Energy’s Next Frontiers How technology is radically reshaping supply, demand, and the energy of geopolitics

Deloitte Center for Energy Solutions Energy’s Next Frontiers How technology is radically reshaping supply, demand, and the energy of geopolitics

About the author

Dr. Joseph A. Stanislaw Dr. Joseph A. Stanislaw is the founder of the advisory firm The JAStanislaw Group, LLC, special- izing in strategic thinking, sustainability, and environmentally sound investment in energy and technology. He is an independent senior advisor to Deloitte’s energy and sustainability practices. As an energy industry leader, advisor, strategist and commentator, Dr. Stanislaw advises on future trends in the global energy market. Dr. Stanislaw serves on several boards in the energy and clean technology space. He is a member of the Council on Foreign Relations.

Dr. Stanislaw was one of the three founders of Cambridge Energy Research Associates in 1983 and served as managing director for all non-US activity until 1997, when he was named president and chief executive officer. He is an adjunct professor in the Nicholas School of the Environment and Earth Sciences at Duke University, where he is a Member of the Board of Advisors for the Nicholas Institute for Environmental Policy Solutions. Dr. Stanislaw was a Research Fellow of Clare Hall and lecturer in Economics at Cambridge University, where he was also a member of the Energy Research Group in the university’s Cavendish Laboratory. He was a senior economist at the Organization of Economic Cooperation and Development’s International Energy Agency in Paris.

Dr. Stanislaw is co-author of The Commanding Heights: The Battle for the World Economy. Now in the second edition, the book has been translated into 13 languages and made into a six-hour documentary on PBS. He is also the author or co-author of numerous reports and published papers on the geopolitics and economics of future energy supply and demand, including Energy in Flux: The 21st Century’s Greatest Challenge, and Clean Over Green: Striking a New Energy Balance as We Build a Bridge to a Low-Carbon Future, and he is featured in the public television documentary, Oil ShockWave.

Dr. Stanislaw received a BA, cum laude, from Harvard College, a PhD in Economics from the University of Edinburgh, and was awarded an MA from the University of Cambridge. He is one of only several people to have been awarded an Honorary Doctorate and Professorship from Gubkin Russian State University of Oil and Gas in Moscow.

Dr. Stanislaw may be contacted at [email protected].

ii Deloitte Center for Energy Solutions

Contents

Through the looking glass (full steam ahead, but…) | 2

Framing the Great Game 2.0: Safety, security, and stability | 7

Demand is supply: The stealth revolution in energy efficiency technologies | 9

The supply surprise | 13

The new Great Game–A technology race | 15

A potential safety net: The Power of One | 17

Endnotes | 18

1 Energy’s Next Frontiers How technology is radically reshaping supply, demand, and the energy of geopolitics

Through the looking glass (full steam ahead, but…)

o understand how radically the energy It is a rare blessing for a country to be Tindustry is changing, consider this: The confronted with an abundance of energy. United States has become the No. 1 producer Pessimism has reigned for the better part of natural gas in the world. This is due to of 150 years. In 1865, the British economist combining horizontal drilling and hydraulic William Stanley Jevons published The Coal fracturing technologies, a combination that has Question, a study that spread panic about the been in widespread use for just four years— depletion of coal reserves. At the 1956 meeting and that has allowed gas from shale formations of the American Institute, M. King to go from accounting for just 2 percent of Hubbert, a Shell geoscientist, coined the con- America’s natural gas production in 2001 to cept of “” and, in 1974, he forecast that over 30 percent1 today. As a result, natural gas global oil supplies would peak in 1995. The prices have been falling in the United States Department of Energy’s 2005 for years. Given appropriate policy and smart contemplated the imminent, “abrupt,” and dan- investments, North America could eventually gerous peaking of world oil and gas supplies. achieve the goal of energy independence—with Yet, while humanity has consumed a total enough domestic supplies to meet American of one trillion barrels of oil since the early needs—though crude oil prices would still be 19th century, today, thanks to an onslaught of at the mercy of world markets. The fundamen- technology-enabled discoveries, another four tal question Americans now face is: Can they trillion barrels are thought to be accessible. In capitalize on this extraordinary opportunity? consequence, reserves-to-production ratios for Or, think about this: In 2008, with oil at many major oil producers are climbing as far $137 a barrel, there was a frenzy of fear over out as 2040, and oil and other liquid fuels will peak oil supply. Yet today, when we talk about remain the world’s largest energy source, meet- peak oil, we do so in reference to demand. ing one-third of demand. Meanwhile, many At some point within the next two decades, people now believe that both the United States global oil consumption could even crest. In the and Europe likely experienced peak demand United States, net petroleum imports reached for gasoline in 2007.3 their peak of domestic consumption—60 per- cent—in 2005, and have been falling ever since. Information technology Imports are now down to 46 percent. Soaring is energy technology output from the Bakken shale fields, coupled with increased deepwater output primarily What is driving this energy revolution? from the Gulf of Mexico, has pushed up US Technology. domestic production by 12 percent since 2008.2 Cutting-edge technology—hardware and, This is the first increase in a quarter-century especially, software—is unlocking geological and has confounded predictions that domestic potential in places and ways hardly imagin- output was set on an inexorable downtrend. able even a few years ago. Energy companies

