The Business Leader's Guide to the Low-carbon Economy

Larry Reynolds

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317039600
• Edition: 1
• Topic: Commerce
• Subtopic: Gouvernance d'entreprise

Rising energy prices and concerns about climate change are driving us towards a new kind of economy - a low-carbon economy. What will this low-carbon economy be like, and what does your business have to do to prosper in this new business environment? Larry Reynolds shows how successful organisations are already learning to be more energy efficient, manage their carbon footprint, adapt to climate change and become truly sustainable. As well as explaining how to future-proof your organisation against possible threats, The Business Leader's Guide to the Low-carbon Economy, tells you how to make the most of the many opportunities that the low-carbon economy will bring, especially in growing profits from new products and services. It is your guide to creating an organisation that will thrive in the twenty-first century. While there are plenty of published books about 'going green', there are none which explain the low-carbon economy and how to thrive in it. This book will fill that important gap. Drawing on examples from across industries, including businesses such as Asda, BT, Cargill, Coca Cola, Co-operative Group, Eurostar, Marks and Spencer, Tesco, Tesla, Walker's Crisps, Walmart and ZipCar, Larry Reynolds shows how today's successful organisations are already benefiting from the coming low-carbon economy.

PART I
The Drivers of the Low-carbon Economy

On 10 March 1776 an unnamed engineer pulled a lever on a strange contraption on the outskirts of Birmingham. As steam entered the device’s orifices and chambers, wheels began to turn and a gush of water showed that the machine was doing what it had been designed to do – pump water out of a mine shaft. The machine was the first of a new kind of steam engine designed by James Watt and Matthew Boulton. As well as firing the starting gun for the Industrial Revolution, Boulton and Watt were also unleashing a new kind of economy: an economy based on energy from hydrocarbons – coal, oil and gas.

For more than two hundred years the hydrocarbon economy has served us well. Today it enables most of the 7 billion people alive to enjoy a standard of life beyond the wildest dreams of the billion people alive in Boulton and Watt’s day.

There are just two problems. Firstly, as supplies of coal, oil and gas decline and population increases, the price of fossil fuels can only rise, making them increasingly unaffordable. Secondly, even if we could afford them, burning fossil fuels is a major contributor to climate change. If climate change continues unabated, the consequences for life on Earth could be very bad. As a result, we’re moving towards a different kind of economy: one that relies much less on fossil fuels, and much more on low-carbon alternatives. Most of this book is about what such an economy will be like, and the consequences for your business. But first, it’s important to understand just how the twin forces of rising energy prices and climate change will drive the low-carbon economy.

1 The Cost of Energy

The days of cheap and easy oil are over.

Fatih Birol, Chief Economist, International Energy Agency

Every day you travel to work, three small miracles occur.

If you drive to work in a conventional vehicle, your journey is made possible only by oil. This oil was originally extracted from miles below the land or seabed, transported to a refinery where it was turned into usable fuel, and then transported by pipes, ships and trucks to your local petrol station. Cheap oil not only powers your car, it makes the manufacture of your car possible in the first place. The energy required to mine the metals, produce the plastics, assemble the parts and ship them from factory to forecourt all depends on oil. Indeed, it’s cheap, oil-based transport that makes global trade possible.

Miracle number two is that you arrive at work to a pleasantly warm office, probably heated by gas. This too has travelled thousands of miles to get to you, possibly by pipeline from Norway or Russia, or by supertanker from the Middle East (a tiny trickle still comes from the North Sea, but this is declining fast). As well as heating your office, and possibly your home, gas is also an essential component in the production of nitrogen-based fertilisers that will have been used in the production of most of what you will eat today.

The final miracle occurs when you flick a switch to turn on your computer. Electricity surges from a power station far away, through the grid, at exactly the right frequency and voltage to boot up your computer and allow you to waste so much time dealing with emails. Nuclear power and renewables generate a little of this electricity, and a third of it is from gas, but the biggest single source of electricity in the UK still comes from burning coal. And of course, electricity doesn’t just power your computer: it powers just about everything else in offices factories and homes that aren’t heated by gas or propelled by oil.

