ENERGY GOVERNANCE OUTLOOK: GLOBAL SCENARIOS AND IMPLICATIONS - BERLIN BEIJING WASHINGTON DC GG2022.NET
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ENERGy GOvERNANCE OuTLOOk:
GLOBAL SCENARIOS AND
IMPLICATIONS
Han Cheng / Iris Ferguson / Ting Guan / Tana Johnson / Yuge Ma / Zhimin Mao / Eliot Pence / Fabian Wigand
SEPTEMBER 2013 BERLIN GG2022.NET
BEIJING
WASHINGTON DC
Supported by PartnersEnergy Governance Outlook: Global Scenarios and Implications _ TABLE OF CONTENTS About the Report 1 Executive Summary 2 Global Energy Governance Today 5 Scenario 1: Fragmented world 6 Scenario 2: International Market Integration 10 Strategic Implications 14 Policy Options 16 Fellows of the Global Energy Governance 22 WORKING GROUP Appendix: Scenario Planning Methodology 25 GLOBAL GOVERNANCE 2022
Global Governance 2022 Global Public Policy Institute (GPPi) Reinhardtstr. 7 10117 Berlin, Germany gg2022.net Published: September 2013 Editors: Johannes Gabriel, Oliver Read, Joel Sandhu Title: © Denis Mironov – shutterstock
Energy Governance Outlook: 1
Global Scenarios and Implications
_ About the Report
This report was produced within the framework of Inge Kaul (Hertie School of Governance), Mao Xiao-
the Global Governance 2022 program, organized by jing (Chinese Academy of International Trade and
Economic Cooperation), Sara Minard (Columbia Uni-
the Global Public Policy Institute in Berlin, in collab-
oration with partner institutions in the United Statesversity), Shantanu Mitra (Department for Interna-
(The Brookings Institution and Princeton University), tional Development), Célestin Monga (World Bank),
China (Tsinghua University and Fudan University), Guy Pfeffermann (Global Business School Network),
and Germany (Hertie School of Governance). Lant Pritchett (Harvard Kennedy School), Ebrahim
Rasool (Ambassador of South Africa to the United
GG2022 brought together 24 young professionals States), Jürgen Zattler (Federal Ministry for Eco-
from the US, China and Germany for three meetings, nomic Cooperation and Development, Germany).
one each in Berlin (26-30 August 2012), Beijing (7-11
January 2013) and Washington, DC (5-9 May 2013). We would like to thank the organizers and funders
During these meetings, the GG2022 fellows jointly of the GG2022 program and everyone else who con-
discussed challenges of global governance in the tributed to making the program possible, most es-
year 2022 and beyond, with a particular focus on pecially Joel Sandhu and Johannes Gabriel. We are
three areas: cyber security, energy security, and de- also grateful to Alex Fragstein for the design work
velopment. and Oliver Read for editing.
This report summarizes the work of the GG2022
working group on global development governance.
To explore possible futures in global development,
the working group used a scenario planning meth-
odology with techniques developed extensively in
the field of future studies. The diverse nationalities,
backgrounds, and expertise of working group mem-
bers contributed crucial assets for devising national
strategies and solutions.
During the three sessions, the working group also
met with leading academic experts and policymak-
ers in the field of international development from all
three countries. We are grateful to all these experts
for their valuable input:
Julius Agbor (The Brookings Institution), Nancy Bird-
sall (Center for Global Development), Deborah
Bräutigam (Johns Hopkins University), Kate Cam-
pana (Speak Up Africa), Carolyn Campbell (Emerg-
ing Capital Partners), Matthew Ferchen (Carne-
gie-Tsinghua Center for Global Policy), He Wenping Disclaimer: The views expressed in this report do not
(China Academy of Social Sciences), Ingrid Hoven necessarily represent the views of, and should not be
(Executive Director for Germany at the World Bank), attributed to, any author in his individual capacity
Jin Ling (China Institute of International Studies), nor to their respective employers.
GLOBAL GOVERNANCE 20222 EXECUTIVE SUMMARY
_ EXECUTIVE SUMMARY
Major technological, economic and political shifts fundamentally reshapes global energy markets.
are remaking the global energy market. Emerging As a result, their exploration, extraction and pro-
economies have become top energy consumers. duction emerge as fundamental issues in global
Technological breakthroughs have fueled the rise energy governance.
of new energy producers. And energy regimes
such as the Organization of the Petroleum Export- Will existing power structures ignore, integrate, or
ing Countries (OPEC) are under increasing pressure defend against unconventional resources? Will the
to reform. Uncertainty remains. Turmoil in the Mid- new unconventional sources be made available to
dle East remains a trigger for concerns over supply. the global market or will their supply remain lim-
Fallout from the financial crisis remains a core con- ited to producing countries? What will be the
cern for both developed and developing countries. effect on countries without domestic supplies?
Carbon emissions are increasing faster than ex- What room does global energy governance have
pected. Further, while clean technologies have be- to shape these new rules of the game on energy
come more affordable, structural limitations, in- trade and what will be the implications on the cli-
cluding the continuation of financial subsidies and mate change framework? How should the energy
poor systems integration, undermine their take-up. governance institutions adapt to this changing en-
vironment?
In the face of these challenges, the current state of
global energy governance is in remission. Interna- We investigate these questions in two scenarios for
tional dialogue on energy is limited. International the year 2022, one with a fragmented world, an-
climate policy has lost momentum. Energy mar- other with an integrated world. Both scenarios
kets on the whole remain as volatile and unpre- share important key assumptions – the emergence
dictable as ever. of new energy consumer- and supplier-countries
and the availability of unconventional fossil fuel
Structured scenario planning has become com- sources (see Figure on page3).
monplace among private and public sector organi-
zations alike. The methodology and development
of scenarios is designed to facilitate strategic long-
term planning in the face of this uncertain future.
