Us Er EnergysNextFrontiers POV May2012

7/28/2019 Us Er EnergysNextFrontiers POV May2012

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Energys next rontiersHow technology is radically reshaping supply

demand and the energy o geopolitics

Deloitte Center for Energy Solutions

By Joseph A. Stanislaw


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2

Through the looking glass (ull steam ahead, but...) 1

Framing the Great Game 2.0: Saety, security and stability 6

Demand is supply: The stealth revolution in energy efciency technologies 7

The supply surprise 10

The new Great Game A technology race 12

A potential saety net: The Power o One 14

About the author 15

Contents


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Energys next frontiers How technology is radically reshaping supply, demand and the energy o geopolitics 1

Through the looking glass(ull steam ahead, but)

To understand how radically the energy industry is

changing, consider this: The United States has become

the number-one producer o natural gas in the world.

This is due to combining horizontal drilling and hydraulic

racturing technologies, a combination that has been in

widespread use or just our yearsand that has allowed

gas rom shale ormations to go rom accounting or just

2% o Americas natural gas production in 2001 to over

30%1 today. As a result, natural gas prices have been

alling in the U.S. or years. Given appropriate policy and

smart investments, North America could eventually achievethe goal o energy independencewith enough domestic

supplies to meet American needsthough crude oil

prices would still be at the mercy o world markets. The

undamental question Americans now ace is: Can they

capitalize on this extraordinary opportunity?

Or, think about this: In 2008, with oil at $137 a barrel,

there was a renzy o ear over peak oil supply. Yet today,

when we talk about peak oil, we do so in reerence to

demand. At some point within the next two decades,

global oil consumption could even crest. In the U.S.,

net petroleum imports reached their peak o domestic

consumption60%in 2005, and have been alling eversince. Imports are now down to 46%. Soaring output rom

the Bakken shale elds, coupled with increased deepwater

output primarily rom the Gul o Mexico, has pushed up

U.S. domestic production by 12% since 2008.2 This is the

rst increase in a quarter-century and has conounded

predictions that domestic output was set on an inexorable

downtrend.

It is a rare blessing or a country to be conronted with an

abundance o energy. Pessimism has reigned or the better

part o 150 years. In 1865, the British economist William

Stanley Jevons published The Coal Question, a study that

spread panic about the depletion o coal reserves. At the

1956 meeting o the American Petroleum Institute, M.

King Hubbert, a Shell geoscientist, coined the concept o

peak oil and, in 1974, he orecast that global oil supplies

would peak in 1995. The Department o Energys 2005

Hirsch Report contemplated the imminent, abrupt and

dangerous peaking o world oil and gas supplies.

Yet, while humanity has consumed a total o one trillion

barrels o oil since the early 19th century, today, thanks

to an onslaught o technology-enabled discoveries,

anotherfourtrillion barrels are thought to be accessible.

In consequence, reserves-to-production ratios or many

major oil producers are climbing as ar out as 2040, and oil

and other liquid uels will remain the worlds largest energy

source, meeting one-third o demand. Meanwhile, many

people now believe that both the U.S. and Europe likely

experienced peak demand or gasoline in 2007.3

Information technology is energy technology

What is driving this energy revolution? Technology.

Cutting-edge technologyhardware and, especially,

sotwareis unlocking geological potential in places and

ways hardly imaginable even a ew years ago. Energy

companies now rank among the most importantand

sophisticatedtechnology companies in the world.

Inormation technology companies are pioneers on every

ront o the energy revolution, including by:

Drivinginnovationsinexploration

Cuttingenergyconsumptioninbuildingsthroughsotware-driven construction and energy management

Allowingutilitiestomoresmartlysourceandmanage

their energy output

Empoweringindividualstounderstandhowto

reduce their energy use; this underscores the

Power o Onehow each and every one o us can

become players in the energy game

Enablingthedesignandtestingofenergysystems,from

solar arrays and wind turbines to nuclear plants

The breakthroughs have been stunning, and oten

elegant in their simplicity. Among the least appreciated

technologies are those that empower companies and

individuals to understand and manageand thus

signicantly reducetheir energy consumption. Last

year, venture capitalists invested $275 millionup 75%

rom 2010in start-ups that make sotware and other

technologies to manage energy use.4

1 http://www.businessweek.

com/printer/magazine/could-

shale-gas-reignite-the-us-

economy-11032011.html2 The San Francisco Chronicle,

September 4, 2011, America's

oil boom poses threat to our

green uture.3 National Post's Financial

Post & FP Investing (Canada),

December 9, 2011, Oil No. 1

source or decades: Exxon4 Los Angeles Times, December

1, 2011 Thursday, Green

technology gains more

investors; Venture capitalists

are attracted to the sector;

third-quarter investments

grow 73%.


