By Stefano Cingolani
A new strategic game has already started in Europe as a direct consequence of the Ukrainian crisis and it is going to redraw the entire energy map in the continent and in the rest of the world. Italy, one of the closest allies of the United States of America, has already been affected. The Italian economy is neither as dependent on the Russian oil and gas as Germany’s one nor as full of money from the oligarchs as the London City, nevertheless Rome it is politically much weaker. US president Barack Obama during his trip to Rome on March the 28th, discussed with the Italian political authorities about the new diplomatic situation and how to decouple the country as soon as possible from Russia, severing the knots with Vladimir Putin previously tangled by Silvio Berlusconi. The fallout is directly affecting the biggest Italian companies controlled by the state: ENI (oil and gas) which has long term agreements with Gazprom, and the electric utility ENEL. All of them need to change their strategy, their management, and to certain extent their mission.
But all Europe is asked to reconsider its energy policy really a very difficult task, not only in the short term but also in the ling run. The EU gets a third of its oil and gas from Russia, and 40 percent of that is pumped across Ukraine; it would face a 30 billion cubic meters shortfall per year if supplies through Ukraine were cut off completely (just under half of Germany’s annual gas consumption) on a total of 130 bcm from Russia. European Union is set to build more liquefied natural gas terminals, upgrade pipeline networks and grids and expand a southern gas supplies through Georgia and Turkey to southern and central Europe. The EU countries may now look to tap its own shale gas reserves and expand nuclear power, despite environmental concerns unless they want to increase the limits to CO2 emissions.
According to George Zachmann of Bruegel, the Bruxelles think tank, Europe can: a) find alternative supplies from Norway, Netherlands and North Africa, plus liquefied natural gas from domestic production and others suppliers; b) switch fuel: electricity generation, heat from oil, new industrial sources; c) reduce households consumption. So, on paper it is possible for Europe to survive without gas from Russia, but replacing it in a year will be a very difficult task. And the transition is not going to last for a short period of time. Because the most ambitious goal is making Western Europe more strategically free and secure.
According to Daniel Yergin, one of the major experts of energy, vice chairman of HIS Inc. and author of “The Prize”, the best selling history of oil, “It’s sort of back to the end of the Cold War. Energy security is back on the agenda for Europeans. And for U.S., it is the first time that our energy position is different. There’s new muscle to it”, Yergin said to the Wall Street Journal. This new long-term priority is going to reshape the global balance. Who is going to win the new great game? Will US recover its global leadership? Has the EU got the imagination, authority and above all the will to play its own diplomatic role? What are the interests of China? Will Russia really be weakened and defeated by international isolation? To answer all these question we need to consider a mach larger chessboard, but once again energy occupies a central position, it is from many points of view the core of the matter.
1 – American gas. The White House is rushing to push more gas onto the market to undercut Putin’s power. ENEL which control the Spanish electric utility ENDESA has signed an agreement with the American company Cheniere Energy to ship 3 billion cubic meters per year of American shale gas from the Gulf of Mexico to the six Spanish Lng (Liquefied natural gas) plants (one billion will be transport to Italy).
Russia’s presence in Ukraine is prompting calls, especially among congressional Republicans, to loosen export restrictions on US natural gas in the hopes of diminishing Russia’s ability to use gas as a diplomatic weapon, like it did in 2006 and 2009. With America’s newfound dominance in gas production (in 2013, the United States surpassed Russia to become the biggest producer of oil and gas, thanks in part to fracking) comes greater power in energy diplomacy. “One immediate step the president can and should take is to dramatically expedite the approval of US exports of natural gas,” House Speaker John Boehner said. Adding new supplies to the global market “sends a clear signal that the global gas market is changing, that there is the prospect of much greater supply coming from other parts of the world,” Carlos Pascual from the State Department told the New York Times.
