Tuesday 30 September 2014

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Energy

 

Heating Buildings only to 16 Centigrade?

Posted by on 29/09/14

Vitali Klitschko, the mayor of Kiev, has recently warned his citizens that they might have to do with home temperatures of no more than 16° during the next winter in order to cope with gas and coal shortages, due to the tense economic and financial situation of the country.

For the average European, let alone American citizen this is unimaginable, except for Europeans who have experienced the years from 1945 to 1948.

But will this be unthinkable forever?

Who guarantees that we shall not be hit again by reduced gas supplies from Russia and difficulties to rapidly replace them by alternative alternative sources?

And more dangerous, though less immediate, are we sure that we must not one day radically reduce our coal, oil and gas consumption in order to put a brake on climate change?

This should normally happen by switching to renewable sources and higher energy efficiency, including through perfectly insulated buildings. But that may not be enough to allow us the luxury of heating our housing and offices at 22-24°! We better remember venerable traditions of wearing sweaters and warm shoes at home to feel well at only 18°. It would save a lot of energy and money.

Our grandchildren will be grateful.

Eberhard Rhein, Brussels, 25/9/2014

Humanity must stop building new and phase out existing coal power plants

Posted by on 28/09/14

The UN Climate Summit on September 24, 2014 has once again underlined the threat of global warming and climate change for future generations but stopped short of responses to what constitutes the overriding challenge for Humanity.

A mobilisation event is not enough, even if the thousands of people that flocked the streets in USA and Europe have been impressive.

Action is required; and it must come urgently and be effective. Bottom-up approaches by cities, regions or corporations are welcome but too tiny to have a global impact.

To keep the planet temperature from rising beyond the critical two centigrade humanity must reduce C02 emissions between 40 and 70% until the middle of the century, which only the EU has pledged to do so far, with its 80-95 reduction target.

In order to be successful the international community must focus on the major countries and sources accounting for the high and rising level of C02 emissions:

  • China, USA, EU, India, Japan, Russia, Brazil, Indonesia, Korea, Canada and Australia are jointly responsible for more than three quarters of total emissions. Without them joining the efforts there will be no effective action and no way to prevent havoc: USA, EU, Japan, Russia, Korea, Canada and Australia will, of course, have to deliver much more than emerging countries.
  • Fossil energies are the main sources driving climate change accounting for roughly 80% of the global C02 output.

Humanity has become fossil-addicted; very few people can imagine 9-11 billion human beings doing without fossil energies by 2050-2100.

Coal being by far the worst polluter the international community should in a first step agree on a halt of new coal-fired power plants and a phasing out existing ones by 2050.

To that end, the December 2015 Paris climate conference should agree to:

  • prohibit the construction of coal-fired power plants that are not equipped with CCS as of 2020;
  • withdraw annually at least 5% of non -CCS coal-fired power plant capacity;.

The USA has started the process of replacing coal by shale gas which emits only half as much C02 as coal-fired power plants. Between 2012-16 it plans to retire 60 GW of the total capacity of 310 GW.

The EU is sending mixed signals.

On the one hand, major coal countries like Poland and Germany continue expanding lignite/coal fired power.

On the other ,UK is preparing to build a 450 MW demonstration plant that will capture 90% of its C02 emissions and store them in deep North Sea waters. UK aims to phase out its coal-fired power and become one of the world leaders in carbon capture and storage technology, a strategy for which it deserves praise.

Politically, it will be anything but easy to conclude an international agreement to stop commissioning new and phase out existing coal-fired power plants.

Carbon capture and storage (CCS) should be the way to overcome the understandable resistance, in particular from emerging countries like India that have hardly contributed to global climate change so far.

It is therefore urgent to build demonstrations plants like the UK is doing.

In parallel, utilities should invest in power plants operating on shale gas, LNG, wind/solar and biogas as alternatives to lignite/coal.

The first step is for the EU to take: it must urgently freeze and start phasing out its lignite/coal-fired power capacity.

This would constitute a strong gesture to the international community.

Eberhard Rhein, Brussels, 20/9/2014

Better security through knowledge

Posted by on 25/09/14

Security was the leading theme of a closed expert debate organised by the Polish Institute of International Affairs and its Turkish counterpart – the Centre for Strategic Research of the Ministry of Foreign Affairs of the Republic of Turkey (SAM – http://sam.gov.tr/about-sam/). Inspired by the discussion, and the more unofficial opinions voiced behind the curtain, I have decided to re-visit the issue of energy security, this time from a slightly different perspective.

Not long ago, while discussing the draft of the Polish Energy Policy until 2050, I underlined those aspects of energy security which go beyond physical security and access to energy resources. Energy security is a system centred around policies pursued by individual countries and international institutions. At the same time, it requires policies and a business climate that promote investment, progress and innovation to ensure that adequate supplies and infrastructure will be available in a timely way in the future. Since these two aspects, politics and investment, are interwoven, it is difficult to improve energy security without international cooperation (coordination). However, cooperation alone is not enough, because the problem of energy security resembles a prisoner’s dilemma where mutual trust is necessary to improve the situation for all parties. And trust is based on credibility. The case at hand is about the credibility of one’s economic policy, of which energy policy is an important component.

Can a policy’s credibility be evaluated? Yes, it can, as financial markets demonstrate on a daily basis. How can we do that? Let’s consider a relatively simple example – monetary policy. Using their knowledge of and information on the economy, experienced participants of the market (let’s call them analysts) create models which simulate how the economy is going to develop in the near future. Central banks do the same. In a given state of knowledge and with universal access to information, both analysts and central banks obtain largely similar projections of economic growth, job markets and inflation. Knowledge of economics also indicates how central banks should react to future changes in the inflation rate. The credibility of central banks follows from the fact that they base their decisions on solid factual information which the markets can read. If central banks make surprising decisions which they are not able to justify, risk increases and investors sell off risky assets or demand greater returns.

Despite being much more complex, energy policy may also be evaluated. Suffice to say that any policy is comprised of regulations which the government uses to achieve such results as higher capital expenditures or lower energy consumption per production unit. At the heart of each such regulation lies a cause-and-effect relationship linking the instrument (regulation) to the outcome (desired result). Even if this relationship is highly complex, it should lend itself to a factual evaluation, as the regulator must have connected the effect and cause somehow. Seeing that such a mechanism exists, we may ‘replicate’ it using our economic and social knowledge to verify whether it can deliver the expected results.

