Sunday 1 March 2015

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Energy and climate: Can it be simply rethinking mainstream growth strategies?

Posted by on 26/02/15

This week could be a turning point for climate and energy policy in Europe. The Commissioner for Energy Union, Maros Sefcovic announced the strategy for Energy Union alongside a Climate communication from the European Commission on the ‘road to Paris’ and a Communication reporting on the electricity interconnection target of 10 percent.

According to the International Energy Agency, energy accounts for two thirds of global emissions so when we are talking about climate change, its effects and how to deal with this, energy policy is fundamental to these debates and inextricably linked. The announcements seem to put citizens first and aim to enhance solidarity in EU energy policy and incorporates the need for social dialogue, thereby ensuring a ‘Just Transition’. However the implementation of this will be the most difficult part. National Member States still show deep divisions on how we should go about renewing our energy policies. Yet it should not only be a question of security, which the crisis in Ukraine is currently highlighting but moreover on how not to harm our environment and the only planet we are living on and about how to build a sustainable future.

The fifth Intergovernmental Panel on Climate Change report published last year stating that humans are a cause of climate change was perhaps foreseen but nevertheless alarming. Yet the same report identified that the technology for a clean transition exists, but it needs to be harnessed.

The climate and energy decisions that Europe will make over the next 12 months, reform of the Emissions Trading Scheme for instance will shape how we use and generate energy for decades to come. They have huge implications for our fuel bills, the security of our energy supplies, our industrial opportunities, and global efforts to manage the risks posed by climate change. If our leaders take this emergency seriously, we can avoid being ‘locked-into’ fossil fuels for another several decades. Significant changes to the structure of some energy companies such as E.On illustrates their business awareness to move away from fossil fuels if they are to respect the climate agenda.

The reality is that we can do so much more in energy policy if we act together as Europeans. We have the political tools and a favourable geographical landscape to do so.  What is even more needed is a mutual commitment to climate change action and thus also to enhance our energy consumption and supply in line with sustainability in social and economic terms.

Last October, the EU Council decision on the EU 2030 climate and energy package, left many feeling very disappointed. Although the European Union is recognised for being a role-model on climate action, the emergence of new clean energy policies in the US and China and the bilateral agreement signed in November now means that an international climate change agreement is more likely to be reached at the UNFCCC summit in Paris this December. The EU has to step-up and show commitment to convince those leading countries that Copenhagen cannot be repeated.

The first priority for Energy Union needs to be energy efficiency. It is the fastest, cleanest and safest way to save energy. It’s a crucial way to meet our energy needs and has multiple benefits. Also a credible European energy strategy would encourage the continued growth of the renewables industry, given the potential for its proven, affordable clean technologies to generate new industrial opportunities and help reduce gas dependency.

The deep flaws in the Emissions Trading Scheme, Europe’s flagship scheme for cutting greenhouse gas emissions, require urgent reform. The Market Stability Reserve needs to take effect as soon as possible. It is perhaps unrealistic to say we need it be reformed before the UN climate summit in Paris this year but it is an issue that requires urgent action as the low carbon price is having a knock-on effect for other climate and energy issues.

Interconnection is also a vital part of renewing European cooperation and solidarity through linked energy supplies whilst lowering dependence on Russia and other third countries. Furthermore, investment is key to this. A discussion should be started for a ‘super-fund’ for energy investment.

At the moment, with funding spread out in separate budgets, its not easy to see the clear long-term investment set-out for our overall, long-term energy and climate goals. There are economic alternatives. The crisis proved this and FEPS, with many other progressive researchers have been publishing the findings on this and showing alternative policy solutions.

We need to seriously re-think our economic models and the way we think about ‘growth’. It should be clearly linked to our climate and environment with as the ‘circular economy’ or the ‘blue economy’ suggest. Europe’s industrial strategies need to not only have regards to ‘growth’ but to assess first how this impacts the environment.

Scientific research tells us that we have to change our approach concerning the way we produce and how we influence nature. The ‘anthropocene’  concept discussed in FEPS Queries magazine issue 5 is based on evidence that proves that human-driven impacts are now significant at the level of the Earth’s deep geological time (such as the changes in carbon and nitrogen cycles, global warming, sea level change etc.)

Without radical action to avoid a 4°c rise in global temperatures, more extreme heatwaves, declining global food stocks, loss of ecosystems and biodiversity, and life-threatening sea-level rises are likely.