But…. there are many buts. First of all a question of time. America is not ready to supply Europe; there are no export facilities. The gas from Gulf of Mexico in not going to flow into Spain and Italy before 2018 when the Lng plant in Corpus Christi will function. Sabine Pass on the Texas- Louisiana border, with a capacity of up to 2bcm, will start pumping Lng only in 2015. Two dozen export applications are pending and a lot of projects coming online in 2018–20 will bring America’s total Lng export capacity to 66bcm by early in the next decade. That is appreciable, but not very much in a world Lng market that might be 540bcm a year by that time, according to the International Energy Agency. A significant part of that gas would be headed to high-price Asia, not just from plants on America’s Pacific coast but also from the Gulf, since from 2015 the new locks on the Panama Canal will enable it to take large Lng carriers.
Europe has the capacity to import a lot more Lng, the problem is inelastic supply. The countries which export cannot simply churn out more of the stuff; the plants which liquefy the gas cost billions of dollars, so they tend already to be running at full blast. And most of what they make they are already selling, at high prices, in Asia. Japan needs Lng to keep the lights on, having shut down its nuclear power plants after the Fukushima disaster. China is trying to burn less coal because of public anger at air pollution. Europe might be able to find another 10bcm of LNG, analysts reckon, but it would pay about twice what Russian pipeline gas currently costs.
2- The role of Ukraine. The United States and the European Union are making energy reform central to their aid packages. The Obama administration is directing part of the $1 billion loan guarantee that John Kerry delivered to Kiev to energy security, energy efficiency and energy sector reform. The European Union’s $15 billion package is also aimed, in part, at modernizing Ukraine’s gas transit system. With patrons of this much-needed aid linking their help to energy reform, there might well be a bigger chance of success.
Edward Chow, an energy and security analyst at Center for Strategic and International Studies (CSIS) says, “The gas pipelines, as well as critically important gas storage facilities, all go through Western Ukraine. Until Russians build additional bypass pipelines…they are still highly dependent on Ukraine to transit gas exports to Europe.” According to Tim Boersma, a fellow in the Energy Security Initiative at the Brookings Institution: “At the end of the day, what will not really change is that Ukraine is an important transit country for natural gas. Some people suggested that Ukraine could become independent of Russian gas, but it is not realistic at all.”
Ukraine is already flexing its muscle as a consumer, and other countries are willing to help. The government’s energy minister announced that Ukraine is planning to reduce its reliance on Russian imports, filling the gap with Slovakian and German gas. Meanwhile, because of an unusually mild winter that has resulted in lower heating demand throughout Europe, gas storage across the continent are up 13 percentage points from the same time last year, the highest since 2008. More gas in the tanks could mean Europe is more willing and able to hold its ground with Russia.
3 – New pipelines. An immediate casualty is likely to be Russia’s South Stream pipeline, which, like Nord Stream, was designed to reduce Gazprom’s export dependence on Ukraine. Due for completion in 2018, with a planned capacity of 63bcm, it has already fallen foul of EU competition rules, and EU disapproval could effectively scupper it. The corollary to spurning Russian gas piped through South Stream is favoring non-Russian schemes like the Trans-Adriatic Pipeline, due for completion by 2018, which will bring Europe 10-20bcm a year from the Caucasus via Turkey.
Poland has been connected with the Czech Republic since 2011; work on a larger link, with a capacity of up to 10bcm, will start before 2017. Slovakia has just opened a pipeline to Hungary. Germany can now send gas to Italy, as well as to Poland and the Czech Republic. Estonia, Latvia and Lithuania, though, have not any source of gas save Russia. Work could start on an interconnector from Poland to Lithuania in 2018; until then Latvia’s abundant storage provides some insurance against strong-arming. Bulgaria also has a particular problem. It gets almost all its gas from a Russian pipeline that crosses Ukraine, and it has limited storage (less than two months’ consumption).
The Trans-Mediterranean pipeline from Algeria through Tunisia to Sicily started flowing gas to mainland Italy in 1983. The GME pipeline from Algeria through Morocco to Spain and Portugal was completed at the end of 1996. The capacity of the Trans-Mediterranean line has since been increased substantially and GME capacity will be increased in the future. Algerian pipeline exports has already been increased to nearly 35 bcm. There were project to build a new pipeline from Algeria through Sardinia but it has been stopped. It could be reconsidered in the near future if the energy crisis with Russia is going to be worsened.
