                                        1.60

 Why should the world energy consumption which has been growing at rate 1.35% annually over the last decade, jump into 1.7% annually over the next three decades? This is in a time at which energy consumption is being rationalized in every quarter by cost, security and environmental considerations. Why should oil consumption which has averaged a growth 1.19% annually over the last twenty years suddenly surge to 1.60% annually in a time of slowly growing world economy and reduced population growth.

 In my humble view nothing of this sort is likely to happen, IEA – WEO predictions are exaggerated. The future growth figure are unlikely to exceed current growth particularly since technology is accelerating efficiency in energy use, especially in the fastest growing market of electricity generation.

 I do not expect global energy use to exceed 1.35% annually during the next few decades. Oil consumption growth is unlikely to exceed 1.10-1.20% annually. Applying these figures will drastically reduce global energy investments over the next three decades.

 The second major inconstancy is concerned with electricity investments, which raises many questions (for instance cost per kw of new power plant is expected to be less than the $ 872 quoted, particularly in DCs utilizing natural gas). However our main argument is the splitting of electricity investment between generation and transmission distribution (T & D). In the electricity supply world wide T&D represent no more than 40% of global electricity investment. How come they became over 55%? This is at a time in which some countries, particularly industrialized countries, are gradually moving into distributed generation (DG) which greatly reduces transmission and distribution costs.

Apparently the new valuable IEA study has many loopholes which tended to generously exaggerate global future energy investments. I expect these, particularly growth figures, to be rationalized in IEC – World Energy Outlook 2004 expected next year.

 Hisham Khatib
Honorary Vice Chairman, WEC