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Paul Isbell CAF Atlantic Energy Fellow

Center for Transatlantic Relations Atlantic Basin Initiative

Johns Hopkins University School for Advanced International Studies (SAIS)

Salvador da Bahia, Rio de Janeiro, Sao Paulo August 2014

A Tale of Three Energy Stories: A New Vision of the Atlantic

for a Strengthened Strategic Energy Dialogue between Brazil and the United States

Roadmap

• Three Stories: • Brazil’s ‘Dynamic Energy

Resume’

• The ‘Shale Revolution’ and US ‘Energy Independence’

• The ‘Atlantic Energy Renaissance’ and the Coalescence of an Atlantic energy space

• Strategic Implications: • The Global Geopolitical Map

and the Global Energy Flow Map

• The Potentials and Implications of the ‘Atlantic Basin’

• ‘Global’ and ‘Transnational Governance’ in an ‘Ocean Basin World’

• The Brazil-US Strategic Energy Dialogue and the ‘Atlantic Energy Forum’

Story #1: Brazil’s Dynamic Energy Resume

• From external hydrocarbon dependence to oil exporter status

• Brazil’s Impressive Low-Carbon Energy Mix

• Threats and Challenges to Brazil’s successful energy resume

• ‘Standard Implications’ of this Story

• The ‘Continuity of Pragmatism’?

Conclusion: Brazil’s energy resume is in need of a new ‘story’ – so as to reveal the strategic horizon afresh

Brazil’s Energy Policy Success: Reduced external energy dependency

• In the mid-1970s, Brazil had

to import 35% of its energy consumption.

• This external dependency had fallen to 25% by 1990.

• In 1999 oil import bill still accounted for 15% of the current account deficit

• Today, external dependency is less 5% of total energy consumption (limited to a small amount of coal, gas and electricity imports)

A conscious, deliberate Brazilian strategic thrust

How has Brazil become nearly self-sufficient in energy?

Increased biofuels production

• Increased penetration of

sugar-cane based ethanol in the transportation mix during the 1980s and 1990s.

• Today, biofuels account for about 30% of the transportation fuel mix.

Increased oil production

• Domestic oil production nearly quadrupled in the 80s (from 172,000bd in 1979 to 650,000bd in 1990)

• By 2009, oil production had risen to over 2mbd, leading Brazil to be self-sufficient in oil, creating a small net export surplus

Expanded domestic ‘liquids’ production have progressively displaced petroleum imports

Brazil’s Energy Policy Success: Brazil’s Low Carbon Energy Mix

• 40% petroleum and other related liquids (natural gas liquids and condensate)

• 18% sugar cane products (ethanol and bagasse)

• 15% hydropower • 10% traditional biomass

(firewood) • 8% natural gas • 5% coal • 2.5% other renewable

energies (wind, solar) • 1.5% nuclear power

40

18

15

10

8

5 3 2

Primary energy mix

petroleum

sugar cane products(ethanol, bagasse)

hydropower

traditional biomass(firewood)

natural gas,

coal

renewable energies

nuclear

Brazil is the only country in the world to make significant progress on both sides of the energy ‘fence’ – in the realm of ‘liquids’ (ie, transportation) and in the electricity/power sector. Over 45% of the primary energy mix is ‘low/lower’ carbon.

Threats to Brazil’s Low Carbon Mix Hydro power’s clouded future

• Growing public opposition

(both ‘NIMBY’ and environmental): Belo Monte

• Climate change ‘feedback effects’ on hydraulic/water patterns (Amazon ‘dieback’; Eastern Amazon becoming savannah-like ecosystem)

• Drought in 2001 already provoked widespread blackouts; experience repeated in 2011

‘Fossil fuel creep’

• Recent increase in demand for diesel fuel; outstripping local biodiesel production

• Electricity demand: expected to rise 5% annually over the coming decade; hydro power only projected to rise 3%

• Supply-demand gap to be met by petroleum and coal?

• Or by natural gas and renewable energy (wind, solar etc)?

Threats to Future Oil Exports Challenges and Dilemmas of the Pre-Salt

• Ambitious production targets (over 4mbd by 2020; 25% from pre-salt)

• If target met, Brazil would likely move from being the 14th largest oil producer in the world to the fourth largest.