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2

Equally impressive is the evolution o renewable and

alternative energy technologies. The renewable energy

market is expected to reach as high as $800 billion market

by 2015 and to generate 17% o the worlds electricity

by 2030. In parts o the world, the cost o solar energy

is reaching grid parity. Nuclear, despite the Fukushima

disaster, is growing at a pace not seen in decades,

especially in Asia21 reactors provide 31% o South

Koreas electricity, while 26 reactors are under construction

in China.5

And energy storage is perhaps the biggest game-changer:

Apple, to take one example, is said to be working on a

hydrogen-based laptop battery that could last or months.

Once the energy storage puzzle is cracked, renewables and

alternatives should have even greater currency.

Or take exploration: Our ability to process and analyze

massive amounts o three-dimensional data about the

ocean foor has allowed the energy industry to discover vast

new ossil uel deposits. Technological innovations in drilling

then allow producers to access these deposits, many o

them located in remote, once-orbidding placesbeneath

the Arctic icecap, or instance, or at extraordinary depths.

Great Game 2.0

The economic, environmental, and geopolitical

consequences o this technological transormation are

breathtaking. Perhaps no change is more important than the

introduction into the energy game o dozens o new players.

The energy o geopolitics will not likely ever be the same.

Today, alongside traditional powers like Saudi Arabia and

the United Arab Emirates, Brazil is becoming an energy

superpower and Canada is reinorcing its position as one,

as is Russia. Also joining the ranks o growing energy

producers are countries like Philippines, Argentina, Angola

and Suriname (all thanks to deepwater drilling), and Poland

(shale gas). In Israel, massive recent gas discoveries are

upending the energy and political calculusa act that

would most likely have stunned ormer Prime Minister

Golda Meir. Let me tell you something that we Israelis have

against Moses, she amously joked in 1956. He took us

40 years through the desert in order to bring us to the one

spot in the Middle East that has no oil. The Department

o Energy estimates that there are 32 countries worldwide

with meaningul reserves o shale gas.

The global energy map has been redrawn and expanded

by technologywhich is the. real driving orce in GreatGame 2.0.

The geopolitical consequences are nowhere greater,

perhaps, than in the United States. For decades, the

U.S. has been the worlds oil glutton, consuming about

a quarter o global energy supplies, despite having just

ve percent o the population. Until recently, the U.S.

had grown increasingly reliant on energy imports, a

dependency that shaped its economy and its oreign policy.

Since 2008, however, U.S. domestic oil output has climbed

12 percent, largely on the back o the Bakken and other

shale discoveries, as well as on the rapid expansion o

deepwater drilling. With its production projected to climbor years to come, the U.S. should soon lose its ranking

as the worlds top oil importera dubious honor that is

expected to go to the European Union by 2015 and China

by 2020. (China already has overtaken the U.S. as the

biggest importer o oil rom the Middle East.)6

I, ve years ago, you had askedWhich country in which

region o the world can be totally energy sel-sucient?

no one would have guessed the United States. Yet now,

the revelation o North Americas massive shale gas and

oil reserves, combined with the technological innovations

that unlock their potential, are helping bring into ocus

the tantalizing prospect o energy independence or the

United States. Just a ew years ago, the ossil-uel-rich

corridor that ran rom Saudi Arabia, through the Caspian,

5 Nuclear Engineering

International, November 1,2011, CommentNuclear

in east Asiathe hotbed?6 New York Times, November

9, 2011, E.U. Poised to

Overtake U.S. as Biggest Oil

Importer.


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Figure 1.

The Saudi-Caspian-Siberia-Canada Corridor: How deeply and quickly will the 'Pot o Gold' be realized in the U.S.?

Source: The JAStainislaw Group LLC

over Siberia, and into Canada the Saud i-Caspian-Siberia-

Canada (SCSC) corridorwas seen as the worlds energy

backbone. Six years ago, the corridor stopped in Canada.

But now, that energy rainbow extends to the U.S. where,

potentially, Americans will be able to tap into the pot

o gold at the end o that rainbow. But the airytale will

only come true i the U.S. seizes the opportunity through

appropriate policy, investments in inrastructure, and

intelligent energy management.

Energy technology is also bringing its transormative powerto other parts o the world, principally by decoupling energy

rom its traditional sources. Renewable energy sources

like wind and solar exist across the globe. The incredible

diaspora o shale gas and oil resources, and the reserves

unlocked by deepwater exploration, expand the energy

map even urther. This localization o energy could be a

major orce inor instanceliting Arica out o poverty

by helping bring reliable energy supplies to remote areas. It

will help enable the continued boom in urbanization, since

energy consumption and high energy costs are one o the

brakes on economic development. And by being locally

embedded, energy technologies will help keep communities

globally connectedrather than dependent.

Since the notion o the Great Game was coined in the

19th century, it has reerred to the oten-violent scramble

among nations or control o territories harboring energy

reserves. This old-style game is still very relevant. This is

evident in the growing geopolitical tensions over access tothe Arctics mammoth energy reserves, in Chinas pursuit o

control over ossil uel deposits in Central Asia, Arica, the

Middle East, and South America, and in the strong entry o

India into the global resources game.

But today it has become equally, i not more, important

to control the technology assetsthe hardware and the

sotware. Thus, the game has changed.