The GG2022 energy group has used scenario plan-
ning methodology to create two distinct scenarios
for the energy world in 2022. In both scenarios, we
identify unconventional fossil fuels as a primary
factor that will significantly impact global energy
markets and change not only the size, structure
and membership of existing energy institutions,
but also their relevance and influence. Though ma-
jor uncertainties concerning the size of the re-
serves of unconventional resources and the envi-
ronmental impact of the methods used to extract
them still exist today, the political and economic
momentum that their extraction has generated
Global ENERGY GovernanceEnergy Governance Outlook: 3
Global Scenarios and Implications
Scenario 1 trading blocs emerge based on longer-term sup-
ply agreements. Resource conflicts surface over
disputed resource-rich territories. While global
Within the “Fragmented World” scenario, coun- climate change negotiations are moribund, some
tries focus on controlling energy assets rather of the regional energy partnerships lead to sub-
than trading energy on a global market. Regional stantial investments in clean technology.
Scenario 2 ing entrants into the global energy market. In turn,
new consuming countries also source from the
global market. Regional investment treaties pro-
By contrast, in the “International Market Inte- vide standardization of norms through which in-
gration” scenario, countries demonstrate grow- ternational investment and trading rules are im-
ing confidence in the global energy market. New proved. Closer cooperation in energy trade spills
producer countries generate a “supply cushion” over to other energy governance areas and cre-
that reverses long-held assumptions about strate- ates a platform for climate leadership and regional
gies for securing energy supplies, gradually entic- climate agreements.
Two Possible Worlds in 2022
International
Fragmented Market
World Integration
›› Focus on controlling ›› New suppliers ›› Growth in market participation
energy assets ›› New consumers ›› Global integration through
›› Regional alliances bilateral investment treaties
›› Resource conflict ›› Enhanced collaboration/
competition
Prompts major shift in geopolitics of energy –
but in which direction?
GLOBAL GOVERNANCE 20224 EXECUTIVE SUMMARY
By examining these contrasting visions for the next energy treaties, regional climate agreements could
10 years, the GG2022 energy group was able to be inserted as well. This will continue the effort to
identify lead strategies – that is, policy options that mitigate climate change, even if a global climate
are suitable for both of these different scenarios. policy agreement cannot be reached.
Each lead strategy addresses one or more of the fol-
lowing four goals: (1) energy affordability, (2) en- More closely incorporate emerging economies in
ergy availability, (3) energy accessibility, (4) energy existing international energy institutions. It is
sustainability. The resulting policy options are: likely that, absent major changes, global gover-
nance of energy will continue to be relatively weak
Scale up energy transport. This includes liquefied and decentralized. Nevertheless, modest changes
natural gas (LNG) import/export terminals, pipe- are feasible in the near future in order to facilitate
lines, and electricity grids. This option also involves dialogue on energy technology and trade. The In-
a clear regulatory framework, concessional finance, ternational Energy Agency (IEA) could extend for-
and long-term off-take contracts in order to im- mal membership to countries such as China and
prove investor security for the needed infrastruc- India, while the G20 could provide greater leader-
ture investments. Procedures for determining infra- ship and coordination among and between devel-
structure investments will need to be streamlined oped and emerging economies.
in order to get the necessary infrastructure in place,
but those procedures must also allot time to en-
gage affected communities and other stakeholders.
Bolster energy-related legal and trade instru-
ments. This includes standardized investment trea-
ties that provide fair and equitable treatment, pro-
tection from expropriation, and mechanisms for
dispute resolution. These investment treaties
should have application at multiple legislative lev-
els and work to normalize best practices and mar-
ket frameworks for energy trade.
Implement energy knowledge-sharing and ca-
pacity-building mechanisms for emerging econ-
omies and developing countries. This includes
agreements and institutions to collect data and dis-
seminate best practices on energy technologies
and environmental protection. Such mechanisms
must involve multiple stakeholders in information
exchange in order to encourage countries to meet
their growing energy needs in a secure and sustain-
able way.
Accelerate clean-technology development and
penetration through bilateral and regional insti-
tutions. While non-state actors are increasingly
forming alliances to reduce carbon emissions,
states must work to keep climate change on the
policy agenda. In emerging bilateral and regional
Global ENERGY GovernanceEnergy Governance Outlook: 5
Global Scenarios and Implications
_ Global Energy
Governance Today
Global energy governance institutions encompass clude emerging economies such as India and China.
a broad set of issues – often regionally focused – In addition, although it generally advocates open
ranging from trade, investment and intellectual energy markets, the agency lacks the mechanisms
property regulations to emissions and supply tar- and mandate to facilitate legal frameworks for en-
gets and limitations. They provide forums for ex- ergy trade.
changing knowledge and technology, and they fa-
cilitate pledges to reduce carbon emissions. The OPEC, a self-selected group of producer countries,
current governance framework includes energy coordinates oil supply volumes and prices of major
consumer and producer organizations, the United oil producers. But with the potential emergence of
Nations efforts on climate change mitigation, and a further major energy exporters, the organization’s
multitude of bilateral and regional agreements reg- capability to continue to exercise its market power
ulating energy trade and investments. is in question.
The current governance structure faces challenges. The International Energy Forum (IEF) has emerged
Newly emerging consumer nations are not consis- as an organization in which consumer and producer
tently included. Climate negotiations are stagnat- countries join a dialogue about stabilizing energy
ing. Energy trade and investment treaties are pri- markets and improving transparency in energy
marily bilateral, not global. markets. The IEF’s Joint Oil Data Initiative is an ex-
ample of such data sharing, but overall the IEF’s
Moreover, no single, strong international body co- reach has been limited. Energy trade and invest-
ordinates energy governance. In the past, the ment is also regulated by many bilateral or regional
Group of Eight (G8) or the Group of Twenty (G20) agreements, such as the Energy Charter Treaty. The
major economies have spearheaded initiatives to Energy Charter Treaty aims to improve investor se-
improve energy efficiency, but neither has deliv- curity among producer, transit and consumer coun-
ered a comprehensive vision for global energy gov- tries in Eastern Europe, but recently its implementa-
ernance. The United Nations Framework Conven- tion and geographical expansion have stagnated.