This is facilitated by appropriate tools (models), which must be prepared in advance, however – a task which requires systematic and interdisciplinary research. Research into the effects of regulations has an additional benefit in that it allows us to identify areas where our knowledge is imperfect. Discussing the risk emerging when a policy takes a leap into the unknown, Noble Prize winner Edmund Phelps says: “At the simplest level, economics can better show us the consequences of our actions. Less simple are cases in which we don’t have the knowledge to predict the full consequences. Global warming and climate change is an example. Actions that we believe will remedy a perceived problem may in fact lead to an unintended consequence… Generally speaking, global energy systems are so complex that interfering with them will almost certainly lead to unintended consequences” (First Things, Economic Justice and the Spirit of Innovation, October 2009).

Knowing the limits of our knowledge is necessary to evaluate whether policymakers venturing into the unknown are fully aware of the risk or whether they do so because they lack knowledge which is objectively available.

In the first case, where such actions are born of necessity, we must consider a comprehensive spectrum of possible scenarios and then evaluate their outcomes, which will help us identify what risks can materialise when the policy is implemented. This is the approach we chose three years ago when contemplating shale gas projects in Poland. We identified three possible directions in which the sector might develop depending on how current conditions encourage investment, progress and innovation, and then investigated their outcomes.

The second situation should never come to be, and to prevent it from happening in Poland we need strategic, systematic and interdisciplinary research into the energy sector, which should look into strategic aspects of energy and climate policies and into the actions taken by the government/state and companies. Security is one of such strategic matters requiring a systematic approach. Energy security is a public good and as such lies within the remit of the state, which decides how to ensure energy security today and in the distant future. However, the actual ‘delivery’ of energy security is accomplished by companies which, acting within a framework imposed by applicable regulations, ensure uninterrupted energy supplies at an acceptable price. And it is those companies that are first to evaluate the practical cost of the regulations – the cost of security. We should therefore take their opinion into account when researching the energy sector, which should allow us to reduce our ignorance in areas where its cost is the highest.

Improving energy security requires a well-designed and durable strategy, which can only be achieved with appropriate knowledge and interdisciplinary research. It is high time we began working on it.

 

Shale gas will be no panacea for Poland’s energy policy

Posted by on 21/09/14

Poland has been a laggard in European Climate Policy. Its substantial coal reserves, second to those of Germany, and a powerful coal lobby have prevented the country for a long time from waking up to the climate challenge.

No wonder that coal continues to account for more than half of its energy consumption and more than  80% of its electricity consumption, that its per capita C02 emissions (8 tons) have remained higher than in most EU countries and that the government has not yet succeeded in  enacting an effective strategy for lowering  green house gas emissions.

On the contrary, it continues building new coal power plants.

By  2020 11 GW  additional capacities should be on the grid,not a wise decision considering that they will remain operational until the middle of the century  when the EU aims at having reduced its CO2 emissions  by at least 80%.

More recently, under pressure from the EU and rising dependency on Russian oil and gas imports, which cover  almost 40% of the energy consumption, the government  seems to have become a bit more active in  searching for alternative energy sources.

Among these shale gas figures high. Poland  has more shale gas reserves than any other European country, with the exception of Ukraine. But over the past four years the government had to temper excessively high hopes and lower initial  estimates  from more than one trillion to only 300-700 billion cubic meters. None of the exploration wells have so far  been successful, so that some of the concessionary companies have left the country.

But despite these drawbacks the efforts should go on, because domestic shale gas would constitute a big step to make Poland a bit less dependent on Russian imports and C02-intensive coal and lignite.

Poland will, of course, have to put in place an appropriate regulatory framework, especially for the protection of groundwater. But this should be a Polish  rather than EU concern.

In addition,the government has decided to bet  on nuclear power to generate emission free electricity. In January 2014, after almost 10 years of deliberations, it has  approved a new strategy for installing two nuclear power plants with a  total capacity of 3 GW to be operational by 2035. This is an ambitious undertaking in terms of safety and financing, considering the substantial cost-overruns  of the  most  recent nuclear reactor  being built in Finland and the German nuclear exit strategy.

Renewable  energy, especially wind, solar and biomass, would be a cost-effective alternative to nuclear electricity. Poland plans to install 0.5 GW annually and reach  a capacity of 6.6 GW by 2020. But this will be impossible to achieve considering further delays on the renewable energy legislation.

This is a pity as the Polish off-shore wind capacity is estimated at 20 GW.

Ideally, the Baltic riparian countries should create a joint wind power grid to serve as a virtual power storage system. With the support from the EU Commission, the interested countries – Denmark, Germany, Poland,  Lithuania, Latvia, Estonia, Finland and Sweden-  stretching  over a coastline of several hundred km – should prepare a feasibility  study  for  such a project that might be completed by 2035.

Last not least, Poland should step up investments for thermal renovations of buildings to reduce the demand for heating during the cold winter months. It should use a  big chunk of the financial assistance from EU structural  funds 2014-20 for this purpose.

Eberhard Rhein, Brussels, 20/9/2014

Words of praise and criticism to Poland

Posted by on 18/09/14

First a few words of credit to Poland. During my work with evaluation and auditing in DG Enlargement, I visited Poland a few times before its accession to EU. Later on, after turning to public administration reform, I had the opportunity to attend a EUPAN conference in Krakow during the Polish presidency. It was always a pleasure to discuss EU issues with our colleagues from Poland.

Another credit I want to give to Poland is inspired by my heritage trip last August. I visited Krakow, Lublin and Zamosc. Overall it was impressing to witness how Poland is preserving Jewish synagogues and cemeteries who were destroyed by Nazi-Germany during the Holocaust.

In the past it might have been Jews abroad who initiated and funded such restorations. Now very often the initiative comes locally, from town and villages where no Jews are left, and with funding from EU, other international aid programs, and national co-financing. The sites are visited by Polish tourist groups and visitors from other countries. This work can stand as a model for other EU member states.

The way how Poland is restoring or even recreating and reliving, Jewish sites – take e.g. the former Jewish quarter Kazimierz in Krakow – pays tribute to its effort to overcome past prejudices. It also contributes to a historic reconciliation between two nations who were living side by side for hundreds of years.

So why complain? Today’s article in EurActiv (18.9) on the use of EU funds for energy renewal in Poland seems to require a response by both Poland and the European Commission. According to the reports quoted by EurActiv, Poland is using billions of euros from EU carbon credits and emission allowances on coal plants and the budget deficit.

The intention was of course to support Poland in diversifying its energy mix, increase its use of renewable energy sources and reduce its carbon emission. How is this possible? Obviously because of Poland’s current reliance on coal fueled power plants and its reluctance to change course.

But it was perhaps made possible by the lenient rules in the relevant regulations and agreements which according to EurActiv are not legally binding or written in the form of recommendations.

EurActiv also writes that “the decision to bolster Poland’s dominant coal industry at the expense of other energy sources and to cut the country’s deficit budget rather than invest in cleaner energy was made under Tusk’s watch.”