4- European shale gas. The EU’s Joint Research Centre puts Europe’s technically recoverable unconventional-gas resource at 11,700bcm, about a quarter of America’s. But law, public opinion and a lack of drilling and exploration kit make European shale gas harder to get out. HIS expects that by 2020 European shale production will only be 4bcm a year, compared with over 70bcm in America today. Conventional-gas production in Europe and its neighboring seas could drop by ten times that over the same time.
Fracking, which involves blasting rock deep underground with water, sand and chemicals to release trapped oil and gas is vied with suspicion in Germany, France and many other European countries. The German Economy and Energy Minister Sigmar Gabriel and the Environment Minister Barbara Hendricks, both center-left Social Democrats, have firmly shut the door on such a prospect: “In no case do we want fracking,” Hendricks said last week, while Gabriel suggested there was “no sensible alternative” to Russian gas.
5 – More coal. There is also the option of generating electricity from coal instead of gas. But a knock-on effect of America’s shale-gas revolution is that it now exports cheap coal to the EU (this is in part why Lng imports have declined). Europe is already running most of its coal-fired stations at high capacity. There might be some slack, and there are also some mothballed stations that burn fuel oil, but there is no large pool of underused generating capacity. And what about CO2 limits? Another alternative is going back to nuclear power.
6 – Back to nukes. Last October, Britain signed a deal with France’s EDF to build the UK’s first new plant in 20 years. The UK has courted international investors, in a bid to help it replace its ageing nuclear power plants. But on the other side the UK signed a pact with Rosatom last September, aimed at helping the firm enter the UK market. The Department of Energy and Climate Change (DECC) said the agreement was “under consideration” following Russia’s military takeover of Ukraine’s Crimea region. Deciding to switch off nuclear reactors by 2022 was popular in Germany. But readying Europe’s largest economy to switch power sources has proven complicated and a recipe for political gridlock. Alexander Rahr, research director of the Germany-Russia Forum think tank, notes that as nuclear power has been phased out, Russian coal “has taken on a more important role for Germany.” If Germany makes its goal of having 80 percent of its power come from renewable sources by 2050, there is no question it will add to the country’s energy security. But along the way, as it takes nuclear power plants offline and builds up its renewable network, the country remains reliant on fossil fuels — and that means Russia.
7 – Renewable sources. Germany’s coast and flat northern plains offer plentiful wind power, but planning the ugly lines to get that electricity to the southern industrial heartland is hitting resistance. A subsidy system meant to build up renewable energies is causing mounting problems. At the moment they need fossil-fuel-fired capacity for backup, and gas is the fuel of choice. Better electricity interconnectors could reduce that need for gas by making it easier to export electricity from renewables-rich markets like Germany on sunny or windy days and to import it on dark or still ones. As with gas interconnectors, forging such links requires a pan-European push. And to make it work on a large scale will require new pricing strategies to recompense the owners of fossil-fuel plants pushed off the grid when renewable energy from other countries flows in. Given the continent’s 117 gigawatts (GW) of wind- turbine capacity, which has been growing at 10% a year, windy weather would improve matters.
Hydro-power, like gas-fired power stations, can be turned on easily when the wind falters, but it is not evenly spread: Sweden and, particularly, Norway have a lot of it, Germany and Benelux not so much. There are currently plans for up to five new interconnectors from Norway to the EU to be built by 2020, with a capacity of up to 5GW (providing 5GW from gas plants would take around 10bcm a year). Norway could generate much more hydropower, given a market. And with better interconnectors, a lot more solar power could come up from the south—perhaps including north Africa.
Merkel’s ambitious plan is for renewable energies, including wind and sun, to make up 40-45 percent of Germany’s energy mix by 2025, compared with just under a quarter now, and 55-60 percent by 2035. Critics say it’s not green enough, though: coal and lignite — decried as dirty by environmentalists — accounted for 45.5 percent of Germany’s energy output last year, up from 44 percent in 2012, as nuclear energy dropped to about 15 percent from more than 20 percent at the time of Fukushima. “The current path of the Energiewende is neither competitive nor low-carbon,” Daniel Yergin said recently. “Costs are rising. And so are CO2 emissions, with coal’s renaissance in the fuel mix to replace nuclear and balance out the renewables.”