20 - 100 billion barrels

100 - 200 billion barrels

200 + billion barrels

20 - 100 bboe*

100 - 200 bboe

200 + bboe

Nuclear

Uranium

Wind/Solar

Human Capital

Oil Reserves Natural Gas Reserves High Coal Reserves

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

Uncertain?


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4

As used in this document,

Deloitte means Deloitte LLP.

Please see www.deloitte.com/us/

about or a detailed description

o the legal structure o Deloitte

LLP and its subsidiaries. Certain

services may not be available to

attest clients under the rules and

regulations o public accounting.

Energy Inc. and the Power of One

The new technologies have not only empowered dozens

o countries, but they also have made corporations and

individuals participants in the energy game.

Google is perhaps the highest-prole example o this: Its

data centers continuously drew almost 260 million watts

about a quarter o the output o an average nuclear

power plantto run Google searches, YouTube views,

Gmail messaging, and d isplay ads. Yet, it has pioneered

technologies that allow its data centers to use only 50%o the energy that most other data centers consume. To

help meet its energy needs, meanwhile, Google has built

a $915 million portolio o clean energy investments on a

simple investment philosophy.7

That is, the uture will be powered by multiple clean energy

technologies, and the key is to nd the ones that will ignite

a revolution and scale to meet the worlds energy needs.

Already, Google has a zero carbon ootprintand its goal is

to go negative.

Meanwhile, smart meters, the internet, and advanced

sotware are allowing individuals to ne-tune their energyconsumption. This underscores the Power o Onethe

ability o every person to proactively manage their energy

consumption and their carbon ootprint. This generational

change is a unction o heightened awareness o the

impact o energy consumption on household expenses, on

oreign policy, and on the environment. The consumption

o energy is no longer just an economic actthis is

becoming a conscious act and an act o conscience. This

will likely intensiy in the coming years.

For both companies and individuals, technology has

unleashed the potential creation o a virtuous energy cycle:

By understanding and managing energy use, individuals

save money, companies increase prots, and both lessen

the environmental impact. Everyone wins.

A recent report by Deloittethe reSources 2012 Study

ound consumer resourceulness has become entrenched

among American consumers. Eighty-three percent o

consumers took steps to reduce their electric bills over the

past year, up rom 68% in the 2011 reSources Study. And,

consumers are demanding that companies oer more

environmentally considerate solutions. U.S. businesses, on

average, are targeting reductions in energy consumption

o 23-24% over a 3-4 year period across electricity, natural

gas, and transportation feet. This years survey indicates

that companies are increasingly recognizing energy

management as a necessary strategic discipline and a key

to competitiveness. The 2011 and 2012 studies suggest

there are three categories where businesses will all as it

relates to their energy management practicesPioneers,

Engagers and Reactors.

7 New York Times, September 8,

2011 Google Details, and

Deends, Its Use o Electricity.

Figure 2.

Organizations are increasingly sophisticated at

managing energy at multiple levels within their

enterprise and across the supply chain.

Pioneers, Engagers or Reactors are descriptors or the spectrum

o businesses engaged in some level o energy management.

The Deloitte reSources 2012 study identied three distinct types

o companies engaged in some level o energy management:

Pioneers: 26% o respondents embracing the challenges o

energy management; developed and implementing strategy

Engagers: 52% o respondents believe must change or

lose to the competition. New to the challenge, reported

diculty in developing and executing programs eectively.

Reactors: 22% o respondents no comprehensive strategy;

isolated, tactical, project initiatives

26%22%

52%

Pioneers Engagers Reactors

Source: Deloitte Center or Energy Solutions


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Danger aheadA license to operate?

The breakneck pace o the energy technology revolution

likely masked inherent risks, howeverespecially in terms

o the environment and the public reaction.

The expansion o hydraulic racturing and the

accelerated production o the Canadian oil sands,

coincided with the global economic crisis that began

in 2008. This initially blunted reaction to the potential

dangers o new energy technologies, since the general

public was absorbed by its core economic concerns andthus inclined to think more about the savings that came

rom less-expensive energy than about environmental

concerns. In parallel, the campaign or a global climate

treaty eectively collapsed ater Copenhagen in 2009,

upending the momentum to curb carbon emissions.

In other words, in the competition between desire (or

cheaper energy) and ear (o the eco-consequences o

ossil uels), desire was at the oreront.

But environmental concerns are again ront-and-center.

The past three years have seen a series o energy-linked

environmental challenges that have reawakened public

concerns: The Gul o Mexico oil spill, the Fukushimanuclear incident, the controversy o hydraulic racturing,

and more.

Another example is the 1,700-mile Keystone XL pipeline

(which would transport 700,000 barrels per day o

Canadian oil sands crude to U.S. Gul coast reneries)

which has stirred a storm o controversy in Washington

ater concerns were raised about carbon emiss ions rom

oil sands production. The grassroots movement against

hydraulic racturing, meanwhile, has gained steam due

to concerns about the potential contamination o ground

water, risks to air quality, and the possible migration o

gases and hydraulic racturing chemicals to the surace. In

January 2012, over 40,000 New Yorkers weighed in during

the public comment period on the States deliberations to

allow hydraulic racturing.