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now rank among the most important—and And energy storage is perhaps the biggest sophisticated—technology companies in the game-changer: Apple, to take one example, world. Information technology companies are is said to be working on a hydrogen-based pioneers on every front of the energy revolu- laptop battery that could last for months. tion, by: Once the energy storage puzzle is cracked, renewables and alternatives should have even • Driving innovations in exploration greater currency. Or take exploration: Our ability to process • Cutting energy consumption in buildings and analyze massive amounts of three-dimen- through software-driven construction and sional data about the ocean floor has allowed energy management the energy industry to discover vast new fossil fuel deposits. Technological innovations in • Allowing utilities to more smartly source drilling then allow producers to access these and manage their energy output deposits, many of them located in remote, once-forbidding places—beneath the Arctic • Empowering individuals to understand icecap, for instance, or at extraordinary depths. how to reduce their energy use; this under- scores the “Power of One”—how each and Great Game 2.0 every one of us can become players in the energy game The economic, environmental, and geopo- litical consequences of this technological trans- • Enabling the design and testing of energy formation are breathtaking. Perhaps no change systems, from solar arrays and wind tur- is more important than the introduction into bines to nuclear plants the energy game of dozens of new players. The The breakthroughs have been stunning, and energy of geopolitics will not likely ever be often elegant in their simplicity. Among the the same. least appreciated technologies are those that Today, alongside traditional powers like empower companies and individuals to under- and the United Arab Emirates, stand and manage—and thus significantly Brazil is becoming an energy superpower reduce—their energy consumption. Last year, and Canada is reinforcing its position as one, venture capitalists invested $275 million—up as is Russia. Also joining the ranks of grow- 75 percent from 2010—in start-ups that make ing energy producers are countries like the software and other technologies to manage Philippines, Argentina, Angola, and Suriname energy use.4 (all thanks to deepwater drilling), and Poland Equally impressive is the evolution of (shale gas). In Israel, massive recent gas dis- renewable and alternative energy technologies. coveries are upending the energy and political The renewable energy market is expected to calculus—a fact that would most likely have reach as high as $800 billion by 2015 and to stunned former Prime Minister Golda Meir. generate 17 percent of the world’s electricity “Let me tell you something that we Israelis by 2030. In parts of the world, the cost of solar have against Moses,” she famously joked in energy is reaching grid parity. Nuclear, despite 1956. “He took us 40 years through the desert the Fukushima disaster, is growing at a pace in order to bring us to the one spot in the not seen in decades, especially in Asia—21 Middle East that has no oil.” The Department reactors provide 31percent of South Korea’s of Energy estimates that there are 32 coun- electricity, while 26 reactors are under con- tries worldwide with meaningful reserves of struction in China.5 shale gas.

3 Energy’s Next Frontiers How technology is radically reshaping supply, demand, and the energy of geopolitics

The global energy map has been redrawn Energy technology is also bringing its trans- and expanded by technology—which is the formative power to other parts of the world, real driving force in “Great Game 2.0.” principally by decoupling energy from its The geopolitical consequences are nowhere traditional sources. Renewable energy sources greater, perhaps, than in the United States. like wind and solar exist across the globe. For decades, the United States has been the The incredible diaspora of shale gas and oil world’s oil glutton, consuming about a quarter resources, and the reserves unlocked by deep- of global energy supplies, despite having just water exploration, expand the energy map even 5 percent of the population. Until recently, the further. This “localization” of energy could be United States had grown increasingly reliant a major force in—for instance—lifting Africa on energy imports, a dependency that shaped out of poverty by helping bring reliable energy its economy and its foreign policy. Since 2008, supplies to remote areas. It will help enable the however, US domestic oil output has climbed continued boom in urbanization, since energy 12 percent, largely on the back of the Bakken consumption and high energy costs are one of and other shale discoveries, as well as on the the brakes on economic development. And by rapid expansion of deepwater drilling. With being locally embedded, energy technologies its production projected to climb for years will help keep communities globally con- to come, the United States should soon lose nected—rather than dependent. its ranking as the world’s top oil importer—a Since the notion of the “Great Game” was dubious honor that is expected to go to the coined in the 19th century, it has referred to European Union by 2015 and China by 2020. the often-violent scramble among nations (China already has overtaken the United States for control of territories harboring energy as the biggest importer of oil from the Middle reserves. This old-style game is still very rele- East.)6 vant. This is evident in the growing geopolitical If, five years ago, you had asked “Which tensions over access to the Arctic’s mammoth country in which region of the world can be energy reserves; in China’s pursuit of con- totally energy self-sufficient?” no one would trol over fossil fuel deposits in Central Asia, have guessed the United States. Yet now, the Africa, the Middle East, and South America; revelation of North America’s massive shale gas and in the strong entry of India into the global and , combined with the techno- resources game. logical innovations that unlock their potential, But today it has become equally, if not is helping bring into focus the tantalizing pros- more, important to control the technology pect of energy independence for the United assets—the hardware and the software. Thus, States. Just a few years ago, the fossil-fuel-rich the game has changed. corridor that ran from Saudi Arabia, through the Caspian, over Siberia, and into Canada— Energy Inc. and the the Saudi-Caspian-Siberia-Canada (SCSC) Power of One corridor—was seen as the world’s energy backbone. Six years ago, the corridor stopped The new technologies have not only in Canada. But now, that energy rainbow empowered dozens of countries, but they also extends to the United States where, potentially, have made corporations and individuals par- Americans will be able to tap into the pot of ticipants in the energy game. gold at the end of that rainbow. But the fai- Google is perhaps the highest-profile rytale will only come true if the United States example of this: Its data centers continuously seizes the opportunity through appropriate drew almost 260 million watts—about a quar- policy, investments in infrastructure, and intel- ter of the output of an average nuclear power ligent energy management. plant—to run Google searches, YouTube views,

