Energy security and dominance in the XXI Century, beyond oil and gas*
(* A slightly short edition of the note is published in NCAC Newsletter – November 2018 - Part II -)
The quest for energy security
One of the main themes which dominated the XX century energy discussion was energy security and was the trigger that in 1974 lead to the creation of the International Energy Agency (IEA), and in 1977 the creation of the Association of Energy Economists, lately renamed as International Association for Energy Economics. Energy security concerns were on the scene because the excessive dependency on imported oil from unstable regions after the 1973-74 Arab states instituted an embargo against countries supporting Israel in the Yom Kippur War, and in conjunction with the 1978-79 Iran oil production and exports cuts, and cancelation of contracts with US companies, during its revolution. Concretely, it was with the 1973-74 oil embargo that a group of western countries agreed to the creation of the IEA, designed to help countries to coordinate a collective response to major disruptions in the supply of oil.
The ghosts of major disruptions of energy supply, in oil and gas, motivated by geopolitical issues, remained high for the last quarter of the XX century and the first decade of the XXI Century. And, today as Saudi Arabia open the door to cut crude oil production among OPEC countries and noninstitutional participants, we are reminded that these ghosts are not gone.
Since the 70`s, world population has almost doubled, the standard of living has improved, and a smaller percentage of the population lives in poverty. Over the same period, primary energy consumption has more than doubled, with a large share of that increase taking place in developing countries. We are more, thirsty for energy, and have seen large swings in geopolitical power, from north to south and west to east, in an environment with many frictions.
New buffers for energy security
Beyond the large increase in population and energy consumption, there is good news on the international energy landscape, where important energy security buffers have been added.
First, additional countries, figure 1, some with very stable democracies and business environment, have become important oil and gas producer, increasing the diversity of oil and natural gas sources, with new players as Canada, China, Brazil, Norway, who added an extra layer of competition to OPEC and producers from politically unstable regions and very unstable business environments.
Second, innovation has allowed access of primary energy sources that were unfeasible a few decades ago. That is the case of Canada with its tar sands, Brazil with pre-salt and deep oil production, Norway in the extreme weather conditions of the northern sea, and certainly the great technological development on fracking and horizontal drilling in the US that revived its oil and gas industry, among others. Also, to these we should add the increased security that the LNG technology has brought to many countries, allowing them to diversify their sources of natural gas supply.
Figure 1: Oil Production
And third, the fantastic technological changes that have taken place in the renewable energy sector, with sharp reduction in the costs of new renewable energy sources such as wind and solar for electricity generation – where for some the costs are down to 1/5 of what that cost was in 2010 -, enabling this new energy sources to become an important part of the energy mix in many places, displacing conventional power generation sources as coal and gas plants.
Big changes in the electric grid
In the years to come, we expect important transformations in the power sector, with a larger penetration of renewables with variable production. What will need a redesign of the electric grid, on the way how it is operated, on how the power plants are dispatched. And it will need the addition of large amounts of energy/electricity storage capacity, taking advantage of the new technologies. Also, great changes are expected in transportation, with a large penetration of electric vehicles that will be plug to the electric grid, taking and injecting energy into it.
Several European countries - Norway, Germany, United Kingdom - have announced that by 2025 and 2030 only buses and electric cars will be able to transit through their cities. In China, also in major cities, all public transportation buses must be electric. In Latin America, Chile is looking for a deep change in its public transportation system with the introduction of electric vehicles.
The digitalization of the electric grid is imperative to manage an increasing number of sources of supply and demands that will need a redefinition of the different power markets, and the redefinition of ancillary services markets.
Storage and the lithium equation
Storage technologies for the electric grid and batteries for electric vehicles and electronic devices are making big improvements in their energy density and have experienced significant cost reductions. In batteries for electric vehicles, the cost reduction has been to a fifth of their cost in 2010.
Even dough is too early to know which storage technology will be within a decade the leading storage technology for utilities and vehicles, today lithium-ion batteries are the default choice for most personal electronics and most electric cars. Today lithium-ion batteries are cheaper given their energy density.
Although there are other emerging technologies that might contest the leadership of lithium-ion batteries, such as solid-state batteries, supercapacitors, graphene fuel cells, still they are not in a stage of a economic development to be competitive.
Who will be the winners, it`s hard to know! However, we should remain alert on the availability of resources and materials that support these different technologies.
As long as lithium-ion batteries are and remain the leading storage technology, is important to be concerned if there is enough lithium to back a sharp increase in its demand and also the reliability of lithium sources. How much lithium is available today, and where it is?