The Polish prime minister was recently elected to next president of the European Council. In his first press conference (EurActiv 3/9), he referred to other sources of energy: “This is a very important moment because I’m convinced that my legacy, my personal experience and our European dreams can become an important source of energy.”

True but don’t forget the energy sources which are fuelling our power plants, warming our buildings and driving our transport means. The challenges of climate change are enormous.

Interview with Mr Abdullayev, President of SOCAR

Posted by on 16/09/14

The President of the State Oil Company of Azerbaijan Republic (SOCAR), Mr Rovnag Ibrahim Abdullayev, discussed with Dimitris Rapidis, Director and Project Coordinator at  Bridging Europe, on a string of issues ranging from energy supply and production, regional cooperation, ongoing and forthcoming projects and partnerships, to the risks of climate change, corporate social responsibility, and the special relationship with Greece as the linking corridor towards the expansion of the company in the Western Mediterranean Basin and the European Union.

*The interview was first published by Bridging Europe. It is republished here.

What is the positioning of SOCAR in the global energy run in terms of production and supply?

Let me first share the vision of SOCAR with you. SOCAR aims to become a vertically integrated international energy company resting upon advanced experience on operation efficiency, social and environmental responsibility, and so far has undertaken major steps to  strengthen its international presence both in terms of energy production and supply.

SOCAR positions itself as a reliable energy partner of Europe. We truly believe that diversification of energy supply is one of the most important topics of today’s energy policy of the European Union, and SOCAR is here to support its European partners.

From historical perspective, the Caspian region always has been and is again re-shaping itself as a hub for global energy supply. SOCAR is currently working on development of a number of upstream and midstream projects together with 25 global companies, which are involved in oil and gas projects in the Caspian region.

Being one of the major players in the industry in the region SOCAR is seeking to raise its own gas production from new fields it is exploring in the Caspian Sea. SOCAR hopes to see its gas production soar in the coming years as production capacity is expanded at existing fields and new ones are discovered and brought into production. Most of the gas produced is likely to be exported to consumers in Europe via forthcoming TANAP and TAP pipelines.

The formation of export routes was crucial for exporting our hydrocarbon potential to the global markets, with the large-scale production of oil and gas only possible once the BTC oil pipeline and SCP gas pipeline had been commissioned. The pace of the next phase of SOCAR’s output growth is to be set by the construction of export routes, especially TANAP and TAP pipelines that will carry the gas produced from Shah Deniz 2.

Which are SOCAR’s existing and forthcoming projects?

Today, SOCAR is actively involved in several significant projects both in a regional and in an international context. In these projects we closely cooperate with well-known global companies and highly experienced teams. Currently OGPC (Oil and Gas Processing Complex) is considered as the largest downstream project of SOCAR in Azerbaijan, which is of strategic importance. The construction of the Complex includes an Oil Refinery with around 9 m. tons, a Gas Refinery with 12 billion bcm capacities and a Petrochemical Plant. The Complex is planned to be fully operated in 2020.

The President Aliyev signed a decree in February establishing a closed joint-stock company (CJSC) for effective management of projects within the second phase of Shah Deniz gas and condensate field’s development, expansion of the South Caucasus Pipeline, Trans-Anatolian Gas Pipeline (TANAP) and Trans Adriatic Pipeline (TAP). The gas which will be produced at the second stage of Azerbaijan’s Shah Deniz field development will be the main source of the Southern Gas Corridor, which envisages the transportation of the Caspian gas to European markets.

In addition to the main projects developed by SOCAR, there is a number of projects and business activities run by our daughter companies in Europe as well as in UAE and Singapore. Fuel retail networks in Georgia, Ukraine, Romania and Switzerland together with the infrastructure projects in UAE, Turkey and Georgia are amongst the most notable ones.

As an example of the diverse nature of projects run by SOCAR’s foreign subsidiaries we can mention “PETKIM Value-Site 2023 Refinery-Petrochemicals-Energy-Logistics Integration” project in Turkey. The project implies construction of a brand new Star refinery, new petrochemical plant facilities, STEP energy plant and Petkim Container Port in Turkey.

Another significant project is the recent acquisition of Greek Natural Gas Transmission system Operator (DESFA). This is work in progress at the moment as this asset provides an excellent diversification opportunity for SOCAR’s investment portfolio.

What is the goal of SOCAR’s Summer School

As part of talent acquisition strategy to develop and attract young professionals to oil and gas sector each year SOCAR purposefully launches sets of diversified projects. Summer School Project initiated by SOCAR since 2010, is one of the decisive activities respectively serving the mission of attracting young, potential and competent students, and retaining young professionals already working at different divisions of SOCAR, through creating deep understanding of SOCAR’s culture and activities both in domestic and international markets. As was clearly mentioned, the program has been launched since 2010, and year by year, every possible development is implemented to make program more comprehensive and useful for the participants. The project is based upon prearranged program, which covers all the chains of energy sector, starting from geology and geophysics of oil and gas wells, and continuing with drilling, production, transportation, refining of produced oil and gas.

The last but not the least, during the program the participants gain deep information on the sales and marketing of produced oil and gas products. It is worth noting that the program is not restricted only to lectures, but also excursions to different production units of SOCAR are organized in accordance with the topic of the day. Overall, the project has substantial positive outcomes in staff development and recruitment strategies of SOCAR.

Baku High Oil School

On 29th of November 2014, the Baku High Oil School was established under the aegis of SOCAR. The Baku High Oil School signed a cooperation agreement with Heriot-Vatt University of the United Kingdom with the purpose of specialists training under a Bachelor Degree Program in the fields of oil and gas engineering and chemical engineering. Since its establishment Baku High Oil School has managed to create modern infrastructure, to form professional administrative and academic personnel.

This higher education institution continues to successfully expand its international ties and attract advanced educational programs and technologies widely applied in Western countries. In the short run, it is expected that the Baku High Oil School will be able to train highly educated in-house specialists who will make their valuable impact in country’s dynamically developing industry and contribute to effective implementation of SOCAR projects both inside and outside of our country.

Baku French Lyceum

The Baku French Lyceum (“BFL”) was established in accordance with an agreement on establishment and activity of the Baku French Lyceum signed between the governments of the Republic of Azerbaijan and the Republic of France on 07.10.2011. BFL commenced its activity on 15.09.2013. Currently 120 children attend kindergarten and school functioning under the lyceum. A supreme governing body of BFL is a Management Committee. The Management Committee consists of 4 persons representing the Heydar Aliyev Foundation, the Ministry of Education of the Republic of Azerbaijan, the Embassy of the Republic of France in Azerbaijan and SOCAR, by one representative from each organization. The Principal of the school and main teachers are citizens of France. Lessons are held in accordance with curriculum of international french schools with observance of requirements of the Law on Education of the Republic of Azerbaijan.