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Gmail messaging, and display ads. Yet, it has management as a necessary strategic discipline pioneered technologies that allow its data cen- and a key to competitiveness. The 2011 and ters to use only 50 percent of the energy that 2012 studies suggest there are three categories most other data centers consume. To help meet where businesses will fall as it relates to their its energy needs, meanwhile, Google has built energy management practices—Pioneers, a $915 million portfolio of clean energy invest- Engagers, and Reactors. ments on a simple investment philosophy.7 That is, the future will be powered by mul- Danger ahead—A tiple clean energy technologies, and the key license to operate? is to find the ones that will ignite a revolution and scale to meet the world’s energy needs. The breakneck pace of the energy technol- Already, Google has a zero carbon foot- ogy revolution likely masked inherent risks, print—and its goal is to go negative. however—especially in terms of the environ- Meanwhile, smart meters, the Internet, and ment and the public reaction. advanced software are allowing individuals The expansion of hydraulic fracturing and to fine-tune their energy consumption. This the accelerated production of the Canadian underscores the Power of One—the ability oil sands coincided with the global economic of every person to proactively manage their crisis that began in 2008. This initially blunted energy consumption and their carbon foot- reaction to the potential dangers of new energy print. This generational change is a function of technologies, since the general public was heightened awareness of the impact of energy absorbed by its core economic concerns and consumption on household expenses, on thus inclined to think more about the savings foreign policy, and on the environment. The that came from less-expensive energy than consumption of energy is no longer just an about environmental concerns. In parallel, the economic act—this is becoming a conscious campaign for a global climate treaty effectively act and an act of conscience. This will likely collapsed after Copenhagen in 2009, upend- intensify in the coming years. ing the momentum to curb carbon emissions. For both companies and individuals, tech- In other words, in the competition between nology has unleashed the potential creation of desire (for cheaper energy) and fear (of the a virtuous energy cycle: By understanding and eco-consequences of fossil fuels), desire was at managing energy use, individuals save money, the forefront. companies increase profits, and both lessen the But environmental concerns are again environmental impact. Everyone wins. front-and-center. The past three years have A recent report by Deloitte—the reSources seen a series of energy-linked environmen- 2012 study—found consumer resourceful- tal challenges that have reawakened public ness has become entrenched among American concerns: the Gulf of Mexico oil spill, the consumers. Eighty-three percent of consumers Fukushima nuclear incident, the controversy of took steps to reduce their electric bills over hydraulic fracturing, and more. the past year, up from 68 percent in the 2011 Another example is the 1,700-mile reSources study. And, consumers are demand- Keystone XL pipeline (which would transport ing that companies offer more environmen- 700,000 barrels per day of Canadian oil sands tally considerate solutions. US businesses, on crude to US Gulf Coast refineries), which has average, are targeting reductions in energy stirred a storm of controversy in Washington consumption of 23-24 percent over a 3-4 year after concerns were raised about carbon emis- period across electricity, natural gas, and trans- sions from oil sands production. The grass- portation fleet. This year’s survey indicates that roots movement against hydraulic fracturing, companies are increasingly recognizing energy meanwhile, has gained steam due to concerns

5 Energy’s Next Frontiers How technology is radically reshaping supply, demand, and the energy of geopolitics

about the potential contamination of ground formations causes earthquakes. The unsettled water, risks to air quality, and the possible nature of these concerns means that companies migration of gases and hydraulic fracturing still have not secured a free-and-clear “license chemicals to the surface. In January 2012, over to operate” from the public. 40,000 New Yorkers weighed in during the These are the early days of the high-tech public comment period on the state’s delibera- energy era. Our knowledge of the potential tions to allow hydraulic fracturing. and the consequences of new technologies is The concerns of the ecological crowd are in its infancy. The full cast of players in Great receiving attention, with some reports show- Game 2.0—states, technology companies, ing that groundwater tends to contain higher energy producers—is only now emerging concentrations of methane near hydraulic onto the stage. How all of these forces interact fracturing wells. Also, hydraulic fracturing has and play out in the coming years could well been linked to earthquakes—not yet proven determine not just where we get our energy but sowing distrust. In November 2011, an from and how much it costs, but also the shape earthquake measuring 5.6 rattled Oklahoma of domestic and global development. The Great and was felt as far away as Illinois. Until two Game 2.0 may well decide which countries years ago, Oklahoma typically had about 50 and companies emerge as enduring powers in earthquakes a year, but in 2010, 1,047 quakes the 21st century—which ones, in other words, shook the state. Both the US Army and the will reach the pot of gold at the end of the US Geological Survey have concluded that energy rainbow. the practice of injecting water into deep rock