Three fossil fuels – oil, gas and coal – currently supply most of the world’s energy needs. The explosion in population, technology and living standards that has occurred on this planet in the last two hundred years since the Industrial Revolution has been possible only because these three fuels have been abundant and cheap.

The good news is that they’re still abundant. There’s enough oil, gas and coal buried below the surface of this planet for us to continue in this high-powered lifestyle for hundreds of years. The bad news is that they’re no longer cheap. That’s because we’ve already used up all the easy-to-get stuff. From now on, especially as far as oil and gas are concerned, getting it out of the ground is going to be extremely difficult – technically, politically and economically. This means that fossil fuels are likely to become very expensive indeed. This is mixed news for business. On the downside, all businesses use energy, and rising energy costs will hit your bottom line. On the plus side, you can gain considerable competitive advantage if you figure out ways to make your business more frugal with energy, or are able to develop appropriate products and services for a world where energy is much more expensive. We’ll explore these opportunities in depth in Chapters 11–15. First, let’s consider why energy costs will rise, by how much, and how quickly.

Oil

Most of the oil we used in the twentieth century was recovered from wells on land (in places such as Texas, Saudi Arabia and most of the Middle East) or in relatively shallow offshore waters (such as the North Sea). This kind of oil is cheap and easy to produce – less than $10 a barrel for some US oil fields.

When you first drill into any oil reservoir, the black gold comes gushing out. Recovering the oil from a newly drilled reservoir is easy – it just spurts out by itself. After a while, though, the pressure within the reservoir starts to fall, and the oil stops flowing. In order to build up the pressure again, you have to pump something back into the reservoir. Different methods are used, but pumping water in is fairly common. Maintaining the pressure in this way means you can maintain production for many years, but it will eventually tail off. At some point it becomes too expensive and difficult to extract any more oil, and the field is abandoned, even though perhaps a quarter of the oil is still down there.

The typical production pattern for a single field follows a bell-shaped curve – modest beginnings, a peak in production levels halfway through the life of the field, and tailing off towards the end. The exact shape of this curve depends on the size of the field and the amount of effort put into extraction. The UK’s North Sea oilfields began production in 1975, peaked in 1999 at 6 million barrels per day (mbpd; a barrel of oil is about 160 litres) and are now steadily declining. In 2010 they produced around 4mbpd, and it’s expected that output will be down to 3mbpd by 2020, and dry up some time in the 2030s.

In the 1950s a geologist at Shell called M. King Hubbert realised that this characteristic peaking of an individual oilfield could also be applied to all the oilfields in a particular region. In 1956 he predicted that the peak of crude oil production in the USA would occur between 1966 and 1972. Nearly all the experts at the time dismissed his prediction. The prevailing wisdom among the oilmen was: ‘If we need more oil, we’ll just drill for it!’ But Hubbert’s thinking was sound. US oil production did indeed peak in 1970, and has been declining ever since.

What applies to a country or region can also apply to the whole world. Using a similar methodology to Hubbert’s, it’s now generally accepted that supplies of conventional oil worldwide will peak some time soon, and decline thereafter.

The big question is: when? At what date will half the world’s supplies of conventional oil be exhausted? Nobody knows for sure, partly because some of the people who own conventional oilfields are quite wary about sharing information about how much is left. Currently, almost an eighth of all the oil in the world comes from one huge field called Ghawar, in Saudi Arabia, and the rulers of that kingdom aren’t saying how much is left. Nevertheless, quite a few people have had a go at predicting the peak. An industry specialist called Matt Simmonds did some phenomenally clever research based on data he was able to wheedle out of the Middle Eastern oilfields, and he reckons the peak will be in 2015. The UK has its very own Taskforce on Peak Oil and Energy Security, with membership drawn from companies in the transport, construction and energy industries. It reckons 2013 is the date. Its 2010 report predicts an energy crunch similar to the credit crunch within five years if the country fails to address energy issues urgently.

Even five years ago, the peak oil theory, as it was known, was quite controversial. At that stage it was a few environmentalists and an even smaller minority of oil industry experts who claimed that once oil supplies had peaked, energy prices would skyrocket and the world’s economy would crash. Fast-forward to 2012 and everything has changed. For a start, the world’s economy has crashed anyway, as a result of the 2008–2009 economic crisis. And almost everyone, from the big oil companies to the highly respectable and conservative International Energy Agency, now accepts that conventional oil is peaking around now, give or take a year or two.