The concerns o the ecological crowd are receiving

attention, with some reports showing that groundwater

tends to contain higher concentrations o methane near

hydraulic racturing wells. Also, hydraulic racturing has

been linked to earthquakesnot yet proven but sowing

distrust. In November 2011, an earthquake measuring

5.6 rattled Oklahoma and was elt as ar away as Illinois.

Until two years ago, Oklahoma typically had about 50

earthquakes a year, but in 2010, 1,047 quakes shook the

state. Both the U.S. Army and the U.S. Geological Survey

have concluded that the practice o injecting water intodeep rock ormations causes earthquakes. The unsettled

nature o these concerns means that companies still have

not secured a ree-and-clear license to operate rom

the public.

These are the early days o the high-tech energy era. Our

knowledge o the potential and the consequences o new

technologies is in its inancy. The ull cast o players in

Great Game 2.0states, technology companies, energy

producersis only now emerging onto the stage. How

all o these orces interact and play out in the coming

years could well determine not just where we get our

energy rom and how much it costs, but also the shape odomestic and global development. The Great Game 2.0

may well decide which countries and companies emerge as

enduring powers in the 21st centurywhich ones, in other

words, will reach the pot o gold at the end o the energy

rainbow.


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6

Framing the Great Game 2.0:Saety, security and stability

The past ew years have seen several crises that absorbed

analysts and seemed to augur signicant changes in

the energy industrynatural disasters like the Japanese

earthquakes that shook up the nuclear calculus, political

upheavals in North Arica and the Middle East that looked

ominous or oil (think Iran and Libya), and man-made

environmental accidents like the Gul o Mexico oil spill.

All were grave in their own way. But none ultimately have

been o truly signicant consequence or global energy

supplies.

The reason or this is that deeper, more proound, longer-

term trends are powering the energy equation. By ar,

the most signicant one is this: Energy is a central orce

in global economics and politics. It is at the heart o the

major global issueseconomics, poverty reduction, climate

change, clean water, and so many more. As a result,

governments are pursuing an energy triptychsecurity,

saety, and stability. This pursuit is at the heart o the Great

Game 2.0.

In the Great Game 2.0, security o supply trumps.

Unpack security o supply and you discover several

essential components beyond the physical access toresources, including the technology needed to tap those

resources, the human talent to invent and manage that

technology, and the ability to securely transport energy

through vulnerable channels, rom the Strait o Hormuz and

the Gul o Malaca. Absent security o supply, national

sovereignty is potentially at risk.

The other two s words in the energy triptych are saety

and stability. Real security o supply will demand that energy

can be accessed with minimal environmental impact and risk

to human saety. And it also will depend on the long-term

stability o a countrys legal and regulatory ramework,

which allows companies and consumers to invest or the

long haul.

The scale o investments being made in new energy

technologies is unprecedentedand nowhere more so

than in China. Beijing is investing $1.7 trillion in strategic

sectors, a major portion o it targeted to clean energy

and clean energy technology. Specically, Beijing says the

packageequivalent to Italys GDP and our times Chinas

2008 scal stimuluswill ocus on alternative energy,

biotechnology, new-generation inormation technology,

high-end equipment manuacturing, advanced materials,

alternative-uel cars and energy-saving and environmentally

riendly technologies.8

China has become procient in thedesign o nuclear reactors, solar, wind, and other energy

technologies. While the Chinese are ramping up their own

R&D, they have been especially skilled at adopting and

adapting technologies and reengineering them to lower

their costs.

The countries that leap ahead in this energy technology

game should be better positioned to protect their

sovereignty and to benet rom sustainable development.

But they also will be able to multiply their gains by being

the beneciaries o a virtuous cycle o innovation in

much the same way that the initial discovery o ossil uels

and, a century later, the technology behind the internetredened the economic landscape.

Take wind and solar energy, or example: As these sources

approach grid parity, they have helped accelerate the

pursuit o energy storage. And energy storage is likely a

game-changer in every realm, rom extending the battery

lie on mobile phones and laptops, to powering cars, to

decentralizing energy production.8 Telegraph.co.uk, November 21,2011, China unveils 1 trillion

green technology programme;

China is to spend more than 1

trillion over the next ve years

on green energy, transport and

advanced manuacturing, U.S.ocials have revealed.


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Demand is supply:The stealth revolution in energyefciency technologies

Companies have business strategies, risk strategies,

strategies or growing markets, and or managing human

resources, and so orth. But most companies do not yet

have an energy strategylet alone broader sustainability

strategies to manage the use o water, land, and other

resources. This is especially striking becausethanks to the

advent o technology that revolutionizes how we manage

energy consumptionevery company is an energy

company.

The headlines at the intersection o energy and technologyhave been dominated by solar, wind, biogas, tidal energy,

and other renewable sources or most o the past decade.