Figure 1. The Saudi-Caspian-Siberia-Canada corridor: How deeply and quickly will the “pot of gold” be realized in the United States

Uncertain?

Oil Reserves Natural Gas Reserves High Coal Reserves 20 - 100 billion barrels 20 - 100 bboe* Nuclear Wind/Solar 100 - 200 billion barrels 100 - 200 bboe Uranium Human Capital 200 + billion barrels 200 + bboe

*Billion barrels of oil equivalent Historical data - Oil and Gas Journal, and BP Statistical Review

Source: The JAStainislaw Group LLC Graphic: Deloitte University Press | DUPress.com

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Framing the Great Game 2.0: Safety, security, and stability

he past few years have seen several accessed with minimal environmental impact Tcrises that absorbed analysts and seemed and risk to human safety. And it also will to augur significant changes in the energy depend on the long-term stability of a coun- industry—natural disasters like the Japanese try’s legal and regulatory framework, which earthquakes that shook up the nuclear calcu- allows companies and consumers to invest for lus, political upheavals in North Africa and the the long haul. Middle East that looked ominous for oil (think The scale of investments being made in new Iran and Libya), and man-made environmental energy technologies is unprecedented—and accidents like the Gulf of Mexico oil spill. All nowhere more so than in China. Beijing is were grave in their own way. But none ulti- investing $1.7 trillion in “strategic sectors,” a mately have been of truly significant conse- major portion of it targeted to clean energy quence for global energy supplies. and clean energy technology. Specifically, The reason for this is that deeper, more Beijing says the package—equivalent to profound, longer-term trends are powering the Italy’s GDP and four times China’s 2008 fiscal energy equation. By far, the most significant stimulus—will focus on “alternative energy, one is this: Energy is a central force in global biotechnology, new-generation information economics and politics. It is at the heart of the major global issues—economics, poverty Figure 2. Organizations are increasingly reduction, climate change, clean water, and sophisticated at managing energy at multiple levels within their enterprise and across the so many more. As a result, governments are supply chain. pursuing an energy triptych—security, safety, and stability. This pursuit is at the heart of the 22% Great Game 2.0. 26% In the Great Game 2.0, “security of supply” trumps. Unpack security of supply and you discover several essential components beyond the physical access to resources, including the technology needed to tap those resources, the human talent to invent and manage that technology, and the ability to securely trans- port energy through vulnerable channels, from the Strait of Hormuz and the Gulf of Malaca. 52% Absent security of supply, national sovereignty is potentially at risk. n Pioneers n Engagers n Reactors The other two “s” words in the energy Source: Deloitte Center for Energy Solutions triptych are safety and stability. Real security of supply will demand that energy can be Graphic: Deloitte University Press | DUPress.com

7 Energy’s Next Frontiers How technology is radically reshaping supply, demand, and the energy of geopolitics

Pioneers, Engagers, or Reactors are descriptors for the spectrum of businesses engaged in some level of energy management.

The Deloitte reSources 2012 study identified three distinct types of companies engaged in some level of energy management:

• Pioneers: 26 percent of respondents—embracing the challenges of energy management; developed and implementing strategy

• Engagers: 52 percent of respondents—believe must change or lose to the competition; new to the challenge, reported difficulty in developing and executing programs effectively

• Reactors: 22 percent of respondents—no comprehensive strategy; isolated, tactical, project initiatives

technology, high-end equipment manufac- be able to multiply their gains by being the turing, advanced materials, alternative-fuel beneficiaries of a “virtuous cycle of innova- cars and energy-saving and environmentally tion” in much the same way that the initial friendly technologies.”8 China has become pro- discovery of fossil fuels and, a century later, the ficient in the design of nuclear reactors, solar, technology behind the Internet redefined the wind, and other energy technologies. While economic landscape. the Chinese are ramping up their own R&D, Take wind and solar energy, for example: As they have been especially skilled at adopting these sources approach grid parity, they have and adapting technologies and reengineering helped accelerate the pursuit of energy storage. them to lower their costs. And energy storage is likely a game-changer in The countries that leap ahead in this energy every realm, from extending the battery life on technology game should be better positioned mobile phones and laptops, to powering cars, to protect their sovereignty and to benefit from to decentralizing energy production. sustainable development. But they also will