tion on Climate Change (UNFCCC) provides a forum
for negotiating treaties to set limits on greenhouseIn sum, global energy governance is disjointed and
in flux. As a result, the GG2022 energy group sees a
gas emissions, but it has not as of yet elicited bind-
ing commitments from major emitters, nor has it larger role for nation-states, the private sector, and
produced a post-Kyoto treaty. civil society than it does for formal international
organizations. These visions are captured in two
The International Energy Agency (IEA) is an import- scenarios – Fragmented World and International
ant organization of energy-consuming countries Market Integration – whose storylines are pre-
within the membership of the Organization for Eco- sented next.
nomic Co-operation and Development (OECD). Its
members coordinate their emergency oil supply
reserves, and the secretariat provides a forum for
market and technology data exchange through ex-
pert networks and reports. Yet the IEA does not in-
GLOBAL GOVERNANCE 20226 SCENARIO 1: FRAGMENTED WORLD
_ Scenario 1:
Fragmented World
Picture of the Future: The Rise of Regional
Energy Arrangements
Today, in 2022, the world is sorted into regional of Middle Eastern countries. In pursuit of energy se-
blocs that aid countries in satiating their energy curity, many governments are bypassing interna-
needs in their respective “neighborhoods.” World- tional energy markets to instead seek longer-term
wide industrialization has continued, bringing supplies within their immediate regions. Cross-re-
greater levels of development but also greater de- gional institutions such as OPEC, the International
mands for energy. Enormous new consuming coun- Energy Agency, and the World Trade Organization
tries in Asia now hold sway, fueling a competitive gradually devolve. Meanwhile, although countries
scramble with Japan and long-industrialized Euro- have formally abandoned global climate change ne-
pean countries. At the same time, breakthroughs in gotiations, some of the regional energy partner-
unconventional fossil fuels enable a few countries in ships have led to substantial investments in clean-
the Americas to greatly increase their energy pro- er-technology projects that make moderate head-
duction and challenge the production dominance way in reducing worldwide carbon emissions.
History of the Future: Fragmented World
> Phase 1 Today Big developing countries such as China and India ramp up their demand for energy.
New suppliers and
2014 US and other non-OPEC countries emerge as major suppliers of unconventional fossil
new consumers fuels, such as shale gas and tar sands.
shake up global
energy system. Energy infrastructure lags behind new energy supplies, making it difficult to get new
supplies to global markets. Countries begin turning to regional partnerships instead.
Countries fail to reach a post-Kyoto Protocol commitment on carbon emissions.
UNFCCC becomes even more marginalized.
> Phase 2 2016 Hillary Clinton runs for US presidency on a pro-manufacturing platform, vowing to
Regional partner- protect domestic industry.
ships proliferate
Following heavy lobbying by the US and Canadian petrochemical industries, and cit-
and resource ing national security, Congress bans US exports of LNG outside North America.
conflicts loom.
2018 East African and Australian natural gas supplies come online. Supply off-takers such
as South Korea partner with Asian producers in pursuit of energy security.
Increasingly left out of the new energy order, Russia tries to claim energy resources in
the Arctic region, and this sets off an international backlash.
> Phase 3 2020 OPEC’s influence takes a huge hit as Saudi Arabia and China announce a bilateral
Opportunities for agreement on energy supplies. Without the support of its biggest member state, the
investments in group begins unraveling.
cleaner energy. With Russia and OPEC losing power as energy suppliers, Japan and the European
Union consider other options and sign an agreement to invest jointly in clean-energy
2022 technology.
Global ENERGY GovernanceEnergy Governance Outlook: 7
Global Scenarios and Implications
Phase 1: A Shake-Up by New Consumers
and Suppliers
Between 2014 and 2016, emerging economies had remained for forging new carbon-emissions
shook up the global energy system. As part of their commitments to replace the Kyoto Protocol.
long-term development plans, the governments of
China and India ramped up energy investments, After all, many countries anticipated that in the near
gaining control over energy assets in Sub-Saharan future the most promising energy sources would
Africa and in several former Soviet republics in Cen- continue to be fossil fuels, even if in unconventional
tral Asia. Meanwhile, long-time consumers such as forms such as shale gas or tar sands. Moreover, re-
Japan continued to demand substantial amounts of gional – rather than global – partnerships appeared
energy imports. Fearful that more and more energy to be the cooperative form of the immediate future,
assets were “spoken for,” Japan and other industri- partly because infrastructure investment could not
alized countries accelerated their efforts to obtain keep pace with emerging energy sources.
reliable access to energy assets that could meet
their needs well into the future. As a result, governments became even more reluc-
tant to tie their hands through a global climate
Non-Middle Eastern producers also transformed agreement. Countries were unable to agree on any
the global energy system in this period. Since at new comprehensive commitments. Thus, the al-
least the 1980s, OPEC had struggled to moderate ready languishing global climate change negotia-
oil supplies in order to prop up oil prices. Further tions came to a standstill, and the United Nations
challenges were posed by the fact that non-OPEC Framework Convention on Climate Change be-
countries – particularly the United States and Can- came even more marginalized.
ada – would become the key near-term beneficia-
ries of a boom in unconventional fossil fuel supplies,
such as shale gas and tar sands. By 2015 the United
States, long a net-importer of energy supplies, was
poised to become a net-exporter. This reduced US
demand for OPEC oil and also held the promise of
substantial non-oil energy supplies in the future.
However, due to infrastructure limitations, the
United States by 2016 proved able to export region-
ally but not globally. Congressional paralysis and
the absence of clear policy framework limited
needed investment in exportation infrastructure.
Investment in the increasingly integrated North
American grid system ensured greater cross broader
collaboration and integration in North America en-
ergy markets. But growing integration of the re-
gional energy markets was not the game changer
that was foreseen. Countries in other parts of the
world too began to turn away from global energy
markets in favor of regional partnerships.
