July 2016 - Archive
July 15, 2016
July 8, 2016
July 1, 2016
THE SHOW MUST GO ON
While politicians fight over Brexit, civil servants stick to their agenda
There will be a summer climate package and carbon market reform will continue, EU officials say, although it is unclear who will now lead that reform. What does seem clear is that the EU will lose a strong pro-climate, pro-market advocate when the UK goes…
Energy Post Weekly (EPW)
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IN THIS WEEK'S ISSUE
May 27, 2016
Oil: it won’t die, just fade away
New reality of the oil market
May 27, 2016
Oil: it won’t die, just fade away
For some time now, debate has been raging over whether oil companies are up against what is called “peak demand”. And more and more people are answering this question affirmatively.
In October last year, no less a person than Spencer Dale, BP’s Chief Economist, already alluded to the “new reality” of the oil market, saying that “there is no longer a strong reason to expect the relative price of oil to increase over time”.
Earlier I had written that Shell and other oil companies had reached “the End of the Oil Super Highway”. Roberto F. Aguilera and Marian Radetzki wrote a book about peak demand, which we featured on Energy Post in September last year. Entrepreneur Peter F. Varadi in December last year wrote about The Twilight of the Gods of Oil.
Even earlier, in January 2015, US-based energy advisor Elias Hinckley had written one of our best-read articles ever, famously claiming that as “historic moment” had arrived: Saudi Arabia sees End of Oil Age coming and opens valves on the carbon bubble, he claimed. Most energy analysts reacted to this story with disbelief, but the actions of Saudi Crown Prince Mohammed bin Salman since then have proved Hinckley right.
Now comes another remarkable article from two luminaries of the oil industry: ex-Shell-CEO Jeroen van der Veer, currently on the board of Statoil, and well-known researcher Amy Myers Jaffe, director of Energy and Sustainability at the UC Davis Institute of Transportation Studies in California.
The authors, both members of the new “Global Agenda Council on the Future of Oil & Gas”, part of the prestigious World Economic Forum, acknowledge that the world will move away from oil in the coming years. What is more, they believe that this will have many benefits for the global economy, leading to more financial stability and a chance for countries to reduce costly price subsidies on oil.
They urge oil and gas companies to explore how they can profitably develop renewable and alternative energies.The industry, they write, “may find new opportunities by addressing the technological challenges associated with the different parts of the renewable energy space” and should investigate how to develop “efficient combinations of large-scale energy storage and transportation solutions in a world with a lot of variable renewable electricity”.
You can read the full article here.
All this is particularly significant coming from the former CEO of Royal Dutch Shell, Jeroen van der Veer. Even though Shell is reportedly about to launch a New Energies unit, the company’s current boss, Ben van Beurden, is holding off on a too rapid change. “We cannot do it overnight [i.e. switch to renewables] because it could mean the end of the company”, he said at Shell’s annual meeting on 24 May.
Peter Simon Vargha, Chief Economist of Hungarian oil company MOL, agrees with Van Beurden that oil is not “yesterday’s fuel”, at least “not yet”. In an excellent article published on Energy Post this week, written with his colleague Csaba Pogonyi, he argues that there are still “some good years” ahead for oil.
However, the article will do little to reassure oil companies or investors. According to Vargha and Pogonyi, any revival of the oil sector will be short-lived – and may well be the last one. Main reason: the advent of the electric car. They show how quickly the electric car will become cheaper than the car with combustion engine – especially if self-driving cars experience a breakthrough.
And where does this leave OPEC? In a mess, writes Rakesh Upadhyay of Oilprice.com in another article we published this week. At this moment, he notes, OPEC is a little more than a battleground between Saudi Arabia and Iran.
“While these two nations continue their slugfest in the OPEC meeting, the smaller nations have no choice but to remain mute spectators, dreaming of their glory days”, Upadhyay concludes. Dreaming of old glory days may well be something that many oil people will soon be doing. The oil soldiers won’t die just yet – but they may start fading away.
New business models
Why disruption is just as hard on the disruptors as the disrupted
May 27, 2016
We have all heard this one before: traditional utility and oil companies are under threat from disruptors in the fast-changing energy market. They are struggling to find new business models as the world is being transformed around them.
That may be true. But not just the incumbents are having a hard time, writes entrepreneur Tobias Engelmeier, in an eye-opening analysis. The “risk-taking, disrupting pioneers” are also finding it difficult to flourish! Just look at the solar companies going bankrupt. And Elon Musk is no Bill Gates either – not yet anyway.
The fundamental problem is, says Engelmeier, that “the global energy transition is threatening conventional energy markets without yet having created functioning new markets”.
According to Engelmeier, the market is stuck in three ways.
On cost: “Renewables and energy efficiency might just not be cheap enough yet to radically disrupt the way people use and buy energy.” There is a “hassle factor” invovled as societies, economies, and consumers need to change their way of operating and “they will only do that and overcome their inertia if the new option is much more attractive than the old.”
On size: “New energy is still small in size compared to old energy. An oil company can spend tens of billions of dollars on developing a new oilfield. A utility can spend billions on a new large coal, gas, hydro, or nuclear power station. Renewables investments are still counted in millions.” This matters “because it makes it almost impossible for the old energy players to change toward new energy. They are simply too large.”
On differentiation and technology: “Renewables and power grids are surprisingly conservative industries. New technologies are difficult to finance…. Along the entire value chain, there are few unique selling propositions that could protect margins. As a result, very few people actually make money.”
Engelmeier concludes that “the early movers might not be the winners. While their spending on educating customers, fighting regulations, or building new organisations is essential for the overall market development, it might not pay back for them. Many of the companies that will really benefit from the revolution in the way we generate and use energy are probably not around yet.”
Something to think about.
Another ETS fix
Why didn’t we think of this one before?
May 27, 2016
The EU Emission Trading System (ETS) must be regarded as one of the great disappointments of EU climate policy. It can’t be stressed enough: the ETS is supposed to be the flagship climate policy instrument of the EU. It is supposed to regulate emissions from the power sector and the industrial sector, two of the largest sources of greenhouse gas emissions. Yet it does not do what it was set up for. You know the reasons why: they have been pointed out over and over again.
Reform of the ETS is one of the most important points on the EU energy agenda. Yet as long as it’s every country for itself – and its own industry – the struggle will be long and hard.
One major bottleneck is the practice of “free allocation” of allowances to (most of) the industrial sector. Understandable why this came about, and why it’s so hard to change: there is no point in chasing away EU manufacturers to geographies outside of the EU where they don’t have to limit their emissions.
One possible solution has this week been proposed by a consortium of 17 research groups, led by think tank Climate Strategies and the German Institute for Economic Research (DIW) in Berlin. Professor Karsten Neuhoff, head of the Climate Policy Department at DIW and a board member of Climate Strategies, writes about this on Energy Post.
In a nutshell, their proposed solution is to include “consumers” of industry into the ETS. At this moment, the ETS applies only to manufacturers, not their customers. For example, to the cement industry – not the construction sector that uses cement. To the steel industry – not the users of steel.
If these customers also had to purchase CO2 allowances, they would have an incentive to use less carbon-intensive materials, or save energy. The system would then work in two directions, as it were, and be less burdensome for the producers. Why didn’t we think of this before?
Neuhoff notes that the idea was taken from the emission trading systems in China and Korea, where large power consumers also have to buy CO2 allowances. The reseach consortium has investigated whether it could be applied to European industry and concludes that it is feasible. Full story here.
Whatever happened to Algae?
Oil giants have quietly pulled the plug on multimillion dollar research projects to produce large quantities of algal biodiesel. Here’s why…
May 27, 2016
I must confess I had not heard much about algae in recent years. The great dream of algal biofuels, pursued by the likes of Shell and ExxonMobil, apparently died a very quiet death. At any rate, these two companies – and many others – seem to have quietly pulled the plug on multimillion dollar research projects to produce large quantities of biodiesel from algae.
The reason: it didn’t pay. As Christian Ridley, Research Associate in Plant Biotechnology at the University of Cambridge in the UK points out, “they found that the economics just didn’t make sense.”
End of algae? Not quite. According to Ridley, there may be a way forward. “Algae don’t just produce biofuels”, he notes. They can be used to make “an amazingly diverse range of products. For example, algae can produce large amounts of omega-3 fatty acids, an important dietary supplement. This means it could be a sustainable, vegetarian source of omega-3, which is otherwise only available from eating fish or unappetising cod liver tablets. More generally, algae are excellent sources of vitamins, minerals and proteins, with species such as Chlorella and Spirulina commonly being consumed for their health benefits.” Another useful product that can be made from algae is degradable bioplastic.
This may be the key to further developing algal biofuels, suggests Ridley. “By combining them with biodiesel production, we could subsidise the price of the fuel and offset the high costs of algal cultivation. This concept, known as a ‘biorefinery’, is part of a new wave of algae research that aims to overcome the issues of the past decade or so.”
In short, algae aren’t dead yet. The biorefinery, Ridley writes optimistically, “may well be the next step towards a future free from fossil fuels.”
We can only hope he is right. Full story here.