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Demand is supply: The stealth revolution in energy efficiency technologies

ompanies have business strategies, risk that revolutionizes how we manage energy Cstrategies, strategies for growing markets, consumption—every company is an energy and for managing human resources, and so company. The headlines at the intersection forth. But most companies do not yet have an of energy and technology have been domi- energy strategy—let alone broader sustainabil- nated by solar, wind, biogas, tidal energy, and ity strategies to manage the use of water, land, other renewable sources for most of the past and other resources. This is especially striking decade. But two other, less-remarked-upon because—thanks to the advent of technology advancements probably matter more. One is

Figure 3. Energy is an asset that should be strategically managed to create economic value for business enterprises

Re sk Con d Ri su uc Policy m in g s pt g in on io g ti • Regulatory n C a p M o n O s • Environmental a t a ly n s M p a p • Tax g u e S m • Stimulus e n t Providers Users (Supply) (Demand) • Traditional • Residential • Environmental • Commercial • Industrial • Tax Energy • Transportation • Stimulus Management

s D n o t i i s n t t i r Enablers a i r I b ic n l p u • Investors p t c t o r io m e I o n • Technology F a E re s ffi tu n in c • Manufacturing c o g ie ru nc st rb R y fra a ev In C en ng ue izi s im Min

Source: Deloitte Consulting LLP

Graphic: Deloitte University Press | DUPress.com

9 Energy’s Next Frontiers How technology is radically reshaping supply, demand, and the energy of geopolitics

Figure 4. Real analytics for energy: The path to “big data”

Prescriptive Analytics

Predictive Monitoring

Fast Analysis of Big Data

Historical Reports

Foundational Elements

Source: Deloitte Consulting LLP

Graphic: Deloitte University Press | DUPress.com

taking place in the management of energy use, of power-hungry appliances like dishwash- where improvements in efficiency could have ers when electricity is cheapest. In fact, by a greater impact on the global energy picture modulating use, customers are not only able than any other development. And the other to consume cheaper, off-peak power, but they is in the oil and gas industries, where new can sell power back to the utility that otherwise technology has brought massive new reserves would have been lost—the meters in the pro- into play. totype system run backwards. Customers with The marriage of technology and energy energy-producing technologies like rooftop is perhaps nowhere more important than in solar arrays or wind turbines also can sell their upgrading electricity infrastructure—and in excess energy back to the power company. particular the long-awaited “smart grid.” The Meanwhile, the smart grid allows South gains in efficiency will likely be astounding Korean utilities to chart energy use by house, once the grid is built out. by neighborhood, by time of day, by season— A picture of what’s possible is unfolding and thus to better plan how they will supply in South Korea, where a prototype grid is energy in the future. In leaping ahead with its being developed in tandem with intelligently prototype grid, South Korea is aiming at its designed buildings. “Smart” buildings con- own virtuous cycle of innovation, one that not nect and communicate with the utility com- only will allow it to combine smart technology pany via the smart grid, allowing customers and green energy into one ecosystem, but also to check the energy use of every socket and allow it to spawn new companies that export track electricity prices minute by minute. This the system worldwide. allows them to automatically schedule the use

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Innovations can be elegantly simple as well: of consumer retail. Except, unlike Amazon, Opower gives electric and gas companies tools whose business model turned many brick-and- to communicate with customers, like text-mes- mortar players into dinosaurs, there are not saging them mid-month if their electric bill is necessarily “losers” in the energy management running particularly high. revolution—the producers, intermediaries, and The budding “demand management” consumers can all win. industry is already making major inroads in How important are such innovations? the corporate world. Innovators like EnerNoc, Consider this: Peak electricity demand is rising using state-of-the-art software, help companies faster than overall demand, so more and more manage energy use and automatically reduce power plants must be built to run for just a few consumption during peak periods, selling the hours a day. One recent study found that 21 “saved” electricity back to utilities at a profit percent of power plants run, on average, for and forestalling the need for the utilities to less than an annual average of three hours per purchase high-priced energy on the spot mar- day—just to meet that peak demand.9 ket. FirstFuel Software, meanwhile, analyzes a Companies generally spend a significant building’s electric use to produce an energy- portion of their operating costs on energy, saving plan—and it does so remotely, without a yet they generally have a poor understand- need for engineers to ever visit the building. ing of their energy consumption and how to Almost all these energy management tech- better manage it. From better management nologies are enabled by the availability of data. of buildings and vehicle fleets, to smarter use Capturing this data creates entire frontiers in of technology, to tighter oversight of their energy management—much as Amazon recon- entire supply chain, organizations can mobi- figured the supply chain and business model lize countless tools to transform how they use

Figure 5. Without a coordinated view of cost, consumption, operational and facility data there can be no enterprise energy management strategy.