Growing regional partnerships and alliances under-
mined the modest international momentum that
GLOBAL GOVERNANCE 20228 SCENARIO 1: FRAGMENTED WORLD
Phase 2: Momentum of Regional Partnerships
and International Resource Conflicts
The movement toward regional energy partner- be built and existing distribution networks needed
ships took another turn in 2017, when the US gov- to be refitted. This proved to be more feasible on a
ernment finally made a clear choice to keep the regional basis than on a global basis. Infrastructure
country’s burgeoning unconventional gas supplies limitations led shale gas extractors to serve re-
out of global markets. For several years, the US and gional rather than global customers.
Canadian industrial lobbies had called for a ban on
natural gas exports outside of the Western hemi- The world’s previously dominant natural gas pro-
sphere in the hopes of not forestalling a lasting ducers, especially Russia, lost some of their former
economic recovery, still on the minds of many pol- power-projection capabilities. For years, several
icymakers. They found an ally in Hillary Clinton, the parts of Europe depended on Russian gas supplies
frontrunner for the 2016 US presidential election. – a situation that fueled robust revenue for Russian
Citing national security considerations, Clinton suppliers. But the development of shale gas re-
emphasized a pro-manufacturing campaign plat- serves in Poland provided additional regional op-
form and vowed that, if elected, she would protect tions, allowing Germany and other European coun-
domestic companies, especially manufacturing tries to decrease their reliance on Russian supplies.
jobs. Joined by a new Democratic majority in Con- Toward the end of the decade, the relationship
gress, in mid-2017 President Clinton signed into between Russia and northern Europe underwent
law a bill prohibiting US natural gas exports be- another strain: In 2019 the Russian navy sent five
yond the Americas. ships to the Arctic Circle to begin extracting en-
ergy resources in disputed areas. This prompted a
This assuaged the demands of powerful interest backlash from the European Union, backed by Can-
groups in the United States and Canada and set off ada, China, and the United States. Although Russia
even more regional energy partnerships in other eventually backed down, the specter of resource
parts of the globe. Around the world, the extraction conflicts in the Arctic and elsewhere remained.
of unconventional energy from shale gas had been This further solidified state inclinations to pursue
accelerating – but as in the Americas, distribution of “secure” energy supplies by satiating their energy
those extracted resources remained a challenge, needs regionally rather than in global markets.
because new gas distribution networks needed to
Phase 3: Opportunities for Investments
in Cleaner Energy
By 2020 the dynamics and regionalism surrounding vulnerabilities within their governments and econ-
influential new consumers and producers of energy omies. Moreover, the shale gas boom had spurred
upended other elements of the previous energy or- interest in non-oil energy sources in countries out-
der: OPEC and the International Energy Agency. side of OPEC’s membership. In a surprise move,
Throughout OPEC’s history, Saudi Arabia had been Saudi Arabia withdrew from the organization in
pivotal. It strived to settle squabbles among mem- 2020. Abandoned by this key member-state, OPEC
ber-states, and it overlooked member-states’ occa- began formally unraveling.
sional over-production vis-à-vis quotas. But playing
this pivotal role became more difficult and costly The International Energy Agency also faltered, al-
over time. The Arab Spring uprisings had shaken though for different reasons. Since its creation in
Middle Eastern and North African states, exposing the 1970s, the IEA had provided an institutional
Global ENERGY GovernanceEnergy Governance Outlook: 9
Global Scenarios and Implications
framework for major energy-consuming countries, regions) enabled countries to replace some of their
sometimes counterbalancing OPEC’s. As an off- coal consumption with cleaner burning natural gas,
shoot of the OECD, the IEA had always drawn its particularly for electricity generation. This produced
membership from “rich” democracies. This posed a modest decrease in carbon emissions within par-
little problem when the universe of major ener- ticular regions, such as North America. Although in
gy-consuming countries coincided closely with the itself this did not drastically reduce global emissions,
universe of rich democracies – but the rise of China it did make the US and Canadian governments
and India complicated the situation. In 2020, the more willing to make more substantial formal com-
IEA’s existing membership agreed to change the mitments to climate change mitigation.
organization’s membership criteria, permitting
non-democracies or less-developed states to join. Meanwhile, countries that were unable or unwilling
But both China and India declined to pursue mem- to fully and directly capitalize on the boom in shale
bership under the new rules. This, coupled with gas and other unconventional fossil fuels faced in-
OPEC’s unraveling later that year, meant that the centives to pursue renewable energy research
IEA could no longer claim to be representing major more vigorously. No substantial shale gas reserves
energy-consuming countries or to be counteract- were uncovered in Japan, but Japan’s energy needs
ing a powerful cartel of energy-producing coun- remained high. Greater shale gas deposits were
tries. International energy governance – which had found in Western Europe, but several countries
never been as intricate as governance of other is- joined France in banning extraction. Then, in late
sues at the global level – was splintering by 2021. 2021, Japan and the European Union announced
that they would sign an agreement to invest jointly
Around the world, governments intensified their in clean energy technology, particularly wind
use of regional multi-year agreements instead of power. In an ironic turn, the 2022 world of frag-
international spot-markets for their energy needs. mented energy governance promises greater re-
This was part of a self-reinforcing cycle. Infrastruc- ductions in carbon emissions than the UNFCCC-led
ture investments and improvements (especially for climate talks ever had.
gas supplies) were made on the basis of short-
er-term regional agreements, not with the goal of
getting new supplies on global markets. But be-
cause new supplies were not reaching global mar-
kets anyway, countries faced no incentive to dis-
continue their investments in the infrastructure
necessary for their regional agreements. In other
words, the lack of a comprehensive worldwide in-
frastructure fueled countries’ emphasis on region-
alism, and that emphasis on regionalism impeded
investments in a comprehensive worldwide infra-
structure. As result, the world became marked by a
proliferation of regional energy agreements and a
power vacuum left by previously central actors,
such as Russia, OPEC, and the IEA.
