Australia: Global energy outlook 2017

Upside for our coal and gas, happy days for renewables, a glimmer of hope for uranium

WHO SHOULD READ THIS

  • Current and prospective producers of, and investors in, renewables, coal and gas and uranium projects and infrastructure in Australia and offshore, together with those seeking to shape policies affecting these sectors.

The International Energy Agency (IEA) has released their 2017 World Energy Outlook which assesses global energy supply and demand out to 2040 under three scenarios.

In their core (New Policies) scenario, under which it is assumed that Paris Climate Agreement emission targets are implemented, global energy needs rise more slowly than in the past but still expand by 28% between today and 2040. This is the equivalent of adding another China and India to today's global energy demand. The largest contribution to demand growth (almost 30%) comes from India. In Southeast Asia energy demand grows at twice the pace of China. Overall, developing countries in Asia account for two-thirds of global energy growth, with the rest coming mainly from the Middle East, Africa and Latin America.

The biggest driver in energy demand comes from a 60% rise in electricity demand to 2040, with over 85% of global growth occurring in developing economies.

Contrary to the expectations of many, coal's contribution to meeting overall energy demand continues to grow slowly out to 2040, but coal's share shrinks from 27% today to 22% in 2040.

Since 2000, coal-fired power generation capacity has grown by a massive 900 gigawatts (GW), but net additions from today to 2040 are only 400 GW and many of these represent plants already under construction.

By 2040 India will be the world's largest importer of coal, with a 45% increase over 2016 import levels. Vietnam, Philippines, Malaysia, Thailand and Pakistan will also increasingly turn to the international coal market to meet their energy needs.

Australia's coal exports out to 2040 are projected to grow by almost 20%.

Renewables are forecast to capture two-thirds of global investment in power plants to 2040 as they become, for many countries, the lowest cost source of new generation.

Rapid deployment of solar photovoltaics (PV), led by China and India, helps solar become the largest source of low-carbon capacity by 2040, by which time the share of all renewables (including hydro) in total power generation reaches 40%, up from the current 24%.

Natural gas is forecast to grow to account for a quarter of global energy demand by 2040 (surpassing coal), and becoming the second-largest fuel in the global mix after oil. The IEA notes that, despite the emerging electric vehicle revolution, the world's consumers are not yet ready to say goodbye to the era of oil.

Some 80% of the projected growth in gas demand takes place in developing economies, led by China, India and other countries in Asia, where much of the gas needs to be imported and infrastructure is often not yet in place.

Finally, nuclear's share of power generation in a post-Fukushima world remains stable at 10%.

WHAT THIS MEANS FOR ENERGY INVESTORS AND PRODUCERS

Renewable energy

While we in Australia have been debating about renewables' appropriate share of power generation beyond the 23% under the Renewable Energy Target, the IEA is saying that the world will produce 40% of its electricity from renewables by 2040. China will be producing 42% of its electricity from renewable sources, and India 38% (including 16% from solar).

While some of the Australian state targets for 2030 may be at the ambitious end of the spectrum, those backing further strong growth in renewables in Australia would appear to be in good company globally.

The positive spin-off for the Australian resources sector are the opportunities to supply the minerals essential to the manufacture of renewable technologies.

Thermal coal

Can Australia grow our thermal coal exports when coal fired power generation is only expected to grow by 9% out to 2040 and the global trade in thermal coal is expected to actually decline?

The IEA does in fact expect Australian thermal exports to grow by almost 20% by 2040. On the Galilee Basin, the IEA says:

"Our New Policies Scenario is consistent with some development happening in the Galilee Basin, but the commercial viability of the projects is closely tied to the trajectory for coal imports in India and production in Indonesia, which is subject to significant uncertainties in both countries."

The IEA expects a dramatic drop in Indonesian coal exports as coal is diverted to their domestic market. This creates an opportunity for Australian thermal coal as South East Asia's power generation from coal ramps up by 180%. The extent of the Indian market opportunity will come down to their ability to meet their ambitious domestic production targets and whether the projected 370 GW in new coal-fired generation capacity to 2040 is realised. The answer is probably yes if India can maintain its economic growth momentum.

Coking coal

The IEA expects the trade in coking coal to keep growing:

"Coking coal is scarcer than [thermal] coal, and even countries like India that are endowed with considerable overall coal reserves may not be self-sufficient in terms of domestic coking coal production. Heavy industries like steel and cement are particularly important in developing countries, and they underpin growth in coking coal trade".

In fact, Indian imports of coking coal are expected to grow strongly and Australia will be dominant in the global trade in coking coal, with a two-thirds market share.

Without a disruptive steel-making technology that displaces coking coal, market prospects look good for Queensland coking coal producers.

Natural Gas

The positive news for Australian natural gas is that global use of gas is set to jump by 45% in the next 25 years. Even better news is that long distance trade in gas is expected to surge by three quarters and LNG's share of that trade is set to grow to 60%.

However, the IEA observes that:

"Gas markets remain well supplied for the next few years. By the mid-2020s, however, market over-capacity is absorbed by import growth. Investment in new capacity therefore is needed from 2020 onwards."

Will Australia be able to take advantage of that post-2020 opportunity in gas? The IEA thinks the lower costs in the USA, Russia and Qatar give them a distinct advantage.

The IEA anticipates that the Australian projects under construction or recently completed will gradually ramp up gas production, and Australian output reaches around 150 billion cubic metres (bcm) in 2025 (up from just under 90 bcm in 2016) before increasing further to 195 bcm in 2040. The IEA expects there will be some new Australian LNG projects out to 2040, but these are mostly smaller incremental projects. There is not expected to be a second investment wave in Australia comparable to the boom of the last ten years. Nevertheless, Australian LNG will be exported to Japan, Korea, increasingly to China and much stronger trade with India and 'other Asia'.

All in all, the Australian gas sector outlook is solid, but perhaps falling short of the golden age predicted 4 to 5 years ago. Leaving aside exports, the Australian domestic East Coast market also presents opportunities for second tier gas producers.

Uranium

Australian uranium producers have endured very challenging conditions since the 2011 Fukushima nuclear disaster. While nuclear power generation is not expected to return to its 17% global share back in 2000, the demand for nuclear energy is expected to lift by 47% out to 2040, which is positive news for uranium projects. However, the ability of Western Australian and Queensland projects to take advantage of this opportunity probably requires bipartisan support for uranium mining, something which is yet to be achieved.

WHERE TO FROM HERE

In amongst all the excitement about the global switch to renewable power generation, the IEA paints a pretty positive next 25 years for the export of Australian fossil fuels. However, we do need to address the high costs that the IEA believes will hold back our gas development potential.

As the IEA observes, we have a world class mining industry and excellent quality coal reserves. The IEA is somewhat generous though in saying we have a "conducive regulatory environment" – backers of projects that have been in the approvals system for up to ten years may beg to differ.

While we struggle to reach a bipartisan view in Australia about the future of renewable energy – and energy policy more generally, it is sobering to consider that by 2040 China may be sourcing 42% of its power from renewables, and India 38%.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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