What do you expect from the 2nd SOCAR Oil and Gas Processing and Petrochemical Complex Forum (OGPC) held in November 2014?

SOCAR OGPC Forum is designed to provide a detailed presentation of the new Oil and Gas Processing and Petrochemical Complex (OGPC) to be constructed by SOCAR. In April 2012, we organized the first forum devoted to SOCAR’s Oil-Gas Processing and Petrochemical Complex Project. During that Forum, the extensive discussions and productive meetings   have greatly benefited to both SOCAR and other participants of the event. Over two years after the first Forum, the OGPC activities have advanced considerably. Now, we are completing the FEED for the Gas Processing Plant and passing to EPC tendering. The works on the Petrochemical Plant will run in parallel. We have also completed the OGPC constructability study and other site surveys. At the same time, the FEED for utilities and off-sites and conceptual design for off-plot facilities has been carried out. As you see, the Project is now passing to a more significant phase. We are receiving more and more requests from various companies to organize another forum, which would help companies to obtain sufficient information about current stage of the Project and discuss the possibilities of further cooperation. That is why we decided to organize the second OGPC Forum, which we hope will help to establish close connections and promote cooperation and discussions on Project related issues at one single platform between potential stakeholders such as engineering companies, EPC contractors, licensors, manufacturers, vendors, service providers etc. We believe this event will play a crucial role in the future sustainable development of the Project.

In November 2014, the 2nd SOCAR OGPC Forum will be organized in Fairmont Hotel located in Flame Towers complex in Baku. Let me use this opportunity to invite our Greek colleagues to visit us in Baku in November!

How are you dealing with the climate change problem and environmental advocacy?

First of all, I would like to note that the dealing with climate change is an ethical issue for us and SOCAR has been taking regular actions to deal with climate changes. Moreover, we actively work with a variety of international institutions on climate change.

After Azerbaijan Republic ratified UN “Framework Convention on Climate Changes” and SOCAR enhanced its financial capabilities, it has started to pay more attention to enforcement of global ecological conventions and ecological issues in all company premises.

In 2008 SOCAR approved its Ecological Policy and actions were taken in the same year to enforce Framework Convention on Climate Changes.

It has been 7 years since SOCAR has been taking inventory of greenhouse gas (GHG). After inventorying process, steps were taken to conceive and implement new projects’ ideas regarding minimization of potential GHG emissions having adverse climatic effects. So accumulation and supply to consumers of associated gas produced with oil, substitution of old power-consuming equipment with modern power-saving equipment may be brought as examples. During these years to enforce these processes successful cooperation affairs have been established with the World Bank, GGFR, European Bank for Reconstruction and Development, Asian Bank of Development, companies from Germany, Norway, Japan and other countries. In frame of these cooperation activities such documents as “Plan on minimization of flue-gas emissions”, “Strategy for minimization of adverse effects of climatic changes” were developed.

Concurrently with the foregoing SOCAR also takes focus-oriented steps in other directions regarding environmental protection. Thus, in order to ensure ecological security, regular ecological monitorings are conducted at SOCAR in all offshore and onshore activities, including also oil-gas, petrochemical operations. Currently Environmental and Social impacts of SOCAR projects are assessed and preventive measures are being identified to minimize them. Mining sites traditionally polluted by oil and oil products are reclaimed and recovered to the natural-landscape design. Provisions were made to control in a closed system of produced waters extracted during the production on SOCAR oil-gas operation sites. Besides,  maintenance was provided on biological purification plants of all production facilities.

The discharges from vehicles globally along with other areas of industry also cause one of the most serious ecological problems.  Ecological impacts are crucial due to the growing number of vehicles in our country. In this regard, SOCAR Ecological Measuring Center conducts ecological diagnosis of vehicles.

One of the priority issues in SOCAR’s environmental protection activity is waste management. Work in this area is organized according to requirements of a Waste Management Plan approved by SOCAR. All types of industrial wastes generated at SOCAR facilities are taken over in Waste Management Center (WMC) being a part of a valid waste management system.

Expansion of plantation sites is one of the major directions of ecological policy in our Republic. SOCAR also contributes to planting activities implemented on a national scale. One of the essential environmental projects implemented by SOCAR was designing and constructing the Ecological Park. The main objective of laying out this Park was to create a contemporary form of society-environment relations, and to show that environmental propaganda, environmental upbringing and protection of the environment is a first priority duty of every citizen. It has been 3 years since SOCAR launched the project titled Eco-Park. As a result of the works performed in this scope, 574434 different types of trees-bushes and flowers were planted in an area of 400 ha. Ecological awareness and enlightening activities are implemented  in conformance with the SOCAR’s “Action Plan on Ecological Awareness”. In the frame of the plan, ecological days are celebrated at SOCAR enterprises and facilities, and cooperation with international ecology-oriented organizations is continuously broadening. In order to enhance environmental protection, to develop “approach to the environment with care” traditions and to educate the youth in the spirit of sensitive approach to the environment SOCAR expands its ecological awareness activity from year to year.

What are the major fields of involvement when addressing to corporate social responsibility (CSR)?

There are several key fields of the CSR in our day-to-day work and we think of corporate social responsibility across SOCAR in a strategic way.

Mainly, it is the idea of implementation of sustainable solutions in all areas of our operation. This implies working on strategy to improve working conditions, to integrate labour standards into our business practice, to monitor our facilities, and to collaborate with our partners in order to drive industry-wide change.

The next level concentrates on our employees and on making SOCAR a place where people can build their careers in a positive work environment. Particularly on this point, SOCAR has been a pioneer in developing various activities on employees’ health and labour safety in accordance with the requirements of Single management system for labour protection in the Azerbaijani oil industry.

Another key field in corporate social responsibility for us is the environment. For instance, SOCAR developed its own “Waste Management Plan” in order to ensure that the systems designed to manage waste, generated at our facilities work efficiently and that collection, sorting out, transportation, utilization of waste is conducted in line with the industry practice. Also, Environmental Department regularly carries out the quantitative and qualitative monitoring of harmful wastes in gaseous, liquid and solid forms emitted to the atmosphere as a result of natural and anthropogenic impacts at enterprises and companies subordinated to SOCAR.

Our CSR policy does not stop here of course, there are number of other projects that SOCAR is involved in, however I am afraid that we will need to have another interview to discuss them all.

What is SOCAR’s involvement in Greece? Do you perceive the country as a strategic partner for your company’s expansion in the West?

As you may be aware, SOCAR has been selected as the preferred bidder in the DESFA privatisation process that is still in progress and that is expected to be finalised within the course of coming months. DESFA is SOCAR’s first project of this scale in the European Union and we are very happy to collaborate with our Greek partners towards the success of it. Furthermore, Greece is one of the “TAP countries” and it certainly plays a central role in realisation of the TAP project.