This fragmentation, however, proved to be benefi-
cial for reducing carbon emissions. Mid-decade,
the global negotiations centered on the UNFCCC
and the Kyoto Protocol had died out. But increased
supplies of natural gas (especially within particular
GLOBAL GOVERNANCE 202210 SCENARIO 2: INTERNATIONAL MARKET INTEGRATION
_ Scenario 2: International
Market Integration
Picture of the Future: The Rise of the
Integrated Global Energy Market
Today, in 2022, nation states demonstrate growing and consumers start to source more from the global
confidence in the global energy market. New pro- market, major new consuming countries pivot: In-
ducer countries generate a “supply cushion” that creasingly, they source from the global market,
reverses long-held assumptions about strategies which they find offers more secure sources of sup-
for securing energy, gradually enticing entrants ply with greater flexibility.
into the global energy market, now flush with
cheaper oil and gas. As a critical mass of producers
History of the Future: International Market Integration
Today The US exports natural gas. Obama nicknamed “Oil President.”
2014 Sudden natural gas $ drop.
China’s Xi Jinping institutionalizes carbon tax, gets nickname “Green President”.
> Phase 1
New suppliers and US-China Energy Dialogue leads to BIT, which articulates tech transfer guidelines and
new consumers energy innovation sharing regime.
shake up global 2016 EU-Russia “Cold War” as long term gas supply contracts renegotiated.
energy system.
BRICS sign historic energy innovation accord, dubbed a “strategic commercial
alliance” (SINOPEC, SASOL & Petrobras).
SOE partnership props up international energy market as accord sells
back into market in attempt to limit influence of speculators.
> Phase 2 2018 Intense competition in new frontiers (Africa).
Traditional alliances (OPEC)
start to unravel. OPEC begins to loose control of its members as African states leave on mass.
2019 Coal to Gas Summit in Beijing. US-China lead global shift from coal to gas, set targets
> Phase 3 in commercial contracts for CO2 reductions.
International energy
market rules emerge from WTO and G20 emerge as new CO2 reduction target forums, displace
UNFCC as central decision making body.
the bottom up; include C02
reductions targets. 2020 Vancouver Summit on international energy market codifying “rules of the road” for
short term energy contracts.
2022
Global ENERGY GovernanceEnergy Governance Outlook: 11
Global Scenarios and Implications
Phase 1: New Suppliers Disrupt Old Energy
Security Paradigm
The rise of new supplier countries (such as the US) emitting fossil fuels such as coal to instead low-
and additional consuming countries from the de- er-emitting fossil fuels such as natural gas.
veloping world brought about a paradigm shift in
global energy markets. The growth in demand By 2015, Africa emerged as the newest hotspot for
from populous emerging consumers such as fossil fuel exploration. That year the continent ac-
China and India proved to be relatively predict- counted for eight of the 10 largest hydrocarbon
able. More impactful was the less obvious influ- finds in gas and oil. This sparked a new competi-
ence of rapidly growing energy supplies from un- tive frontier between major state owned enter-
conventional fossil fuel sources in the United prises (eg, China National Offshore Oil Corpora-
States, Africa, and Latin America. Earlier than an- tion, Sinopec, Petronas, Petrobras) and traditional
ticipated, the production of unconventional fossil private powerhouses (eg, Exxon and Total). The
fuels became more energy efficient and substan- battle played out in the global energy market,
tially less environmentally damaging. Shale gas where both groups preferred to sell energy sup-
companies, for instance, developed new ex- plies back into the global market. With the exten-
traction methods that use very little water, greatly sion of the West African Transform Margin up the
reducing extraction costs and groundwater con- coast of West Africa, and the announcement that
tamination concerns. East African reserves had secured off-take con-
tracts in India, South Korea, and Japan, Africa as-
Substantial investment in renewable energy cended in the new global energy world.
sources continued, but with an emphasis on
“game changer” technologies. For example, im- The US also rose as a key new energy pole in this
proving battery technology became a major focus period. In his second presidential term, Obama
for Western countries, where consumption of pe- continued to express concern about climate
troleum is focused on the transport sector. Not change and catastrophic events, but he did not
wanting to cede ground to China on green tech- spearhead comprehensive policies to deal with
nology, the US announced a 10-year “man on the these concerns. In fact, he advanced America’s re-
moon” initiative to develop the world’s first naissance in fossil fuel extraction. Major catastro-
long-lasting battery, and the government began phes in deep water offshore drilling and nuclear
the initiative with a major investment in the Bell generation proved less influential as policy fore-
Labs Battery Extension Facility. Although such in- runners. President Obama eliminated the morato-
vestments did not completely appease civil soci- rium and announced an expansive domestic drill-
ety groups pushing for a “greener future,” they did ing agenda. Then, in the run-up to the 2016 presi-
indicate progress in that direction. dential elections, candidate Hillary Clinton went
even further: Backed by a strong domestic lobby
In the near term, however, renewable energy was and looking to head off Republican challengers,
unable to displace fossil fuels. In addition to in- Clinton embraced the campaign slogan “Frack
vestments in battery research, countries around Baby Frack.”
the world made strides in solar and wind energy
production, leading to substantial price drops in
photovoltaic and other technologies. But lack of
usage and absence of distribution mechanisms re-
mained major impediments to rapid wide-scale
adoption of solar and wind technology. Instead,
progress came in the form of shifts from higher
GLOBAL GOVERNANCE 202212 SCENARIO 2: INTERNATIONAL MARKET INTEGRATION
Phase 2: US/China “Breakthrough”
Sets Scene for Global Integration
Now a decade after the start of the shale boom, and nese energy, it nevertheless provides a “proof of
frustrated by lack of innovation within its state- concept” for some wild cat investors.
owned energy enterprises, China looked to outside
sources for expertise in deep water drilling and On the back of major losses on Keystone, environ-
fracking, but an absence of intellectual property mentalists saw the BIET as potentially advancing
protection deterred potential investors. The 2014 their own goals of reducing global carbon emis-
Joint China-US Economic Dialogue placed energy sions. Environmentalists began a concerted cam-
and intellectual property protection atop its paign to advance natural gas export to China. China,
agenda; the summit ended with agreement on es- seeing the added benefit of lower emissions and
tablishing an “energy dialogue.” lower natural gas prices, revisited its long-term sup-
ply contracts with Indonesian coal, lowering its
The US natural gas industry, seeking financing and supplier contracts down to 70% from its 2010 level.
suffering from bottoming out prices of natural gas The switch towards increased natural gas consump-
at home, lobbied congress for the creation of a bi- tion decelerated China’s coal consumption growth.
lateral energy investment treaty (BIET) with China.
