June 10, 2016
EXPRESS #1
Going for gas – a shaky strategy?
Oil companies will find gas much less profitable than oil
June 10, 2016
We have heard a lot in recent weeks about oil companies looking around for renewable energy strategies, to cope with the challenge of “peak oil demand” in an increasingly low-carbon world. But their real plan B, which they have been pursuing for at least five years now, is to transform themselves from oil into (predominantly) gas companies.
Companies like Shell, BP and Total already get half or more of their production from gas, and they intend to expand the share of this lowest-carbon fossil fuel considerably. But how solid is this strategy?
Five years ago, it looked a pretty good bet, writes geophysicist (ex-Shell) and regular contributor to Energy Post, Jilles van den Beukel, in another one of his sharp analyses. Today, however, it looks increasingly risky, according to Van den Beukel, who is never afraid to take on conventional corporate thinking.
The main problem with the oil majors’ gas strategy is that gas is “systematically less profitable than oil”, notes Van den Beukel. This applies in particular to LNG, which forms the mainstay of the companies’ gas activities. It is in LNG where they are hoping to make their big profits: shale gas is dominated by smaller companies and pipeline gas by major national suppliers such as Gazprom.
Van den Beukel gives four main reasons why this is so:
-there is no cartel in the gas market like OPEC in oil
-gas (particularly LNG) is much more expensive to transport than oil
-gas faces stronger competition (e.g. in the power market) than oil (which dominates the transport market)
-shale gas is a stronger competitor to gas than shale oil is to oil
All of these are long-term issues: in the short term the situation looks even worse, with massive LNG supplies about to enter the market and limited growth opportunities in sight. If Van den Beukel is right, this spells further trouble for the already much-pressured profitability of the companies that until recently were the undisputed giants of the world.
Full story here.
Note that the International Energy Agency on 7 June published its annual Medium-Term Gas Market Report. As the name implies, this looks primarily at the “medium term” (five years ahead). It confirms Van den Beukel’s analysis. It sees “massive quantities of LNG exports coming on line” in the next five years, “while, despite lower gas prices, demand continues to soften in traditional markets.” For the longer term “functional developments point to oversupply in the market over the forecast horizon period which should keep spot gas prices across the globe under pressure.”
EXPRESS #2
Going it alone in the carbon market
Why a French carbon price floor won’t help reduce EU emissions
June 10, 2016
Energy Post has a tradition of publishing in-depth articles on the EU emission trading system (ETS). There are few places where you can find better analyses of this crucially important policy instrument. And we have another one for you this week.
I always stress that the ETS is indeed a “crucially important” topic. Complex though it may be, it’s the flagship climate policy tool of the EU. It is what is supposed to deliver Europe’s emission reductions across the entire European power and industrial sectors.
So, the fact that – as everybody knows – the ETS is not functioning well (some would say: not functioning at all), is of major concern. For this reason reform of the ETS is one of the hot topics in Brussels, although nobody is holding their breath for a quick solution. The main reason for this pessimism is that a number of EU countries, particularly (but not exclusively) in Eastern Europe, don’t want to see their industries put under pressure. To the frustration of some more ambitious countries, particularly in North Western Europe, who are increasingly thinking about adopting unilateral policies.
The UK was the first EU country to go it alone: it imposed a minimum price on power sector carbon emissions starting in 2013. France is now considering following that example. In May, France’s environment and energy minister Ségolène Royal announced her intention to implement a domestic carbon price floor for the French power sector.
So what would happen if France started imposing a minimum carbon price unilaterally, without waiting for the ETS to be “fixed”? Hæge Fjellheim, Yan Qin and Emil Dimantchev, senior analysts at Thomson Reuters (formerly Point Carbon), have written a very interesting analysis of the possible consequences.
First of all, a carbon price floor would drive coal power out of the generation mix, they find, while output from gas-fired power plants (and nuclear) will remain largely unchanged. That may seem like a desirable result, but note that in 2015 fossil fuel based generation from coal and gas contributed a mere 1.6% and 4% respectively of total French power production, while nuclear supplied 76% and various renewables 18%.
France, in other words, does not have much of a CO2-problem. This is also the reason why the measure would only have a marginal impact on total EU CO2 emissions, the authors point out. It would not do the EU ETS any good at all. On the contrary: it might even weaken it. In addition, what a carbon price floor would accomplish is to lower French exports of electricity, which is not necessarily good news. France is currently a major net exporter of power.
