A disruptive time of profound change

By Ed Crooks
Published: September 16 2008 03:00

At the small town of Schwarze Pumpe in eastern Germany, the Swedish energy group Vattenfall has built a power plant that would have bemused an earlier generation of electrical engineers.
The heat source is conventional: lignite, brown coal. What is new is that the coal is burned in pure oxygen, and the carbon dioxide that is the principal exhaust gas is captured, compressed and liquefied, and pumped into tankers. The trucks then drive the liquid CO2 to an exhausted gas field, also in Germany to be pumped 3.5km below the surface.
The pilot plant is tiny, generating a mere 30 megawatts of power. Vattenfall's conventional power station at the same site is about 50 times bigger. Yet the carbon capture project is the first working example of a technology that its supporters argue is our only hope for saving the planet from catastrophic climate change.
At a time of rapid technological progress, with the stakes potentially as high as they could possibly be, it is no suprise that much of the talk about energy has become super-heated.
José Manuel Barroso, president of the European Commission, has talked about the upheaval in the energy industry as a "third industrial revolution", set to change economies and societies as profoundly as the steam-powered first wave of industrialisation in the 19th century, or the oil-fuelled development of motor and air transport in the 20th.
In the US, Barack Obama, the Democratic presidential candidate, calls for a "transformation" of the economy to make America independent of imported energy and to fight the threat of climate change. "Energy independence will require an all-hands-on-deck effort from America: effort from our scientists and entrepreneurs, from businesses, and from every American citizen," he said in a speech last week.
John McCain, his Republican rival, has strongly backed nuclear power, calling for 45 new nuclear plants to be built by 2030. Sarah Palin, the Republican vice-presidential candidate, has also called for "energy independence".
It is important to take a reality check on this talk. Fossil fuels - oil, gas and coal - provide about four-fifths of the world's energy today. They are most likely to provide something very close to that even 20 years from now. It is highly unlikely that the US, which is this month importing more than 11m barrels of oil and petroleum products every day, will really become independent for energy at any time in the foreseeable future.
For transport, no alternative source has yet been found to match the convenience and cost of oil. Hopes invested in biofuels have drained away as food prices have soared.
For power generation, similarly, none of the nuclear or renewable alternatives can yet match the combination of low investment cost and project risk with high reliability that is provided by coal- and gas-fired plants.
The International Energy Agency, the rich countries' watchdog, estimated a year ago that under "business as usual" policies, fossil fuels' contribution to the world's energy mix would rise from 81 per cent in 2005 to 82 per cent by 2030.
Even if every policy then under consideration for supporting renewables and improving energy efficiency were adopted, that share would fall only 5 percentage points, to 76 per cent, the IEA believed.
That more renewable-friendly outlook certainly looks more plausible to many energy experts. Business as usual would, for example, require oil production to rise by a third from about 87m b/d today to about 116m b/d by 2030. Total, the French oil group, is one of several expert sources suggesting production is unlikely to go above 100m over that period. But even if that were the case, demand for oil, gas and coal will all continue to grow steadily.
One implication of that outlook is that the industry needs to became ever more skilled at finding and developing new sources of hydrocarbons. Heavy oil such as Canada's oil sands, gas shales such as the fields in Oklahoma and Louisiana, and exploration in ultra-deep water and in the Arctic will all be important elements.
Another implication is that if the threat of man-made climate change is to be addressed, the world will have to begin capturing the emissions from burning fossil fuels on a massive scale, which is why Vattenfall's little plant at Schwartze Pumpe is so significant.
Jean-Francois Minster, Total's scientific director, says: "Our view is that we should try to satisfy both energy needs and environmental constraints. The only source of energy in the short term for many uses is fossil fuels, so we should find ways in which both of those objectives are compatible."
But while the present central role of fossil fuels in the world's energy system should not be forgotten, it is still the case that the fastest growth is likely to come from other sources of energy: renewables and possibly nuclear power as well.
In that sense, the politicians' rhetoric is rooted in reality.
Traditional utilities are investing in huge wind farms in Europe and the US, encouraged by generous public subsidies.
Biofuels industries have grown up from nothing in a few years, again as a result of subsidies. Even big oil companies, often seen as the most conventional of energy businesses, are investing significant amounts in such exotic processes as extracting road fuel from algae.
ExxonMobil, the world's biggest energy company, is developing new processes to produce hydrogen. Exxon was blasted earlier in the year by some of its shareholders, descendents of John D. Rockefeller, the founder its ancestor Standard Oil, for not doing enough to develop new energy technologies.
Rex Tillerson, Exxon's chairman and chief executive, has made no secret of his scepticism about some renewable energy, including biofuels and solar power.
But even Exxon is backing a wide range of research into what it calls potential technological "breakthroughs" in alternative energy.
Change is visible in emerging economies, too. India still has a huge need for power supplies of any kind: 400m people have no access to electricity. But it is one of the most attractive countries in the world for investment in renewable energy, along with China.
Whether all this adds up to another industrial revolution, history will judge. But there can be no denying that energy companies are entering a period of profound change. This is a disruptive environment, in which new opportunities are being created, and new threats emerging. And while we can have a sense of the way the competitive forces are shifting, we are also facing huge uncertainties, over vital questions such as the pace of climate change and the availability of oil and gas.
Lew Watts of PFC Energy, the consultancy, argues: "I am convinced that the really major breakthroughs will come from outside the energy industry: from nanotech, or bio-sciences, or somewhere very different."
Copyright The Financial Times Limited 2008