May 27, 2016
BRUSSELS INSIDER by Sonja van Renssen
The fight over EU’s nuclear ambitions
What the conflict over EU’s nuclear plans means for European energy research
May 27, 2016
A leaked “strategy paper” in the German media has thrown up fresh questions over what Europe intends to spend its innovation budget on. In the paper, dedicated to nuclear research, the European Commission and member states set out broad goals for the nuclear industry, including developing small modular reactors. Nuclear opponents reacted furiously. Sonja van Renssen investigates the fight over nuclear research that goes on in the corridors of Brussels and assesses the implications for the future of European energy research.
On 17 May, the Spiegel Online, one of Germany’s main media outlets, published a scoop entitled “EU wants to massively strengthen nuclear”. The author reported that a new “strategy paper” reveals that the European Commission wants to drive the construction of new nuclear plants and even develop new “mini-reactors”.
This was a juicy story for Germans, where the last nuclear plant is due to be shut down in 2022. The story catapulted up to the national level, with German Energy Minister Sigmar Gabriel, denouncing it: “It is absurd even to consider that one of the oldest technologies we use for energy generation in Europe, should get subsidies again.”
But what was this infamous “strategy paper”? Where did it come from? And what kind of impact could it have? Energy Post decided to investigate.
It turns out that the strategy in question is a follow-up to the EU’s new Strategic Energy Technology (SET) Plan adopted in September 2015. This plan is supposed to be the innovation pillar of the Energy Union; just as the original SET Plan, conceived back in 2007, was supposed to be the technology pillar of the EU’s first climate and energy package.
From the start, its impressive ambition has been to align energy R&D efforts in Europe with the EU policy agenda. No easy task, as you can imagine: the European research effort is as fragmented as its energy market. Different member states have different priorities.
The new SET Plan consciously moves away from promoting research into individual energy technologies such as wind and solar, to champion an energy system approach to innovation. It breaks down six R&D priorities set out in the Energy Union (renewables, consumers, energy efficiency, transport, plus nuclear and carbon capture and storage for member states who are interested) into ten priority actions. The goal is “to accelerate the energy system transformation and create jobs and growth”.
One example of a priority action is “become competitive in the global battery sector to drive e-mobility forward”. Another is “maintaining a high level of safety of nuclear reactors and associated fuel cycles during operation and decommissioning, while improving their efficiency”.
Each of these ten actions is supposed to be fleshed out further with an agreement between the European Commission, member states and other stakeholders on strategic targets and an implementation plan to deliver them. What the Spiegel Online leaked was the draft agreement on strategic targets developed by the Commission, after consultation with member states and stakeholders, for nuclear safety research.
So what’s the problem? The issue is that the document appears to interpret its safety mandate very generously. “It’s not just about safety,” says Bram Claeys from Greenpeace. “Its purpose is clearly to grow the share of nuclear energy and further subsidise nuclear energy.” He also points out that there is no environmental NGO working on nuclear safety on the list of stakeholders who were consulted for it.
Is this a fair assessment? Greenpeace is known to be anti-nuclear and the leaked paper has since been made public by the German Greens. Yet certainly there is text in there that seems to go beyond R&D on safety. For example, one of the “targets” in the paper is “a flexible electricity grid that allows the integration of large baseload suppliers”. Some experts predict an end to baseload altogether, as soon as by 2030 in Germany, as renewables take over the energy system. Whether or not you agree, power market design is not safety R&D.
Another target is “stable/predictable investment conditions, including availability of appropriate financing schemes, such as contracts for difference”. Again, what is the link to safety R&D? Finally, the paper also sets a specific goal to develop “advanced and innovative fission reactors”, by which it means small modular reactors (SMRs). “This is the first time SMRs are considered as a priority,” one EU source said.
These targets go beyond nuclear safety, decommissioning and waste management. To some extent, they go beyond the Commission’s own paper on nuclear investments (the famous PINC) published just last month. In that, for example, it is much more ambivalent about SMRs – the nuclear industry has considered their deployment since the 1950s, it says.
No wonder hackles are up and no wonder the EU Commissioner for Research, Carlos Moedas, felt obliged to respond. “The future lies in renewables… not nuclear,” he insisted to German magazine Focus on Sunday 22 May. The Commission also felt that it was important enough to post an official reaction on its site, in which it “rejects allegations of push for nuclear energy”.
Through the Euratom Treaty, member states have given the Commission a mandate to put safety and waste management at the core of European nuclear research. The Commission says in its response that it will “stick to the mandate” and “nuclear fission research will focus solely on safety, waste management and radiation protection”. It does not refer to any of the specific language under fire in the draft paper.
Note that you can see the public document that the draft agreement is based on – and indeed similar documents for the other energy research priorities, including an already finalised agreement on strategic targets for photovoltaics research – here.
Attention and money
The EU’s ambitions on nuclear remain unclear at this point. The draft agreement has yet to be adopted and may in theory still be amended. Why does it matter at all? Because the SET Plan and its offshoots determine what projects ultimately get political attention and money. There are no funds directly attached to the SET Plan but it will guide the expenditure of EU R&D funds in the Horizon 2020, plus national and private funds.
A question that remains is why countries such as Germany did not speak out earlier when the Commission was consulting on its draft agreement. One EU source said that the consultation went to research, not energy departments, who did not flag it up to their colleagues.
What remains is that there are lots of competing priorities for innovation funds. Two new reports released in Brussels this week suggest that one, the EU could turn its historic climate leadership into a global competitive advantage for its industries and two it could deliver enormous carbon reductions through ICT. Nuclear energy, which traditionally made up 80% of government spending on energy R&D in Europe in the 1970s and 1980s, does not emerge as a priority in these studies.
So is Europe chasing the right energy innovations? We will return to this question with an eye on a new EU innovation and competitiveness strategy due later this year.
May 27, 2016
ENERGY WATCH by Karel Beckman
NEED A JOB?
May 27, 2016
Try solar PV
Or in Europe: try offshore wind
Nuclear has places too
Perhaps don’t apply to ITER
Need a job?
Try solar PV
More than 8.1 million people worldwide are now employed (directly and indirectly) by the renewable energy industry – a five percent increase from last year – according to a report released this week by the International Renewable Energy Agency (IRENA). This is 5% more than a year before.
As IRENA notes, the growth stands in contrast to the trend in the broader energy sector. In the US renewable energy jobs increased 6% while employment in oil and gas declined 18%. In China the renewable energy sector employs 3.5 million people, the oil and gas sector 2.6 million.
Solar PV is the biggest sector in terms of employment:
These numbers matter because jobs translate into political influence,which will be a crucial factor in upcoming energy transition battles. In the United States in particular the growing number of renewable energy jobs (6% increase to 769,000 jobs) makes it more likely that political consensus could be reached on climate policy.
Buried in the IRENA report, not such good news for the EU renewable energy sector: in 2014, for the fourth year in a row, member states of the European Union witnessed a decline in renewable energy employment. The total number of jobs fell by 3% to reach 1.17 million. The European solar PV sector saw two-thirds of its jobs disappear since 2011.
Or if you are in Europe: offshore wind
No doubt, Europe lost many of its renewables jobs to China, but now China may start to offer some support to the renewable energy sector in Europe. Bloomberg New Energy Finance (BNEF) reports that the UK’s first Chinese-backed offshore wind farm was approved this week. An investment consortium, consisting of UK utility SSE (40%), Danish infrastructure fund Copenhagen Infastructure Partners (35%) and China’s SDIC Power Holdings (25%) reached agreement on the £2.6 billion Beatrice project. This 588 MW wind farm – “one of the largest private investments ever made in Scottish infrastructure” – with 84 wind turbines supplied by Siemens, should be operational in 2019.
BNEF is upbeat about the European offshore wind sector, which saw more than $10 billion of asset finance approved in the first quarter of this year. Dong Energy recently greenlighted a 1.2 GW, $5.7 billion offshore wind farm. More large projects will follow.
Earlier this month, Statoil and Siemens were granted a licence to build the world’s first commercial-scale floating wind farm, Hywind, in the North Sea, this one off the Scottish coast. It concerns a 20 MW demonstration project that was announced in Decmember 2014.
Floating wind farms could be the wave of the future, as the “low-hanging fruit” of near-shore locations gets exhausted – not just in Europe, but also in the US, Japan and elsewhere. In the US 60% of offshore wind capacity lies in waters over 60 metres deep. 1,000 GW of wind power could be built there, experts say – as much as the entire electricity generation capacity of the US today. But only if the floating turbine technology becomes a success.
That is still uncertain. “Great concept, implausible economics”, MIT Technology Review headlined last week, although the article turns out be more nuanced than this.
One study, from the Carbon Trust, actually found that the cost of energy from floating turbines could be lower than fixed installations, but would require more upfront investment,n notes the article. Nevertheless, results from Japan, which has invested heavily in this technology, are disappointing so far, with costs twice as high as expected, says MIT, although projects there are moving forward. The hope is that technology improvements, mass producton and the use of cheaper materials could bring down costs.
