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13 May 2015

CERAWeek Houston 2015: 5 days to understand global energy issues


Last week was held in Houston, the 34th CERA WEEK, the largest global gathering of energy actors. 38 plenary sessions and 84 workshops have been organized with 2,800 participants, including representatives of governments, administrations, energy companies, equipment suppliers, banks and consulting firms, to discuss an unequivocally issue: “Turning Point : Energy’s New World”…

The week was structured around five topics: an overview of the geopolitical situation, the oil market, the gas market, the electricity market, and the medium-term overall outlook. Each topic, in fact, echoes the main subject of the convention: the world of energy is at a crossroad. Indeed, four main considerations dominated the debates: fossil fuels, energy prices, changing of traditional business models, and the impact of digitalization on the energy sector with the corollary key issue of cyber security.

The resilience in using fossil fuels

The oil market, deeply shocked by the boom of US’s non-conventional oil production and the OPEC unwillingness to support the prices, is still in excess of supply over the effective demand. However, it is clear that, despite high extraction costs, the expansion of the North American production is not at risk. The US, Canada and Mexico are also laying the foundations for a comprehensive energy union across the continent, to optimize the use of their different energy sources. Meanwhile, the gas market, in particular LNG, is still strongly driven by Asia, with an estimated increase of global consumption of 50% by 2030. But there is uncertainty about China’s shift towards gas and Japan’s shift to coal (in case of delay in the nuclear restart). Coal seems to have a bright future ahead, thanks to the sharp decrease of its prices, although far more discrete than oil. Coal is now hyper competitive and its consumption is expected to rise until 2020. Today, a fair competition between gas and coal may be possible only in two countries: the US (due to shale gas) and the United Kingdom (thanks to its carbon tax).

Diverging trends in prices

The recent fall in oil prices is clearly the most spectacular, but its real effect should be analyzed depending on various factors such as the exchange rate of local currencies against the US dollar, tax practices in each State, and the margins taken by the refining industries to deliver their final product. Regarding gas market, prices remain highly fragmented among the different regions of the world but, by 2020, a convergence between European and Asian market prices could happen, with North America keeping its advantage still, thanks to unconventional gas. Regarding the coal market, the price advantage may be threatened under three conditions: a significant level of CO2 price, appropriate taxation and a fair subsidy level for renewable energies to become competitive. But in this case, the development of CCS could also become profitable, helping maintain its use.

The change of business model in electricity

The electricity sector gradually gets out of its historical business model of vertically integrated companies and becomes more fragmented, with a value chain spread in clusters. The development axes for new entrants are: smart downstream platforms, smart upstream platforms, electricity management, aggregation of demand, and the aggregation of supply. This will shape the basis of new energy companies, with technology helping their development but not the reverse. The core revolution of business model is in moving the value from the upstream to the downstream.

Tackle the risks of cyber attacks

On the digital matter however, concerns are high. In a digitalized system, all connected objects are potential gateways for cyber-attacks. Indeed, the amount of these appliances will quickly rise up to tens of billions (50 billion by 2020, according to Cisco). A very close collaboration between all agencies responsible for the security of states should be set (as it is already the case in the US with the cooperation between the FBI, the NSA, the SoD and CTO of businesses…). If all key sectors should be protected, energy is clearly a priority, the US is a perfect example as the energy sector is right-and-already the most attacked among the 16 sectors considered as strategic.
In this international meeting, Europe appeared, unfortunately, marginalized from global energy challenges. The EU policies, which nevertheless seek to be exemplary, are often ignored or misunderstood. As a matter fact, only a plenary session (dedicated to the COP21) and two workshops were focused on European issues…

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