The vast global network of energy infrastructure is, for all intents and purposes, a living, breathing organism. And like other organisms, it’s full of vulnerabilities. Across all sectors and at every point in the supply chain, physical – and of course cyber – weaknesses pose serious threats to the functionality and reliability of vital energy systems.
Just how vulnerable is the global energy system? It’s a difficult question to answer. Weather-related outages in the US alone are estimated to cost between $18 billion and $33 billion annually. Direct theft of oil and gas is harder to quantify – in Nigeria it’s a $1.5 billion a month business; and in Mexico millions of barrels disappear every year. What we can do is identify some pressure points moving forward. Broadly, they can be divided into three categories: production, transportation, and the grid. In the interest of time, climate preparedness – a worthy category on its own – will be largely left for discussion another day.
Security of supply is the defining principle behind each of these categories, but perhaps more so the first two. How secure is our global supply from a production and transportation standpoint? Generally speaking, quite secure, but the grey area is large enough and sufficiently unpredictable to warrant a closer look.
Let’s begin with some of the more tangible issues facing energy transportation before turning our attention to production. Practically speaking, no method is perfect, and most present more than a handful of issues.
By many metrics rail transportation is one of the safest methods. However, increased use has resulted in a recent bout of high profile US and Canadian derailments. Should the US export ban fall, look for rail transport to climb in importance and the oversight to increase on what are typically self-inflicted damages.
Rail won’t supplant pipelines however, especially in North America – the US shale and tight oil boom continues to support the construction of thousands of miles of pipe annually. And they remain key political tools in Eastern Europe and Asia. They’re accident prone, but relatively cheap. Identifying just one, or even several, as a pressure point is impossible, but together they represent a relatively easy target in an increasingly vulnerable network of transportation.
Failed welds and corrosion are the familiar suspects, but global oil and gas theft is on the rise and one source estimates total losses top $37 billion per year – much of which comes from illegal pipeline tapping. It also suggests, perhaps surprisingly, that the US accounts for the lion’s share, or roughly $10 billion, followed by Nigeria, Iraq, and Mexico. While the exact figures are difficult to verify, equipment theft is a big piece of the pie – a piece that is estimated to cost West Texas drillers nearly $20 million a year.
Security is the pressure point here, both physical and cyber. To date, manpowered, automated, and satellite security systems have demonstrated clear limits. With several mega-projects on the way in the US and abroad, the development of sufficient security infrastructure will need to lead and not follow.
Now to production, and allow me to digress, or at least provide a look ahead. The world is currently quite well supplied. Globally, crude oil inventory builds are expected through 2016, and the market can bear an increasingly higher threshold of unplanned supply disruptions. Looking toward 2030 and beyond however, challenges are plentiful and the money is tight.
Concerning oil, much of the pressure falls, unsurprisingly, on OPEC. Assuming moderate global economic growth, the call on OPEC crude is expected to rise nearly 25 percent to 39.7 mbpd by 2040, nearly equaling declining non-OPEC output. More specifically, we can look to Iraq and Venezuela as clear pressure points. Together, they hold roughly 30 percent of world crude reserves, though both nations have historically underachieved in terms of production. Deteriorating relations with the US and sectarian conflict only look to complicate the matter moving forward.
The natural gas outlook is less worrisome, and the market continues to become more flexible and integrated each year. Price points provide the bulk of the uncertainty as they waver between consumer attractiveness and investment realities.
Finally, to the grid – let’s again look to the US as a barometer. The grid is the victim of hundreds of daily cyber attacks and cybersecurity is now one of the top five concerns for US electric utilities. Many providers lack the proper monitoring and cyberthreat protection to fight a major assault, but the pressure lies elsewhere.
The average age of a US substation transformer is 42 – they have an expected lifespan of 40. In short, the nation’s electricity infrastructure is old, and it falters more often any other developed nation. Cyber threats are real – and growing – but the existing infrastructure remains more vulnerable to physical and weather-related events than any domestic or foreign hacker.
Modernization is what to watch, but it’s been slow-moving. The International Energy Agency estimates that the US power sector will require $2.1 trillion in investments by 2035 if it is to meet its renewable goals as well as reasonably enhance the dependability and security of its infrastructure under growing demand.
It’s far from a definitive list, but these pressure points will demand our attention sooner, rather than later.
First published at www.oilprice.com