Atlantic Council summit
Charles Ellinas — 06/12/2015
The European Commission is promoting Energy Union and security through diversification of energy supplies to break up what it sees as effectively Russian monopoly in many member states. It promotes interconnectors, LNG terminals and other projects among which is the North-South Gas Corridor. This is not about getting Russia out of Europe, but Russia has to play within the rules of the game.
The unthinkable is already happening in Cyprus. Turkey’s accession to the EU has been transformed because of Syria and the refugees, making Cyprus less important, and there is now real pressure to open more chapters and work more closely with Turkey.
The highly influential US think-tank Atlantic Council held its 7th annual Summit in Istanbul last month. I attended as one of 600 invited international delegates. The summit concentrated on global and regional energy and economic issues.
The Atlantic Council’s goal is to “work together to secure the future” and it works closely with the US government. Through the papers it publishes, the ideas it generates, and the communities it builds, the Council shapes policy choices and strategies to “create a more secure and prosperous world”.
Fatih Birol, Executive Director of IEA, said cheap oil is good for the global economy, but it is causing a decline in new oil&gas projects. If prices remain at $50-$60 per barrel for 10 years, which is possible, 75% of the world’s oil will be dependent on the Middle East with its inherent instabilities and security challenges. A prolonged period of low investment will cause increasing supply problems. Low oil prices are also affecting negatively the drive to implement energy efficiency and, notwithstanding COP21, delay the wider use of renewables.
Despite the fast growth of renewables now making a serious contribution to global energy, fossil fuels will still account for over 80% of the world’s energy needs by 2035.
A year ago, nobody expected oil prices to stay below $100. Now oil companies are learning to live with ‘lower for longer’ prices. The US has over 4,000 independent oil&gas producers and it is a resilient market fully based on supply and demand. If the oil price goes up shale oil production will go up and more flexibly, and vice-versa. Combined with more oil from Iran, Iraq and possibly Libya over the next few years, it will keep oil prices ‘low for longer’.
Similar arguments apply to gas. New LNG coming into the market from Australia and the US, and possibly others, will keep prices low for a long time. The additional problem for gas is that coal is cheap, and in Asia gas prices will be squeezed between coal and renewables.
European energy security
It was made clear that success with such projects can be assured only through the participation of and funding by private industry. It is not the role of the EU or its member states to fund projects, only to regulate and promote them. Private industry will invest only when a project becomes serious, risk is managed and commerciality is assured.
However, even though Energy Union is gaining momentum, if not carefully managed it may lead to conflicts between member states and to stranded assets. Statoil went as far as to say that Energy Union has developed away from its intended concept to reinforce EU energy security and it is backfiring. It has led to increasing use of coal and ballooning subsidies of renewables.
Whatever happens in 2016 will affect Europe in the years to come. In terms of gas, Europe is divided in two: one that is liquid and well-connected and another which is dependent, requiring diversification. We are in a transformative era driven by technology. LNG is one such case. Europe needs more than interconnectors – it needs LNG terminals in southeast Europe. But such projects need to be funded – they may not be economic and companies may not fund them.
The industry view was that LNG will play a role in Europe, but too much is made of it. These are not commercial projects and the private sector will not invest in them.
Price is the deciding factor – LNG has to compete with piped gas to make a breakthrough in European gas markets and not just be a back-up. That’s how Russia is selling its gas to Europe – it is cheap.
The German view was that LNG is welcome, but indigenous gas is depleting fast and EU needs Russian gas. Other sources are good but limited. The EU should let the market decide. Everybody should be welcome to supply gas to Europe, but at the right price.
Europe needs a balance between energy sources, including renewables, in line with low carbon targets. This is still lacking and that’s why it is in the current, unbalanced situation. Gas has an important role to play as a transition fuel.
Impact on the East Med
Turkey wants to become a bridge between the region and EU energy markets – 70% of global gas resources are east of Turkey and 60% of consumers to the west – Turkey is the conduit.
The Israel-Turkey relationship is improving, with indications becoming more positive. This may eventually facilitate Israeli gas going to Turkey.
The region cannot have silos – the East Med, southeast Europe, the Balkans are all inter-connected. But in the region every country wants its own gas hub –but they cannot get it.
However, there is a case to develop a regional liquid trading system as in Western Europe. This would require a single regulatory and pricing regime aligned to Europe. Greece and Turkey may be able to achieve this if they cooperate.
The development of Zhor is a blessing for Egypt, but gas prices may be a challenge for LNG exports from East Med to Europe. Even though geopolitically gas export cooperation between Israel, Jordan, Cyprus and Egypt would be good, it may face challenges. Other options should be kept open, including exports to Turkey and through Turkey to Europe, marine CNG to southeast Europe and even FLNG for stranded assets. The region may need bold ideas.
US Deputy Secretary of State Antony Blinken stressed East Med regional cooperation.
In this context, he specifically referred to Israel-Jordan working together to build a pipeline to supply Israeli gas to Jordanian industry. When referring to Cyprus, he urged Greek and Turkish Cypriots to get together to develop energy and allow gas to flow to Europe.
Charles Ellinas is a hydrocarbons business consultant
Source