But two other, less-remarked-upon advancements probably

matter more. One is taking place in the management o

energy use, where improvements in eciency could have a

greater impact on the global energy picture than any other

development. And the other is in the oil and gas industries,

where new technology has brought massive new reserves

into play.

The marriage o technology and energy is perhaps

nowhere more important than in upgrading electricity

inrastructureand in particular the long-awaited smartgrid. The gains in eciency will likely be astounding once

the grid is built out.

A picture o whats possible is unolding in South Korea,

where a prototype grid is being developed in tandem with

intelligently designed buildings. Smart buildings connect

and communicate with the utility company via the smart

grid, allowing customers to check the energy use o every

socket and track electricity prices minute by minute. This

allows them to automatically schedule the use o power-

hungry appliances like dishwashers when electricity is

cheapest. In act, by modulating use, customers are not only

able to consume cheaper, o-peak power, but they can sell

power back to the utility that otherwise would have been

lostthe meters in the prototype system run backwards.

Customers with energy-producing technologies like rootop

solar arrays or wind turbines also can sell their excess energy

back to the power company.

Enablers Investors Technology Manufacturing

Users

(Demand) Residential Commercial Industrial Transportation

Policy Regulatory Environmental Tax

Stimulus

Providers

(Supply) Traditional Environmental Tax Stimulus

Energy

Management

Man

aging

Risk

Red

uucin

gC

osts

Minim

izin

gCa

rbon

Foot

prin

tIncreasin

gRevenu

es

Consumptio

n

Manage

mentSupplyOp

tions

DistributionEfficiency

Infra

structure

Implica

tions

Figure 3.

Energy is an asset that should be strategically managed to create economic value

or business enterprises

Source: Deloitte Consulting LLP

Meanwhile, the smart grid allows South Korean utilities

to chart energy use by house, by neighborhood, by time

o day, by seasonand thus to better plan how they

will supply energy in the uture. In leaping ahead with its

prototype grid, South Korea is aiming at its own virtuous

cycle o innovation, one that not only will allow it to

combine smart technology and green energy into one

ecosystem, but also one that will allow it to spawn new

companies that export the system worldwide.


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8

Figure 4.

Real analytics or energy: The path to Big Data

9 New York Times, December 6,

2011, A Mismatch Between

Grid Regulation and ModernNeeds

Innovations can be elegantly simple as well: Opower gives

electric and gas companies tools to communicate with

customers, like text-messaging them mid-month i their

electric bill is running particularly high.

The budding demand management industry is already

making major inroads in the corporate world. Innovators like

EnerNoc, using state-o-the-art sotware, help companies

manage energy use and automatically reduce consumption

during peak periods, selling the saved electricity back to

utilities at a prot and orestalling the need or the utilitiesto purchase high-priced energy on the spot market. FirstFuel

Sotware, meanwhile, analyzes a buildings electric use to

produce an energy-saving planand it does so remotely,

without a need or engineers to ever visit the building.

Almost all these energy management technologies are

enabled by the availability o data. Capturing this data

creates entire rontiers in energy managementmuch

as Amazon recongured the supply chain and business

model o consumer retail. Except, unlike Amazon, whose

business model turned many brick-and-mortar players into

dinosaurs, there are not necessarily losers in the energy

management revolutionthe producers, intermediaries,and consumers can all win.

How important are such innovations? Consider this: Peak

electricity demand is rising aster than overall demand, so

more and more power plants must be built to run or just

a ew hours a day. One recent study ound that 21 percent

o power plants run, on average, or less than an annual

average o three hours per dayjust to meet that peak

demand.9

Companies generally spend a signicant portion o their

operating costs on energy, yet they generally have a poor

understanding o their energy consumption and how to

better manage it. From better management o buildings

and vehicle feets, to smarter use o technology, to tighter

oversight o their entire supply chain, organizations can

mobilize countless tools to transorm how they use energy

and other resources. The benets o active energy and


Predictive

monitoring

Fast Analysis of Big Data

Historical Reports

PrescriptiveAnalytics

Foundational Elements

sustainability management are not only nancialthough

the bottom-line eect is the one most likely to motivate

managementthey also oster an ethos o sustainability

throughout an organization, attract consumers who are

now savvy about how green the products and services

are that they consume, and serve to shield a company

rom being bueted by energy price volatility.


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An eciency sea change is taking place oshore as

wellin the world o shipping. Technology is allowing

designers to reinvent how ships are made and how they

move, revolutionizing the industry. The B9 Energy Group

in the United Kingdom is retrotting Rolls Royce engines

to run on natural gas, thereby reducing uel consumption.

But B9s real innovation is in the giant high-tech sails that

provide most o a ships propulsion. These will be able to

unurl or old up at the push o a button, avoiding the

need or the large crews that manned the rigging o large

sailing ships in years gone by. Even more impressive: the

DK Group in the Netherlands has tested what it calls an air

cavity system that enables a ship to glide at low riction

through the water by injecting air around the submerged

part o the ship's hull, creating a carpet o bubbles under

the vessel.

