How vulnerable is Europe’s energy security in relation to its oil and gas supplies? Will Russia use gas supply constraints to further Russian political aims, and what might be the implications for the UK market of the potential acquisition of UK companies by Gazprom, current UK/Russian friction, etc.? European energy liberalisation issues have still to be settled and rising global oil prices pose a huge challenge to government strategies for securing a stable energy future.
This huge subject has been around for many, many years and will become even more intense in years to come. As proof of this, Bob Hawley (BEA Chairman & Chairman of Welsh Power Group) highlighted recent newspaper headlines:
“US hits out at Iran/China oil deal” (FT)
“OPEC’s Head sees price of oil hitting $US200 a barrel” (Telegraph)
“BP goes back to petroleum” (Guardian)
This BEA workshop hosted over 45 UK energy industry professionals who engaged with our panel of most authoritative speakers from three quite different backgrounds, all experienced in the politics of oil and gas and its effect on the European energy sector.
Martin Lambert (Shell) covered the FAQs around the supply and demand for world oil, which has such a major consequential impact on global energy business and the consumer. He overviewed the current global oil scene, looking at Shell scenarios, the geopolitics, peak oil price prospects, if there is likely to be a scramble, and Shell’s preferred options. Sue Harrison (BERR) described the situation and progress concerning European energy market liberalisation, the implications, and her expectations of the future. She referred to issues such as the separation of grids from supply businesses, good access to the grids, the protection of national champions, dealing with abuses, etc. Finally, speaking to us via video-conference from Russia itself, Roger Munnings (KPMG) presented his analysis of the growing impact that the Russian energy position and policy has, particularly in Europe, but also on the world. He commented on the effect of EU/Russian politics on the supply of energy to the EU, and on the strategy and challenges for energy investments by EU companies in Russia.
[CLICK ON THE PRESENTATION TITLES BELOW FOR SLIDES]
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“The Global Energy Scene: Shell Scenarios – will there be a Scramble? ” |
Martin Lambert, a Cambridge graduate in Economics and Management Studies, is the Business Development Manager for Shell’s Gas to Liquids (GTL) business. GTL is part of Shell’s newly-created future fuels division. His current focus is on development and marketing of products from the Pearl plant under construction in Qatar, the world’s largest GTL plant. He has worked for the Shell Group for more than 20 years, holding a number of commercial positions, mainly in the Gas and Power business. From 1998 to 2002, he was Business Development Manager for Shell Philippines Exploration, responsible for marketing the gas and associated oil products from the Malampaya gas field to power stations in the Philippines. He was also responsible for further development of both upstream exploration and the downstream gas business in the Philippines. Prior to that, his roles included marketing Brunei LNG in Japan, and later from Oman LNG into a number of markets. |
Martin began by explaining that the latest Shell Energy Scenarios to 2050 (available at www.shell.com) are in effect CO2 scenarios, offering two possible alternatives – ‘Scramble’ & ‘Blueprints’ – of how the challenges of providing more energy and less carbon dioxide might be met. They are not a forecast but instead offer a credible picture of the future for companies and industry to test how robust their plans are to meet those challenges. Three basic hard truths affect global energy today:
Undoubtedly, the ‘Scramble’ scenario was undesirable, and Martin explained why. ‘Scramble’ reflected the dynamics behind energy nationalism and loss of economic growth, with fears over energy security leading to a scramble for resources and insufficient attention to the environment. Typically, ‘Scramble’ occurred in a world of energy nationalism, driven by bi-lateral views and deals done in an uncoordinated way. ‘Scramble’ relied on home grown solutions and on securing home grown supplies, leading to a worsening CO2 situation, to knee-jerk reactions, and providing too little, too late in terms of realistic solutions. This un-joined-up approach would be disastrous as energy demand continued to grow apace and environmental concerns were not seen as a priority. He called this the ‘earthquake syndrome’ – a number of little shocks over time can relieve the pressure, but lack of movement causes a very big problem recognised too late to solve effectively.
‘Blueprints’, on the other hand, was Shell’s preferred scenario, reflecting better anticipation of energy supply security and environmental issues, with coalitions emerging to lead in addressing these. This result is a more stable energy system with better environmental outcomes.
Under this scenario, reactions, though not too collaborative at first, are not national-reactive. They rely on multi-national alliances and a more coordinated approach. Carbon trading becomes more appropriate along with drivers for renewable/alternative energy solutions. The energy profile tails off by 2050, rather than suffering a sudden big problem as in the ‘Scramble‘ scenario. In fact, less coal usage is the key difference in the Blueprints scenario, though carbon footprint effects are still being assessed.
In a nutshell, ‘Scramble’ led to late reactions and significantly higher CO2 emissions by 2050. ‘Blueprints’ with its early action and global cooperation, provided much improved regional CO2 reductions by 2050, worldwide.