Renewable energy subsidies paid by all consumers are pushing up their bills — the costs are expected to total 23.6 billion euros ($32.5 billion) this year. Companies have enjoyed sweeping discounts on those subsidies, but the European Union’s executive Commission is investigating whether that’s unfair. Sigmar Gabriel wants to cut incentives to reduce the cost of electricity for the consumers and to protect the utilities companies in crisis (like E.On.) affected by the unfair competition of the renewables.
8- Oil as a weapon. Oil remains the major and more reliable source. According to Yergin, “We are seeing a rebalancing of global oil supply in which we are going to have a north-south and south-north flow in the Western Hemisphere. That means that the Middle east and Asia, and particularly China, are going to be much more connected”.
The financer George Soros proposed that the US open up its strategic oil reserves and dump them all in the market. According to a Bloomberg report he believes that “strongest sanction” against Russia “is in the hands of the United States” because US could sell crude from the Strategic Oil Reserve and depress prices. Soros stressed that the Russian government needs a price of over 100 US dollars per barrel in order to balance the budget.
The “Soros plan” looks good on paper but actually it is wishful thinking. According to the latest official data, the US Strategic Petroleum Reserve currently holds 695.9 million barrels of crude oil. At the same time, the world’s global oil production was equal to 84.82 million barrels of oil per day in 2012. The whole Strategic Reserve is equal to just 8,42 days of global production. Russia produces around 10.9 million barrels of oil per day so, the US, even if it dumps all of it reserves in the market, will be able to replace around 64 days of Russian production. And the retaliation from Moscow is going to affect the US and the world financial markets. Both Sergei Glazyev, presidential advisor and Alexei Ulyukaev, Russia’s minister of economy, hinted that Moscow will liquidate its dollar-denominated currency reserves and switch the country’s oil and natural gas trading to other currencies. The ‘nuclear option’ would be switching the Russian oil and gas trade to gold.
9- A Cold Energy War? All that summed up, if the tensions with Russia will become a real Cold War 2.0, we are going to see a new energetic strain (hope not a crisis) and a major realignment in the energy balance of power in the world, with US called to play a central role, probably much larger than their real concrete capacity to deliver. But Russia is not going to take a strategic advantage either. Oil-and-gas exports make up 70% of Russia’s $515 billion annual exports, and 52% of the federal budget, according to America’s Energy Information Administration. Oil unlike gas, is easy to store, ship and trade, which means a single customer has less scope for action. But to sell its oil easily, Russia needs access to the world financial system. Its companies need to borrow on the bond market, and want their shares traded on international exchanges. They also need to process payments in dollars.
If Russia were to push farther into Ukraine, or to try its chances in Moldova, Georgia or the Baltic states, and Europe to take strong action in response, it could shut down exports completely, thus doing huge damage to the EU. But barring immediate, permanent and total victory, that would also doom Russia as a gas exporter. China already has worries about Russia’s dependability as a supplier. Even with $475 billion in foreign-exchange reserves, the Kremlin cannot continue to run Russia’s ramshackle and uncompetitive economy without its most important export revenues. That’s why the hawks in Russia as well as in the Western countries need to calm down. That’s no alternative to a diplomatic solution on the basis of a new multilateral agreement involving all the world powers. Not a new Yalta, perhaps a new Westfalia.
Published on Longitude n.38
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Stefano Cingolani, giornalista e scrittore, specializzato in politica estera ed economia, editorialista del quotidiano “Il Foglio” e del settimanale “Panorama”. Ha lavorato all’“Unità”, al “Mondo”, al “Corriere della Sera” (in particolare da New York e da Parigi), all’agenzia ApBiscom e al “Riformista”. Ha condotto Radio3Mondo su Radio Rai. Il suo ultimo libro è “Bolle, balle, sfere di cristallo, l’economia dell’inganno”, Bompiani 2011.