Wharton: The Upside of Global Energy Scarcity

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Rising energy demand from China and India has unleashed a worldwide race to secure access to scarce fossil fuel resources, a more difficult proposition with the emergence of national oil companies in the resource-owning countries. While Western companies will likely feel the pain of increasing energy costs, there is a potential upside to global energy scarcity, according to experts from Wharton and The Boston Consulting Group: Renewable and nuclear energy present huge opportunities for investors and entrepreneurs, underscored by concern over a global stalemate surrounding curbs on carbon-dioxide emissions.

The International Energy Agency (IEA), an autonomous body set up within the framework of the Organization for Economic Cooperation and Development, says in its November 2007 World Energy Outlook that "if governments around the world stick with current policies, the world's energy needs would be well over 50% higher in 2030 than today." Global energy demand would grow an average of 1.8% annually, from 11.4 billion tons of oil equivalent (toe) in 2005 to 17.7 billion toe by 2030. Fossil fuels would make up 84% of that increase, the report notes, although oil's share would fall from 35% to 32% while coal's share would jump from 25% to 28%.

Worldwide, the IEA expects an investment need of about $22 trillion in energy-supply infrastructure. Not surprisingly, its latest report is focused on China and India; these two countries account for 45% of the increase in demand in the "reference scenario" it forecasts. China's energy-supply infrastructure would need investments of $3.7 trillion until 2030, while India's would need $1.25 trillion, the IEA says.

The dramatic growth of the Chinese and Indian economies in recent years has caught stakeholders in the global energy industry ill-prepared, according to Hal Sirkin, senior partner and managing director at BCG and head of its global operations practice. "China and India are changing the global balance points in resources," he says, noting that the emerging consumer markets in these two countries are behind the boost in demand.

The forces at work in the emerging scenario are energy security, energy affordability, climate change and sustainability, says Balu Balagopal, senior partner and managing director at BCG. "There is a clear recognition that energy security and independence are top of mind because the demand side of the equation shows quite healthy growth driven by the growth in these emerging economies such as India and China," he notes. "At the same time there is an uptick from a supply standpoint -- traditional oil and gas are coming under some pressure."

Balagopal says that while "alarmists talk of peak oil," it might more appropriately be characterized as the end of cheap oil. Proponents of the peak-oil theory say that global petroleum production will peak sometime between 2025 and 2030, after which total available energy will decline continuously. Balagopal suggests that many new sources of energy are potentially being brought on stream, including frontier energy such as deepwater exploration and oil sands. But all that will take time to come through, he says, and "they are also more expensive."

Securing Access

"In the medium term, the Chinese and Indians will have to import more oil, and that is making them both nervous," says Wharton management professor Witold Henisz. "Interestingly, the battlefield today is in Africa." According to various reports, Chinese and Indian companies investing in Angola and Sudan are "not being as concerned [as Western firms] with corruption and other practices," Henisz says. That should give them "a strategic advantage as compared to the Western oil companies."

Rick Peters, senior partner and former leader of BCG's energy practice, points to "a lot of deals and a lot of effort on the part of India and China to lock up the incremental production." Adds Sirkin: China wants to be an investor, "not because it wants to invest, but it has an imperative to get access to resources and that is the best way." As the world's oil majors rush to secure their supplies of hydrocarbon reserves, they are encountering wholly unfamiliar territory. "Increasingly, the balance of power has shifted," Peters says. Until several years ago, "these super majors could go into the resource-holder countries and were welcomed because of their unique expertise." The entry of Chinese and Indian oil companies competing for the same resources has provided the resource owners many more options in securing more favorable terms, he notes.

Resource owners across Latin America, the former Soviet Union and Africa are also trying "to do a lot more on their own," Peters adds. For successful developers, the model is very much shifting to local development, technology transfer, and companies and divisions within countries having a localized face. "That model is the right model. You have to be more and more creative about the win-win opportunities." The resource owners "have become much more aggressive and savvy about relinquishing their rights to those resources and the conditions under which they will relinquish [them]," Balagopal points out.

Henisz predicts that "one or two or three Chinese and Indian or Russian state-owned oil companies will emerge as globally integrated producers of oil that will rival Exxon Mobil (XOM), Shell (RDS.A) and BP (BP)." He says consolidation within the industry is an imperative, and that it will provide "at least perceived security of oil supplies for China and India" and a greater pool of investment resources.