Standard View of Energy Strategic View of Energy

• Utility bills (spend) • Capital budgets and Finance expenditures • Capital project portfolio Operations Finance Finance Real Estate/ Facilities Management • Meter and sub-meter data (consumption) Operations • Energy price • Process and production data Energy Strategy

• Facility information: Real Estate/ size, location, etc. Facilities Management

Source: Deloitte Consulting LLP

Graphic: Deloitte University Press | DUPress.com

Opera 11 Energy’s Next Frontiers How technology is radically reshaping supply, demand, and the energy of geopolitics

energy and other resources. The benefits of thereby reducing fuel consumption. But B9’s active energy and sustainability management real innovation is in the giant high-tech sails are not only financial—though the bottom-line that provide most of a ship’s propulsion. These effect is the one most likely to motivate man- will be able to unfurl or fold up at the push of agement—they also foster an ethos of sustain- a button, avoiding the need for the large crews ability throughout an organization, attract that manned the rigging of large sailing ships consumers who are now savvy about how in years gone by. Even more impressive: The “green” the products and services are that they DK Group in the Netherlands has tested what consume, and serve to shield a company from it calls an “air cavity system” that enables a ship being buffeted by energy price volatility. to glide at low friction through the water by An efficiency “sea change” is taking place injecting air around the submerged part of the offshore as well—in the world of shipping. ship’s hull, creating a carpet of bubbles under Technology is allowing designers to reinvent the vessel. how ships are made and how they move, These innovations in shipping crystallize revolutionizing the industry. The B9 Energy the notion of locally embedded technologies Group in the United Kingdom is retrofitting that are globally connected—a hallmark of the Rolls Royce engines to run on natural gas, new technology-driven energy era.

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The supply surprise

he supply-side revolution in energy inaccessible deposits, directionally guiding Ttechnology is equally impressive. Thanks drill bits at angles between 45 degrees and 80 to advances made possible principally by degrees into spaces between old vertical wells advanced software, the International Energy where crude still remains in shale reservoirs. Agency (IEA) estimates that unconventional Fracturing technology resources like shale gas now account for about developed over decades, half of the world’s natural gas resources, while but when combined with Just a few unconventional oil production will reach 10 horizontal drilling, it has years ago the million barrels a day by 2035. Conservative come to dominate in just estimates put the world’s oil reserves at four four years. Nearly every expectation was times the total consumed throughout history, day, potential shale oil and that the United while more optimistic forecasters place the gas reserves are discovered multiple at 10 or even 12. The IEA estimates in such unlikely places as States would that $20 trillion will be spent on unconven- Pennsylvania (which now be importing tional sources of gas and oil between now produces more natural gas large volumes and 2035.10 than Texas), Poland, Israel, Wildcatters near Santa Barbara, California, and Ohio—names not of natural gas first found “brown shale”—an oil-rich, porous, normally associated with and becoming lightweight rock—in the Orcutt oil fields in the oil field. And many of heavily 1901. But for the next century, the various these are not small fields, owners of Orcutt drilled 2,000 vertical wells, but what are known in the dependent on bypassing the shale in order to get at the liquid industry as “elephants” world markets. oil beneath. By 2004, the field was thought holding one billion barrels to be in terminal decline and was sold to or more. So much oil is Now people Breitburn Energy Partners. Breitburn quickly coming out of the Bakken talk about determined that the brown shale, just 900 feet formation in Montana/ a hundred- deep, was a vast potential resource. Applying North Dakota—discovered the latest technology, Breitburn was able to in 1951, but “unlocked” year supply nearly double Orcutt’s output to 90,000 barrels by the new rock fractur- of domestic a month. ing and horizontal drilling natural gas. What made this possible? Today, the technology only in 2008— modern day version of wildcatters are energy that it has outstripped the technology entrepreneurs—geoscientists and existing pipeline capac- software engineers who drill wells on computer ity to move it to refineries. Railroads such screens before drilling in the field. They cre- as BNSF and Canadian National have been ate three-dimensional images of the under- pressed into service to move some of the crude. ground—a kind of MRI of the earth—that At latest count, Bakken is said to hold 18 bil- reveal hidden oil deposits. Offset angle drilling lion barrels of recoverable oil. then allows drillers to penetrate previously

13 Energy’s Next Frontiers How technology is radically reshaping supply, demand, and the energy of geopolitics

Just a few years ago the expectation was that extracted from dense rock—had been a very the United States would be importing large marginal business. In 2000, production was volumes of natural gas and becoming heavily only about 200,000 barrels per day, 3 percent of dependent on world markets—and spend- total output. Today it is about a million barrels ing upward of $100 billion a year for those per day. The dramatic increase in tight oil has imports. Now people talk about a hundred- been made possible by the same technolo- year supply of domestic natural gas. The new gies—hydraulic fracturing and horizontal drill- hydraulic fracturing technologies are also ing—that enabled the explosive growth in shale producing legions of jobs. gas production.12 Thanks to new technology, And in many ways, this is just the begin- the United States has become less dependent ning of the unconventional revolution. on petroleum imports from unstable countries. Companies are continuing to pioneer inno- The revolution is not only taking place vative exploration methods. In Long Beach, on land, but is occurring offshore as well. California, Signal Hill Petroleum has buried Deepwater exploration has been revolution- 6,000 small yellow canisters containing sophis- ized by the ability of powerful computers to ticated equipment so sensitive it can record crunch seismic data 15,000 feet below the sea the vibrations of a person walking past.11 The floor. The result has been a boom in deepwater devices work in tandem with a fleet of hydrau- drilling: In 2000, there were just 20 deepwater lic “vibroseis” trucks. By producing vibrations, drilling vessels. Today, there are over 200, and the trucks create images of formations as deepwater wells are supplying 8 percent of the far as three miles underground. Meanwhile, world’s oil—a figure expected to double by new technology based on radar and sonar 2020.13 Here, too, technology leaps are tak- techniques will drastically reduce the cost of ing place in the field: The invention of super hydraulic fracturing and increase its efficiency. strong alloys, for instance, allows drill bits to Shale gas has been dominating headlines, go into hot, high-pressure fields deep in the but its fossil twin, shale (or “tight”) oil is also earth’s crust. Shell, meanwhile, is deploying the experiencing a technological revolution—help- world’s largest vessel—a 500-meter, all-in-one ing raise US crude oil output by 18 percent behemoth that explores, extracts, liquefies, and since 2008. For years, tight oil—which is compresses from small gas fields.14

