July 15, 2016
What to think of Nord Stream 2?
July 15, 2016
Nord Stream 2 is a bad deal for Eastern Europe and for Germany. That is the viewpoint of Georg Zachmann, Senior Fellow at Brussels-based think tank Bruegel.
In an opinion article on Energy Post, he essentially puts forward three arguments. First, the proposed pipeline from Russia to Germany would “work against efforts to diversify gas supplies”.
Second, it could lead to Eastern European countries having to pay higher prices for gas than Germany and would give Russia a tool to discriminate between countries.
Third, German support for Nord Stream 2 would risk breaking the “fragile European consensus” with regard to Russia’s violations in Ukraine.
No, Nord Stream 2 is a good deal for Germany and for Eastern Europe. That is the view put forward by Andreas Goldthau in a report written for the European Centre for Energy and Resource Security (EUCERS) and the Russia Institute of King’s College London, which I reviewed on Energy Post.
Goldthau argues that the pipeline, a joint venture between Gazprom (50%) and five major West European energy companies (Shell, Eon, Engie, Uniper, BASF/Wintershall), increases rather reduces security of supply. It is also likely to lead to lower rather than higher prices, even in Eastern Europe.
The major difference between Zachmann and Goldthau is perhaps that the latter believes that the European gas market is functioning well and the former does not.
The EU, writes Goldthau, with its three energy market packages, especially the Third Energy Package (2009), which enforced third-party access provisions on pipeline infrastructure through ownership unbundling and established independent regulator, has managed to create liberalised gas markets in Europe. It has further integrated these markets by building pipeline interconnections and reverse flow capacity, a process that is still going on. According to Goldthau, gas supplied through Nord Stream enters this market and thereby increases liquidity rather than dependence on a single supplier.
Goldthau provides evidence that after the first Nord Stream was built, in 2011, gas prices in Central and Eastern Europe (CEE) “started to align with German prices. (…) Compared to the ‘traditional’ situation in which prices of gas tended to be higher in Eastern Europe than in Western Europe, a function of rigid long-term contract structures and a lack of optionality, this amounts to a qualitative shift in CEE gas prices.”
He argues that the second Nord Stream will have a similar effect: “Nord Stream 2 stands the chance of enhancing the liquidity of regional hubs in which the additional volumes of 55 bcm will be primarily absorbed. This includes GASPOOL [in Germany] and by extension the Central European Gas Hub (CEGH) [in Austria] via EUGAL [the proposed online extension of Nord Stream 2 to the German-Czech border] and the Czech and Slovak grids, but also NetConnect Germany (NCG).” This, adds, Goldthau “will strengthen the role of regional Central European gas hubs in EU gas trading and pricing. Current ‘transit hubs’ such as CEGH will be upgraded to become (…) full-fledged ‘trading hubs’ such as TTF [in the Netherlands] and NBP [in the UK].”
It would be interesting to hear what Zachmann has to say to this argument. He does not discuss the new gas market structure in his piece, but the debate will no doubt be continued.
As to the political conflict with Russia, Goldthau argues that trying to stop Nord Stream 2 would turn the EU from a “competition watchdog” into a “political actor”. It would turn the “Energy Union” into a political rather than economic project. The question is whether the EU Member States would agree with such a transformation.
Incidentally, Goldthau’s report was financed by the five European companies that together hold 50% in Nord Stream 2. Yes, yes, I know. On the other hand, Zachmann, in addition to his work at Bruegel, works as consultant for the Berlin Economics advisory group in Moldova, Georgia and Ukraine. The latter country stands to lose $2 billion per year in transit fees if Nord Stream 2 gets built and Russia will end gas transit through Ukraine.
Full article by Zachmann here.
Full article on Goldthau’s report here.
Why is no one talking about Europe’s dependence on Russian oil?
July 15, 2016
When we talk about security of energy supply, especially with regard to dependence on Russia, it’s always about gas. Thus, many in Brussels want to prevent the Nord Stream 2 pipeline to be built, because they fear it will increase European dependence on Russian gas. But why is no one talking about oil?
As a matter of fact, Europe’s dependence on imported oil, particularly from Russia, is larger than on gas. What is more, oil is much more important to the economy and to energy security than gas: Europe imports five times as much oil as gas and oil (mostly used in transport) is much more difficult to replace than gas (mostly used in electricity generation and heating, where many alternatives exist).
These facts are not new, but they are brought to light again by a new report from Cambridge Econometrics prepared for Brussels-based NGO Transport & Environment (T&E) – the guys that warned about diesel and other car emission scandals when no one was listening.
The new report, “A Study on oil dependency in the EU”, published on 11 July, shows that the oil import problem is even worsening: European dependence on oil imports has grown from 76% in 2000 to over 88% (!) in 2014. The EU spends some €215 bn on oil imports, over 5 times as much as gas imports (€40 bn). And Russia is the biggest supplier: dependence on Russia has grown from 22% in 2001 to 30% in 2015.
The report also looks at which companies are the largest supplier of oil to the EU, with an interesting top-10 as a result:
Number one, Rosneft, is a Russian state-owned company led by Igor Sechin, a close associate of president Putin. So, if we should fight Russian influence on Europe, maybe oil is the place to start rather than gas.
For T&E, however, this is not the main concern. It notes that the European Commission “is preparing a strategy for decarbonising transport, expected later this summer”, and it wants the Commission to make a big push for low-carbon transport.
According to T&E: “improved transport efficiency would also deliver substantial economic and environmental benefits. For instance, the take-up of electric vehicles and 2025 standards for cars is estimated to lead to a 1% increase in EU GDP, up to 2 million additional jobs and a 93% reduction in GHG emissions from cars and vans, by 2050.”