• Daunting investment needs: Petrobras 2010-14 5-yr plan: capital expenditures of $224bn ($50bn+/yr to 2020)

• Logistics/infrastructure challenges: “entire floating cities” will be needed in Brazil’s SE waters

• Required: state-of-the-art technology; technically sophisticated and specialized workforce

• Potential investment, technical and labor bottlenecks: impacts of the recent Brazilian petroleum legislation?? (IOC access, domestic content, R&D requirements, etc.)

Brazil’s Climate Change Challenge • Brazil: 52% of LAC emissions; 7%+ of

global total (1.25% of world energy and 35% of global land-use emissions)

• Nearly 80% from ‘AFOLU’ sources (agriculture, forestry and land-use); only 20% of Brazil’s emissions come from the energy sector;

• 1.9 tons of CO2 per capita from energy; Less than one-fifth the OECD average; less than half the world average

• W/o 40-year investment in renewable energy, emissions would be nearly 20% higher

• However, AFOLU emissions have slowed. Meanwhile, energy emissions are growing faster

12%

9%

21% 56%

2%

Total Emissions Profile

Energy

Industrial

Agricultural

Land/Forestry

Waste

17%

28% 39%

13%

3%

Energy Emissions Profile

Electricity/heat

Manufacturing/construction

Transportation

Other FuelConsumption

Fugitive Emissions

Standard Interpretations of the Story Optimistic line:

“The country of the future has finally arrived” • Brazil has increased its geopolitical

‘flexibility’ just as it has enhanced its macroeconomic ‘flexibility’ – Iran (and like examples) – Military spending (low levels, low

growth rates relative to other BRICS

• Brazil’s oil and its future position among the top handful of oil exporters will allow it to continue to progressively eliminate poverty and to continue to expand its middle class

• Brazil has and will continue to become a key technological player in the ‘offshore’ and in the global relations between IOCs and NOCs

• As a result, Brazil has a chance at a permanent seat on the UN Security Council

Pessimistic line:

“A wave of ‘B as in BRIC’ admirers, followed by a wave of ‘B as in BRIC’ sceptics”

• Brazil now facing limitations & growing challenges; cycle of ‘emergence’ now facing ‘diminishing marginal returns’

• Brazil is now ‘punching above’ its weight (the undiplomatic example of the Brazil’s sides fate in 2014)

• Pre-salt legislation as an example

• Brazil is suspicious of the Northern Atlantic and inclined to continue its South-South strategic thrust

• Brazil faces the danger of relying on raw material exports to China

What fate for the historical pattern of Brazilian policy pragmatism?

Brazil’s Policy Pragmatism • Brazil used the state to promote ethanol

o Subsidies o Mandates

• Brazil used the market to expand domestic oil production o 1997 partial privatization of Petrobras o Opening and partial liberalization of petroleum

sector o More recent pre-salt legislation?

• On-going dialectic between state and market in

Brazilian energy (economic, climate) policy (eg, recent pre-salt legislation)

Story #2: The ‘Shale Revolution’

• The ‘previous US story’: Growing external energy dependency and declining geopolitical leverage

• The ‘new US story’: the ‘Shale Revolution’

• The ‘Standard Interpretations’

• A new narrative is called for

Previous US story: growing external energy dependence (I)

Previous US story: growing external energy dependence (II)

Previous US story: growing external energy dependence (III)

The New US Story: ‘Shale Revolution’ (I)

• Shale oil production has increased 65% since 2005 (now equal to Iraqi production)

• Shale gas: 35% increase in production (Marcellus shale in PA = to reserves of Qatar (second largest X in 2012)

• Gas imports down by 28% since 2005

• Oil imports have fallen 16% since 2005

• Improvement in competitiveness of energy-intensive sectors, particularly manufacturing

The New US Story: ‘Shale Revolution’ (II) • Optimistic view on ‘energy independence’ – oil imports eliminated

by the end of this decade (based on private sector estimates)

The New US Story: ‘Shale Revolution’ (III) • More measured, ‘official’ view – net oil imports falling to 36% by

2030-35 (based on EIA projections)

The ‘Standard Interpretations’ Measured Pessimists

• With exports, domestic prices will rise to level of world prices

• Shale is not necessarily sustainable – Rapid production declines in the Barnett

shale

– Local pollution and contamination fro ‘fracking’

– Fugitive emissions of methane (GHG 42x more heat-trapping than CO2

• Subsoil property rights regimes break the

spread of shale production beyond the US

Optimists

• US energy prices will fall still farther, or at least stay low and newly competitive

• US manufacturing industries will be

revived and that the post Cold War ‘offshoring’ trend will be reversed to become a new ‘on-shoring wave’