Any sustainable energy future will require the use of alternative transport fuels and a wide range of energy sources and carrier option technologies are already available (GTL / 1st generation biofuels) or in development (electric / hydrogen / next generation biofuels). Today’s GTL technology is a pathway to a longer-term future, providing much cleaner diesel that can be produced from a variety of resources other than oil. The process also lends itself very well to carbon capture and storage, and its cleaner carbon footprint makes it readily acceptable to the transportation chain. Electricity in transportation offers interesting but difficult challenges. There is still a trade off between battery weight and fuel required for vehicle drive-power, but Hybrids and plug-in Hybrids offer an evolutionary pathway towards increasing use of electricity in transportation. Hydrogen, if it can be made in a sustainable way, may improve the future carbon footprint, but this is still uncertain. First-generation Biofuels, and the distinction is important, are a necessary step towards 2nd generation biofuels, but do not offer a long-term solution since they can have a serious and unacceptable impact on food resources. 2nd generation biofuels should provide a more viable and sustainable pathway and a better carbon footprint and much development is in process. If biofuels are to scale-up to help meet the predicted level of global demand for transport fuels, then to escape land competition non-food organic raw materials, such as algae, need to be developed. More R&D is needed but is still a long way off.
Martin concluded that the three hard truths would be very hard to solve, since there were no ideal answers, no silver bullets. Technology must play a major role and political and regulatory choices would be pivotal. Indubitably, if a Scramble for oil is to be avoided it would be essential to tackle all three hard truths TOGETHER, probably within the next 5 years, to ensure a sustainable future.
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”European Energy Liberalisation – the real prospects for achievement” |
Sue Harrison has been Head of European Energy Markets in the UK Department of Business, Enterprise and Regulatory Reform (BERR) since November 1993. She has led for the UK the negotiations in Brussels of all the European Union (EU) Directives and Regulations on the Internal Market in Electricity and Gas and on Security of Supply. Before 1993 Sue worked in the Department of Trade and Industry (DTI) Consumer Affairs Division and was for many years the Head of the DTI’s Translation Service. |
Sue set the scene by pointing out the very great efforts that had gone into achieving an unprecedentedly fast agreement on the package of five major pieces of legislation that the EU Commission had proposed in July 2007.
Before this, there had been a raft of legislation that simply did not seem to be having much impact on the ground. Certain fundamental weaknesses in EU energy markets had been identified by the Commission, and most were still very national and showed little sign of joining up to form one single market. The key measures proposed in this third package of EU legislation in 2007 were:
Community level agreement at the recent 6 June Energy Council had focussed on unbundling and on how to join up markets. There was strong opposition from France and Germany to the unbundling of Transmission networks. Compromise was reached by adding a third alternative of Independent Transmission Operator (ITO), which, if properly implemented, should bring about independent transmission operator networks in place of the current system of vertically structured European companies. In 4 years the ITO model would be reviewed to see if it was working.
Regulators now have a set of duties and powers similar to those of OFGEM in the UK. A new body, the EU Regulatory Agency, will focus on cross-border issues, and on supervising network operators.
Finally, the 3rd country clause as currently drafted was still very protectionist and discussions are to continuing to find an approach acceptable to all.
The next steps would be to finalise the legal texts and adopt the legislation by the end of 2008 well before new European Parliament elections next year. We are already seeing structural change in EU markets due to competition action by the Commission, and work is underway to establish regional markets. Sue commented that it might be a while before any practical change is evident on the ground. But in the current climate of energy price escalation and growing consumer anxiety, governments are under tremendous political pressure to bring about improvements in market functioning now.
Sue disagreed with a questioner that the UK government had effectively caved in over unbundling proposals in exchange for a deal on working times. She said that the government had always known that there would have to be a compromise, and had in fact brokered the very strong third alternative of the ITO. Finally, she confirmed that whilst the UK government favoured an EU-level approach, nonetheless the bottom line had to be to ensure national energy security.