These innovations in shipping crystallize the notion

o locally embedded technologies that are globally

connecteda hallmark o the new technology-driven

energy era.

Figure 5.

Without a coordinated view o cost, consumption, operational and acility data

there can be no enterprise energy management strategy.

Operations

Energy

Strategy

Operations

Finance

Finance

Real Estate/

Facilities

Management

Real Estate/Facilities

Management

Utility bills (spend)

Capital budgetsand expenditures

Capital project

Meter and sub-meterdata (consumption)

Energy price

Process andproduction data

Facility information:size, location, etc.

Standard View of Energy Strategic View of Energy

portfolio



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10

The supply surprise

The supply-side revolution in energy technology is equally

impressive. Thanks to advances made possible principally

by advanced sotware, the International Energy Agency

(IEA) estimates that unconventional resources like shale

gas now account or about hal o the worlds natural

gas resources, while unconventional oil production will

reach 10 million barrels a day by 2035. Conservative

estimates put the worlds oil reserves at our times the

total consumed throughout history, while more optimistic

orecasters place the multiple at ten or even 12. The IEA

estimates that $20 trillion will be spent on unconventionalsources o gas and oil between now and 2035.10

Wildcatters near Santa Barbara, Caliornia, rst ound

brown shalean oil-rich, porous, lightweight rockin

the Orcutt oil elds in 1901. But or the next century,

the various owners o Orcutt drilled 2,000 vertical wells,

bypassing the shale in order to get at the liquid oil

beneath. By 2004, the eld was thought to be in terminal

decline and was sold to Breitburn Energy Partners.

Breitburn quickly determined that the brown shale, just

900 eet deep, was a vast potential resource. Applying

the latest technology, Breitburn was able to nearly double

Orcutts output to 90,000 barrels a month.

What made this possible? Today, the modern day version

o wildcatters are energy technology entrepreneurs

geoscientists and sotware engineers who drill wells on

computer screens beore drilling in the eld. They create

three-dimensional images o the undergrounda kind o

MRI o the earththat reveal hidden oil deposits. Oset

angle drilling then allows drillers to penetrate previously

inaccessible deposits, directionally guiding drill bits at

angles between 45 degrees and 80 degrees into spaces

between old vertical wells where crude still remains in

shale reservoirs.

Fracturing technology developed over decades, but

when combined with horizontal drilling, it has come to

dominate in just our years. Nearly every day, potential

shale oil and gas reserves are discovered in such unlikely

places as Pennsylvania (which now produces more natural

gas than Texas), Poland, Israel, and Ohionames not

normally associated with the oil eld. And many o these

are not small elds, but what are known in the industry as

elephants holding one billion barrels or more. So much

oil is coming out o the Bakken ormation in Montana/

North Dakotadiscovered in 1951, but unlocked bythe new rock racturing and horizontal drilling technology

only in 2008that it has outstripped the existing pipeline

capacity to move it to reneries. Railroads such as BNSF

and Canadian National have been pressed into service to

move some o the crude. At latest count, Bakken is said to

hold 18 billion barrels o recoverable oil.

Just a ew years ago the expectation was that the U.S.

would be importing large volumes o natural gas and

becoming heavily dependent on world marketsand

spending upward o $100 billion a year or those imports.

Now people talk about a hundred-year supply o domestic

natural gas. The new hydraulic racturing technologies arealso producing legions o jobs.

And in many ways, this is just the beginning o the

unconventional revolution. Companies are continuing to

pioneer innovative exploration methods. In Long Beach,

Caliornia, Signal Hill Petroleum has buried 6,000 small

yellow canisters containing sophisticated equipment so

sensitive it can record the vibrations o a person walking

past.11 The devices work in tandem with a feet o

hydraulic vibroseis" trucks. By producing vibrations, the

trucks create images o ormations as ar as three miles

underground. Meanwhile, new technology based on radar

and sonar techniques will drastically reduce the cost o

hydraulic racturing and increase its eciency.

10International Herald Tribune,

November 15, 201, The

pitalls on the road to tapping

new energy; Unconventional

sources like oil sands oer

hope, but may pollute more.11

Los Angeles Times, October29, 2011, Producers Tap Into

Oil Boom.


13/20


Shale gas has been dominating headlines, but its

ossil twin, shale (or tight) oil is also experiencing a

technological revolutionhelping raise U.S. crude oil

output by 18 percent since 2008. For years, tight oil

which is extracted rom dense rockhad been a very

marginal business. In 2000, production was only about

200,000 barrels per day, 3 percent o total output. Today it

is about a million barrels per day. The dramatic increase in

tight oil has been made possible by the same technologies,

hydraulic racturing and horizontal drilling, that enabled

the explosive growth in shale gas production.12

Thanks tonew technology, the U.S. has become less dependent on

petroleum imports rom unstable countries.