The BIET seemingly aligned both countries’ inter- South Africa, hosting China and Brazil for the 6th
ests: China had the need and finance while US com- Annual BRICS Forum in 2015, proposed a strategic
panies had the technology and need. The BIET was trilateral technology transfer alliance focused on
hailed as a major strategic breakthrough and set the sharing gas-to-liquids and deep-water-drilling
stage for China to acquire major Canadian and US oil technologies with Brazil. Looking to build on Exx-
services companies. China further incentivized the on’s seismic data, SAPetro, South Africa’s national
development of the domestic shale gas industry by petroleum company, was especially eager to learn
removing legal impediments (for example, through from Petrobras, which saw value and access to
unbundling shale from oil/gas classification and al- cheap capital from China. Meanwhile, China was
lowing foreign and private bidders into increasingly the major driver of a Sasol-SINOPEC partnership,
frequent bidding rounds). The development of which saw synergies in its own coal and gas sectors.
shale gas in China, however, was not fully exploited The partnerships allowed all three countries to pur-
as full-scale investment remained repressed by lin- sue joint projects in new frontier markets, espe-
gering concerns about off-taker and intellectual cially Africa, but instead of securing these assets for
property protection regulations and infrastructure national consumption, the trio decided that it was
requirements in the area of exploration and ex- in their better interest to sell the resources back
traction. While this delayed “game changer” for Chi- into the global market.
Phase 3: As Old Alliances Realign,
Global Market Matures
The new alliances between new consumers and with the regime, agreeing to take a tougher stance
new producers shook up old alliances. The Iranian and consenting to limited sanctions.
regime was in serious turmoil as gas revenues
dipped below breakeven targets, and off-taker con- Internally, OPEC started to unravel in 2019. As Iraq
tracts became more competitive. Sanctions on the and US oil came online, spare capacity reached 9
regime started to bite, as China appeared less de- billion barrels by 2020, an increase of 400% in five
pendent on maintaining a resource relationship years, reducing price setting power of the alliance.
Global ENERGY GovernanceEnergy Governance Outlook: 13
Global Scenarios and Implications
Frustrated by what they perceived as a “founder grated global energy market. Building off of a “spa-
collusion” between Venezuela and Saudi Arabia, Af- ghetti-bowl” of pre-existing arrangements, the
rican states (Libya, Nigeria, Algeria and Angola) left summit served as the starting point, ushering in a
the cartel en masse and started participating more new era of energy collaboration and cooperation,
actively in global energy markets. in stark contrast to the cartel and price fixing of past
energy eras. New rules of the game – including data
As OPEC and other old alliances devolved, new in- sharing, emergency reserves, burden sharing on
stitutions filled the gap. The G20 and the World shipping route security, spare capacity and invest-
Trade Organization emerged as central forums for ment rules – were enshrined in a compact between
energy. The G20 Summit in Vancouver in 2020, la- major producers and consumers.
belled the “Integrated Energy Market Summit,”
looked to formalize the rules of the road for an inte-
Phase 4: Bottom-Up Global Climate
Consensus
With the world entering the third decade of the 21st cerns. Domestic forces have therefore gradually
century, it has done so with the foundations of an shifted global dialogue and promoted a general-
integrated international energy market in place. ized shift in climate negotiations. Political leaders
Standards and commercial arrangements have in emerging countries have started to embrace
been increasingly conducted via a global market new language to discuss climate change – from
and managed by a new set of actors. Looking for a “burden sharing” and “load shedding” to “opportu-
new role after Doha’s failure, the WTO has taken the nity sharing.”
lead in managing the new framework while the
G20 remains the central forum for agenda setting. The green shoots of a bottom-up patchwork agree-
ment on carbon reduction targets look obtainable
Both China and the US have approached climate by 2030 as major consumers and suppliers increas-
negotiations differently, now that attaining carbon ingly explore new political space for a global
reduction targets appears less of a cost and an inte- climate change treaty.
grated market facilitates more open dialogue and
commercial cooperation. Having substantially re-
duced its CO2 emissions by managing a strategic
shift from coal to natural gas, Chinese policymakers
play a more active role in climate negotiations. See-
ing an interest in spurring a global shift from coal to
gas to ensure an export market for its surplus sup-
plies, the US no longer slow peddles carbon targets
and promotes gas as an effective bridge fuel, to the
consternation of some activists.
Elsewhere, in India, a reinvigorated public debate
about energy and development has been sparked
by chronic massive rolling blackouts, which grip the
political class and threaten disorder. China, where
pollution continues unabated, sees its own inter-
ests in driving the dialogue to satisfy domestic con-
GLOBAL GOVERNANCE 202214 STRATEGIC IMPLICATIONS
_ Strategic Implications
Neither scenario – Fragmented World or Interna- pliers are forming their own regional alliances
tional Market Integration – is inherently better than based on common interests in claiming new lead-
the other. While they have unique aspects, they also ership in the international economy of fossil fuels,
share features, such as the availability of new energy while former producers lose battlefields in the shift
sources, the shifting of geopolitical alliances, a drop of geopolitical power. And that new alliance is con-
in fossil fuel prices, and an erosion of the market fronted with the responsibility to address green-
power of some traditional producers. Both scenar- house gas emissions and tackle global climate
ios contain positive and negative aspects – and to- change through regional collaborative actions after
gether the two scenarios illuminate a variety of po- global consensus fails to happen.