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"The Russian Influence on EU Energy Supply"
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Roger Munnings CBE (KPMG LLP) Roger Munnings has been Chairman and CEO of KPMG’s businesses in Russia and the CIS since 1 July and has been resident in Moscow since then. He is a member of the International Council of KPMG - the governing body of the global organisation of KPMG firms and a Member of the Board of KPMG’s EMA Region, and became Chairman of KPMG’s Global Energy and Natural Resources Practice in 1993., Roger has been a partner in KPMG since 1987 and is a graduate of Oxford University in Politics, Philosophy and Economics. Currently a member of the National Council on Corporate Governance, Roger is also a member of the Union of Industrialists and Entrepreneurs, a member of the Russian Union of Directors, a member of the Executive Board of the Association of European Businesses, a Board member of the US-Russia Business Council, Washington, USA, and a Board member of the Russo-British Chamber of Commerce, London, UK. Roger Munnings sits on the Advisory Board of the World Energy Council, the Russian Early Music Festival and the Board of Trustees of the Yekaterinburg Symphony, and acts as an advisor to the Bolshoi Theatre, Moscow. Roger is a frequent and respected commentator on Russia and on energy matters at major conferences around the world. Most recently he chaired the plenary sessions at the 2008 and 2007 Russian Economic Forum in London and an opening plenary of the Global Investment and Finance Forum in Moscow (December 2007). Roger chaired the plenary session at the recent World Energy Congress in Rome (November 2007) and at the Energy Session of the 2006 World Economic Forum in Moscow. He was a member of the Round Table on Energy Security for the G8 Energy Ministers’ Meeting in Moscow in 2006. Roger was also a member of the Energy and Natural Resources Group for G20 Finance Ministers’ Meeting in Melbourne, Australia in 2006. |
Speaking to the audience by video-conference from Moscow, Roger began his remarks by illustrating Russia’s percentage share of world primary energy reserves and production. Its reserves of natural gas and coal are enormous.
Russia’s macro-economic growth over the last 8 years has been startling with foreign exchange reserves growing from $bn12 in 2000 to some $bn 534 by April 2008. He explained that the Stabilisation Fund had been set up to keep excess liquidity under control and had proven most effective. The pictured lack of foreign investment actually shows weaker than current reality. Inflation caused by bottlenecks in the economy was becoming a threat. The economy had come up to operating towards full capacity much more quickly than had been expected and the shortfall in investment over the past 30-35 years caused by the stagnation of the Brehznev years and the uncertainty of the Gorbachov/Yeltsin periods was causing issues in the areas of infrastructure and transport and modern quality office space. Nevertheless Russian GDP per head was still about one quarter of that in Western Europe and North America, having been nearly one twentieth at the turn of the century. The catch up potential remains a significant driver of economic growth for the future.
Roger explained that the Russian government sees its hydrocarbon strength as its most exploitable resource both for the good of its citizens and to make Russia one of the strongest world economies. Already, capitalisation of Russian companies has shown tremendous growth over the past five years, and if they can manage to keep a number of difficult elements together, he expects Russia will be in the top six economies in barely another 5 years time.
Russia’s economic growth is seen as key to influencing its political influence in the world. In the past, Premier Vladimir Putin had become disenchanted by certain treatment by Western countries. He had felt greatly disappointed that Russia’s goodwill was not reciprocated. Russia does not need lectures on concepts; it needs help to bring those concepts about. Although Putin’s perception of Western influence was not always positive, he remained convinced that democracy is the most effective way forward for Russia's future.
New President Dmitri Medvedev is of a different generation and many of his views should be positive for Western countries. He sees Russian regulation conforming to EU standards, as evidenced by his recent public statements to the world media. He also sees poverty and corruption as Russia’s biggest internal threats, and is committed to oppose these vigorously whenever possible. He has laid out domestic policy goals that seem to speak to Russia's expanding consumer class and wants Russians to enjoy personal freedoms through democracy and to have the right to private ownership and all the other quality of life benefits enjoyed by their counterparts in the West.
Undoubtedly, Russia remains a highly influential player in international matters, and energy forms one of its most important assets. However, they must go beyond bilateralism to achieve their economic goals of the future.
Responding to a query from the audience about a recent FT interview that implied that Gazprom was to be broken up, whilst he was not able to offer any absolute assurances, Roger felt that since Gazprom currently produces some 40% of the Russian budget it would seem fundamental to Russian’s continuing future economic growth and strength, and was therefore unlikely to be broken up any time soon. Roger understood the concerns that Western countries might have over such matters as Gazprom’s investment in supply companies, and transmission issues, and he understood how Gazprom’s motives and influence on EU markets could appear suspicious to Western eyes. However, Roger felt it was still early days in Russia’s reintegration into the rest of the world, and such anxieties were natural given the historical context. What is needed are international agreements, both regulatory and physical, in order to step up trust between the parties so that difficult discussions can be positively conducted. Nationalistic mutterings are naturally a worry, but Roger was convinced that treating them with understanding while being appropriately tough in negotiations would achieve the best results for all concerned.
To conclude, Roger’s observations are that Russia would prefer a robust, united Europe with which it could deal one-on-one. Sometimes its actions might appear clumsy, but Russia does feel more aligned with the EU than other parts of the world. This was a most positive attitude and in his opinion bodes very well for Russia’s future influence on EU energy supply. Russia needs the European energy market in a reciprocal way to Europe needing Russia's energy sources.