Data-driven insights in Davos bring global energy transformation to life

Today our global energy ecosystem stands at the forefront of a revolutionary transformation. In a compelling presentation to the World Economic Forum in Davos late January, Martin Fraenkel, President of S&P Global Platts, managed to bring that “revolution” to life – at the Global Situation Room in a narrative that combines historical data from past energy transitions with powerful forward-looking analysis using various policy and technology scenarios.

Fraenkel used the oil market as an example because it is global and connected by waterborne trade flows. He highlighted how it is possible to observe the market adjusting and rebalancing in response to policy decisions, technology advancement or changing market dynamics.

Using accompanying graphics powered by S&P Global Platts Analytics cFlow cargo tracking software Fraenkel charted all the vessels carrying crude oil around the world over time beginning in 2012, with each dot representing a ship and each region of origin a color. On heavily trafficked routes, like the Persian Gulf to Asia, the dots are so frequent that they overlap and turn white as a signal of intensity.

The narrative starts with the US a major importer, despite also being a significant oil producer, because for 40 years prior to 2016, crude exports were banned. Ostensibly for energy security, there were other, perhaps unanticipated consequences along the energy value chain.

Crude Oil Flows (snap shot at 2014)

In this case, as advances in drilling technology resulted in a boom in US oil production, the need for imported oil diminished. However, because US refiners had been configured to process a different type of oil than was being produced domestically, the price of oil in the US dropped. In addition, since the US price fell well below Brent, the international price marker, other producers outside the US had the incentive to send their oil elsewhere, where they could get a higher price.

As we look at West African trade flows at this time, you’ll see fewer ships flowing into the US and more flowing to Asia as the oil markets rebalanced around the constraint of restricted US exports and growing US production.

At the end of 2015, when the US lifted the crude export ban, crude market flows again readjusted as US refiners could then aim to optimize the type of crude they used to best match their configurations.

In addition, the low domestic prices gave refiners an incentive to invest in building additional capacity. So flows from West Africa rebalanced once again in response.

Once the export ban was lifted, the US continued to import a significant amount of oil, particularly from the Middle East, reflecting US refinery needs.

Analysis of OPEC, highlighted how changing oil trade flows have interesting impacts on bilateral and multilateral trade and political relationships as traditional connections weaken and new relations form.

Looking at other energy markets, understanding what is driving the shifts in the market can help companies and countries prepare or even shape the future.

The LNG – or liquefied natural gas – market is smaller and in an earlier stage of development than the crude market and the global natural gas markets are in the midst of a shift from localized, regional markets – connected via land-based pipelines – to a more global market connected by the waterborne flow of LNG.

Fraenkel highlighted clear patterns of trade flows which were the result of the LNG markets being structured on long-term contracts, indexed to oil prices. However, the massive expected LNG supply growth over the next few years from the US (driven by shale gas production), Australia and the Middle East is shifting the market structure to one of spot trading, using the Platts JKM benchmark which was demonstrated in a pronounced shift in the trade flows.

Furthermore the combination of abundant volumes of stranded gas, innovative cost cutting, and inexpensive capital offered LNG developers the opportunity to challenge coal in the power generation sector – making LNG increasingly attractive to buyers in Asia as a method to fight pollution and air quality issues.

Using the same approach but in a very different arena, Fraenkel highlighted the “Great US Electric Power Sector Transformation”.

The long run development of the sector has seen dominant energy fuel types used in electric power generation supplanted by new, emergent technology classes. Market fundamentals (relative fuel price, supply/demand economics) historically played a key role in transitioning of markets. But regional examples also demonstrate the heightened role of policy and technology innovation.

Energy Transition, showing all power sources (snap shot at 2013)

This was clearly demonstrated by showing how the US power market transformed since 1950s in response to key market factors. The narrative charted the entrance of nuclear, and of course the rise of Natural gas became clear through the early 2000’s. While relative fuel price was the dominant factor influencing historical long-run trends, in the past decade policy and technology move to the fore.

The role of environmental policy and relative fuel price are especially relevant factors when looking at the US transition away from coal to cleaner energy forms.

In 2005, the advent of the shale gas revolution in the US led to lower natural gas prices resulting in an initial wave of impact pressuring economics at existing coal plants

At same time, new EPA regulations setting limits on air toxic pollutants at power plants reflected in a dramatic uptick in coal retirements the closer we move towards EPA’s compliance dates in 2015 and 2016.

Energy Transition, showing coal retirements (snap shot at 2017)

The addition of new solar and wind plants were driven by the local impact of solar incentive programs in different states on market growth was plain to see on the visuals.

Fraenkel highlighted how an understanding of policy and market design mechanisms have played a role driving “game-changing” trends throughout the US power sector. He then presented a number of scenarios using S&P Global Platts Analysts forecasts which illustrated the major forces that are likely to dictate our future.

In sum, if the trick is to bring the revolutionary energy transformation to life, the goal is to offer governments and businesses the data needed to understand future energy transition pathways, while considering policy, and promoting environmental sustainability.

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