Renewables break records
In April, the European Commission agreed to finance a floating wind farm demonstration project off the Portuguese coast. Several media reported that Portugal ran 100% on renewable energy for four days (107 hours straight) from May 7 to May 11. Electricity consumption in the country was fully covered by solar, wind and hydro power for that period.
Actually, as this article shows, Portugal produced more renewable energy than it could use – it exported the surplus. Oliver Joy, a spokesman for the Wind Europe trade association said in The Guardian: “We are seeing trends like this spread across Europe – last year with Denmark and now in Portugal. The Iberian peninsula is a great resource for renewables and wind energy, not just for the region but for the whole of Europe.”
Joy said “with the right policies in place, wind could meet a quarter of Europe’s power needs in the next 15 years.” This would require “an increased build-out of interconnectors, a reformed electricity market and political will”.
Portugal is not the only country to book renewable energy records. In the second week of May, the amount of coal-fired power in the UK fell to zero several times – the first time since the first coal-fired power plants were built in 1882.
On 8 May, as I reported in this column last week, Germany was briefly powered 95% (or at least 90%) with renewable electricity. What is remarkable about this is that the German grid managed to handle this without outages. One reason is that, as it turns out, Germany’s coal-fired and nuclear power plants are more flexible than was expected, writes energy expert Fereidoon Sioshansi in his newsletter EEnergyInformer. In addition, investment in system control software and weather forecasting tools are helping, as are exports to neighbouring countries.
With countries like Germany and Portugal regularly producing excess amounts of renewables, and offshore wind on the verge of a great expansion in North West Europe, it may be time for a European Supergrid, writes Sioshansi, to facilitate the flow of renewable energy across Europe.
But what does it all cost?
Although no one denies the value of renewable energy, we should keep in mind what we are doing it all for, namely (primarily) to reduce greenhouse gas emissions. And it is legitimate to ask: is support for renewable energy the most efficient way to achieve this objective?
The Dutch Ministry of Finance has recently published a very interesting interdepartmental report which fairly thoroughly investigates the “cost efficiency” of a large number of CO2 reduction instruments. With some highly intriguing results.
Martien Visser, professor Energy Transition and Grid Integration at Hanze University of Applied Sciences in Groningen, the Netherlands, summarised the report in a column for a Dutch website. Visser notes first of all that Dutch CO2 emissions are 200 million tons annually – 1 tonne per inhabitant per month. This means that if climate measures cost, say €100 per tonne, this would amount to €100 per capita per month of extra costs. If say, a climate measure costs €250 per tonne, a family of four would lose €1000 a month in purchasing power. That would clearly be too high a price to pay. In other words: costs matter.
The Dutch study looks at Dutch policy measures, which cannot be simply extrapolated to other countries, but it gives a number of useful pointers that other countries could follow up on. With one important caveat: although the study did perform cost-benefit analyses, not all benefits (or costs) were taken into account. For example, effects on air quality were excluded.
The investigation showed that a number of measures yield net benefits rather than costs. For example, energy savings in industry is a totally no-regret option. The EU’s CO2 emissions standard for passenger cars of 95 g/km also turns out to have positive benefits. (If the car companies adhere to it of course.) The most cost-effective measure of all? The obligatory use of energy-saving tyres on automobiles!
Dutch support schemes for wind, solar and biomass all come in at less than €100/ton, but support for nuclear energy and for the CCS “Road” project also score squite reasonably. Insulation of buildings is cost effective as well, but an obligation on buildings to achieve a specific energy efficiency target (label B), as required by Dutch law, turns out to be quite costly (€250/tonne).
Support measures for district heating systems come in at €700/tonne. The support of electric cars turns out to be the least cost effective measure, at almost €1000/tonne! Note that this applies to the fiscal support given to EV’s in the Netherlands, not necessarily to all support measures for electric transportation. Also, the study notes that in 2030 this same measure will cost only €30/tonne. Timing matters too.
Another important point to note that is that the EU Emission Trading System (ETS) can have a huge distortive effect on the efficacy of measures. In fact, national measures that apply to companies within the ETS do not have any effect at all – because they will lead to more CO2 allowances becoming available in the ETS system elsewhere in Europe. So within the ETS, national climate policies simply don’t work.
The Dutch report, by the way, got almost no publicity in Holland, writes Visser. He notes that apparently most people don’t like to see their favourite climate policy measured against the cost efficiency standard.
Nuclear offers jobs too
The future of nuclear power continues to be a controversial topic all over the world. In Europe, the mere intention of spending EU money on supporting the development of nuclear power leads to serious rows, as Sonja van Renssen reports in her Brussels Insider column this week. “Absurd, crazy, irresponsible”, was the reaction of German politicians (left and right) to a strategy document from the European Commission that says the EU should do more to support nuclear technologies.
The French and the British are allied against Germany in this dossier. French president François Hollande has made it clear that his government fully intends to support EDF’s plan to build a huge new nuclear power station at Hinkley Point in Britain. “The French nuclear industry has 200,000 employees”, Hollande was quoted as saying in several media. “It represents our energy independence”. Note the job argument here.
In Lithuania, meanwhile, the Parliament has appealed to the government to take action to halt the construction of the Astravyets nuclear power plant which Belarus is building 55 km away from Vilnius.
“The parliament has insisted on the government officially informing Belarus that power produced in Astravyets will not be permitted to enter the Lithuanian power grid and will not be sold in Lithuania”, reports Warsaw-based think tank OSW. The 1.2 GW plant, which is expected to become operational in 2018, will be cooled with water from the Neris, the river which flows through Vilnius. The government in the Lithuanian capital has not made a decision yet.
In the United States the government has raised the alarm over the nuclear sector, noting that as many as 20 nuclear plants could be shut down over the next decade. “We are supposed to be adding zero carbon sources, not subtracting them”, said US Energy Secretary Ernest Moniz at a nuclear energy conference. But he acknowledged there is little the US government can do to keep the plants open.
But where do we put the waste?
Not everybody will realise that to date there is no long-term storage facility for nuclear waste anywhere in the world. All nuclear waste is stored in temporary facilities. Finland is probably furthest ahead in this space: this country has approved the construction of a final repository which should be ready in the early 2020s.
But this facility will only store nuclear waste from Finland. The Finns do not want to import spent fuel from other countries. In fact, most countries will balk at imports of nuclear waste, which creates a big problem for the global nuclear sector, as it will have to find suitable repositories everywhere.
However, there may be a solution ahead. The World Nuclear Assocation has recently rather triumphantly announced that Australia might be willing to construct a multi-national waste facility in the south of the country.
More precisely, the South Australia Nuclear Fuel Cycle Royal Commission has concluded in a report that “the disposal of used fuel and intermediate level waste (ILW) could be undertaken safely in a permanent geological disposal facility in South Australia. This would have the potential to deliver significant inter-generational economic benefits to the community.” The Commission has “recommended that the South Australian Government pursues this opportunity”.
The World Nuclear Association notes that the report from the Commission “has fundamentally changed the nature of the global nuclear waste discourse”, but that seems somewhat premature.
Interestingly, Australia has no nuclear reactors and the Australian government is opposed to nuclear power, although the country is the third largest uranium exporter in the world. The Royal Commission recommends “that the Australian government discard its long-standing anti-nuclear policies.”
Need a job? Maybe not at ITER
France is also host to the famous international ITER project, a joint initiative of China, the EU, India, Japan, Russia, South Korea, and the United States to build a prototype nuclear fusion reactor. With a meeting of the governing council of ITER coming up in June, the fate of this machine is hanging in the balance.
ITER chief Bernard Bigot said in an interview with French newspaper Les Echos that the experimental reactor under construction in Cadarache, France, will not see the first test of its super-heated plasma before 2025 and its first full-power fusion not before 2035. “The previous planning, which foresaw first plasma by 2020 and full fusion by 2023, was totally unrealistic,” said Bigot. ITER’s management has requested another €4.6 billion in extra funding.
Science Magazine reports that a panel of independent experts has just concluded that while the new schedule is feasible (powering up the reactor in 2025 for the first time), the extra funding needed to achieve it (€4.6 billion) may be too much to hope for. The budget for the project is currently estimated at $20 billion. When the construction agreement was signed 10 years ago, ITER was due to be finished in 2016 at a cost around a third of current estimates, notes Science. Note that all these cost estimates do not include the cost of the reactor hardware which is provided “in kind” by the member countries.
The question is will the member states pull the plug now that, as Science Magazine writes, after 30 years of planning and work “the site in Cadarache, France, is now abuzz with construction, and the components of its gigantic reactor are arriving from around the world.”
Key may be what the US will decide. Painful for ITER is that in the US private initiatives to develop nuclear fusion are marching on. Startup Tri Alpha Energy in California managed to raise nearly half a billion dollars from investors, including Goldman Sachs, to build a fusion reactor with, apparently, a more efficient design. This raises the question of whether the US House of Representatives, which has so far backed ITER against the wishes of the Senate, will continue its support of the project.
Next week Energy Post will carry an article by Australian professor Mark Diesendorf who argues that the world can do very well with renewables alone and does not need nuclear power.
May 20, 2016
Is a second Chernobyl possible?
