THE AIR FUELS AND SUSTAINABLE ENERGY ASSOCIATION CONFERENCE
5TH July 2022 at MOD Worthy Down
The Energy Future – reflections on the past and lessons for the future
Good morning and thank you for inviting me to talk today. As you know I spent most of my career in the energy industry, primarily with BP, but also as a Board member of the Oil & Pipelines Agency for seven years and for the past decade as a Member of the Worshipful Company of Fuellers with whom you and other Military units have had a long relationship. I am pleased to be joined by a number of fellow Fuellers as well as past colleagues from the OPA and Defence Fuels. It is a pleasure to talk to you today as the preparation has also been a voyage of discovery for me.
Greg asked me to share my thoughts on the evolution of the energy situation, reflecting on the past whilst looking into the future and the uncertainties and challenges we may face. While I was invited as a Fueller, these are strictly my own personal views and reflect what I have observed and witnessed over 50 years. I also recognise that perspectives on the future cover a very broad spectrum and whatever I say will to some extent prove wrong and probably controversial. I am happy to be challenged at the end or later during the day. There are many other experts in the room who will be able to help me answer the really difficult questions!
I hope to show you how we have just been through one major energy revolution and survived that and are well into the next transformation that started a decade ago and we will survive this one too.
Let me wind the clock back nearly 50 years when the new age of the energy industry fundamentally started. There was a true crisis in 1973 following the outbreak of the Yom Kippur war in the Middle East. This led to oil embargoes imposed by various OPEC producers on a number of countries, particularly the USA as well some in Europe leading to significand cutbacks in oil production. It is a little hard to put an exact number on the cutbacks since what was done was not always what was threatened but I believe it was somewhere around 5-7% of global supply for a few months. It was the only real disruption on oil supplies since the Suez crisis of 1956. When people think about security of supply – about which I will say more shortly – Suez was the last time we had actual petrol rationing in this country that lasted about 4-5 months. We have never had a material global supply disruption since then so it is little surprise politicians never really cared about it. It was never a problem: we could always fill our cars with petrol or diesel when we wanted to.
The oil supply problems in 1973 in the UK were compounded by a miners’ strike which led to the 3-day week, a General Election over “who runs the Country” and the end of the Heath Government. Oil prices rose four-fold and I remember so well addressing the big question of the day – how will we cope because “oil demand is inelastic”. Price increases will have no impact. Of course that was complete nonsense and within less than 6 months we had an oil glut lasting the best part of 10 years.
A further disruption occurred in 1978-79 with the Iranian Revolution and the fall of the Shah and a further four-fold increase in oil prices coupled with the “Winter of Discontent”. People forget this historic perspective and are quite falsely comparing today’s difficulties with then. They talk today about record high oil prices and while they are high they are actually no higher in real terms than they were in 1980. Since then, energy efficiency has improved enormously – globally between 1 and 2% annually, while in the UK our dependence upon oil as a component of GDP has dropped 75%. We have had prices collapses since then and a few peaks for instance in 2008 and some more recently but comparisons with 40 years ago are totally misplaced.
But of course in the UK we could be comfortable about our energy situation. Strategically we had over 300 years of coal reserves for power generation and indeed had been a major global coal exporter in the past. The UK was still building coal-fired power stations with the last one commissioned in 1980. We would be OK! Now we have just one left which we are trying to keep open to keep the lights on this winter, running, I suspect, upon coal stocks of Russian origin!
My first key point – do not be pessimistic about the future when we have achieved today what was unthinkable 40 years ago – the cessation of coal as a source of energy. We now have 300 years of coal reserves – perhaps more like 3000 years that are worthless and will never be used, not at least until someone delivers in situ gasification and carbon recovery. What has happened over the past decade is even more dramatic. The “Large Combustion Plant Directive” was set to drive down the use of coal generated electricity. 10 years ago it was seen as an impossible or hugely expensive objective except we forgot the power of technology and innovation. The price of photo-voltaics and offshore wind power collapsed to prices not foreseen in 2012 as remotely possible. We will talk about nuclear later but when Hinckley Point was authorised the cost of new offshore wind was even higher – now the price differential is reversed and the cost of new wind power is comparable to fossil costs 10 years ago. I was as guilty as others is not having faith in technological change.
We have of course had the added benefit of North Sea oil and gas but when that first came ashore in Norfolk where I live town gas or coal gas as it was called was a lighting as well as heating and cooking fuel. How the world has changed!