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The new Great Game–A technology race

he global energy technology race has co-generation, or other methods, with another Tprofound implications for the economy, 17 percent planning to do so. workers, the environment, and national secu- , stability, and safety would rity. History often turns as a result of energy be rich enough prizes. But innovations—beginning, of course, with the job creation potential fire. Each time a major new energy technol- of the energy technol- Technology ogy has emerged—be it steam, electricity, or ogy revolution presents a is making oil—the balance of power among nations has reward of enormous value shifted, while entire new industries have been to our societies. Until now, greater energy spawned. The technology-driven revolution in this paradigm shift has resources efficiency management, unconventional fossil benefited China above all, fuels, and clean energy could rearrange the thanks to its low-cost jobs available to a chessboard again. and its skill in appropriat- greater number For both nations and companies, secure, ing and scaling up technol- of actors than stable energy supplies will become ever more ogy developed by others. important as new sources of instability are Nonetheless, it is not ever before. introduced into the equation. Evidence of too early to discern what This holds these are legion: from the budding “trade war” might separate the win- the promise between the United States and China over solar ners from the losers in the energy, to attacks on energy grids that have Great Game 2.0. of generating raised the specter of a “cyber Pearl Harbor,” to For governments, the much greater the brake on energy development that could be keys to success will be: placed by environmental concerns. energy security But instability has always been a factor in • Developing a vision- for countries, the energy game. What’s new is that technol- ary and stable national companies, ogy is making greater energy resources avail- policy framework: able to a greater number of actors than ever What matters above all and individuals. before. This holds the promise of generating is a robust, long-term much greater energy security for countries, energy vision. Stable, companies, and individuals. But which coun- forward-looking legisla- tries and companies will emerge as kings and tive frameworks are critical in this regard. queens, and which as pawns, is still unclear. Absent a federal energy framework—a In a recent survey by Deloitte—the reSources national —companies can- 2012 study—more than one-third (35 per- not realize the investment potential of the cent) of companies generate some portion future. Certainty matters. For example, of their electricity on-site from renewables, China’s dominance of the solar and wind industries was built in just five years on central government mandates. China is not

15 Energy’s Next Frontiers How technology is radically reshaping supply, demand, and the energy of geopolitics

only increasing its cleantech capacity but is natural gas was cheap. But today they also building powerful industries to export appear prescient—and have positioned renewable and alternative energy compo- the United States to have at least a shot at nents around the world. becoming energy independent. In fact, the federal government has been determinative • Building national infrastructure: In in almost every energy transformation over addition to legislative frameworks, govern- the past century. ments should lead in enabling the creation of state-of-the-art energy infrastructure. • Referee the level playing field: A legisla- Case in point: In the United States, 30 states tive framework creates a level playing field, have developed renewable energy man- and deep commitments to R&D broaden dates, with targets of between 15-25 percent the horizon of that field. With the rules in by 2020. But it is very difficult to upgrade place and the innovation pump primed, the the electric grid. The grid, which was built government’s next job is to get out of the on a regulatory structure that dates to way and let the players in the energy game the 1930s, has emerged as an ill-matched determine which technologies win and patchwork defined by decisions made at which lose. (Of course, the government will the state level. For the United States to tap provide the referees in this battle, too.) the potential of wind and solar resources that may be several states away from the big • Enforce transparency and accountability load centers, this must change. Presently, to turn the public into an ally: The con- no single agency, no single entity, is troversies over the environmental impact charged with looking at the broad national of hydraulic fracturing are due, in part, energy interest. to misperceptions. This is understandable given that the technologies are new and • Making deep, long-term commitments it will take time for the public and envi- to R&D: High-octane research budgets ronmentalists to fully understand their are needed; the private sector alone can- impact—and in the interim, advocates are not sustain investment and propel break- likely to dwell on the most dire evidence throughs in the midst of volatile energy to advance their case. But governments markets and pressure to create profits. can accelerate the process of public educa- Take the shale gas revolution, which was tion by compelling companies to disclose made possible by the federal government. full data on the effects of drilling on water Between 1978 and 2007, the Department of supplies, geological stability, and the envi- Energy (DOE) spent $24 billion on fos- ronment more generally. Since the tech- sil energy research. In doing so, it helped nologies are still in their early days, their pioneer massive hydraulic fracturing in environmental impact will be substantially 1976 with its Eastern Gas Shales Project. mitigated over time—as has already been Horizontal drilling and well installation the case with hydraulic fracturing in its first were also enabled by air-based drilling four years of widespread use. It is likely that and drill bits developed by the DOE. And the public, once able to accurately weigh the 3-D imaging also was a DOE innovation. costs and benefits of hydraulic fracturing, All these projects were widely condemned will become more supportive of it. Facts can as failures in the 1980s and 1990s when and should prevail over fear.