• US global influence and/or geopolitical leverage will be significantly enhanced, reversing the recent trend (or at least widespread perception) of decline

• The US to reestablish will ‘reestablish’ global stability and prosperity under its renewed leadership

• These changes reinforce the underlying rationale behind the ‘pivot to Asia’

Story #3: The ‘Atlantic Energy Renaissance’

• A new projection of the global (energy) map

• The Atlantic Energy ‘Revolutions’

• The Shifting Global Energy Flow Map and the New Atlantic Center of Gravity

• Implications

A New ‘Projection’ of the Map

• New Map: ‘Atlantic Basin projection’

• Relies on same data: ‘national’ or ‘continental regional’ BUT arranges it differently

• ‘Atlantic Basin’: Africa, LAC, NA and Europe; plus islands

• ‘Great Crescent’: Mideast, Central Asia, Russia

• ‘Asia-Pacific’ (South, Southeast and East Asia, plus all ‘islands’

• Both of the stories above are rooted in ‘national’ and ‘land-based’ notions of the relevant map

• Result: limits our visions of the strategic horizon

• But the global map is transforming: the rise of the ‘seascape’

Atlantic Fossil Fuel Revival - Oil • Proven Oil Reserves, The Atlantic Basin and the World, bn bbl, 1980-2011

Source: BP Statistical Review of World Energy 2013, and author’s own elaboration.

Atlantic Basin: 700bn bbl

Atlantic Fossil Fuel Revival - Oil • Proven Oil Reserves, The Atlantic Basin and the World, % of world

total, 1980-2011


Atlantic Basin: 42% of global reserves

Atlantic Fossil Fuel Revival - Oil • Oil Production, The Atlantic Basin and the World, 1965-2012


Atlantic Basin contributes 42% of global oil production . . . .

. . . . but the Atlantic Basin will account for nearly two-thirds (64.5%) of all projection growth in oil production to 2030 . . .

Atlantic Fossil Fuel Revival - Gas • Gas Reserves, Conventional (left) and ‘Shale’ (right), Atlantic Basin

and the World, 2012 • Atlantic

Source: Oil & Gas Journal, Worldwide Report, December 3,

2012, cited from EIA 2013.

Global ‘Shale’ Gas, Technically Recoverable Resources (TRR), by

Region, 2013

Source: EIA 2013, and author’s own elaboration.

The ‘Atlantic Basin’ accounts for only 20% of conventional proven gas reserves, but . . .

. . . The Atlantic holds 70% of known technically-recoverable shale gas reserves.

Atlantic Fossil Fuel Revival - Gas

Source: EIA 2013, and author’s own elaboration.

• Total Global Gas Supply, Technically Recoverable Resources (TRR), Atlantic Basin and the World, 2013

•

Atlantic Basin accounts for nearly half of the world’s technically available gas reserves (conventional + shale) . . . .

. . . . Atlantic Basin will outpace the Great Crescent in gas production, accounting for 38% of all projected growth in global gas production to 2030 (versus the Great Crescent’s 36%)

Source: BP Energy Outlook 2030, January 2013 and own-elaboration.


Atlantic Offshore Revolution - Oil

• One-third (28mbd) of global oil production occurs offshore (8mbd in the ‘deep’ offshore)

• Over 60% of global offshore oil and 95% of ‘deep offshore’ is Atlantic

Global offshore production has more than doubled since 1980 – from less than 15% to nearly one-third today – rising in absolute daily production terms from 8.9mbd to 28mbd in 2010. Since 1980 . . . .

• . . . offshore oil production has accounted for all of the net increase in global oil production, from 66mbd to 86mbd (+20mbd)

• . . . onshore production has fallen from a peak (1970: 60mbd+) and now appears to be in long-term decline worldwide

Source: IFP Energie Nouvelle, “Panorama 2012: a look at offshore hydrocarbons” 2012

.

Atlantic Offshore Revolution - Gas

• Atlantic Basin accounts for 54% of global offshore gas production

• Current offshore gas production accounts for some 27% of total global production.

• Over half (54%) of this global offshore gas production occurs in the Atlantic Basin.

• Nearly all (97%) of current deep offshore gas comes from the Atlantic . . . .