“European money is keeping Ukraine’s shaky nuclear power stations alive”
In the past, Energy Post has published several articles on why Ukraine should phase out coal power and on the necessity for the country to reform its gas sector. But what about its nuclear power stations?
As was pointed out in this article by Zuzanna Nowak of the Polish Institute of International Affairs (PISM), Ukraine’s dependence on Russia is actually worse in nuclear power than in gas. What is more, the potential risks of Ukraine’s nuclear power plants are much greater. Nobody would like to see another Chernobyl or anything remotely like that.
In a new article for Energy Post, Iryna Holovko of the NGO CEE Bankwatch, warns that “the country’s ageing nuclear fleet has a disturbing track record of mishaps and failures over the past few years”. Yet, she adds, the Ukrainian authorities keep extending the lifetimes of the plants. Since 2010, extensions have been approved for 4 of the 15 power stations and 2 are up for a decision this year.
Holovko argues that it would be better for Ukraine – and for Europe – if the country were to embark on “a safer energy path” by investing in energy efficiency and realising the country’s vast wind and solar potential.
Europe has a role to play in this, she notes. Ukraine’s nuclear power sector is supported with hundreds of millions of euros from the European Bank for Reconstruction and Development (EBRD) and Euratom. This money, which is used for safety upgrades, “effectively enables the lifetime extensions”. She calls on European policymakers to put Ukraine on a new energy course. Certainly an argument worth hearing – and debating on in Brussels.
Is US tight oil production up against its limits?
“Productivity of Bakken has peaked”
The US “tight oil” revolution (usually called “shale oil revolution”, tight oil includes shale oil) needs no introduction of course. It has been the great driver behind the increase in oil supply in recent years, and has completely upset the old World Oil Order which was ruled by OPEC and a few western multinational oil companies.
The question now – with Saudi Arabia having effectively started a price – is how long this revolution can last, and how far it will go.
Jilles van den Beukel and Enno Peters have analysed “the dramatic increase in drilling productivity over the last 10 years” in the Bakken play – one of the three great US shale plays. They come to the conclusion that much of this has been caused by “geology, drilling efficiency and increased focus on the best producing areas”. By contrast, technological improvements have made a much smaller contribution.
This has important implications. Geologically, they note, “the play is now well established. Sweet spots are well known.” In addition, drilling efficiencies have probably “reached their limit, after years of high activity and the recent intense competition in the services industry”. This means that we can expect “drilling productivity to have reached its peak”. Put simply, according to these authors: the US tight oil revolution (the same arguments apply to the other two big plays) has reached its peak.
Which news, if true, should be well received in Saudi Arabia. You can check out the article here: http://www.energypost.eu/bakken-shows-us-tight-oil-production-limits/
Can oil giants be successful in “new energies”?
“Storage is the only remaining niche”
In last week’s Energy Watch I wrote about the problems facing Big Oil in the current market. The oil companies may be against a “demand peak” – meaning that the demand growth they could count on in the past will never come back, as a result of climate policies and the advent of electric transport. With Saudi Arabia and other countries controlling low-priced oil, the western oil companies may be faced with a shrinking market.
One alternative option which they are already pursuing is to grow their natural gas business. But what about renewables or other alternative energies?
This is a more difficult proposition. All the oil companies ventured into renewables in the past (solar power, bio-energy, wind), but most of these efforts ended into failure. As one executive of Spanish oil company Repsol told me this week, his company had invested in offshore wind and geothermal energy in the past, but found it difficult to see where they, as oil company, could “add value”.
Well, as Jason Deign, publisher and editor of the newsletter Energy Storage Report points out, one alternative area that could still be lucrative for the oil companies, is energy storage. In an article that we published on Energy Post, Deign discusses some major moves of oil companies, notably Total, into the energy storage space. The French oil company acquired the battery manufacturer Saft Groupe.
Deign agrees that it “is is hard to see how the supermajors can fight their way back into a renewable industry now sewn up by companies the size of SolarCity (in solar) or Siemens (wind)”. But he argues that the storage sector is still “being dominated by cash-hungry startups with massive growth potential”. What is more, the battery industry is closely allied to the transportation sector, one of Big Oil’s most important markets.
It will be interesting to see how companies like Total, Statoil and Shell will evolve over the coming years. Total is already heavily invested in solar power. Statoil earlier this year announced it would invest in energy storage, renewables, efficiency and smart grids through a new spinoff called Statoil Energy Ventures
Can Democrats and Republicans agree on climate policy?
“Here’s how it could happen”
When you listen to presidential candidates in the US, it seems crazy to think that they could ever agree on anything – certainly not on climate policy, one of the most divisive issues in the US. Donald Trump and many others on the “right” side of the political spectrum either do not believe in climate change, or give it low priority. At the same time, on the “left” side, the climate issue has risen to one of the top spots on the political agenda. Whoever wins the presidential elections, there seems to be little hope of any compromises in the US Congress.
However, according to David Koranyi, Director of the Eurasian Energy Futures Initiative of the Atlantic Council, appearances may deceive. There may be more room for a bipartisan climate policy in the US than it seems.
In an important article for Energy Post, based on a new Strategy Paper he wrote for the Atlantic Council, A US Strategy for a Sustainable Energy Future, Koranyi notes that “the politics of climate and energy security is changing fast”. There is broad support for energy efficiency incentives, fuel efficiency regulations, and renewable portfolio standards. There is also increasing recognition of the necesssity to invest in the US’s ageing energy infrastructure and of the benefits clean energy jobs.
Koranyi also underlines why it is crucial for the US to agree on a bipartisan policy. Despite progress made under president Obama, the US “is behind the curve”, with still very high per capita emissions and modest climate goals. In addition, failure of the US to carry out a successful climate policy would send a disastrous signal to the rest of the world.
Koranyi also outlines what a bipartisan climate and energy policy would look like. A “progressively increasing, possibly revenue neutral economy-wide national carbon fee” could be at the heart of a “grand bargain”, he writes. “A market-friendly, transparent, all across the board carbon fee would serve as the central price signal and policy tool, enabling the scrapping of the politically controversial CPP and the phasing out of all energy subsidies for both renewable and fossil fuels beyond 2021.”
A bold proposal, worth thinking about. If the US were to agree on such a consensus policy, could the EU be far behind?
May 20, 2016
by Sonja van Renssen
A first Energy Union victory
Member states agree to let Brussels scrutinise gas deals
Europe is one step closer to a more united, coherent energy policy. This week national ambassadors took the unprecedented step of agreeing that yes, Brussels should have the right to scrutinise intergovernmental agreements (IGAs) on gas before they are signed. It’s historic because such an “ex ante” assessment was rejected by EU member states just a few years back. At the same time, Brussels is running into problems with other parts of its Energy Union. Some member states still want national not regional plans to ultimately underpin gas strategy, they’re bickering over how to implement a new “solidarity principle” and they don’t see why the Commission should be allowed a closer look at important commercial gas contracts. If the decision on IGAs is unexpected, the rest is business as usual.
Even just over a year ago, when heads of state and government met to discuss the Energy Union for the first time, greater European Commission involvement in energy deals seemed a distant dream. In 2011 member states had already rejected the idea of the Commission getting involved in negotiating energy IGAs with third parties such as Russia. Their conclusions in March 2015 seemed to bode no better. They simply called for all agreements on gas purchases from foreign suppliers to comply with EU law and “reinforced transparency”. There was no mention of a stronger role for the Commission. The single reference to commercial contracts warned that confidentiality is key. Instead, European leaders liberally inserted references to member states’ sovereign rights on energy issues.
But the Commission believed that the situation had changed since 2011. Energy security had risen to the top of the agenda after the crisis in Ukraine, plus instability in North Africa and the Middle East. South Stream was dead. The Energy Union very much alive. And it had become clear just how many IGAs break the law: fully one-third of those notified to Brussels relating to energy infrastructure or supply are not in line with EU competition or free market rules. Armed with these facts, in February 2016, the Commission proposed a controversial “ex ante” (pre-signing) assessment of energy IGAs as part of its winter package on gas and security of supply. It also proposed an overhaul of a 2010 gas security of supply regulation that would give it access to more information about commercial gas deals.
What exactly are IGAs? These are legally binding agreements between countries (usually bilateral) that have typically served to provide certainty for building new oil and gas pipelines or for fuel purchases. They usually underpin commercial contracts. Gas IGAs are the most common – and problematic – kind. Six IGAs underpinned South Stream alone. For this reason, it is significant that national ambassadors this Wednesday agreed to submit these for ex ante assessment.
Note that they have nonetheless narrowed the scope of the Commission’s original proposal, which was for all energy IGAs. That could have helped avoid problems like the nuclear fuel supply deal between Russia and Hungary for the Paks II reactor, which the Commission reportedly blocked last year because it was incompatible with EU competition law. Incidentally, nowhere does it say that member states cannot sign an IGA if the Commission disagrees with it, though naturally they may find themselves in hot water later when it turns out the deal breaks EU law.