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A potential safety net: The Power of One

he most extraordinary aspect of the percent—returning 15.2 percent versus 10.4 Ttechnology-driven energy revolution, percent for the S&P.15 however, is that even if governments fail to act The use of energy can now become a effectively, corporations and individuals have conscious act—and an act of conscience. It’s still been empowered to make a radical differ- not about being virtuous, it’s about being ence in their own consumption—and thus to profitable—and, at little to no cost, virtue is materially influence the broader energy game. achieved. Governments should do everything The Power of One has come into its own. possible to abet this virtuous cycle—and, if The new energy-related software and nothing else, they should make certain not to hardware on the market and in development— hinder it. smart meters, smart appliances, demand The “Great Game of the 21st Century” is the management programs, and so forth—liber- technology continuum driving along the devel- ate individual actors from being at the mercy opment curve from 1.0 to 2.0 to 3.0—with each of broader forces. Every company needs an version coming faster than the one before. The energy and sustainability strategy to define future is one of continuous research and devel- how it manages resources. The absence of opment, informed investment job creation, and such a strategy may well limit profitability greater energy security—without sacrificing potential and jeopardize the long-term health the environment. of the business. By contrast, sustainable The emerging energy world boasts a new companies can be a boon for investors. In the geography, new technology enablers for both two years from 2009 through 2011, the top supply and demand, and a new road map—a 100 companies in Newsweek’s 2009 “Green map which can lead to the pot of gold at the Rankings” outperformed the S&P 500 by 4.8 end of the energy rainbow.

17 Energy’s Next Frontiers How technology is radically reshaping supply, demand, and the energy of geopolitics

Endnotes

1. http://www.businessweek.com/printer/ than £1 trillion over the next five years magazine/could-shale-gas-reignite-the- on green energy, transport and advanced us-economy-11032011.html. manufacturing, U.S. officials have revealed.” 2. “America’s oil boom poses threat to 9. New York Times, December 6, 2011, our green future,” The San Francisco “A Mismatch Between Grid Regula- Chronicle, September 4, 2011. tion and Modern Needs.” 3. National Post’s Financial Post & FP Invest- 10. International Herald Tribune, November 15, ing (Canada), December 9, 2011, “Oil 2001, “The pitfalls on the road to tapping No. 1 source for decades: Exxon.” new energy; Unconventional sources like oil 4. Los Angeles Times, December 1, 2011, sands offer hope, but may pollute more.” “Green technology gains more investors; 11. Los Angeles Times, October 29, 2011, Venture capitalists are attracted to the sec- “Producers Tap Into Oil Boom.” tor; third-quarter investments grow 73%.” 12. Wall Street Journal, December 12, 2011, 5. Nuclear Engineering International, No- “America’s New Energy Security.” vember 1, 2011, “Comment—Nuclear 13. New York Times, October 25, 2011, “New Tech- in east Asia—the hotbed?” nologies Redraw the World’s Energy Picture.” 6. New York Times, November 9, 14. Press release, February 9, 2011, “Shell 2011, “E.U. Poised to Overtake Decides to Move Forward with Ground- U.S. as Biggest Oil Importer.” breaking Floating LNG”; Wall Street 7. New York Times, September 8, 2011, “Google Journal, May 20, 2011, “Shell Approves Details, and Defends, Its Use of Electricity.” World’s First Floating LNG Project.” 8. Telegraph.co.uk, November 21, 2011, 15. Newsweek, September 20, 2009, “The Green- “China unveils £1 trillion green technol- est Big Companies in America,” http:// ogy programme; China is to spend more greenrankings2009.newsweek.com/.

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About the Deloitte Center for Energy Solutions The Deloitte Center for Energy Solutions provides a forum for innovation, thought leadership, groundbreaking research, and industry collaboration to help companies solve the most complex energy challenges. Through the Center, Deloitte’s Energy & Resources Group leads the debate on critical topics on the minds of executives—from the impact of legislative and regulatory policy, to operational efficiency, to sustainable and profitable growth. We provide comprehensive solutions through a global network of specialists and thought leaders. With locations in Houston and Washington, D.C., the Deloitte Center for Energy Solutions offers interaction through seminars, roundtables and other forms of engagement, where established and growing companies can come together to learn, discuss and debate. www.deloitte.com/energysolutions

As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.