Feature: Coal To Be King For Another 25 Years

Despite all the claims and counter claims about global warming, carbon taxes, and new sources of 'green' energy, one thing continues to standout when you look at the global energy scene: Australia is sitting pretty.

And another standout is that coal is the coming fuel over the next 25 years.

Now, this isn't just me saying this, but the highly respected International Energy Agency which last week predicted that coal use will overtake oil as the largest fuel in the global energy mix by 2035.

As the world's major coal exporter, Australia will benefit, as will we from the expected and widely forecast golden age for natural gas (which includes so-called unconventional gas).

And, if nuclear energy recovers from the hit taken from the Fukushima crisis in Japan, then we also stand to benefit with our massive reserves, especially at Olympic Dam in South Australia.

And if nuclear energy doesn't expand as forecast by the IEA in its central forecast, then more coal and natural gas will be required, which again will benefit Australia.

The forecast was made in the IEA's 2011 World Energy Outlook.

The IEA says its central New Policies Scenario, which assumes that recent government commitments are implemented in a cautious manner, "primary energy demand increases by one-third between 2010 and 2035, with 90% of the growth in non-OECD economies."

The points of this scenario are:

"China consolidates its position as the world's largest energy consumer: it consumes nearly 70% more energy than the United States by 2035, even though, by then, per capita demand in China is still less than half the level in the United States.

"The share of fossil fuels in global primary energy consumption falls from around 81% today to 75% in 2035.

"Renewables increase from 13% of the mix today to 18% in 2035; the growth in renewables is underpinned by subsidies that rise from $64 billion in 2010 to $250 billion in 2035, support that in some cases cannot be taken for granted in this age of fiscal austerity. By contrast, subsidies for fossil fuels amounted to $409 billion in 2010."

The IEA says coal has met almost half of the increase in global energy demand over the last decade.

"Whether this trend alters and how quickly is among the most important questions for the future of the global energy economy," the Agency said.

"Maintaining current policies would see coal use rise by a further 65 percent by 2035, overtaking oil as the largest fuel in the global energy mix," the outlook report said.

"The main market for traded coal continues to shift from the Atlantic to the Pacific, but the scale and direction of international trade flows are highly uncertain, particularly after 2020. It would take only a relatively small shift in domestic demand or supply for China to become a net-exporter of international trade flows is highly uncertain, particularly after 2020," the outlook said.

The outlook also expects India's coal use to double, so that India displaces the United States as the world's second-largest coal consumer and becomes the largest coal importer in the 2020s.

Now these developments are a big deal for Australia, despite what The Greens and other groups might argue.

Indian companies are investing heavily in the Australian coal industry directly and through joint ventures and contractural arrangements.

The IEA says coal has met almost half of the increase in global energy demand over the last decade.

It points out that a rising use of new fuels would cut coal consumption to where it rises over the next 10 years then levels of around 25% above consumption levels in 2009.

The Agency says China's consumption of coal is almost half of global demand and its Five-Year Plan for 2011 to 2015, which aims to reduce the energy and carbon intensity of the economy, will be a determining factor for world coal markets.

"China's emergence as a net coal importer in 2009 led to rising prices and new investment in exporting countries, including Australia, Indonesia, Russia and Mongolia.'

Widespread deployment of more efficient coal-fired power plants and carbon capture and storage (CCS) technology could boost the long-term prospects for coal, but there are still considerable hurdles.

"If the average efficiency of all coal-fired power plants were to be five percentage points higher than projected in 2035, "such an accelerated move away from the least efficient combustion technologies would lower CO2 emissions from the power sector by 8% and reduce local air pollution."

"Opting for more efficient technology for new coal power plants would require relatively small additional investments, but improving efficiency levels at existing plants would come at a much higher cost."

It says that if Carbon Capture and Storage "is not widely deployed in the 2020s, an extraordinary burden would rest on other low-carbon technologies to deliver lower emissions in line with global climate objectives."

Looking at oil, the IEA says short-term pressures on oil markets may be eased by slower economic growth and by the expected return of Libyan oil to the market.

"But trends on both the oil demand and supply sides maintain pressure on prices.

"We assume that the average IEA crude oil import price remains high, approaching $120/barrel (in year-2010 dollars) in 2035 (over $210/barrel in nominal terms) in the New Policies Scenario although, in practice, price volatility is likely to remain.

"All of the net increase in oil demand comes from the transport sector in emerging economies, as economic growth pushes up demand for personal mobility and freight.

"Oil demand (excluding biofuels) rises from 87 million barrels per day (mb/d) in 2010 to 99 mb/d in 2035.

"The total number of passenger cars doubles to almost 1.7 billion in 2035.

"Sales in non-OECD markets exceed those in the OECD by 2020, with the centre of gravity of car manufacturing shifting to non-OECD countries before 2015.

"The rise in oil use comes despite some impressive gains in fuel economy in many regions, notably for passenger vehicles in Europe and for heavy freight in the United States.