Until last week, there was a blocking minority of member states that opposed any kind of ex ante assessment. These included Germany, France, Belgium, Italy, Greece and Hungary among others. The two main concessions to this group, proposed and successfully shepherded through by the Dutch EU presidency, were: one, to drop the mandatory ex ante assessment for non-gas IGAs and two, to exempt all non-binding agreements (e.g. Memoranda of Understanding) from any kind of notification to Brussels.
How significant are these changes? Certainly they put member states on a collision track with the European Parliament, which will co-decide the new legislation. The rapporteur, or MEP in charge, Polish right of centre MEP Zdzislaw Krasnodebski, will unveil his position at the start of June. But one of his advisors already told Energy Post: “We want both [all] IGAs and non-binding agreements to be checked ex ante.”
Poland, along with many of Europe’s other newer member states, has been a vocal supporter of more power to Brussels on this front. Older member states such as Germany rely less on IGAs – and indeed are happy to negotiate their own deals with Gazprom (and get good prices) – while newer member states tend to rely on IGAs much more and appreciate EU support in their negotiations with Russia in particular.
“We have had a bit of a problem of understanding from the old EU,” says Mariusz Kawnik, Director of Regulatory and International Affairs at PGNiG (Polish Oil and Gas Company) in Warsaw and the former chief negotiator for Poland in the IGA debate. “There was even one member state in 2011 which couldn’t believe an IGA exists on gas imports.”
Mr Krasnodebski’s advisor explains why he believes that non-binding agreements also need an ex ante check – more than the simple notification the Commission proposed (and the Council scrapped): “They could form an alternative to an IGA. The newest non-binding agreements look exactly like IGAs.” Like IGAs, these Memoranda of Understanding and Letters of Intent could lead to political pressure or illegal commercial contracts, so why let them slip under the radar? It would be interesting to know what kinds of documents underpin Nord Stream 2 so far.
MEPs will debate the file on 27 June. In the meantime, EU energy ministers are expected to rubberstamp the position agreed by their ambassadors this Wednesday at the next Energy Council on 6 June. Negotiations between Parliament and Council should start in October with many expecting a deal before the end of the year.
In parallel, there is a closely related but much more difficult debate getting underway on the second legislative proposal of the winter package: a revised gas security of supply regulation. The Dutch EU presidency proposes a debate on this by ministers at the 6 June Council. This will focus on what the presidency identifies as the three most contentious elements: regional cooperation, solidarity and transparency.
These are all essential building blocks of the Energy Union. And they are all running into problems. Take the regional approach. The Commission wants member states to prepare regional risk assessments and preventive action and emergency plans. But some countries favour “a more flexible approach”, says the Dutch presidency, with joint analysis of specific risks (e.g. a major gas supplier turning off the tap) yet national plans. Other member states simply don’t like the region the Commission has put them in, a Council source said.
A new “solidarity principle” has found widespread favour, but under exactly what conditions should it be deployed? The essence of this principle is a suggestion that member states should be forced to prioritise gas deliveries to vulnerable consumers in neighbouring countries over non-vulnerable consumers in their own, when the former face an emergency. It leaves open the “technical, legal and financial arrangements” for this however. Some, such as Kawnik, see problems getting these agreed and want the Commission to spell out more exactly what’s needed. Others simply don’t seem to trust one another to deliver when the time comes.
Finally, demanding more transparency of commercial gas contracts was always going to be contentious. Some member states don’t see the need to submit further information to Brussels in non-emergency situations – the Commission argues that it needs this to better assess security of supply risks. It wants all gas contracts that last more than one year and put more than 40% of the gas consumption in a member state in the hands of a single supplier to be notified. Kawnik is one of very few who argues that all contracts should be submitted to the Commission, to ensure that the transparency requirement hits every country. At the moment, with the 40% threshold, only seven countries – Finland, Latvia, Estonia, Lithuania, Poland, Hungary and Bulgaria – would have to reveal all, he says.
In the European Parliament, it is another Polish MEP, Jerzy Buzek, chair of the energy and industry committee, who is leading debate on this file. He plans to present his report close to a debate on the topic scheduled for 13 June.
The question is: how relevant is the debate on security of gas supply to the completion of the internal energy market? For some of those in the gas business, such as Anders Marvik from Statoil, Head of its EU Office, much of this political debate is a distraction from what really matters: completing the internal market for gas, or “getting sufficient electricity and gas interconnections in place”. In effect, they argue that it does not matter much where gas comes from, as long as the market is competitive.
But for Poland, who with two rapporteurs in place will play a big role in the gas package in the Parliament in particular, priorities are different. “Energy security is a top priority for the new government [in Warsaw],” says Kwanik. “Until we’re free of Russian dependence, we will not be fine with a fluid market. That’s not the deciding factor.”
As to dependence on Russia: 2015 was a good year for Gazprom: it reached its highest market share ever in Europe with 31%. And in the first five months of this year (to 15 May 2016), Gazprom’s exports to Europe rose another 18%, the company reported, with growth in Germany (+14,2%), Great Britain (+104,1%), the Netherlands (+106,7%), Denmark (+140,2%), Italy (+7,7%), France (+38,6%), Austria (+21,6%) and Greece (+85,3%).
May 20, 2016
by Karel Beckman
Saudi Arabia’s pipe dreams, Germany’s baseload problems, new hopes for coal and gas power
Saudi Arabia moving beyond oil? “A pipe dream”
I remember visiting Saudi Arabia in 2006 with a party of journalists. Government representatives treated us to grandiose plans of flourishing green megacities, ports, business districts, financial centres and tourist resorts that were to arise on the coast of the Red Sea over the next decade. A huge contrast with the air pollution, poverty and resentment that we could see and feel on the streets of Riyadh and the oppressive atmosphere that forbade men and women even to mingle at McDonald’s.
Nothing ever came of these Red Sea Dubai’s of course. You can still see what the flagship project, King Abdullah Economic City. looks like here on the internet. You won’t find it when you go there.
But hold on, the crown prince, Mohammed bin Salman, who has in recent times managed to become the de-facto ruler of Saudi Arabia, has recently presented a Vision for 2030 that is a lot like the Vision that was presented to us back then. It holds out the promise of a “vibrant society”, “dynamic” cities, environmental sustainability, “rewarding opportunities”, “providing equal opportunities”, “attracting talent”, privatising government services, launching new economic sectors, embracing “transparency”, and so on. (By the way, he Salman has also promised to revive the King Abdullah Economic City project.)
Analysts from western think tanks, like McKinsey and The Atlantic Council, believe that it may well be possible for Saudi Arabia to move to this bright future “beyond oil”. Jilles van den Beukel, a former geoscientist with Shell, takes a more sceptical view. In an article he wrote for Energy Post, he argues that Bin Salman’s Vision 2030 is completely unrealistic. It should be seen, he writes, in the light of the crown prince’s grab for power: with his plan he is trying to reach out to a young population in a bid to become too popular to be deposed. But the Vision is no more than a pipe dream: grandiose aspirations not grounded in the reality of Saudi life.
The Saudi people, writes Van den Beukel, would be much better served with piecemeal, gradual, realistic reforms, such as allowing women to drive.This would do much more for the country – and the stability of the world – than Vision 2030. You can read this important article here: http://www.energypost.eu/saudi-arabia-needs-realism-2030-vision/
I might add that given the huge inequalities in the country and the explosive mixture of narrow-minded religious leaders and corrupt rulers, I agree with Jilles. In fact, I regard this as one of the great, underestimated benefits of the renewable energy revolution: the move to a low-carbon energy system will in time wipe out the Oil Kingdoms of this world, with all of their corruption and abuse.
Energiewende: Germany’s baseload problem
If an Energiewende in Saudi Arabia seems still to be a little way beyond the horizon, Germany’s Energiewende seems to be marching full steam ahead. You may have read that on 8 May, Germany was briefly powered 95% with renewable electricity. This was presented by some (including State Secretary for Economic Affairs and Energy Rainer Baake) as a great victory for the Energiewende.
However, Craig Morris, writing at the Energy Transition blog of the Heinrich Böll Foundation – and a great supporter of the Energiewende – puts this remarkable feat into some perspective.
First of all he notes that it is not entirely clear what the exact level of renewable power was (you can see the numbers on the website of Agora Energiewende – if I interpret the graph correctly, the level was around 90%).
Second, he points out that “we are only talking about electricity, not energy”. The power sector makes up only around 20% of German energy demand (no surprise if you have ever driven down the Autobahn in the Ruhr area). Last year renewables made up only 15% of total energy consumption in Germany.
Thirdly, the 90% or 95% level was reached only for a few hours, not the entire day.
But the really important point is what conclusion to draw from this. The website Quartz.com reported that Germany had “so much renewable energy on Sunday that it had to pay people to use electricity.” Wrong, says Morris: it had so much baseload running that it had to pay people to consume electricity.
The fact is, says Morris, that Germany’s power plant fleet “cannot easily produce less than 20 GW at any time”. This is because conventional power plants cannot be simply operated below a certain production level. “The real news, therefore”, says Morris, “is not that Germany may have reached a record high level of renewable electricity, but that its baseload power plants are in real trouble.”
According to Morris, this is the issue that German policymakers should turn to first: get rid of the country’s surplus baseload power.