I do need to address another issue that worried many in the 1970s – the question of “When will the oil run out?” I recently wrote a thought piece on this subject and I answered my own rhetorical question – NEVER! But 30 or 40 years ago oil companies had reported commercial reserves aften around 15 years. There was lots of academic analysis here and in the USA predicting that we would soon start running out of the stuff, probably early in the 21st century. One forecaster, Peter Odell was widely rebuked for suggesting the opposite but it was Sheikh Yamani, the Saudi Oil Minister who famously said the Stone Age did not end because we ran out of stones and the oil age will not end because we run out of oil. How right he was.
It is a demand issue not a supply problem and all oil forecasters now seem to agree that oil demand will peak soon and start falling for ever. The only disagreement is exactly when and how fast but my personal sense is we have reached that point, if not already, very soon. Oil demand is still below the 2019 peak and it may never recover to that level again given the current economic challenges the world faces, and the price impacts on demand.
The paradox or dilemma now is what happens to oil prices in the future. There are two quite different scenarios. Firstly, with lower demand prospects companies will be reluctant to invest in long term assets and then be left with stranded assets – remember the lesson from coal. We have seen projects deferred though some of those decisions are now being revisited. That would drive up prices. Alternatively, OPEC will recognise that they must maximise the recovery and realisation of their oil assets before they become unwanted and will drive to realise their value before they too get left in the ground. They need the money to develop alternative economic prospects. This will stimulate production and falling prices. Personally, I suspect the latter scenario as the prices of renewable continue to fall but that does not mean we will not have intermittent supply disruptions. With plenty of oil available and declining dependence upon energy and particularly oil for economic growth I am optimistic that oil prices will not go through the roof.
Look at these charts. Oil demand rose rapidly from 1950 to the mid 1970s with prices peaking in 1980. OPEC demand dropped in half from 1975 and did not fully recover for 20 years. Total oil demand which had grown between 5 and 10 % for two decades remained flat for a decade. Global dependence upon oil as a percent of total energy demand peaked at just over 40% in 1973 and has been declining ever since. Coal demand globally has already passed its peak and the same will happen for natural gas in the 2030s. We have been through more than one energy revolution since 1973 and the pace of change is getting even quicker. It may be a bit of a roller-coaster but the difficulties we face are, I suggest, no greater that those we have already solved.
That does not mean it will always be a smooth ride – we have a fragile infrastructure and as Richard Hill said just yesterday – infrastructure can be the military enabler or its Achilles heel. We are not very good in the UK about making key strategic decisions on energy investments. I can think of a couple that had real foresight. When Churchill declared over a hundred years ago that the Royal Navy fuel of the future would be oil that was a brave decision! Oil had barely been discovered and coal was 95% of global energy supply. In 1937 some inspired individual started building the GPSS – the Government Pipeline and Storage System in anticipation of the possibility of war. Who would have expected a six inch pipeline, a pre-war contingency asset would save the Country’s aviation business from collapse when the Buncefield oil terminal in Hertfordshire blew up? A World War II relic that kept Heathrow alive! Building strategic energy security is a long term and expensive project. The French achieved it by building 60 nuclear power stations that provide now 70% of French electricity supply. It took 40 years but at what cost. President Carter set an ambition of US “Energy Independence”. He was to see this finally achieved 40 years later with the fracking revolution.
Looking to the future what can we anticipate? It is absolutely clear that generating and delivering low carbon electricity – that not from fossil fuels – is the single largest challenge. We will need a massive increase in generation but we can be optimistic given what has already been achieved. We need to upgrade the balancing mechanisms in the power supply without using fossil fuel backup. It now seems possible to achieve that with 100% renewables – that was deemed impossible a decade ago. We will grow demand response – but that was a business I helped to commoditise in the USA over a decade ago – achievable. We must upgrade distribution systems both at a national level as well as at the local level. We do not have the capacity I suggest to refuel all those new electric cars. NIMBYs will flourish – I live in Norfolk and there is huge outrage at expanding the overhead power line to take offshore wind power from the Norfolk coast to London. How do we insulate all those drafty Victorian houses that look lovely? I have given up trying to heat mine above 18 degrees! Can we find enough copper? However, as I have said what seems impossible or unlikely today is a soluble problem for tomorrow’s engineers and innovators. We have proven we can do it.
Technology is both a solution and a challenge. We have seen the cost of PV and wind collapse driven by the speed of innovation and scale-up efficiencies. Sometimes the problems look more intractable. Look at CCS – Carbon Capture and Storage. I believe this is a vital enabling technology to meet our climate objectives but the UK has spent over a decade trying, unsuccessfully, to get development projects up and running. It needs proactive Government engagement but 10 years forward thinking is a really long time in politics.
Similarly with batteries – these will be vital to sustain the power systems and critical if we are to retain and grow a UK car industry. We are behind in the race as other countries develop large scale manufacturing capability. Hydrogen – the Chemistry is simple and it has long been seen as one of the key fuels of the future. The physics and engineering of storing and transporting it are the challenge. For some applications it in unlikely ever to be a solution – I do not anticipate in my lifetime flying in a battery or hydrogen powered aircraft. You may be luckier but I speak as perhaps the oldest person in the room!