tential opportunities and potential threats that
could arise in the coming years. These opportunities In the International Market Integration scenario,
and threats are summarized in table 1. the availability of supply is secured by a more
flushed and flexible global energy market with con-
In the Fragmented World scenario, characterized ventional fossil fuels at a lower price. As means to
by new suppliers becoming available and secured facilitate and stimulate fluidity of market access to
from discovering particularly unconventional fossil new supply, bilateral trade and investment agree-
fuels in the Americas, the global energy market is ments are prioritized, which ultimately promotes
enriched with diversified sources; these sources are the integration of the international market. Former
beyond traditional Middle Eastern and some Afri- producers, particularly those in currently existing
can countries, which appear to form an evolving alliances such as OPEC and the IEA, are also losing in
landscape of emerging players at a lower fossil fuel the shift of power due to a leadership vacuum and
price. Relying on the rise of domestic production political conflict.
and exports to the international market, new sup-
Selected Threats and Opportunities Across Scenarios
FRAGMENTED THREATS OPPORTUNITIES
WORLD
Availability of ›› Environmental concerns ›› Economic growth for export countries
›› Challenges to trading sources ›› Fuel price reduction
›› Territorial disputes over new resources (eg, offshore oil) ›› Diversification of sources
Shifting alliances ›› Leadership vacuum, leading to instability ›› Stability in regional alliances
›› Jockeying for resources between regions
Fossil fuel prices ›› Crowding out of clean energy ›› Stability in the international economy
drop ›› Increased coal consumption
›› Pre-emptive action from former fossil fuel producers
Former producers ›› Power vacuum, leading to political conflict ›› Potential for new international leadership and
lose power ›› New country for production reserve capacity required cooperation
Climate agenda ›› The dissolution of the carbon market due to low prices ›› Collective action thanks to growing coal use
›› CO2 increase ›› More private sector support for carbon tax
›› Crowding out of renewables because of low fuel prices ›› Carbon tax incentivizes
Global ENERGY GovernanceEnergy Governance Outlook: 15
Global Scenarios and Implications
INTEGRATED THREATS OPPORTUNITIES
WORLD
Availability of ›› Interest groups preventing US exports ›› Economic growth for export countries
new sources ›› Territorial disputes on offshore oil ›› Fuel price reduction
›› Diversification of sources
Bilateral invest- ›› Speculation potential as market increases ›› Bottom-up standards and trust for inter-
ment national agreements
treaties ›› Opportunities for international investors
Fossil fuel prices ›› Crowding out of clean energy ›› Stability in the international economy
drop ›› Pre-emptive action from former fossil fuel pro-
ducers
Former produc- ›› Power vacuum, leading to political ›› Potential for new international leadership
ers lose power conflict and cooperation
›› New provider of reserve capacity needed
International ›› Small countries cannot decide rules ›› Re-launch of WTO process
market of the game ›› Private sector engagement
integration ›› Energy security exposed ›› Cooperation in market, leading to
›› Enforcement of regulation cooperation in climate framework
Both scenarios are impacted by common themes, shale gas reserves, such as China and EU states, can
and the resulting opportunities and threats focus reproduce the US success in shale gas development.
on three strategic implications: energy availability, Current US crude oil suppliers, such as Saudi Arabia,
affordability, and accessibility. Paying attention to Canada and Mexico, would need to seek alternative
these three strategic implications helps to identify markets. Middle Eastern countries and Russia need to
ways to offset risks and leverage benefits in each seriously consider diversifying their economy. At the
scenario. same time, a more integrated energy market needs
to be formed to provide the needed transparency
In the next 10 years, the availability of energy largely and stability, thus further reducing the price volatil-
depends on the realization of projected expansion ity in the world’s energy market.
of conventional and unconventional energy pro-
duction. To mitigate perceived investment risks, the In the Fragmented World, a country’s access to
United States needs to provide regulatory certainty energy supplies will hinge to a large extent on its
to foster investment in extraction and in the trans- own geographic location, economic or political
portation of unconventional sources. It also needs powers, and resource endowments. Any country
to tighten its regulatory environment in order to that is disadvantaged in this regard will need to con-
prevent drilling-related accidents from potentially sider risk-mitigation strategies to prevent shortages
halting fracking activities. China, on the other hand, in energy supplies – for instance, by shifting their
would need to solve technological and environ- domestic energy mix toward a higher share of
mental challenges on fracking for its own particular renewables. In the International Market Integration
case as this technology is geographically specific. scenario, to prevent crowding out of renewables
due to increased reliance on natural gas energy sup-
The prospect of the affordability of energy has differ- ply, countries such as the US also need to develop
ent implications globally. The US needs to loosen its relevant policies. The accessibility of traditional and
current export restrictions. The price reduction also newly added sources also depends on the availabil-
depends on whether other countries holding large ity of transporting infrastructure.
GLOBAL GOVERNANCE 202216 POLICY OPTIONS
_ Policy Options
Based on the strategic implications of a Fragmented environments. Each of the policy options addresses
World and an International Market Integration world, one or a combination of the strategic implications.
the GG2022 group has derived robust strategic op- The policy will aim to make energy more affordable,
tions to provide a secure, affordable and sustainable available, accessible, sustainable, or a combination
energy supply irrespective of the alternative future of the above.