Asia’s coal power problem
Germany may have a problem with too much baseload power, much of the rest of the world is still busy building baseload power plants. Which in most cases means: coal-fired power plants.
According to The Guardian newspaper, World Bank president Jim Yong Kim recently warned that “plans to build more coal-fired power plants in Asia would be ‘a disaster for the planet’.” He did not quite say that in his official speech – he merely said “inaction” would be a “disaster” – but The Guardian quotes him as saying to reporters that “If Vietnam goes forward with 40 GW of coal, if the entire region [of south and east Asia] implements the coal-based plans right now, I think we are finished.”
According to Platts Energy, China alone is planning to build 150 GW of new coal plants, notes The Guardian. By 2020 that is. This is on top of the 270 GW it built over the last five years. If you’re not good at numbers, think of 1 GW as one 1 power plant. So that’s 420 new coal power plants. Countries like India, Vietnam and Indonesia are also looking to build large numbers of coal power plants.
John Roome, the World Bank’s most senior climate change official, stated that “if all of the business-as-usual coal-fired power plants in India, China, Vietnam and Indonesia came online that would take up … almost all of the carbon budget [i.e. to keep global warming below 2C].”
By the way, David Hone, Chief Climate Change Advisor with Shell, recently pointed out in his interesting blog that the effect of coal use on the climate was already well known before the first World War.
In 1912, Hone writes, a small country newspaper in Australia carried a story entitled: “Coal Consumption Affecing Climate”. Here is what it said:
New hope for CCS
It’s not clear yet whether all these coal plants will be built – or whether the renewables revolution will come in time to prevent that. What does seem clear is that it will take somewhat of a miracle to get these Asian countries (and don’t forget countries like Turkey) to “pivot” to a clean energy future, as the World Bank wants to do.
Which means that, as many industry experts have been saying for a long time, we still need a massive effort at carbon capture and storage (CCS). According to the International Energy Agency (IEA), one-fifth of emission reductions in 2050 will need to come from CCS in the power and industrial sectors, equating to approximately 3,400 (!) projects. There are only a handful of CCS projects operational today.
The “challenges” of CCS are well-known. The process to extract CO2 requires energy, which leads to a substantial efficiency loss. In a gas-fired power plant 10% of the capacity is used to capture the CO2. And then the CO2 still has to be transported and stored underground of course. This means that CCS only has a real chance if carbon gets a steep price in the market.
However, there may be new hope for CCS. US oil company ExxonMobil has announced that it is investing in a new technology, with a partner, FuelCell Energy, which could “substantially improve CCS efficiency, effectiveness and affordability”, in particular for natural gas-fired power plants, but also for coal power plants.
ExxonMobil’s new technology puts the CO2 in a carbonate fuel cell, which is then used to generate power. According to the company, a 500 MW power plant using such a fuel cell would be able to generate an additional 120 MW of power.
This sounds promising, although the technology would still cost money. According to an article in MIT Technology Review, it would add about 2 cents per kWh to the cost of electricity (excluding the cost of transport and storage). Nor has the technology been proven yet. ExxonMobil has said it will first build a small-scale test pilot on a kilowatt-scale, to be be followed by a 2.5 MW pilot plant, before it can be scaled up any further. In other words, it is still a few years away, at best.
And let’s hope it’s not just a PR effort on the part of Exxon, a company that’s not known for its climate consciousness. In its press release, ExxonMobil proudly states that it is “a leader in CCS applications”. They say that last year they “captured 6.9 million metric tons of carbon dioxide for sequestration – the equivalent of eliminating the annual greenhouse gas emissions of more than 1 million passenger vehicles.” Which sounds impressive, except that according to their own information, they also put 122 million tons of CO2 into the air. And that’s just from their operations, not from their oil as it’s used by people in their cars.
A gas-fired power station that does not emit CO2
Nevertheless, Exxon’s announcement is a reminder that innovation is not only going ahead in “clean” energies, but also in the fossil fuel sector. Who knows what the results will be?
In this context an even more sensational announcement was made recently by another US company, Net Power. This company, which is backed by some pretty big names in the industry, including Toshiba and Exelon, promises a brand new type of gas-fired power plant that emits no CO2 at all.
Net Power uses a technology called the Allam Cycle,which has a combustion turbine running on carbon dioxide. “The system burns natural gas with oxygen, as opposed to air, and uses high-pressure carbon dioxide, as opposed to inefficient steam like most power plants, to drive a turbine”, says the company. “Net Power produces only electricity, liquid water and pipeline-ready CO2, all while operating as efficiently as the best natural gas power plants available today.”
The “pipeline-ready CO2” can be stored – or used for industrial purposes. The company is also looking into the possibility to use the technology with coal-fired power plants.
Net Power does not shy away from ambitious promises: “For the first time cleaner energy does not mean more expensive energy, and, as a result, our global climate goals are within reach.” That may be a bit exaggerated, but they have started on the construction of a 50 MW demonstration plant, which should be finished next year.
It is not clear yet how much Net Power’s system will cost, nor does it include a solution for the storage of CO2. Still it does show that the future of energy may yet look very different from what most of us think today.
May 13, 2016
THIS WEEK: The Rough Adventures of Big Oil (Chapters 1 to 7)
- In which Big Oil runs up against a Peak
How will the big western oil companies deal with the challenges of decarbonisation ? I find this one of the most fascinating topics in energy. The ExxonMobils, BPs, Shells and Totals of this world were – and in many ways still are – the greatest companies on earth. But if the future is to be zero-carbon, as the Paris Climate Agreement has it, what is their future going to be?
What is important to realise is that the international oil companies, or IOCs as they are called, have already lost a lot of their shine in recent years – quite apart from any climate policies. This is shown very clearly in an excellent analysis published recently by the Boston Consulting Group (BCG), entitled Big Oil’s Road to Reinvention.
BCG shows in great detail how the performance and value of the IOCs has been on a downward trajectory since 2009 – even before the oil price crash. See this interesting chart:
The reason for this, in a nutshell, is that Big Oil’s business model, which is based on its unique ability to carry out huge, costly and complex projects in difficult circumstances, has come under pressure as a result of rising costs, poor project execution, and disappointing exploration results.
As to this last point, as BCG points out: “From 2001 through 2014, exploration expenses for all the majors combined quadrupled from $25 billion a year to almost $100 billion. Yet discovery levels remained unchanged: about 20 billion barrels of oil equivalent (BOE). … Despite more than a decade of technological advances in seismic surveying, interpretation, and reservoir modeling, the full-cycle return rate for exploration has halved, dropping below 10% (based on $90 per barrel of oil).”
So what should Big Oil do? Naturally, the companies have already taken a number of measures, in particular reducing expenses, but these are all essentially cutbacks. They don’t lead to new growth. According to BCG, Big Oil should re-invent itself.
Here, however, BCG’s analysis is not very convincing, in my view. The BCG consultants propose “five revolutions” which the companies should embrace:
-A cultural revolution to instill cost and continous improvements as priorities
-A project development revolution based on better standardization and supplier collaboration
-An operating-model revolution
-An institutional revolution to change the nature of collaboration among oil companies, legislators and petroleum agencies (
-A portfolio revolution to ensure that the asset base sustains attractive cash generation.
The first four are no doubt all sensible measures, but they are reorganisations, which like cutbacks do not lead to new growth. The last one, the portfolio revolution, is the key. By this BCG means that the companies should move away from the difficult projects (deep sea, oil sands, Arctic, etc.) and move to the “easier” (cheaper to produce) regions. As BCG puts it: “Operators may need to accept more country and political risk to gain access to lower-cost reserves. In some cases, they may want to enter fee-for-service agreements.”
But this is precisely the problem: countries that have “easy” resources can do very well without the IOCs, thank you. They have their own National Oil Companies or NOCs.
So BCG’s recommendations in the end don’t offer a fundamental solution for Big Oil.
Is it possible then that the IOCs have “peaked” – that they have come up against historical limits and will never again be the greatest companies on earth?
- In which Big Oil enters a new world
That Shell and colleagues may have had their moment of Peak Oil was confirmed, indirectly, by the OPEC meeting that took place in Vienna last week.
You may be remember that a few weeks earlier, on 17 April, OPEC had already met with major non-OPEC producers, such as Russia and Mexico, in Doha, Qatar, to try and agree on production limits to boost the oil price. As Michael T. Klare wrote in his fascinating essay, “Debacle in Doha”, this attempt failed miserably, essentially because Saudi Arabia has concluded that global demand for oil will not grow anymore in the same way as it has in the past, whereas global supplies will be plentiful. Thus, as Klare put it: “The world of ever-increasing oil demand that we have come to known over the last decades is no more. From now on, suppliers will fight each other for ever diminishing market shares.”
Some readers may have dismissed Klare’s assessment as exaggerated, but the OPEC meeting on 5 May completely confirmed it. As Reuters reported, it became clear at that meeting that Saudi Arabia no longer believes in a world in which oil is fundamentally scarce.
Whereas in the past OPEC had a price target, and Saudi Arabia would if necessary lower its production to support the target price, the Saudi’s no longer believe this is possible. “In a major shift in thinking, Riyadh now believes that targeting prices has become pointless as the weak global market reflects structural changes rather than any temporary trend, according to sources familiar with its views”, reports Reuters.