. . . . however, because the AB offshore only accounts for 2% of global gas production and Australia, the world’s largest ‘deep offshore gas’ reserve holder (40%), is likely to increase its production share in the future

Atlantic Offshore Discoveries/Investment • Atlantic Basin offshore oil discoveries

The Atlantic accounts for over 60% of global offshore oil discoveries More importantly, the Southern Atlantic dominates this ‘offshore revolution’

‘Deep Offshore’ Oil/Gas Investment Rest of the World 19%

Northern Atlantic 24%

Atlantic Basin 81%

• US$210bn in deep offshore hydrocarbons investment during 2011-15 in subsea pipelines, completions and platforms

• Atlantic Basin: 81% • Southern Atlantic: nearly 60%

Southern Atlantic 57%

Source: IFP Energie Nouvelle, “Panorama 2012: a look at offshore hydrocarbons” 2012

Source: Deutsche Bank and Wood Mackenzie.


Atlantic ‘Low Carbon’ Revolution • Atlantic Basin: world’s leader in ‘low carbon’ and renewable energy

• AB’s collective installed capacities: • solar (77% of the world total) • wind (64%) • geothermal (59%)

• Atlantic renewables roughly two-thirds of the world’s total installed ‘renewable’ electricity capacity

• . . . nevertheless, Asia-Pacific will continue to erode Atlantic Basin predominance in renewable energy

• by 2030, Asia-Pacific will contribute 41% of all renewable energy production, cutting the Atlantic Basin’s prior lead (54% in 2030, down from 79% in 1990)

Source: Renewable Energy Status Report 2014, REN21 (2014) and own-elaboration.

Atlantic ‘Low Carbon’ Revolution

• Atlantic Basin Renewable Energy Investment: • In 2008, the Atlantic registered its peak

share (77%) of global investment in renewable energy

• Meanwhile, in 2007, Asia-Pacific experienced its lowest recent share of 23%.

• Double dip in investment: a steep double-dip drop-off in which AB accounted for the entire global decline (from US$279bn to US$214bn)

• . . . . the factors behind the drop in AB RE investment are multiple

• recent Atlantic investment decline has not affected the Southern Atlantic

• continued to registered constant levels around US$20bn annually


Atlantic Coal • Global Coal, Atlantic Basin and the World, 1990-2030 • Atlantic Basin: 43% of global coal reserves

Asia-Pacific: 31% of global coal reserves, but dominates global coal consumption and production . . . .

. . . . However, more than half of the projected growth in global coal production has already taken place Atlantic Basin will continue to meet Asia-Pacific coal demand at the margin


Atlantic Biofuels • Atlantic Basin: produces, consumes and trades 85% to 90% of global biofuels

Global biofuels currently contribute less than 2mbdoe, or less than 3% of the global ‘liquids’ energy mix . . . .

. . . . nevertheless, biofuels still represent a strategic energy vector, given that it is now the only way to replace petroleum liquids in the transport of global material flows (air and sea travel. Biofuels are also a ‘strategic branching’ fuel between a ‘liquids’ or an ‘electrified’ future for transportation

Atlantic and New Global Energy Flow Map

• The Growing ‘Asian demand call’ on the Atlantic Basin, 2000-2030

• The growth in the total ‘Asian energy demand call’ on Atlantic Basin energy is projected to be to twice as intense, at the margin, as the growth in the already heavy call on the ‘Great Crescent.’



• The Growing ‘Asian liquids call’ on the Atlantic Basin, 2000-2030 • The growth in the ‘Asian liquids demand call’ on Atlantic Basin energy is projected to be to three times

as intense, at the margin, as the growth in the already heavy call on the ‘Great Crescent.’



• The Growing ‘Asian gas call’ on the Atlantic Basin, 2000-2030

• The growth in the ‘Asian gas call’ on the Atlantic Basin is projected to be half again as intense, at the margin, as the growth in the already heavy call on the ‘Great Crescent.’


Strategic Implications: The Global Geopolitical and Energy Flow Maps

• Center of gravity of energy demand shifting east: away from the Atlantic Basin into Asia-Pacific and the Great Crescent

• Center of gravity of energy supply shifting west: away from the Great Crescent and into the Atlantic Basin

• Reversal of ‘East-to-West’ flows: becoming ‘West-to-East’ flows • The Atlantic Basin will become, increasingly, the energy supplier, at the

margin, to Asia-Pacific • Growth in global energy flows within the Atlantic (low-latitude canals will

bottleneck to push increasing flow to the ‘high-latitude’ passages the opening Arctic in the North, but particularly the ‘Cape Passage’

• Implications:

– ‘Potential geopolitical leverage’ shifting westward (problematizes the ‘pivot to Asia’)

– ‘Potential governance equation’ transforming into a question for newly coalescing ‘ocean basin’ associations and communities (problematizes the perceived imperative for ‘global’ (energy) governance, esp. ‘land-based’ visions

– Heightened global ‘strategic significance’ of the ‘Southern Atlantic’

Strategic Implications: The Potentials and Implications of the ‘Atlantic Basin’

• Shifts in global energy (and other material) reserves, production

and flows: generating a new, increasingly coherent ‘Atlantic space’

• Former ‘global’ and traditional ‘regional’ approaches have reached ‘diminishing marginal returns’

• A new Atlantic Community? – The new ‘Atlantic Energy Forum’ (AEF) – Harness the Atlantic energy revolution: geopolitical and governance

potentials (collective) – Channel SE4All initiative in the Southern Atlantic – Guide the new ‘offshore’ revolution – Mediate long-term solutions between:

• Fossil Fuels and Low Carbon • IOCs and NOCs • Importers and Exporters • Developing and developed countries

Implications: Brazil’s Shifting ‘Strategic Horizon’

• Energy independence = increased geopolitical flexibility – Iran example

– Military expenditure (rising, but less than other BRICS countries)

• Still, only ‘limited’ flexibility vis-à-vis China and India

• South-South projection should be ‘strategically-hedged’ by a new strategic projection into and across the ‘Atlantic space’

• A new Southern Atlantic within an ‘Atlantic Basin’ community

Broader Strategic Implications • A heightening, relative strategic significance of the Southern Atlantic.

– Long forgotten, neglected or ignored (even by Latin Americans and Africans themselves), the Southern Atlantic is now becoming the most dynamic strategic sub-region of the world upon our emerging geopolitical and global energy flow maps

• As the potential hinge between alternative visions of the global order, the Southern Atlantic could hold the key to the future of the Atlantic Basin and the world. – Once a kind of marginal ‘geopolitical antipode’ to the eternally central ‘heartland’

of the ‘supercontinent’ of Eurasia, the Southern Atlantic is now displacing, at least partially, the broader ‘Eurasian heartland’ (including its Middle East component) in terms of relative significance along the strategic horizon.

• The Southern Atlantic now hangs in the balance – between the Northern Atlantic and Asia-Pacific between fossil fuels and low

carbon, – between outmoded land-based conceptions of geopolitics and global governance

and new projections of the global map which highlight the ‘seascape’ and the potential for new forms of transnational cooperation and governance, and, finally,

– between the repetitive obsolete global re-articulations of ‘North versus South’ and innovative new forms of North-South-East-West collaboration and the creation of a new Atlantic Community.

Strategic Suggestions: The Brazil-US Strategic Energy Dialogue and the ‘Atlantic

Energy Forum’

• The US and Brazil should consider a new strategic energy partnership that embraces the Atlantic Basin as its central guiding principle

• Advantages for Brazil

• Advantages for US

• Advantages for the Atlantic

• Advantages for the World

References and Further Reading

• The ‘Atlantic Basin Initiative’ (ABI): http://transatlantic.sais-jhu.edu/events/2012/Atlantic%20Basin%20Initiative/Atlantic%20Basin%20Initiative

• The ‘Atlantic Energy Forum’ (AEF): Inaugural meeting agenda (November 8-9 in Cancun) and AEF brochure, available upon request

• “Towards a New Atlantic Community” White Paper of the Atlantic Basin Initiative, 2014 (via above link)

• “Atlantic Energy and the Global Energy Flow Map,” a paper for the Atlantic Future project of the EC (FP7), 2014

• “Atlantic Energy and the Strategic Horizon,” CIDOB, 2013 • Energy and the Atlantic: the Shifting Energy Landscapes of the

Atlantic Basin, OCP and German Marshall Fund, 2012 • All of the above are available on the CTR JHU SAIS website.

http://transatlantic.sais-jhu.edu/events/2012/Atlantic Basin Initiative/Atlantic Basin Initiative






Supplementary Material

An Atlantic Basin Energy System?

Source: UNCOMTRADE, 2014. Note: Figures include both exports and imports of all types of energy trade in all energy sources, including refined energy products.

Atlantic Basin Energy Demand to 2050

Source: IIASA GEA Model Database 2013 and own-elaboration.

Global Energy Demand to 2050

Source: IIASA GEA Model Database 2013 and own-elaboration.

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