If conventional oil – that is, oil extracted from land or shallow seas – were all we had, the world would already be facing a huge energy crisis. But we also have unconventional sources of oil – in deep waters, in tar sands and in oil shale.

DEEP WATER

If you are willing and able to drill in deep water, vast quantities of oil become available. What’s stopping us? The first problem is sheer technical difficulty. It’s one thing drilling 2 kilometres below the surface of the North Sea from a static platform: it’s quite another to drill 5 kilometres below the seabed from a floating platform. As the 2010 failure of BP’s Deepwater Horizon rig demonstrated, when things go wrong, they’re very hard to fix in such testing environments. Deepwater drilling is also politically sensitive. Many people don’t want to see drilling for oil in places like the Arctic, and those objections are multiplied when a disaster like BP’s failure in the Gulf of Mexico causes widespread environmental damage.

Technical and political difficulties add to the cost. While a barrel of onshore oil might be produced for less than $10 a barrel, most estimates put the cost of a barrel of oil from the Arctic at over $100 a barrel. This isn’t a problem if people are willing to pay the price. But there’s a more fundamental limiting factor known by the acronym EROEI – Energy Return On Energy Invested. Producing energy – in the form of crude oil or anything else – requires energy. A land-based oil well might take one unit of energy to produce anything from 25 to 100 barrels of energy, an EROEI of 25–100. But deepwater drilling gives an EROEI of 10–25. In other words, for every unit of energy used in the extraction process, the resulting oil will only provide 10–25 units of energy in return.

TAR SANDS AND OIL SHALES

If deepwater drilling seems too tricky, what about extracting oil from tar sands?

The total amount of recoverable oil in the Athabasca tar sands in Alberta is estimated to be around a trillion barrels – enough to supply the whole world at current usage rates for thirty years. Unfortunately, the process for getting oil out of tar sands is very expensive, highly polluting and gives a very poor EROEI – something like 3–5. For this reason, supplies from Athabasca are unlikely to increase significantly above the current levels of a million barrels or so a day – possibly enough to secure North America’s energy security, but hardly enough to supply growing worldwide demand. Oil shales are similarly problematic in terms of cost, pollution and poor EROEI.

THE POLITICS OF OIL

The most powerful influence on the supply of oil isn’t to do with technical challenges, the price of oil or EROEI considerations. It’s politics.

About a third of the world’s oil production is controlled by OPEC, the Organization of the Petroleum Exporting Countries. Its 12 members are Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. OPEC members meet regularly to attempt to control the world price and supply of oil. As they control about a third of the world’s oil production, their decisions carry a lot of weight. When OPEC decided to restrict oil supplies to the USA in the light of its support for Israel in the 1974 Yom Kippur War, world prices quadrupled in a matter of days.

First among equals in OPEC is Saudi Arabia, which alone produces just over 10mbpd – one barrel in eight of all the oil consumed in the world every day. Saudi Arabia is a fascinating country. Since its foundation in 1932 it’s been ruled first by the founder, Abdul Aziz, and then successively by five of his sons. Its current ruler is 88-year-old King Abdullah. Throughout its short history, the country has been marked by extreme tension between the hardline fundamentalist Muslims, of whom Osama bin Laden, the mastermind behind the 9/11 attacks on the USA, is merely one example, and the relatively moderate, fairly pro-Western, royal family who actually rule the country (I say ‘relatively moderate’ – this is a country where women are still forbidden to vote, drive or do anything much without the permission of a male relative).

Saudi Arabia was largely immune to the unrest spreading through the Arab world in 2011, mainly because of its oil wealth. In 2011 King Abdullah provided sanctuary to the deposed Tunisian dictator Zine El Abidine Ali while announcing a 15 per cent pay increase to state employees. Saudi Arabia, like most OPEC countries, relies almost entirely on oil revenues to sustain its economy. And oil wealth is a double-edged sword. When oil prices are high, governments like Saudi Arabia’s are forced by their people’s growing expectations to create more artificial jobs, more subsidies, more major projects. When oil revenues drop, there aren’t enough genuine wealth-creating jobs to sustain the economy. This is sometimes known as ‘the resource curse’, and sometimes as ‘the Dutch disease’ – when the Netherlands was able to export natural gas for a brief period in the 1960s, the rest of the Dutch economy faltered badly.