Reuters speaks of “a massive change in Saudi thinking”. “In the past five years, the development of unconventional oil production from U.S. shale deposits and other sources such as Canadian oil sands has made redundant the idea that crude is a scarce and finite resource. Russia, which is not an OPEC member, has also contributed to the ample global supply.”
Shell and Co. could return to their former glory if oil prices were to rocket back up to a $100 or more. But the OPEC meeting shows that moment may never come again.
- In which Big Oil lets down Big Government
All this is bad news for Big Oil. But it’s also not altogether good news for governments that count on tax revenues from oil companies to finance some of their spending.
Shell reports every year how much it pays in taxes to governments in its Report on Payments to Governments which the company has to publish under UK law. The website Carbon Brief had an interesting story about this the other day.
According to this report, Shell paid out $22 billion in various taxes on its upstream activities alone, divided as follows:
It is interesting to see the amounts that countries like Denmark and Norway get from Shell. The chart does not include joint-ventures (which is the reason why Shell’s substantial payments to the Dutch government are not included, because Shell there operates in a joint-venture with ExxonMobil) and it only refers to its upstream activities. If taxes on petrol and refining are included, Shell paid $60.8 billion to governments last year, according to the company.
The question how long this kind of money will keep on flowing if oil prices don’t go back up. Other countries may end up in the same situation as the UK, which had to pay Shell back last year.
- In which Big Oil becomes Big Gas but still faces many challenges
Of course the people in the oil companies aren’t crazy. They are already pursuing one plan B (not mentioned in the analysis from Boston Consulting Group), namely to turn themselves into Big Gas companies.
But whether this will ever turn into the cash cow oil has been for so many decades is not certain yet. At this moment the global gas market is not exactly racing ahead.
Cedigaz, the International Association for Natural Gas, published a rather downbeat report over last year recently: “Natural gas demand grew by 1.6% in 2015 (to 3472 bcm) after having stagnated in 2014. However, this apparent, if modest, resumption of global gas market growth can be misleading as the higher growth rate is essentially the result of a weather driven recovery in the EU where demand rebounded by 4.5% after having dropped by 11% in 2014. For the rest of the world gas demand growth was actually lower than in 2014 (1.2% vs. 2%) and was pulled by a limited number of countries led by the US. The inability of natural gas demand to keep pace with an accelerated supply growth led to an imbalance in the global gas market and to a price weakness which is expected to continue in the short and medium-term, amid a sluggish economic environment.”
Cedigaz mentions a number of factors that influenced the gas market – all negative: “The decline in prices for all fossil fuels, the slowdown of China’s economic growth (+ 6.9%), the renewal of nuclear energy in Asia together with a booming expansion of renewable energy capacity, the fast decline of Chinese energy intensity, the curtailment of Groningen gas field production, the decline in Asian gas premium and the gas pricing reform in China. The weakness of the oil price impacted that of long-term LNG contracts, the majority of which is still indexed on oil. The falling oil price also acted as a cap on spot LNG in Asia, through oil switching in the power and industrial sectors.”
The press release ends with a strikingly sombre note: “the future of gas faces many challenges.”
- In which Big Gas begins to see a brighter future
ENI, the Italian oil company, recently published an overview of “a decade of gas demand”, which yields some interesting longer-term perspectives.
Despite the recent stagnation of the gas market, the long-term trend for gas consumption is pretty positive, the report shows:
In fact, the only region where gas demand went down is OECD Europe:
And in case you might think Europe has a high per capita gas use, well, no. As this chart shows, gas consumption is substantially higher in North America, Russia and even in the Middle East, where gas is used as feedstock in industrial processes:
Clearly there is still scope for growth in Europe, and even more in China and India. There may be hope for Big Oil/Gas after all!
- In which Big Oil, Big Gas and Big Coal do business as usual
The US Energy Information Administration (EIA), a government agency, each year publishes an International Energy Outlook. If the 2016 edition is to be believed, which came out on 11 May, there is no reason at all for Big Oil to worry. Nor indeed for Big Gas or Big Coal.
I must say it is a somewhat amazing document. It projects first of all substantial growth in global energy use, which is not so surprising, but also strong continued growth in use of oil, gas and coal. To be sure, gas will grow the most – by 1.9% a year up to 2040, followed by oil (1.1-1.5%) and then coal (0.6%/year). And yes, renewables will grow faster (2.6%/year) as will nuclear power (2.3%/year).
Nevertheless, this will result in a world in 2040 still heavily dominated by fossil fuels (78%) – and with steeply rising energy-related greenhouse gas emissions: from 32.2 billion tons in 2012 to 43.2 billon tons in 2040, an increase of 34%:
Did the EIA never hear of Paris or any climate agreement? Apparently not, because no reference is made to it.
To compare: the 2-degrees pathway which Paris has promised implies that total CO2 emissions (not just from energy) should decline to roughly 20 billion tons in 2040 and to zero around 2055. Clearly something here must give.
- In which the story is to be continued
But perhaps the EIA is underestimating the potential of renewable energy?
I attended a conference of the International Renewable Energy Agency (IRENA) in Bonn this week, and came away with some hopeful stories on the renewables revolution happening right now across the world. More on that next week.
By Sonja van Renssen
THIS WEEK: Forget the war on coal. The next war is against oil
Oil, not coal, will be the most polluting fossil fuel in a two degrees world. That was one of several stark messages delivered by Pawel Olejarnik, an analyst from the International Energy Agency (IEA), at a conference in Brussels at the end of April. “Oil will trump coal as the leading emitter of CO2 emissions,” he said. Implication: the war on coal will soon be replaced by a war on oil, although the oil industry would prefer not to talk about that for the moment. In the meantime, the European Commission is finally – after years of neglect – preparing a decarbonisation strategy for the transport sector.
In a scenario where global warming is limited to two degrees Celsius, oil is the dominant fossil fuel with a 40% share of global energy-related CO2 emissions in 2040, said Pawel Olejarnik in Brussels. That’s up from 34% today. Conversely, coal drops from accounting for nearly half to just a quarter of emissions. Gas actually overtakes it.
Olejarnik was speaking at the Brussels launch of a new report entitled “Oil Market Futures” that explores oil demand – and the oil price – in the wake of the Paris agreement. The report was commissioned by the European Climate Foundation (ECF) and delivered by the International Council on Clean Transportation (the not-for-profit group that uncovered the Volkswagen scandal) plus consultancies Poyry and Cambridge Econometrics.
The authors conclude that policy-driven efficiency improvements in vehicles, planes and ships – including 20% electric vehicle sales by 2030 – could keep demand for oil in transport at current levels of around 50 million barrels a day. Without these improvements, demand would double by mid-century, driven by growth in Asia.
EU decarbonisation strategy for the transport sector
Which raises the question: where is the EU’s decarbonisation strategy for transport? This is the only sector for which the EU has not yet drawn up post-2020 decarbonisation plans.
So far, the energy transition in Europe has focused first and foremost on the power system. Ever cheaper solar and wind technologies have upended electricity markets and challenged network operators. Dealing with these changes has kept EU energy policymakers busy.
Only recently, the heating and cooling sector, which has long clamoured for attention, finally got a dedicated “EU heating and cooling strategy”. This is thanks in part to tensions between Russia and Ukraine and consequent worries about gas supplies: most gas goes to heating. That has left untouched transport, the chief destination for oil.
The European Commission plans to rectify this. By the summer, it intends to issue a decarbonisation strategy for the transport sector. It will also issue legislative proposals for national emission reduction targets that cover sectors outside the EU Emission Trading Scheme (ETS) – principally transport.
In practical terms, most are looking for new CO2 emission standards for cars, vans and trucks to deliver the bulk of emission reductions from transport in future. Cars and vans currently have a standard that runs until 2020. Trucks are exempt so far, although the US is already on its second round, NGO Transport and Environment (T&E) likes to point out. The NGO wants more dedicated policies to promote electrification of the transport sector. Others are still fighting for biofuels.
Oil won’t go away
This is a space to watch over the coming months and indeed years. And yet, oil is not about to go away. “Oil will not disappear,” emphasised Mechthild Wörsdörfer, a Director at the European Commission’s energy department, at the “Oil Market Futures” launch. She explained: “It is likely to retain its role especially in long-distance transport.”
The ECF report shows oil use in aviation nearly doubling out to 2050, even in a two degrees world. Olejarnik says: “Even in a carbon-constrained world, we still need a substantial amount of oil.”
Dependence on Middle East will increase
The continued, if smaller, dependence on oil in future is likely to go hand-in-hand with an even greater dependence on the Middle East for supplies, the IEA analyst added. Today, about half of the 40-million barrel a day oil trade consists of Middle Eastern exports. That proportion would rise to 59% in a two-degrees world, Olejarnik suggested, a few percentage points higher even than expected under business-as-usual.
One reason is that the lower the oil price, the harder for more expensive non-OPEC sources to compete. The ECF report suggests that three-quarters of shale resources are economical to produce at prices above US$80 a barrel, but not Arctic, deepwater or oil sands oil for example.