Full article here.
Carbon bubble? What carbon bubble?
July 15, 2016
Europe may become increasingly dependent on imported oil, the companies supplying the oil are increasingly coming under pressure from climate policies.
I am sure you are familiar with the notion of “carbon bubble”, or “stranded assets”: the idea, first (cleverly) put forward by the NGO Carbon Tracker, which calculated how much “carbon” (oil, coal, gas) could still be produced within the well-known 2-degree limit and then declared that all the rest of the carbon still in the ground could not be produced anymore. These assets would become “stranded”.
Next, Carbon Tracker and other NGO’s went to shareholders of major oil companies and warned them that the oil and gas reserves they have on their books are inflated, since much of them could never be produced. Policymakers would prevent this from happening. The message: the oil companies had better change into renewable energy companies, or their shareholder value would go up in smoke.
According to Jilles van den Beukel, a retired geophysicist (ex-Shell) and blogger, this idea is misleading, however. He argues, in an article we published on Energy Post, that it is based on a simplistic notion of reserves: “Lumping all fossil fuels together, regardless of their economic value and associated emissions, is a severe simplication. I would certainly hope that the carbon budget of oil (a premium fossil fuel whose high energy density makes for instance flying possible) or gas (a relatively clean fossil fuel) can be increased at the expense of that of coal.”
He argues that the carbon bubble theory “lumps together all different types of reserves (proved, probable, possible; developed, undeveloped). In reality the value of a barrel of possible reserves, in an area where exploration may or may not prove the existence of oil, that may or may not be commercially developed, is only a tiny fraction of the value of a barrel of proved reserves that has already been developed (with significant investments for development already made). It is these low-value “possible reserves” that run a risk of being stranded, rather than the high-value “proved reserves”.”
Proved reserves, Van den Beukel points out, “typically only account for 15-30% of the total resource base of an oil company and account for 80-90% of the value of a company. That is not surprising, given that proved reserves are either developed or in the process of being developed (for most companies project sanction is a prerequisite in order to book proved reserves). These are the assets were large investments have taken place or are currently taking place. In general, the investments related to developing a field are much larger (1 or 2 orders of magnitude) than the finding costs.”
He concludes that “with typical proved reserves to production ratios of the order of 10-15, the risk that proved/developed oil reserves will turn out to be stranded is very small. Production from these assets falls far short of demand, even for a scenario which limits global warming to two degrees.”
This does not mean, however, that oil companies have nothing to worry about. They do. Their assets may not be at stake, their long-term business model is, notes Van den Beukel. In the long term, the demand for oil and gas will wither away.
The question is whether these companies are able to transform themselves into “renewable energy” companies, as activists are asking. Van den Beukel has his doubts: “I feel that, from a financial point of view, oil companies will be better off by sticking to their core business and by accepting that they are likely to be in a sunset industry – in the long term.”
Full article here.
Does Adnan Amin, head of IRENA, believe in miracles?
July 15, 2016
Bill Gates has famously said that “we need miracles to achieve a clean-energy breakthrough” (and is putting his money where his mouth is), but Adnan Amin, Director-General of the International Renewable Energy Agency (IRENA), begs to differ. “We don’t need a miracle, it’s already happening”, he told Energy Post, in an interview we had with him recently in Bonn. “Everything we are seeing is pointing to transformational change in the energy sector.”
Amin is referring to the spectacular cost decreases of solar and wind power – and now also of battery storage – which are taking global energy markets by storm. “Last year we were blown away by solar PV prices as low as 5.4 cts/kWh in Dubai and 4.3 cts in Peru. Now we have had a record 2.99 cts in Dubai.”
Amin, under whose leadership IRENA has become the world’s fastest-growing intergovernmental organisation with over 170 member countries, says that Bill Gates is not the only one who is behind the times. He notes that renewables are growing much faster than most people, including many policymakers, realise. “Even among climate negotiators there is suprisingly limited knowledge about what renewables can accomplish”, he said. (In fact he used stronger words, but asked me to moderate them.)
What this implies, says Amin, is that renewables can grow considerably faster than most scenarios assume. As Dolf Gielen, Director of the IRENA Innovation and Technology Centre in Bonn, who was present at the interview, put it: “we believe today’s policy plans underestimate what is going on in the market. Take solar. If you add up all the national projections, you get to 500-600 GW in 2030. Today we are 230 GW and adding 50 GW a year. So even at today’s growth rate you will hit 1000 GW in 2030. That’s not rocket science. If you assume some growth, you will get to 1500 GW. And it’s the same in other technologies. Battery storage for example. That’s being taken up by the market whether policymakers believe in it or not. All this is not fully reflected in the national plans. Nor has it been accommodated by the incumbent players.”
IRENA’s own scenario, called REMAP, projects that it is possible to achieve a 36% share of “modern renewables” in total primary energy consumption by 2030. (So not just electricity consumption, but total energy consumption.) That’s going significantly beyond what all the national climate plans (INDCs) offered at the Paris Climate Conference would add up to: 21%.
Amin has more interesting things to say. For example, he points out that “people are underestimating what is happening in off-grid. We have all been talking for many years about 1.3 billion people without access to modern energy services. Nobody ever questions this figure. But when we looked into this recently we discovered there is a lot of investment going into solar home systems, particularly in developing countries. You don’t see this in the energy statistics, that’s why we looked at the trade statistics. There are thousands of these home systems developed by entrepreneurs. They provide very low-cost basic power services for cell phone charging, refrigeration, and that sort of thing. So we see this picture changing dramatically.”
Full interview here.