As a result of our increasing activity in Greece, it was decided to open the country office in Athens so that we have our permanent presence in the country as well as in the region. Now, when SOCAR Energy Greece S.A. has been fully established it shall be much easier for us to manage our relationship with our existing counterparts and look at further business opportunities in Greece.

Indeed, Greece is a good friend and a reliable strategic partner of Azerbaijan. Perhaps, one of the most significant indicators of the friendship between our countries is the fact that our collaboration is not limited to the oil and gas industry and that it had constantly evolved during the past years. I believe that the relationship and the economic cooperation between our countries will grow even stronger in the future. I think that numerous official meetings of the Azerbaijani and Greek leadership and the recent official visit of the President Aliyev to Athens only support my point of view.

What is the company’s project plan for energy supply in the EU?

At the times when Europe needs reliable suppliers, supply from SOCAR and Azerbaijan is viewed as a part of Europe’s strategic goals. The challenges to security of supply could be political, technical or even due to extreme weather and demand. I would like to stress that SOCAR met its supply demands during the harsh winter of 2012 due to its storage facilities and strong commitment to meet its contractual obligations. Recently, SOCAR has engaged in expansion of its storage facilities in order to continue to be a reliable supplier.

Instead of selling to regional markets, SOCAR decided to embark on a chain of mega project to export gas to Europe: a chain that crosses 7 countries, deals with six regulatory systems, involves 12 investing companies, includes 12 gas buyers and requires 45 billion USD of investments. By the way, this chain of projects is called the Southern Gas Corridor, or shortly SGC. The mega project will be able to facilitate the transportation of gas not only from Azerbaijan but also from Central Asia and Middle-East countries. The pipeline is being built with the potential to double the capacity and can be scaled up to 30 bcm/a. This is the first project in decades to introduce new gas supplies into Europe rather than simply re-routing existing supplies, thus diversifying sources.

As we plan, the first gas explored from the second stage of the Shah Deniz field will be delivered to Turkey through TANAP in 2018 and then to Europe through TAP in 2019. Today successful execution of these projects is of top priority for SOCAR. The Southern Gas Corridor will be a strong catalyst for interconnectors across Southern Europe, while the TAP section will be able to connect Caspian gas to multiple European markets. In addition, there are signs of strong commercial interests in adding a component of the project into the Balkans.

Sustainable energy means business in the Port of Amsterdam

Posted by on 15/09/14

Profitability and sustainability go hand in hand with the Amsterdam Investment Fund; a network of financing tools that is propelling the city towards energy transition.

Four years ago, Amsterdam chose to sell its shares in NUON, a former local utility company. Its next move would change the future of the city and produce a paradigm-shifting contribution to European sustainability efforts. The city dedicated €75 million of the NUON sale earnings to perpetuating a cycle of lowering CO2 and increasing energy efficiency. To do so it devised a powerful financing instrument – the Amsterdam Investment Fund (AIF).

The Amsterdam Energy Strategy

The realities of climate change and resource depletion are an immediate concern for the Netherlands. The country is at high risk from floods resulting from global warming, and natural gas resources are expected to expire in approximately ten years. The Netherlands is facing these challenges head-on with a plan that places the capital at the centre of rapid energy transition for the whole country. The Amsterdam Energy Strategy 2040 is an ambitious, realistic and absolutely necessary plan to achieve a 40% reduction in CO2 emissions between 1990 and 2025, a 75% reduction by 2040, and ultimate independence from fossil fuels. According to this strategy, Amsterdam must strive to make the city sustainable in every way – it must become financially sustainable as well as energy independent. This will ‘require new forms of cooperation.’

‘If we want to achieve our goal,’ says AIF founding fund manager, Maarten van Casteren, ‘We need to mobilise the whole city.’ This year, the fund has won a place among finalists for the City Climate Leadership Award for its role in generating the contribution of citizens, building owners, housing corporations, schools and SMEs in this drive towards sustainability.

Multiplication through know-how

‘When we established the fund a lot was already happening in the city without government involvement,’ says Casteren, ‘but they had trouble getting started. Residents were more focussed on lowering their energy bills, but funding was not available from the market.’

Lack of initial cash-flow is often a key barrier to sustainable initiatives seeking bank loans or investments. ‘The AIF helps them with technical knowledge and funding from the very early stage,’ explains Casteren. The fund does not offer subsidies, but soft loans and equity deals for viable projects. The loans can be repaid through the savings or profits generated by increased energy efficiency. The technical and economic feasibility of projects is ensured before the loans are made, thus making AIF-approved projects more attractive to other investors.

Built to last

The structure of the AIF is characterised by a rigorous rating system based on economic returns as well as qualitative assessment criteria: innovation, duplication, diversification and visibility. Its success in generating both sustainable energy solutions and a healthy fund lies in the complex interaction of different financing strategies aimed at different target groups. The fund dedicates 20% to social returns, and 80% to commercial ones. Large scale, high-interest commercial investments generate the profit to fund smaller scale social investments with low or zero interest rates. All projects require a minimum outcome of at least 45kg of CO2 savings per project euro invested and commercial investments require a minimal return of 7.5% per annum so that the sum can be reinvested. ‘The fund has to revolve,’ explains Casteren, ‘because it must stay intact over several years.’

Mobilising the city

‘The public response to the fund has been very good,’ says Casteren, ‘We invested a total of EUR 22 million in less than a year for over 40 projects, varying from large scale commercial projects to solar panels for a sports club.’ All of these projects are led by citizens wanting to contribute to an energy efficient future.

New business models

Earlier this year, the AIF-funded Rockstart Smart Energy Programme received applications from start-ups in 39 different countries looking for support to get their ideas off the ground. Based on energy-efficiency potential and economic viability, ten of these companies were chosen and invited to Amsterdam to receive all the support that the programme could offer them. As well as a cash investment of €20,000, the young entrepreneurs were provided with office, legal and fiscal support, intensive coaching from 80 different mentors, and the opportunity to pitch their business in front of over 200 investors. In return for all of this, the fund owns an 8% share in each business.

Ideas range from simple but effective energy-awareness solutions like TheCityGame andGive O2 – apps designed to motivate and spread sustainable behaviour – to ambitious platforms like We Share Solar, which sets out to create a solar energy revolution.

Care to save wants to change attitudes to energy by educating the next generation, ‘often it is they who educate parents,’ says founder, Andrily Shmyhelskyy. But great intentions alone would not create a viable business. That is where Rockstart came in, ‘The mentoring helped us a lot to understand how the market works and how to manufacture this product. The programme allowed us to assess the market and learn how to develop our business.’