For all the benefits to the EU economy of a low oil price, it brings with it too the risk of turmoil in regions close to Europe and ones that it will remain dependent on. “The Arab Spring happened at US$110 a barrel,” noted Rem Korteweg, a senior research fellow at the London-based Centre for European Reform think tank, at the ECF report’s launch. “It is naïve to think that cheap oil will not cause us Europeans anxiety about stability in our neighbourhood.”
He believes more instability is a serious risk “if oil prices stay low for a long period of time”. And for him, even a doubling of the current oil price to around US$80, is a “relatively low oil price scenario”. Smaller producers such as Azerbaijan, Angola and Nigeria are already asking for international financial assistance as low oil prices leave a hole in their budgets, Korteweg warned.
At the same time, Olejarnik countered that the world’s dependence on oil for a long time to come, even if in smaller quantities, gives regions like the Middle East and Africa time to change course. He pointed to Saudi Arabia’s recent announcement that it will diversify away from oil as a positive signal.
Oil industry targets coal
What does the oil industry make of all this? Industry insiders acknowledge that demand is likely to go down in the long run. At least some believe that prices are unlikely to break the US$100 mark again. They see their future as energy, not oil, companies.
And yet, they argue too that for the moment at least, there are cheaper emission reduction opportunities out there than tackling European transport emissions. That is one of their lobbying points in the Brussels corridors: If the Paris climate agreement ushers in a truly global approach, they are saying, why not target all of the world’s coal first?
Can China do it (limit its coal use)?
What happens in China has more impact on the climate and the global energy equation than anything else. But do we really know what is going on there?
Valerie J. Karplus, an expert on Chinese energy at MIT Sloan School of Management, has written an important analysis of the reality behind the official energy statistics. Her first conclusion is that the levelling off of China’s coal use since 2014 is probably real.
Her second conclusion is that it may also be sustainable. That is, China’s coal use may have peaked, never to rise above the 2013 record any more. If so, that would be 17 years before the official target date of 2030 – and it would be good news for the climate.
There are some caveats, though. First there is at least one scenario in which coal use could easily reverse its downward trend, writes Karplus: a return to high oil and gas prices. This is because in that case it becomes attractive for China to turn coal into synthetic fuels. The country has a great capability for doing so.
The second risk is that Chinese coal producers will export their product to other countries if their domestic market is saturated. The World Bank has just recently issued a stark warning that countries in Asia have plans for building large numbers of coal-fired power stations that would ruin any likelihood of staying within the 2-degree climate target.
This scenario is all the more likely as China’s nationwide carbon market will kick in next year. Starting in 2017, the country’s regional carbon markets will be joined together in a single huge CO2 market, following the example of the EU Emission Trading Scheme. This will put pressure on heavy emitters to reduce their coal use – making exports increasingly attractive.
For China watchers: E3G has recently published an excellent review of the energy component of China’s latest five-year plan.
The US can't do it without gas (reducing CO2 emissions)
At this moment, coal is the primary target of global decarbonisation efforts. But once coal use go down, this will inevitably put oil to the top of the energy/climate agenda, as Sonja van Renssen points out in her Brussels column this week. And after that – will it be gas?
Some people would like to see the use of natural gas be reduced immediately – in the US Democratic presidential candidate Bernie Sanders for one. But as independent energy consultant Geoffrey Styles, Managing Director of GSW Strategy Group, points out in a new article, this would not be a good idea.
The reason can be seen in this chart, which shows the US electricity mix in 2015:
As Styles points out, the chart shows actual generation, not capacity. Since renewable sources like wind and solar have much lower capacity factors than conventional power station, to replace say a 2,000 MW nuclear plant with would require between 7,600 and 9,400 MW of solar and wind.
This is the reason why it would not be a smart idea to replace gas-fired power stations with renewables, says Styles. At the rates at which wind and solar are currently added, it will still take 36 years to replace the existing coal-fired capacity in the US. Better start with that. Coal puts twice as much CO2 in the air as gas after all.
What is more, gas is currently widely used as backup power for renewables in the US, Styles points out.
But what about the methane emissions from gas use, which are often cited as an important climate drawback of gas? Methane is X times as strong a greenhouse gas as CO2. True, but, notes Styles, first of all, methane emissions have been stable since 2005 despite a 44% increase in natural gas use. Secondly, methane on a CO2-equivalent basis, contributes only 2.5% of US greenhouse gas emissions (in 2014). Even more to the point: the greenhouse gas burden from methane equates to less than half of the 360 million ton per year reduction in emissions from fossil fuel combustion in electric power generation since 2005, writes Styles. In other words, increased reliance on natural gas for power generation is making matters better for the US, not worse.
Conclusion: “we are many years away from being able to rely entirely on renewable energy sources and energy efficiency to run our economy. In the meantime, nuclear and shale gas are essential to the continuing decarbonisation of US electricity, which is the lynchpin of the plans behind the Adminstration’s pledge [in Paris] to reduce US greenhouse gas emissions by 26-28% by 2025. That goal would be out of reach without them.”
Will Europe do it (put the climate squeeze on industry)?
The EU Emission Trading Scheme (ETS) is supposed to be Europe’s “flagship” climate policy, but it has been languishing for many years. And it doesn’t look like it’s going to change any time soon.
The ETS applies to two sectors: energy generation (about 57% of total emissions)and manufacturing industry (43%), such as steel, cement and chemical plants. One problem is that industry has been given its CO2 allowances for free ever since the start of the ETS in 2005. They have also been given too many allowances. The reason: EU lawmakers are afraid that European industry will be put at a disadvantage compared to non-EU companies with which they compete if they have to pay for their allowances. What is more: each EU member state wants to protect its own industry.
Emil Dimantchev, senior carbon market analyst at Thomson Reuters, has written a thorough analysis of the problem. It’s a fairly technical story. The European Commission has calculated cost “pass-through” rates for different industrial sectors. If industries are unable to pass through their CO2 costs to their customers, because of international competition, they get their CO2 credits for free. In 2009, the Commission determined that virtually sectors were at risk of what is called “carbon leakage”, i.e. they all get their allowances for free.
Since they also get plenty of allowances, this means of course that they have no incentive to cut CO2 emissions. Worse: they have even been able to make money with their credits. Because as it turned out – and has been proven by a lot of research – industries were after all able to raise their prices on the back of their free CO2 credits. What they did was pass through the opportunity cost of the credits, i.e. the money they would have received if they had sold the credits in the market. Thus they made windfall profits.
According to one study by CE Delft, the largest emitters in 19 EU countries investigated earned at least €15 billion in the period 2008-2014.
Dimantchev calls on EU lawmakers to limit the amount of free allowances given to industry in accordance with what the companies really need. The question is whether they are willing to listen. Reforms that are now on the table propose limiting the amount of free allowances given to industry, but the largest political group in the European Parliament, the European People’s Party (EPP), said just last week that this proposal is going to far, according to Reuters. The EPP is also against “accelerating overall carbon reductions”.
What will Germany do (with its lignite)?
Julian Schwartzkopff, researcher at energy and climate think tank E3G, has written a fascinating analysis of what may be behind Czech utility EPH’s offer to buy Vattenfall’s German lignite assets.
The move by EPH is surprising, writes Schwartzkopff, since Vattenfall is on record saying that they don’t expect their German lignite operations to be much of a moneymaker anymore. So what does EPH know that Vattenfall doesn’t?
Several considerations are possible. EPH could be betting that German climate policy will fail. After all, Schwartzkopff points out, according to modelling commissioned by the German think tank Agora Energiewende, all of the power plants that EPH has acquired, except for one unit at Boxberg, would need to close by 2030 for Germany to achieve its climate targets. So unless German climate policy fails, EPH can’t very well expect to make money on the German lignite plants.
An alternative option for EPH would be “to sue the German government for compensation if a coal phase-out was adopted”. This would mean the cost would be borne by the German taxpayer.
Another option is for EPH to position its lignite plants as providers of backup capacity in a yet to be created capacity market in Germany. The German government has already agreed to create a “lignite reseve” that will reward Vattenfall with €600 million for shutting down two units at the Jänschwalde plant.
However, Berlin has no intention of creating a capacity market in the future. Several studies commissioned by the Economics Ministry have concluded that Germany does not need it.
Schwartzkopff does not even rule out that EPH will let its German subsidiary Mibrag, in which the lignite assets would be consolidated, go bankrupt. This way it could escape the cleaning-up costs that need to be paid after a mine is closed. EPH will receive €1.7 billion from Vattenfall for these restoration and rehabilitation costs, but it does not need to spend the money for that purpose.
A fundamental problem with the acquisition, suggest Schwartzkopff, is that EPH is “a highly leveraged company with an intransparent ownership structure operating through intermediate holdings in tax havens”. In other words, it is not clear whether the lignite business is in good hands with EPH.
All of this, concludes Schwartzkopff, should set alarm bells ringing in Berlin – and in Stockholm, where the Swedish government, the owner of Vattenfall, has to decide on the deal. Sweden after all has a climate reputation to lose.