If Matt Simmonds is right and Ghawar starts to decline in 2015, Saudi Arabia will face some serious problems. Whether King Abdullah’s successor, whoever that is and whenever it happens, will be able to control the inherent tension in the kingdom remains to be seen.

The other Middle Eastern OPEC producers also have their problems. During 2011 there were popular uprisings against autocratic governments in Libya and Iran, partly as a result of these oil-rich states finding that they could no longer afford to subsidise food and fuel quite so generously for their people. The Libyan uprising resulted in the downfall of Muammar Gaddafi; the Iranian protests were suppressed.

The world’s second largest producer, with a little under 10mbpd, is Russia, which isn’t a member of OPEC. The politics of Russian oil are complex. Three key groups are involved: Vladimir Putin, who has served as both President and Prime Minister of Russia and who controls most of the political power; the so-called oligarchs, a small group of businessmen who own many of the oil and gas companies in Russia, and international companies like BP and Exxon-Mobil which are involved in joint ventures with Russian companies. All three groups need each other, and all three groups mistrust each other in a way that leads to a highly unstable situation.

To give just one example of how this plays out in practice, in January 2011 BP’s boss Bob Dudley shook hands with Russian Prime Minister Vladimir Putin. They agreed a $16 billion deal for a joint venture between BP and Rosneft, Russia’s state-controlled oil company, to develop Russia’s Arctic oilfields. From a business perspective, the deal made sense: Russia gains access to BP’s skills, and BP gains access to some unexplored oilfields.

Rosneft’s main assets used to belong to a company called Yukos, owned by businessman called Mikhail Khordorkovsky. Some years ago, Khordorkovsky and Putin fell out: Khordorkovsky is now in jail, and the assets of his firm were acquired at a knockdown price by Rosneft, via a mysterious company registered at the address of a vodka bar in Tver, a small town north of Moscow.

Before he became head of BP, Bob Dudley was head of a Russian joint venture called TNK-BP, and he actually fled from Moscow in 2008 in fear for his life when it was intimated that he’d upset some of his Russian business partners. The Russian partners in TNK-BP were very unhappy that BP was now doing a deal with Rosneft, and during the course of 2011 succeeded in scuppering the deal. This left the field open to BP’s rival Exxon-Mobil, which signed its deal to exploit the Russian Arctic oilfields with Vladimir Putin in August 2011. Whether this deal can be sustained remains to be seen, but one thing’s for sure: some fairly murky politics will continue to play a part in Russian oil and gas production for some time to come.

In summary, then: more than a quarter of the oil we use every day comes from the Middle East or Russia. Both countries are politically sensitive, and don’t always have a very positive relationship with the Western world. Relying on them for a major source of energy is a bit of a gamble, which is why US presidents from Richard Nixon to Barack Obama have claimed that it’s time to end the USA’s addiction to oil. They just haven’t yet managed to do it. The world’s supplies of cheap conventional oil are in decline. The oil remaining is either technically hard to get at – deepwater, tar sands, oil shales – or under the control of undemocratic regimes, or both. This alone would ensure that the price of oil was set to rise steeply in the years ahead. But it’s worse than that – not only is supply becoming more difficult, but demand is soaring.

SOARING DEMAND

Every day the world uses 88 million barrels of oil, mainly for transport – cars, trucks, ships, planes and trains. Since the first commercial production of oil in the early twentieth century, demand for oil has risen steadily, and there’s no reason why it should slacken off any time soon. In fact, there are two good reasons why the demand is likely to increase at an even faster rate.

The first reason is the growth of newly emerging economies, especially China and India. In 2010 the average US citizen got through 24 barrels of oil each year, and the average UK citizen about 10. The average Chinese citizen used 2 barrels a year in 2010, and the average Indian just one. But...