As shown in table 1, only four countries concentrate 96% of lithium production and lithium reserves. Chile stands as the leading country in reserves, with 44% of world reserves, and one of the two countries that lead the production of lithium in the world. Chile and Australia account for 76% of lithium production in 2017; and at 2017 consumption levels, current world lithium reserves can last more than 350 years. Today, about 46% of lithium production is used for batteries, and that figure is expected to increase up to 80% within a decade to satisfy the huge demand of lithium needed in the batteries for the electromobility revolution. Between 2016 and 2017 lithium production increased by 13%, and by 2025 it`s consumption can easily double 2017 consumption.
Lithium as a strategic resource
Chile is a leading country in South America, offering the best ranked business environment in the region by World Bank 2019 Doing Business report, in the position 56 among 190 economies, and offers one of the best environments for investments in the mining sector, in the 8th position according to the investment attractiveness index for the mining sector elaborated by the Fraser Institute.
In addition to its favorable business environment, Chile was favored with large reserves of lithium, which are found in brines below flat salt surfaces in the northern desert of the country. For its extraction, only is needed the use of the vast solid salt flat surface of the desert and sun for evaporation to occur. In contrast, Australia's lithium reserves are found in hard-rock sources, which make them more expensive to process than brines.
By the end of 2017, the global supply of lithium was dominated by six producers: Albemarle, SQM, Tianqi, FMC, Orocobre, and Galaxy Resources.
The Chilean SQM and the US Albemarle are the only companies in Chile that have had contracts in force since the 1980s to extract lithium. These permits were granted by the Corporation for the Promotion of Production (Corfo), which, on behalf of the State, determines which projects can operate.
The Chinese company Tianqi Lithium Corporation has a 51% participation in the Australian company Talison Lithium, the other 49% is controlled by Albemarle, and recently Tianqi bought 26.1% of the shares of SQM. For Tianqi, these ownership plus other stakes it has on lithium reserves in other places, lead it in a path of getting control over 70% of the global lithium market, a component that today is a strategic ingredient for batteries and the development of a world-class electric car industry.
Also, Tianqi with Albermarle, through the Talison joint venture, already controls half of the property of other lithium deposits in Chile, Siete Salares, which includes mining exploration concessions -not yet exploited- in an area of 152 km2, endeavor that could become the second largest lithium reserve in Chile, after the Salar de Atacama where SQM and Albemarle have their operations in the country.
All antitrust authorities in Chile expressed no main concerns and approved the entry of Tianqi Lithium Corporation in the property of SQM. Although the national economic prosecutor - who also supported the entry of Tianqi in the ownership of SQM - has acknowledged in the Chilean Congress that there is indeed an agreement between Albemarle and Tianqi to split the world market for lithium concentrate.
One of the main side backs for Chile of this corporate operation, is with the determination of the transfer prices, as Tianqi has a strategy to extend its business by encapsulating both upstream and downstream activities in the lithium industries, and the impact that the coordination among global players could have on depress selling prices. Where, the country can start trading lithium at lower than market costs, negatively affecting the taxes and the royalty that the Chilean government could collect from the sales, and also negatively affecting SQM minority shareholders locally and abroad.
On the side backs for the global economy, is the risk of the market power that can be exercised in lithium products with the concentration of its production in a few large companies with a stake of more than 70% of the market.
China`s interest to have leverage on Chilean lithium industry is logical given the easy of access to the resource and its low cost of production, compared with lithium production costs in other regions, what will give Chinese industry an important competitive advantage in batteries and the electric car industry.
A Chilean high-level government official has confirmed that the authority is working on a plan to allocate new lithium production contracts to investors interested to give an additional impulse to the development of the industry, and it is looking for new partnerships that provide more than just an extractive activity and give much more value added to the Chilean lithium industry. But, any new extraction activity on this venue, might take many years to materialize.
As is noticed by US Geological Survey report [1] “Lithium supply security has become a top priority for technology companies in the United States and Asia. Strategic alliances and joint ventures among technology companies and exploration companies continued to be established to ensure a reliable, diversified supply of lithium for battery suppliers and vehicle manufacturers.”
In this new industry, Asian players are moving fast and with decisive strategies to take the control of the resources, expressing their acknowledged that the access to resources and the leadership of advanced energy technologies should be a priority to energy security and dominance in the XXI Century.
[1] Source: U.S. Geological Survey, Mineral Commodity Summaries, January 2018.
[1] Source: U.S. Geological Survey, Mineral Commodity Summaries, January 2018.
W: US domestic production was withheld to avoid disclosing company proprietary data.