In short, a unilateral French carbon price floor would not do the climate much good. So why would the French government want to pursue it? The authors suggest that it may be motivated by a desire to “lead by example”. By showing that the country is prepared to take action, France may want to convince the other EU countries to follow suit: “By implementing a domestic price floor, the French government would showcase that it is doing its share at home, while it advocates for carbon price corridors at the EU and global levels.”
Full story here.
EXPRESS #3
Going for the least-cost option in energy efficiency – daft!
European Commission torn on target
June 10, 2016
You would think that energy efficiency was one of the least controversial topics in the EU, but in Brussels things are never as simple as that. There has long been a fight going on about what should be European energy efficiency targets. For 2020, there is a 20% target of energy savings (compared to a business-as-usual scenario).
For 2030, there still is a debate going on. Officially, the European Commission is expected to come up with a proposal for a 2030 target after the summer, but according to Brook Riley, energy and climate campaigner of Friends of the Earth Europe, it is possible that the level of ambition may be already decided in mid-July.
The question is what that level will be. The previous Commission came up with a 27% target, but as Riley has previously shown, this was based on faulty assumptions, misleadingly showing that the “cost-benefit” crossover (the point where costs become larger than benefits) is at 27% in 2030.
The new Commission has rejected this 27%, but “sceptical member states” hold on to this number, says Riley. The Commission will now certainly come out with a proposal for at least 30%, but Riley says this is still too low. New calculations, he notes, show that the cost-benefit crossover point is at 35%. This, however, is purely based on financial investment and savings. It does not include benefits in terms of jobs, lower energy dependence, lower carbon emissions, or better living standards. For this reason, Riley argues that the target should be 40%.
However, he adds that “critical Commission officials – known as submarines, apparently, because they try to torpedo higher ambition – claim that the ‘key issue for EU impact assessments is the cost difference between business as usual and new policy scenarios’.”
In other words, says Riley, “they want to go for the least cost scenario, which is inevitably the least ambitious. It’s daft! Who buys – on a matter of principle – the cheapest possible bicycle, car or apartment?”
As Riley points out, a lot is at stake in this debate, both in regard to climate policy and the future of the European economy. It will be interesting to see how it ends.
Full story here.
EXPRESS #4
Should they stay or should they go?
UK energy bills may rise after Brexit
June 10, 2016
As our correspondent Sonja van Renssen points out in this week’s Brussels Insider column, “absolutely nothing” is being decided at this moment in Brussels, as long as Brexit is hanging over the European continent.
Energy is of course not the main issue in the Brexit referendum, but it does enter into it. And a Brexit would of course have a major impact on the EU and UK energy sectors.
The campaigners for Brexit have recently made a claim that UK energy prices would go down if Britain were to leave the EU. In particular, their claim is that the UK cannot abolish the “EU-imposed VAT” on energy consumption of households.
Stephen Tindale, Director of the (pro-nuclear, pro-renewables) Alvin Weinberg Foundation, shows in an article for Energy Post that this claim is highly misleading. VAT on domestic energy was not “imposed” by Brussels, he notes, it was introduced by the Conservative government. It is true, though, that EU rules state that, once introduced, VAT cannot be reduced below 5%.
However, the question of the costs of energy is much more complex than that, as Tindale explains. All in all, he argues that is more likely that a Brexit will lead to higher energy costs for consumers than lower.
Full story here.
This does not necessarily mean that EU policy only has positive effects. Indeed, according to Steffen Böhm, Professor in Organisation and Sustainability at the University of Exeter, in some ways the EU “can’t be trusted on the environment”. Böhm does not argue that EU policies are too green for Britain – on the contrary, he says they are not green enough.
He gives four examples:
-The EU’s climate policy, which is less ambitious than the UK’s policy.
-The EU’s push for biofuels, of doubtful benefit to the climate.
-The EU’s weak implementation of vehicle exhaust emission standards.
-The EU’s pursuit of trade deal TTIP, which Böhm says will have negative effects on the environment.
Full story here.
Note that earlier, in March, we published an excellent broad overview of all climate and energy policy issues related to a Brexit, “Brexit Britain: the balance sheet of energy and climate policy”, by Malcolm Keay and David Buchan.