But some large gains are waiting to be exploited. My wife and I had to change our cars last year. They final died graciously but to my amazement new technology halves my petrol consumption and I can boast of cutting my transportation carbon footprint in half!
At this time I cannot ignore Ukraine. This is a truly horrific humanitarian crisis and I am sure politically and militarily we all have a lot to learn. Let me just address for a moment the less important matter of the impact on the oil market. The impact upon the gas markets is more dramatic but I am really not qualified to add to the debate. At the outset in early March the Economist was predicting oil prices reaching $250 per barrel, perhaps even $300. A well-known bank suggested last week $380 per barrel which precipitated the IEA to change its stance and ask Saudi Arabia to produce more oil rather than cut back on development investments. I do not normally try and predict oil prices - it’s a fool’s errand as I have learnt to my cost. But I did publish a commentary at that time, using what my American friends here will understand as military command – “nuts”. We will not have the actual figures for some time but I would suggest that, unlike in 1973, the impact of the war on global oil supply and demand is minimal. Russia is still producing oil at a high rate even if its economy is in dire straits. Well reported figures show exports are going to India and China in very large volumes at a $25-35 per barrel discount. Europe is buying the crudes they did – but inefficiently and more expensively. The Oxford Institute for Energy Studies suggested last week that Russian oil exports have actually increased by nearly 20% between February and May! As I have already said, higher prices will depress demand, COVID is repressing demand in China, we are heading for a recession in much of Europe and perhaps the USA while our dependence is declining every year. There does remain the difficult issue of the supply of diesel and heating oil in Europe, heavily dependent upon Russian production but in the past the refining industry has shown the capacity to adjust.
I cannot conclude without a few comments on food and the issue of whether we are facing a food crisis at the expense of a fuel crisis. The cost of PV is falling rapidly – great. Farmers have discovered that generating electricity is a better financial proposition than growing food with probably a lot less hard work. Is it really right that we are planting fields of PV on the best agricultural land in the country? I live in Norfolk and I am horrified by what I see all around me. Electricity prices will fall but at the expense of rising food prices.
Likewise biofuels. These are a great innovation but I read recently that 20% of the US land devoted to the production of maize is used to make a 10% additive to petrol. The policy was to provide a subsidy to farmers and to make cheap gasoline as they call it. The maths does not work. We can never grow enough biofeed to solve the gasoline problem but they are subsiding farmers to make cheaper fuel rather than more plentiful food. It is OK to use waste to make fuels but to use virgin edible food – not my choice.
Ukraine – I have been saying since the beginning that as well as a humanitarian crisis we will see the impact is the prices of food not energy. What history shows is that Putin is repeating exactly the sins and methods of Stalin in the great Ukrainian famines of the 1920s and 1930s.
I cannot conclude with a few final works on SAF – Sustainable Aviation Fuels. The chemistry works – we know that. They work in jet turbines and we know that and the quality issues have been signed off by the turbine manufacturers and ASTM. They may be less energy efficient weight for weight but they work. The challenge is how we make SAF in sufficient volumes and at a price that is competitive with fossil fuel alternatives. There are multiple options and I believe the funding and the will power to succeed is there. You will recognise by now my thesis – rely upon our capacity to deliver technological innovation. We have done it successfully many times before and you will do it again.
So to conclude. Do not get depressed. It is easy to read reports – even from our own Climate Change Committee about how far away we are from where we need to be. My experience over decades in the energy industry is we underestimate the power of technology and innovation. If anything the pace of change is moving even faster than it has in the past and it will speed up in the future. Decarbonising electricity is key – we are solving the generation challenge but we need to address the infrastructure and distribution impact. I do not believe financing will hold us back – I am not sure I would have said that so convincingly 10 years ago.
We have a Energy Strategy but no implementation plan – that is an issue. But events do have an impact. At the end of 2021 COP26 agreed everything; by April we had our first national energy strategy for decades but by June were looking at how we could keep the coal fires burning to protect electricity supply this winter!
Oil will remain a transition fuel for many decades to come but its importance will continue to decline. Oil has a couple of unfortunately powerful characteristics – it is cheap, plentiful, has a high energy intensity, is transportable and convenient. I can think of no other fuel with all those characteristics and advantages. We need to manage its decline but we will never run out of it. Aviation will be one of its final homes. We need to find a way of balancing future investment to protect against the problems of stranded assets and in particular with declining oil production where will refineries survive. Biofuels have an important place but derived from waste. Will we have to prioritise food over energy?