The revolution is not only taking place on land, but is

occurring oshore as well. Deepwater exploration has

been revolutionized by the ability o powerul computers

to crunch seismic data 15,000 eet below the sea foor.

The result has been a boom in deepwater drilling: In 2000,

there were just 20 deepwater drilling vessels. Today, there

are over 200, and deepwater wells are supplying eight

percent o the worlds oila gure expected to double

by 2020.13 Here, too, technology leaps are taking place in

the eld: The invention o super strong alloys, or instance,allow drill bits to go into hot, high-pressure elds deep

in the earths crust. Shell, meanwhile, is deploying the

worlds largest vessela 500-meter, all-in-one behemoth

that explores, extracts, liquees, and compresses rom

small gas elds.14

12Wall Street Journal, December

12, 2011, America's New

Energy Security13 New York Times, October 25,

2011, New Technologies

Redraw the Worlds Energy

Picture14 Shell Decides to Move

Forward with Groundbreaking

Floating LNG, Press Release,

2/9/11; Shell Approves

Worlds First Floating LNG

Project, Wall Street Journal,

5/20/11

Just a ew years ago the expectation was that the U.S.would be importing large volumes o natural gas and

becoming heavily dependent on world markets. Nowpeople talk about a hundred-year supply o domesticnatural gas.


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12

The new Great GameA technology race

The global energy technology race has proound

implications or the economy, workers, the environment,

and national security. History oten turns as a result o

energy innovationsbeginning, o course, with re. Each

time a major new energy technology has emergedbe

it steam, electricity, or oilthe balance o power among

nations has shited, while entire new industries have been

spawned. The technology-driven revolution in eciency

management, unconventional ossil uels, and clean energy

could rearrange the chessboard again.

For both nations and companies, secure, stable energy

supplies will become ever more important as new sources

o instability are introduced into the equation. Evidence o

these are legion: rom the budding trade war between

the U.S. and China over solar energy, to attacks on energy

grids that have raised the specter o a cyber Pearl Harbor,

to the brake on energy development that could be placed by

environmental concerns.

But instability has always been a actor in the energy game.

Whats new is that technology is making greater energy

resources available to a greater number o actors than ever

beore. This holds the promise o generating much greater

energy security or countries, companies, and individuals.

But which countries and companies will emerge as kings

and queens, and which as pawns, is still unclear. In a recent

survey by Deloittethe reSources 2012 Studymore than

one-third (35%) o companies generate some portion o

their electricity on-site rom renewables, co-generation or

other methods, with another 17% planning to do so.

Energy security, stability, and saety would be rich enough

prizes. But the job creation potential o the energy

technology revolution presents a reward o enormous

value to our societies. Until now, this paradigm shit has

beneted China above all, thanks to its low-cost jobs

and its skill in appropriating and scaling up technology

developed by others.

Technology is making greater energy resources availableto a greater number o actors than ever beore. This holdsthe promise o generating much greater energy securityor countries, companies, and individuals.


15/20


Nonetheless, it is not too early to discern what might

separate the winners rom the losers in the Great Game 2.0.

For governments, the keys to success will be:

Developing a visionary and stable national policy

ramework: What matters above all is a robust,

long-term energy vision. Stable, orward-looking

legislative rameworks are critical in this regard. Absent

a ederal energy rameworka national energy policy

companies cannot realize the investment potential o the

uture. Certainty matters. For example, Chinas dominanceo the solar and wind industries was built in just ve

years on central government mandates. China is not

only increasing its cleantech capacity but is also building

powerul industries to export renewable and alternative

energy components around the world.

Building national inrastructure: In additional to

legislative rameworks, governments should also lead

in enabling the creation o state-o-the-art energy

inrastructure. Case in point: In the U.S., 30 states have

developed renewable energy mandates, with targets o

between 15-25 percent by 2020. But it is very dicult to

upgrade the electric grid. The grid, which was built on aregulatory structure that dates to the 1930s, has emerged

as an ill-matched patchwork dened by decisions made

at the state level. For the U.S. to tap the potential o

wind and solar resources that may be several states away

rom the big load centers, this must change. Presently, no

single agency, no single entity, is charged with looking at

the broad national energy interest.

Making deep, long-term commitments to R&D:

High-octane research budgets are needed; the private

sector alone cannot sustain investment and propel

breakthroughs in the midst o volatile energy markets and

pressure to create prots. Take the shale gas revolution,

which was made possible by the ederal government.

Between 1978-2007, the Department o Energy (DOE)

spent $24 billion on ossil energy research. In doing so,

it helped pioneer massive hydraulic racturing in 1976

with its Eastern Gas Shales Project. Horizontal drilling and

well installation also was enabled by air-based drilling

and drill bits developed by the DOE. And 3-D imaging

also was a DOE innovation. All these projects were

widely condemned as ailures in the 1980s and 1990s

when natural gas was cheap. But today they appear

prescientand have positioned the U.S. to have at least a

shot at becoming energy independent. In act, the ederal

government has been determinative in almost every

energy transormation over the past century.