‘Accelerating start-ups is key to the global energy transition,’ says Marcel Peters, CEO and founder of another chosen business, Bundles, ‘It is of course mostly about technological innovations, but without changing business models the adoption of these technologies will not prosper. Creating a new business model is 1000 times easier for a start-up than for an existing company…’

After the huge success of this first edition, the 2015 Rockstart Acceleration Programme is already underway, with applications flooding in from all over the world.

Energy means business

Last October, the AIF used €45 million to create The Amsterdam Climate and Energy Fund (AKEF). The fund is dedicated to commercial projects with commercial interest rates. The Energy Research Centre of the Netherlands (ECN) helps to evaluate investment applications in terms of sustainability, energy conservation and technical feasibility, and all investments must actively lower CO 2 emissions. E3 , a consortium of business, climate and energy experts, ensures financial returns in line with the prevailing market, and manages the fund according to the mandate of the AIF. ‘This allows them to act swiftly and smoothly in the market place,’ explains Casteren, ‘operating under investment rules, and taking business decisions without political influence.’

In its first year, AKEF has helped to bring about OrangeGas gas stations, where vehicles can be refuelled using gas made from biological waste and sewage sludge. By providing the Ajax Football Stadium with an initial investment of 1.6 million, AKEF is also behind the installation of a 4,200 solar panels on the roof of the stadium, bringing the Amsterdam Arena closer to the goals of its exciting sustainability project, Amsterdam ArenA. Naturally sustainable. It is not only the profits of this investment that will lead to changes in Amsterdam; the high-visibility solar roof has provoked competition with other buildings vying for the title of largest solar roof in the city, thus fuelling the sustainability drive in the city.

Braving the future

Already the AIF has a direct impact on global energy transition, actively sharing information and best practices with other global cities through its participation in the C40 Sustainable Infrastructure Finance Network. ‘There is a change in approaching sustainable projects from a business perspective,’ says Casteren. Revolving loans are keeping the wheels turning for perpetual energy improvements in Amsterdam, and the approach may have the potential to accelerate the energy transition elsewhere in Europe in preparation for 2020.

Next year holds exciting and challenging developments for the city: only climate-neutral buildings will be constructed from 2015; electric transport will be further increased to 40,000 electric vehicles; and the city aims to make solar energy cost-effective for businesses. These changes will require the support of businesses and citizens, innovative technology and the clever use of funds, and the Amsterdam Investment Fund is there to help it happen.

FURTHER INFORMATION

Read more about the Amsterdam Climate and Energy Fund

Read more about the role of the ECN in the fund

Click here to view last year’s exciting Rockstart demo day!

Europa nicht mehr auf Gaskurs?

Posted by on 15/09/14

Seit einigen Tagen verzeichnen europäische Energie-Unternehmen rückläufige Gaslieferungen aus Putins Reich. Kaum vorstellbar, dass dafür allein technische Probleme verantwortlich sein sollen. Vielmehr liegt nahe, dass die Russen gerade ihre Folterwerkzeuge zeigen. Sie müssen die Gaslieferungen ja nicht ganz einstellen. Eine reduzierte Lieferung über ein paar Wochen hinweg dürfte reichen, um die Europäer nervös zu machen. Russland kann die EU auch treffen, indem es den Import von Konsumgütern beschränkt. So wie die Dinge liegen, könnte sich aus dem politischen Konflikt schon recht bald auch ein Handelskrieg entwickeln.

Merging energy and climate change services under one Commissioner is an overdue change

Posted by on 10/09/14

The division of Commission services into one dealing with energy policy and another one with climate change policy has always been an artificial one: to influence climate change policy makers have to rely on energy policy.

It is therefore positive to recombine the two sides of the coin under a single command and put an end to internal disputes and overlapping created during the past 10 years.

European energy policy must serve foremost the interest of European citizens with energy security and sustainability of supply being the overwhelming targets.

But in a global and long-term perspective, European energy policy must also take climate developments into account. That is why it makes sense to aim at abolishing C02 emissions by the middle of century, which implies phasing out fossil energies, enhancing energy efficiency and switching to renewable energies and completing the network of long-distance power transmission and low-cost power storage .

A single command structure should therefore make the EU more effective. It will become operational just in time for the two main issues the EU will be confronted with very shortly: reducing the dependency on Russia as the single most important supplier of energy and contributing to a successful outcome of the climate conference in Paris in late 2015.

Eberhard Rhein, Brussels, 10/9/2014

UK Conservatives shouldn’t abandon the green agenda

Posted by on 09/09/14

Whitehouse Consultancy Director Carl Thomson argues that the UK Conservative Party should continue to support investment in renewable energy in an article for the Huffington Post.

To read Carl’s article, please click here.

The Whitehouse Consultancy is one of Europe’s public affairs and communications agencies.

Energy security: a global perspective

Posted by on 02/09/14
By Adam Czyzewski The Ministry of Economy has put out for initial public consultation a draft of the Polish Energy Policy until 2050. As could be expected given the current tensions between the EU, US and Russia, Poland’s energy security topped the triad of sustainable growth objectives. But how to define 'energy security'?

Australia’s energy policy volte-face is inadmissible

Posted by on 02/09/14

Mr. Abbot`s new liberal-conservative government has been elected on the promise to abolish the carbon tax on mining, coal power and air transport companies introduced by his predecessor to contain excessively high Australian green house gas emissions. As of first July 2014 the carbon tax has been formally repealed.

The new government claims that electricity and gas prices have thereby been reduced by 9 and 7 per cent respectively and that the measure will boost economic growth.

The previous targets of reducing C02 emissions by 5 per cent until 2020 over 2000 and producing one fifth of its energy from renewable sources, especially wind and solar for which Australia has big potentials, by 2020 seem in shambles together with the institutional and regulatory frameworks that have been put in place over the years.

The coal mining industry and big business have been the driving forces behind this scandalous policy turnabout in one of the most affluent and green house gas emitter countries on earth! With 17 tons C02 emissions per capita emissions, more than twice the EU average, Australia ranks among the 12 most polluting countries on earth!

The dramatic policy shift happens at the very moment when major countries and civil society will meet in New York at the invitation of the UN Secretary General to discuss solutions for the International Climate Compact to be finalised in Paris in December 2015.

The time has come to seriously think about “outlawing” countries which flatly refuse to make any contributions to Humanity’s most pressing challenge: contain temperature increase to less than two centigrade. Australia should become, jointly with Russia and Qatar, one of the first countries to be put on a black list of outlawed countries.

Let us hope that under domestic and international pressure the next government will rethink its strategy, the more so as Australia will be suffer very badly from creeping climate change.

Eberhard Rhein, Brussels, 27/8/2014

Is Merkel playing into Putin’s hands?