Policy Option: Scaling-Up Energy Transport
Infrastructure
›› Ensure regulatory certainty on energy exports
›› Provide concessional finance and long-term off-take contracts
›› Speed up permitting procedures for infrastructure and engage affected stakeholders
> Policy Implications
The need for scaling-up energy transport infra- hinder the scale-up of this need. Regional energy
structure to make available energy more acces- trade as predominantly occurring under the Frag-
sible. In the Fragmented World, energy trade mented World relies strongly on an extension of oil
occurs mostly on a regional basis, while in the Inter- and gas pipelines as well as, to a lesser extent, elec-
national Market Integration scenario, energy trade tricity grid interconnections. In International Mar-
occurs globally as a more integrated energy market ket Integration, there is greater potential for global
emerges. In both scenarios, the potential for new energy trade driven by regional price differences. In
unconventional energy sources to reshape energy this scenario, global energy trade relies on the
trade strongly depends on the availability of suffi- extension of liquefied natural gas (LNG) import-
cient transport infrastructure to connect markets. and export-facilities in key supply and demand
The current transport infrastructure is insufficient countries.
to deal with the energy trade potential, but major
regulatory investment and technological barriers
> Policy Instruments
Remove regulatory, investment and technological The uncertainty revolving around a potential bill
barriers for energy transport infrastructure. Regu- banning the US LNG export is an example of
latory uncertainty today prevents the required delayed investments in LNG export terminals.
investments from flowing to energy transport infra- These regulatory uncertainties drive up financing
structure. Uncertainty remains regarding the size costs for investors. On the national level, countries
of global unconventional fossil fuel reserves, regar- need to provide a reliable long-term regulatory
ding many developing countries’ capability to framework for LNG exports. On the international
exploit them in the short-term as well as regarding level they need to agree on common codes and
environmental regulation and export legislation. standards for energy transport (eg, network codes
Global ENERGY GovernanceEnergy Governance Outlook: 17
Global Scenarios and Implications
for electricity) and provide bilateral investment ensuring effective stakeholder consultation and
treaties to ensure investor security. Concessional offering affected communities equity stakes in
finance and state guarantees from the government energy transport infrastructure projects will help to
side and long-term off-take agreements from the reduce local opposition to the projects.
energy consumers all help to reduce investor risk.
Permitting procedures need to speed up, and
Policy Option: Energy-Related Legal
and Trade Mechanisms
›› Aligned bilateral investment treaties standardizing energy trade
›› Common/harmonized international trade codes for energy technology
›› Legal reciprocity and intellectual property protection agreements
> Policy Implications
The need for additional investment in the energy reserves that are more difficult to reach (eg, deep
sector to make energy more affordable and acces- sea drilling or oil shale), additional investments are
sible. Both scenarios suggest the need for additional needed for both upstream and downstream infra-
investment in the energy sector. In the Fragmented structure development.
World scenario, consuming countries fear unstable
supply from traditional energy producers, and In both scenarios, there is a threat of under-invest-
therefore some opt to install more renewable-en- ment due to economic uncertainty and the difficul-
ergy capacity within their own territories. For devel- ties associated with risk assessment and deci-
oped and emerging countries, this means additional sionmaking on large energy projects. In addition,
commitment of public and private investment there is little framework for governing foreign direct
towards renewable energy technology develop- investment in the energy sector. This leads to alter-
ment. For the least developed countries, this may native structures, such as bilateral investment trea-
indicate additional need for aid and foreign invest- ties (in International Market Integration) or regional
ment to provide required liquidity. In the Interna- arrangements (in Fragmented World) to define
tional Market Integration world, with the continued investment conditions and settle disputes.
reliance on fossil fuels and the switch towards
> Policy Instruments
Use bilateral investment treaties to create energy structure on foreign direct investment, BITs have
related multilateral investment and trade frame- provided the needed guarantee of dispute settle-
work. Bilateral investment treaties (BITs) refer to an ment and risk amelioration. Private investors can
agreement that sets the investment conditions for seek arbitration from international dispute resolu-
private investors from one state in another state. tion institutions without the need to involve diplo-
It usually contains line items that define fair and matic protection from the home state. At the same
equitable treatment, protection from expropria- time, due to the increasing uniformity of these BITs
tion, and provides mechanisms for dispute resolu- in terms of language and format, a common stan-
tion. In the face of a lacking global governance dard is forming for foreign direct investment.
GLOBAL GOVERNANCE 202218 POLICY OPTIONS
With this in mind, we see the potential for BITs – ding more transparent, common and stable legal
signed between one major energy consuming or platforms in the energy sector for foreign invest-
producing country with their partners – to expand ment. At the same time, we realize the difficulties
into a multilateral investment framework that of negotiating and forming a multilateral invest-
eventually harmonizes international investment in ment standard among many national players. We
the energy sector in the next 10 years. There have argue that starting such efforts on a bilateral level
been attempts in the past to form such multilateral and expanding the legal web from there may
international standards for energy related foreign increase the likelihood of forming a widely
investment from a top-down approach, such as accepted investment governance structure within
the European Energy Charter Treaty. Although the global energy sector.
their influence on providing better investment
governance remains to be seen, such efforts indi-
cate the demand and experimentation of provi-
Policy Option: Environmental Regulation
and Standards
›› Sharing information, knowledge and consensus building
›› Collaborating with international industrial association
›› Integrate BRICS countries into the system
›› Studies on international environmental impact
> Policy Implications
The need for cross-border regulation and stan- environmental externalities that could result from
dardization to make energy use more accessible extraction or emissions. That calls for information
and sustainable. Energy extraction, production, and knowledge sharing as well as consensus build-
and use create myriad negative environmental ing between major energy players through collab-
externalities. To mitigate many of these concerns, oration with international governing institutions,
it is crucial to establish environmental standards particularly with emerging economies under
and oversight. The options remain focused on consideration.
> Policy Instruments
Sharing information, knowledge and consensus impact mitigation and pollution/emission control.
building. To assess the environmental impact of They could join an existing data platform such as
unconventional energy extraction, international that of the International Steel Association.
standards should be jointly developed by countries
with unconventional sources, industry representa- Just as industry should develop mechanisms for
tives and civil society. measuring emissions, so should emerging and
developed countries. Baseline standards for emis-
To reduce emissions from their energy usage, energy sions and data accounting mechanisms should be
extraction industries should develop a knowledge developed and followed. Transparency, account-
and data sharing system in terms of environmental ability and trust are critical in addressing the
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