"Alternative vehicle technologies emerge that use oil much more efficiently or not at all, such as electric vehicles, but it takes time for them to become commercially viable and penetrate markets.

"With limited potential for substitution for oil as a transportation fuel, the concentration of oil demand in the transport sector makes demand less responsive to changes in the oil price (especially where oil products are subsidised).

"The cost of bringing oil to market rises as oil companies are forced to turn to more difficult and costly sources to replace lost capacity and meet rising demand.

"Production of conventional crude oil - the largest single component of oil supply - remains at current levels before declining slightly to around 68 mb/d by 2035.

"To compensate for declining crude oil production at existing fields, 47 mb/d of gross capacity additions are required, twice the current total oil production of all OPEC countries in the Middle East.

"A growing share of output comes from natural gas liquids (over 18 mb/d in 2035) and unconventional sources (10 mb/d).

"The largest increase in oil production comes from Iraq, followed by Saudi Arabia, Brazil, Kazakhstan and Canada.

"Biofuels supply triples to the equivalent of more than 4 mb/d, bolstered by $1.4 trillion in subsidies over the projection period.

"Oil imports to the United States, currently the world's biggest importer, drop as efficiency gains reduce demand and new supplies such as light tight oil are developed, but increasing reliance on oil imports elsewhere heightens concerns about the cost of imports and supply security.

"Four-fifths of oil consumed in non-OECD Asia comes from imports in 2035, compared with just over half in 2010.

"Globally, reliance grows on a relatively small number of producers, mainly in the Middle East North Africa region, with oil shipped along vulnerable supply routes.

In aggregate, the increase in production from this region is over 90% of the required growth in world oil output, pushing the share of OPEC in global production above 50% in 2035.

Earlier this year the IEA issued a report on the outlook for gas (which we covered in AirWeekly).

Entitled The Golden Age For Gas, it made clear the accelerating discoveries and production of so-called unconventional gas (tight or shale gas, plus coal seam gas) was changing the energy equation in more and more economies.

In the World Outlook, the Agency says "there is much less uncertainty over the outlook for natural gas: factors both on the supply and demand sides point to a bright future, even a golden age, for natural gas.

"Our Outlook reinforces the main conclusions of a WEO special report released in June 2011: gas consumption rises in all three scenarios, underlining how gas does well under a wide range of future policy directions."

Under one of the different policy scenarios in the Outlook, the Agency says demand for gas "all but reaches that for coal, with 80% of the additional demand coming from non-OECD countries."

"Policies promoting fuel diversification support a major expansion of gas use in China; this is met through higher domestic production and through an increasing share of LNG trade and Eurasian pipeline imports.

"Global trade doubles and more than one-third of the increase goes to China.

"Russia remains the largest gas producer in 2035 and makes the largest contribution to global supply growth, followed by China, Qatar, the United States and Australia.

"Unconventional gas now accounts for half of the estimated natural gas resource base and it is more widely dispersed than conventional resources, a fact that has positive implications for gas security.

"The share of unconventional gas rises to one-fifth of total gas production by 2035, although the pace of this development varies considerably by region.

"The growth in output will also depend on the gas industry dealing successfully with the environmental challenges: a golden age of gas will require golden standards for production.

"Natural gas is the cleanest of the fossil fuels, but increased use of gas in itself (without carbon capture and storage) will not be enough to put us on a carbon emissions path consistent with limiting the rise in average global temperatures to 2°C."

Note from those comments that Australia is also a big player in gas.

But the IEA doesn't consider (as no one else does), yet the high potential Australia has for shale and tight gas and oil, as Beach Energy seems to be revealing in its early Cooper Basin drilling.

Uranium is back in the news with the Federal Government wanting to export it to India.

The IEA says the Fukushima disaster in Japan has raised questions about the future role of nuclear power, although it has not changed policies in countries such as China, India, Russia and Korea that are driving its expansion.

The Agency says that in its New Policies Scenario, "nuclear output rises by more than 70% over the period to 2035, only slightly less than projected last year."

"However, we say in a Low Nuclear Case, which assumes that no new OECD reactors are built, that non-OECD countries build only half of the additions projected in our New Policies Scenario and that the operating lifespan of existing nuclear plants is shortened.

"While creating opportunities for renewables, such a low-nuclear future would also boost demand for fossil fuels: the increase in global coal demand is equal to twice the level of Australia's current steam coal exports and the rise in gas demand is equivalent to two-thirds of Russia's current natural gas exports.

"The net result would be to put additional upward pressure on energy prices, raise additional concerns about energy security and make it harder and more expensive to combat climate change.

"The consequences would be particularly severe for those countries with limited indigenous energy resources which have been planning to rely relatively heavily on nuclear power.

"It would also make it considerably more challenging for emerging economies to satisfy their rapidly growing demand for electricity," the Agency warned.