Posted by on 02/09/14

The crisis in Ukraine is exacerbating. With more than 5000 Russian soldiers on the Ukrainian territory, with the latest equipment, we can literary talk about an invasion.

Vladimir Putin’s main target is to rebuild of the Soviet space; this space included two NATO- member- states: Latvia and Estonia. Putin will not stop here but will go further, beyond Ukraine.

This situation resembles the one in 1939 when nobody believed in the risk of a war, but in just a couple of months Poland was split.

Targeted as the next on the list, the Baltic States, Poland and Romania, ask for a firm reaction and military aid to Ukraine. The experience of these states in the last 20 years of relations with the Russians space makes them more realistic. From Berlin, Rome or Paris things seem more distant.

The main goal of Vladimir Putin is to discreet NATO and USA as the main guarantees of the Western security.  Once done the world status-quo will tear apart and the Russian Federation will regain its role as unique power.

Analysts also take into consideration the possibility that Russia will use some narrow and precise nuclear strikes in the South-Eastern Europe. The goal is just to intimidate and force NATO to … not to react. The presumed targets could be Latvia, Estonia and even Poland. Point 5 in the NATO Treaty asks for a united military reaction, but at this moment Germany seems far from being ready for such an action. 7 out of 10 Germans believe their country should not intervene if the Russian Federation attacks Estonia, and the fault lies to the German politicians headed by Angela Merkel, who did not prepare the civil society for such a process.

As it is known that Angela Merkel was a USSR agent, a close friend to Vladimir Putin, I wonder if we do not deal with a premeditated infiltration at a high level in the most powerful NATO European state. What if in these moments the politics of Berlin is not made at Berlin but at Moscow, and Putin’s confidence starts from this point?

My accusations are sincere when I see how Merkel doesn’t make NATO politics but the one of Putin. If we speak of an already occupied German, as was the case of Ukraine through its former president Yanukovych? What does the civil society in Germany do, the opinion shapers, where is the pressure from bottom to top? Has the social responsibility disappeared, the political factors are no longer supervised? We speak of a totalitarian regime in an acceptable form.

Russia will send more troops in Ukraine and only a moral support from NATO states, if not NATO itself, can block the Russian expansion. Otherwise, as was the case of Hitler, they will go further just because nobody opposes them and because they can do it.

Vladimir Putin mentioned that the Ukrainians and the Russians are the some people, the Soviet one most probable. In this case the Dugin-Putin doctrine speaks about the right of the people over the individual right, thus about the restoration of a consecrate space. In such conditions the threat goes to the Baltic States, the Republic of Moldova and Georgia, other states being already included in the Soviet space.

It is just a matter of time before Russia goes further, while NATO is dysfunctional.

P.S. I wonder now, who was behind the increase in Germany’s energy dependence on Russian gas, by reduction of nuclear energy?

 

L’éolien soulagé : les vents contraires épargnent le ministère de l’Écologie

Posted by on 01/09/14

Après le grand chambardement ministériel, les professionnels de l’énergie peuvent souffler. Ségolène Royal, dont l’omniprésence a été particulièrement appréciée depuis son entrée en fonction par les professionnels de l’énergie, reste ministre de l’Écologie. Mais ils ne devraient pas être les seuls à se réjouir. De celle qui porte la loi sur la transition énergétique dépend aussi l’avenir économique du pays, le secteur des énergies renouvelables étant susceptible de créer des emplois par centaine de milliers.

« Nous sommes satisfaits du projet actuel et rassurés que Ségolène Royal continue à le porter » a fait savoir, visiblement soulagé, Frédéric Lanoë, Président de France Energie Éolienne (FEE), syndicat professionnel de l’éolien. Le syndicat des énergies renouvelables (SER) n’est pas moins enthousiaste. Ainsi, « le calendrier parlementaire, notamment celui de la loi de transition énergétique, et les grandes orientations qui doivent guider l’avenir des énergies renouvelables devraient être confirmés et l’action en leur faveur poursuivie » a fait savoir le SER.

France Énergie éolienne a également rappelé « la nécessité de faire de la transition énergétique et de la croissance verte deux priorités du nouveau gouvernement », et en a profité pour renouveler sa proposition de pacte industriel pour favoriser l’emploi. L’éolien constitue en effet une voie de réindustrialisation encore sous-exploitée et toutes les parties prenantes de la dynamique énergétique, les industriels et le Gouvernement ont intérêt à orienter ensemble leurs efforts vers la recherche, l’innovation, l’investissement et l’emploi.

L’éolien et les énergies renouvelables : un vivier d’emploi

Et pour cause, le secteur énergétique est le 3e secteur industriel français en termes d’emplois directs après l’automobile et l’aéronautique. Face aux derniers chiffres du chômage tombés le 27 août, il devient urgent de passer de l’intention à l’action. Après huit mois de hausse consécutifs, les chiffres dévoilés par Pôle emploi continuent de surprendre : si la hausse était de 0,3 % en juin, elle est de 0,8 % en juillet 2014.

Rien qu’EDF emploie 100 000 salariés en France et aura in fine recruté 6000 personnes en France fin 2014. Outre la production et l’ingénierie, le recrutement concerne aussi les nouveaux métiers liés aux énergies renouvelables, sachant que l’électricien est premier Européen des ENR et que les énergies renouvelables font partie intégrante de sa stratégie de développement. À titre d’exemple, en France, les 5 unités de production hydraulique et les 2 unités d’ingénierie emploient 4700 collaboratrices et collaborateurs qui assurent la gestion de 439 centrales hydrauliques.

La transition énergétique peut compter sur EDF a fait comprendre Henri Proglio

L’entreprise a déjà fait part de son soutien à la transition énergétique par la voix de son PDG. Si Henri Proglio n’a pas explicitement commenté le remaniement ministériel, il a en revanche salué le texte au moment de sa présentation en Conseil des ministres, jugeant dans une déclaration écrite à l’AFP qu’il était « équilibré » puisqu’il « n’oppose pas les énergies, mais souligne leur complémentarité ». Il continuera de le faire s’il est réélu à la tête de l’entreprise, son mandat arrivant à son terme en novembre 2014.

Dans les faits, EDF continue de développer la filière éolienne (terrestre et en mer), en France comme à l’international. Jeudi 28 août, elle a d’ailleurs officiellement annoncé la mise en service de trois parcs éoliens d’une puissance totale de 34,7 mégawatts dans la région Languedoc Roussillon. À l’international, cette filière représente déjà 87 % de son activité.

Une mobilisation générale pour des centaines de milliers d’emplois supplémentaires

Ce n’est pas uniquement à l’échelle d’EDF que la mutation doit s’engager. La transition énergétique exige de la part des particuliers et des entreprises le changement de nos modes de consommation vers davantage de sobriété et d’efficacité. Autrement dit, cela ne va pas sans le développement des énergies décarbonées que sont les énergies renouvelables et dont la France dispose en abondance. Cela ne va pas non plus sans la rénovation des bâtiments, la production de matériaux ou encore l’intelligence des réseaux. Autant de chantiers qui nécessitent de la main-d’œuvre.

