KEYFACT Energy
With so much focus on the oil price and whether oil supply can be trimmed to match the much lower demand due to the pandemic, I take the opportunity to look elsewhere at the impacts of disruption in the energy sector. Can the pandemic mark a permanent shift in companies’ energy transition strategies? It offers a rare opportunity to reset the global energy narrative. With the daily flood of oil news, and stories of pandemic-related economic chaos, the four energy topics below have by-and-large failed to make media headlines.
Electricity. With millions staying at home, trying to work from home, and having the kids at home, domestic electricity consumption is higher. Home energy use has soared working on laptops, video calls, more home cooking and watching more TV. Many people will see this impact in their next electricity bill. Even so, electricity consumption overall is down significantly because large manufacturing industries, mining projects and factories, subways and non-essential businesses have been shuttered and office blocks are closed. Overall, electricity consumption has plunged around 20-30% in many countries. In manufacturing the fall in usage has often been 50%.
This creates complex issues for electricity producers and grid operators. The traditional morning and evening peaks in consumption are much diminished. In some industrial areas peaks have disappeared whilst residential zones may have unusually high daytime demand. However, low demand creating excess supply can destabilise the electricity grid and, in an extreme situation, lead to power cuts. Maintaining security of supply is not trivial at the best of times. Oversupply can cause the frequency of the power system to rise. The inputs coming from renewables – wind & solar – are growing and make the grid inherently more unstable because their frequency is constantly changing often minute by minute making balancing supply and demand, and maintaining system frequency far more challenging.
Some of the recent lows in power demand have not been seen for 20 years. To stop the whole system crashing some power sources have to be abruptly shut down. When the system crashes, rolling blackouts can occur, which leads chaos, for example in hospitals running life saving equipment, or in transport systems that rely on electricity. Overall, one should expect that very high cost production, available to meet peaks in demand, should be unnecessary. So the cost of power for most users should be lower. The way that the grid operators and large and small power producers manage the situation and power price will likely only be known when your bill falls through the letterbox in coming weeks.
Ethanol. No, this is not about bootleg alcohol! It is about bioethanol, used in making gasoline cleaner burning. Typically, in most countries, ethanol makes up 10% of each gallon of gasoline sold. But its introduction in Mexico has been thwarted by legal and regulatory issues and resistance by fuel retailers over the last 3 years.
With demand for gasoline 30-60% lower due to lockdowns, social distancing and people leaving their cars unused in the street, so too is the market for ethanol much reduced. This in turn impacts agriculture and the numerous farm workers involved growing crops of corn, wheat, maize, sugar cane, and sweet sorghum. In 2019, bioethanol production had reached all-time highs, so this was a problem well before the pandemic. No surprise then that ethanol prices have broadly tracked gasoline prices which recently touched 20-year lows in some countries.
Production capacity would normally be approaching a peak now with the onset of summer in the northern hemisphere. Ethanol production margins are razor thin. Farmers are faced with shutting down some ethanol feedstock production; however a change to planting more profitable crops takes time.
Renewables. With so much disruption in the energy sector, now would be a great moment for all countries to make a conscious shift to investing in more renewable energy. If economic recovery could be based around renewable energy it would create momentum towards zero net emissions by 2050. There is a lot of talk about it, and a chance to seize the moment. Clear Government support and setting of route map to decarbonise would be really helpful.
Investment in renewables has fallen around 10% globally. Innovative energy storage solutions are needed allowing renewable sources that have the lowest cost of supply to enter the grid at the optimal time of day, rather than being excluded. One of the main energy storage opportunities in Mexico can be pumping water to fill water reservoirs creating hydro storage. Coupled with this, new battery technology projects are needed – such as lithium-ion batteries and behind-the-meter storage in homes. Together these can help improve security of power supply.
At the moment, a 3-act environmental tragedy is unfolding in Mexico. All 3 parts are worsening air quality, the world’s number one environmental health risk. All 3 could be reduced by more uptake of renewables. First, the recent decision to limit the contribution from renewables and burn more sulphur-rich fuel oil to produce electricity. Secondly, new data from NASA that shows Mexico has 2 of the top 5 most sulphur dioxide polluting refineries in the world, and 5 of the top 23. And thirdly, Mexico has been flaring more and more associated gas at its oilfields. Gas flaring has doubled over the past 12 months and is around 500 million cubic feet per day. That is about US$ 1 million per day of gas being burnt off….or about US$ 366 million of natural gas lost this year!! Flaring gas in a manner which generates no value is not a good way to safeguard a country’s precious hydrocarbon resources. Squeezing renewables out of the energy supply is just as bad.
Liquefied natural gas (LNG). With the slump in economic activity, so too is there a slump in demand for LNG. Oversupply of LNG was an emerging storyline well before Covid. Storage has been filling up everywhere, a familiar tale. The pace that economic activity resumes will be critical, particularly resumption of economic growth in China, India and Asia Pacific as a whole because they are major consumers.
New LNG developments have already faced postponements and financing issues, for example in the US and Canada, and some existing projects are being taken offline and cargoes cancelled to ease oversupply. LNG will be an essential part of global economic recovery, when it comes, with this form of natural gas offering a secure and competitive energy source. With relatively low emissions, its carbon footprint is much lower than burning oil or coal.
Today’s energy world – whether it is oil, renewables, LNG, ethanol or electricity – is a reflection of the bigger global disruption. At a time when all countries needed to pull together to solve some of the biggest global challenges in over 75 years, it has done anything but. Squabbling, blaming others, hiding insecurities behind claims of success, name calling, self serving decisions, egocentric behaviour and national rather than international priorities, and breaking the agreed rules, have become part of a new normal. Yes, definitely, it is a house divided.
Mr. Chris Sladen runs an advisory service offering insights to inform, shape a decision, and guide the next steps for energy ventures. Chris has a unique global experience having worked in the energy sector of over 40 countries. This is underpinned by extensive knowledge of petroleum systems and where best to find oil and gas, notably in the Gulf of Mexico & nearby areas, and NE & SE Asia, as well as the development of midstream, downstream & renewables investments in many emerging economies. Chris has extensive experience acquired on the Boards of companies, subsidiaries, business chambers & organisations. Chris has a career of over 40 years in the energy sector, living in Mexico (2001-2018), Russia, Vietnam, Mongolia, China & UK.