Reeree the level playing feld: A legislative ramework

creates a level playing eld, and deep commitments to

R&D broaden the horizon o that eld. With the rules in

place and the innovation pump primed, the governments

next job is to get out o the way and let the players in

the energy game determine which technologies win and

which lose. (O course, the government will provide the

reerees in this battle, too.)

Enorce transparency and accountability to turn

the public into an ally: The controversies over the

environmental impact o hydraulic racturing are due,

in part, to misperceptions. This is understandable giventhat the technologies are new and it will take time or

the public and environmentalists to ully understand

their impactand in the interim, advocates are likely

to dwell on the most dire evidence to advance their

case. But governments can accelerate the process o

public education by compelling companies to disclose

ull data on the eects o drilling on water supplies,

geological stability, and the environment more generally.

Since the technologies are still in their early days, their

environmental impact will be substantially mitigated

over timeas has already been the case with hydraulic

racturing in its rst our years o widespread use. It is

likely that publics, once able to accurately weigh the costs

and benets o hydraulic racturing, will become more

supportive o it. Facts can and should prevail over ear.


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14

A potential safety net: The Power of One

The most extraordinary aspect o the technology-driven

energy revolution, however, is that even i governments

ail to act eectively, corporations and individuals have still

been empowered to make a radical dierence in their own

consumptionand thus to materially infuence the broader

energy game. The Power o One has come into its own.

The new energy-related sotware and hardware on

the market and in developmentsmart meters, smart

appliances, demand management programs, and soorthliberate individual actors rom being at the mercy

o broader orces. Every company needs an energy and

sustainability strategy to dene how it manages resources.

The absence o such a strategy may well limit protability

potential and jeopardize the long-term health o the

business. By contrast, sustainable companies can be a

boon or investors. In the two years rom 2009 through

2011, the top 100 companies in Newsweek's 2009 Green

Rankings outperormed the S&P 500 by 4.8 percent

returning 15.2 percent versus 10.4 percent or the S&P.15

The use o energy can now become a conscious actand

an act o conscience. Its not about being virtuous, its

about being protableand, at little to no cost, virtue is

achieved. Governments should do everything possible to

abet this virtuous cycleand, i nothing else, they should

make certain not to hinder it.

The Great Game o the 21st Century is the technology

continuum driving along the development curve rom

1.0 to 2.0 to 3.0with each version coming aster than

the one beore. The uture is one o continuous researchand development, inormed investment job creation,

and greater energy securitywithout sacricing the

environment.

The emerging energy world boasts a new geography, new

technology enablers or both supply and demand, and a

new road mapa map which can lead to the pot o gold

at the end o the energy rainbow.

A potential saety net: The Power o One

15Newsweek, September 20, 2009, "The Greenest Big Companies in America," http://greenrankings2009.newsweek.com/


17/20


About the author

Dr. Joseph A. Stanislaw

Independent Senior Advisor

Energy & SustainabilityDeloitte LLP

+1 703 251 1726

[email protected]

Dr. Joseph A. Stanislaw is ounder o the advisory rm The JAStanislaw Group, LLC,

specializing in strategic thinking, sustainability, and environmentally sound investment

in energy and technology. He is an independent senior advisor to Deloittes energy and

sustainability practices. As an energy industry leader, advisor, strategist and commentator,

Dr. Stanislaw advises on uture trends in the global energy market. Dr. Stanislaw serves on

several boards in the energy and clean technology space. He is a member o the Council on

Foreign Relations.

Dr. Stanislaw was one o three ounders o Cambridge Energy Research Associates in 1983

and served as managing director or all non-U.S. activity until 1997, when he was named

president and chie executive ocer. He is an adjunct proessor in the Nicholas School othe Environment and Earth Sciences at Duke University, where he is a Member o the Board

o Advisors or the Nicholas Institute or Environmental Policy Solutions. Dr. Stanislaw was a

Research Fellow o Clare Hall and lecturer in Economics at Cambridge University, where he

was also a member o the Energy Research Group in the Universitys Cavendish Laboratory.

He was a senior economist at the Organization o Economic Cooperation and Developments

International Energy Agency in Paris.

Dr. Stanislaw is co-author o 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 o numerous reports and

published papers on the geopolitics and economics o uture energy supply and demand,

including Energy in Flux: The 21st Centurys Greatest Challenge, and Clean Over Green: Striking

a New Energy Balance as We Build a Bridge to a Low-Carbon Future, and he is eatured in thepublic television documentary, Oil ShockWave.

Dr. Stanislaw received a B.A., cum laude, rom Harvard College, a Ph.D. in Economics rom the

University o Edinburgh, and was awarded an M.A. rom the University o Cambridge. He is

one o only several people to have been awarded an Honorary Doctorate and Proessorship

rom Gubkin Russian State University o Oil and Gas in Moscow.

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


18/20

16

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For more inormation, please contact [email protected]

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November 29, 2012

Deloitte Energy Transacting Accounting Chicago, ILFor more inormation, please contact [email protected]

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