Une étude du CirED-Cnrs1 analysant le contenu du scénario NégaWatt en emplois directs et indirects a estimé précisément pour chaque secteur les créations et les suppressions d’emplois. Ses conclusions sont plus qu’encourageantes étant donné que d’ici à 2030 la transition telle qu’elle est proposée est susceptible de produire 632 000 emplois de plus que si la France persévérait dans sa politique énergétique actuelle. Les emplois créés dans la production, le transport et la distribution d’énergie seront plus nombreux que les emplois détruits.

Mieux encore, une autre étude réalisée par l’OFCE (Office Français des Conjonctures Économiques) et l’ADEME, bien que basant ses calculs sur une méthodologie différente, aboutit à une estimation confirmant la première. Elle conclut en effet à 745 000 emplois en 2050 avec le scénario négaWatt, et même à 825 000 avec le scénario « média » de l’ADEME.

Outre la baisse du chômage, cette étude anticipe une forte réduction de la dette publique et une balance commerciale sortant du rouge avant 2050. En outre, les ménages verraient considérablement réduire leur facture énergétique et pourraient profiter d’un revenu brut disponible supérieur. Tout ceci donne plutôt envie d’accélérer le mouvement, à l’échelle individuelle et collective.

Oil prices are down. What is going to happen next?

Posted by on 29/08/14

June 19th saw the price of Brent crude rise to a one-year high of USD 116 per barrel. A week later, the price began to drop, eventually reaching its lowest since April last year, at slightly below USD 102 on August 19th.And all of this in a time when armed conflicts, which are far from being resolved, ravage Ukraine, Iraq, Libya and Syria, while tensions between Russia, the European Union and the United States are second only to those at the time of the Cold War. The wars have caused oil supply from North Africa and the Middle East to shrink by more than 3 million barrels a day. Our safety cushion, Saudi Arabia’s untapped reserves, is slowly becoming dangerously slim, currently offering a daily capacity of 3.2 million barrels – 700,000 above the lower end of the market’s comfort zone. What is going to happen next?

It is much easier to explain what has already happened. Markets are driven by expectations, which are in turn formed based on past events and experiences. Underpinning the process is uncertainty, which in the case of such unique events as geopolitical conflicts is very high, although not so high as to deprive us of the expectations through which we perceive real-world developments. Let us then look at the oil market as it was seen in May, before crude prices began to rise. Late-May projections indicated that Brent prices were to decline gradually in 2014 and 2015, down to the region of one hundred dollars per barrel, and that this would happen amid considerable price volatility. The decline seemed likely considering that solid supply growth in the US and Canada, unfettered by geopolitical risks, was alone sufficient to meet the anticipated increase in global demand.

However, the balance between oil supply and demand was maintained, albeit only with a relatively thin safety cushion formed by Saudi Arabia’s crude reserves. The 700,000 barrels a day separating the market from its comfort zone could soon be in jeopardy if active conflicts were to escalate or new ones erupt. Any such event, which could occur in a multitude of possible locations, would send oil prices rocketing. Although the forecasts I saw in May predicted that the supply of crude oil from Libya and Nigeria (and to a lesser extent from Venezuela) would continue to decline, they also projected a significant surge in oil production in Iraq, Kuwait and, to a lesser degree, the United Arab Emirates. The conflict in Ukraine and the sanctions imposed on Russia were both taken into account as risk factors affecting future oil supplies. However, the projections concerning the oil balance in 2014–2015 did not factor in reduced production.

This time, the drop happened in Iraq, a key player on the global oil market. OPEC’s second largest oil producer (at some 3.3 million barrels a day), Iraq is also among the world’s top potential oil suppliers in terms of available reserves. When the Islamic State of Iraq and Syria (ISIS) carried out its offensive in northern Iraq in June, capturing the provinces of Nineveh and Saladin and their capitals of Mosul and Tikrit, panic spread through various markets, including that of crude oil. Prices went up.

The fear premium on crude is typically at its highest at the start of a conflict. If supplies remain uninterrupted, as was the case here, the market eventually diversifies, forming different perceptions as to a conflict’s potential developments and possible hedging strategies. When on June 29th ISIS announced the formation of the ‘Islamic State’ caliphate in the area controlled by the group, concerns that the conflict would spread to southern Iraq, where current production is based, temporarily abated and the oil price began to drop.

On the top of these circumstances, a rare situation could be observed last week when all available information favoured a decline in prices. The American Energy Information Administration agency (EIA) reported that the production of oil from unconventional deposits (tight oil) in the US was higher than expected, with individual well efficiency above projected values. At the same time, the agency adjusted its demand growth forecasts for 2014 and 2015 downward, anticipating a global economic slowdown. EIA projections were consistent with Europe’s estimated GDP growth figures published at that time, which turned out lower than originally forecast. Iraq’s production prospects also improved when Nouri al-Maliki stepped down as Prime Minister, thus removing the risk of a coup from the equation.

What is going to happen next? There is no good answer to that question as it is difficult to foresee how today’s conflicts will develop. What the recent situation in Iraq has shown us is that the risk premium on Brent crude anticipated in May’s projections was too low and that we should expect higher prices in 2014 and 2015.

Although Ukraine and Syria produce little oil, the effect of armed conflicts ravaging the two countries extends far beyond their geographical borders. Sanctions imposed in connection with the Ukrainian crisis will affect future oil supplies from Russia. Hampered access to Western technologies and capital will delay production from difficult and expensive oil deposits indefinitely, which will likely result in reduced production from 2016 on. At the same time, the war in Syria has set off intense hostilities in Iraq, prompting the United States to become involved again. Libya is in a state of complete anarchy. At 1.45 million barrels in 2012, the country’s daily oil production has now halved and is likely to fall to zero. The Israeli-Palestine conflict is yet another potential source of trouble.

However, with the crude oil supply from the US increasing, there is also some good news. Rising dynamically since 2008, the country’s oil production has already more than offset the slumps in North Africa and the Middle East, ensuring relative tranquillity on the oil market. Compared to May’s forecasts, the US is now projected to produce an additional 300,000–400,000 barrels of oil a day in 2014 and 2015. In combination with global oil demand forecasts adjusted down by some 200,000 barrels a day, the new figures somewhat improve the global oil balance. In these circumstances, the price of Brent crude may stay in the region of one hundred dollars per barrel for some time or even drop below that threshold if oil prices prove especially volatile. Will this happen? Only time will tell.

 

 

 

 

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