Hopefully this week’s announcements will provide the turning point we urgently need towards a sustainable transition. COP 21 in December can be too if there is the political willingness to take urgent measures.

Barosso and Oettinger messed up South Stream

Posted by on 22/02/15

Soon after he was appointed Commission Vice President for the Energy Union, Maroš Šefčovič started lobbying Russia to return to the South Stream gas pipeline project. The same project was frozen by direct orders of former Commission President José Manuel Barroso.

First episode: Barroso stops South Stream by telling the former Bulgarian PM Plamen Oresharski that the commission will slam his country with infringements it cannot afford.
This happened against the background of the Ukraine crisis. The message was clear: the Commission doesn’t want to open its doors for a project detrimental to Ukraine.
Six months have elapsed. Barroso has been replaced by Jean-Claude Juncker, Oresharski has been replaced by Boyko Borissov. And the Ukraine crisis is at the brink of becoming an outright war.
So Borissov comes to Brussels and warns Šefčovič of an “energy catastrophe” for his country following the freezing of South Stream.’ Exactly one month before Putin said in Turkey that Russia is fed up with Bulgaria’s blocking the project, and that the Russian gas will arrive on European territory, but in Turkey instead. And the project is no longer called “South Stream, but Turkish Stream”.
The next day after his meeting with Borissov Šefčovič goes to Russia and asks Gazprom to revert to the old South Stream project. He was not successful, but what happened to the previous warnings to Bulgaria about infringements?
Russia obviously takes the message seriously, because Putin took in Budapest yesterday (17 February) a U-turn, announcing that Russia has not given up South Stream, which he had himself declared dead in December.
Now the Commission is having second thoughts about the project and has asked the Russian side to reconsider Bulgaria for implementing it, Putin said.
But I don’t think it was only Putin who made a U-turn. What made the Juncker Commission make a U-turn with respect to the Barroso commission? Isn’t this the recognition of a major mistake? Thanks to Barroso, and to the then energy commissioner Günther Oettinger, the new South Stream would be dependent, apart from Russia, from Turkey.

EU renewables shortfall to be put out to tender?

Posted by on 16/02/15

How can you make sure you hit an EU-wide binding target for renewable energy, if you don’t have binding targets at the national level?

It’s a problem Commission officials have struggled with since the 2030 climate and energy targets were agreed by EU leaders last October.

Heard in Europe hears tell that one renewable energy company has come up with a solution – putting the shortfall out to tender.

Imagine the EU doesn’t look like making the binding 27% of renewables across the Union because member states aren’t being forced to hit their non-binding national target of at least 27%.

In that case, a body – most likely the Commission – will open up the remaining percentage to bids from renewable companies across the EU.

It will select the best offers, and through that process make sure the EU meets its green commitments.

We understand that this idea is being looked at by officials, but our sources tell us “it is extremely early days”.

Indeed, no one at the Commission was prepared to go on the record about the plan at this stage.

Confidence in the Commission’s ability to fight climate change through market mechanisms remains shaky, following the failure of its EU’s Emissions Trading System.

ETS was meant to be a cornerstone of the fight against climate change. But the market for emissions allowances collapsed after a huge surplus of the permits was handed out.

 

Photograph courtesy of Russell Smith. Published under a Creative Commons license.

The emissions abyss (and the climate action the world can take now)

Posted by on 15/02/15

By Tasneem Essop, head of low carbon frameworks for WWF’s Global Climate and Energy Initiative

While all eyes are focusing on the negotiations for a new climate agreement that will form the basis of the climate regime after 2020, it is critical that we do not lose sight of the need to increase our actions on climate in the current period up to 2020.

The issue of addressing pre-2020 ambition was placed on the agenda at COP 17 in Durban. But after three years of discussions, sharing ideas and listening to experts, we are yet to see any real concrete actions that can address the low level of ambition in this period.

Today, we’re launching a report, which is a compilation of views from WWF climate specialists around the world on how some key countries could help close the ‘gigatonne gap’ in emissions over the next five years.

The gap we’re witnessing, which is more of an abyss, is caused by low levels of climate commitments from governments in the current period.

At the moment the pre-2020 period does not seem to be on the political radar in most countries, despite the fact that the IPCC science says emissions must peak within this decade to keep average global warming below 2°C to limit dangerous climate change.

With current emission trends we are heading for a 3.6 to 4°C scenario.

For us, science and equity have to be at the heart of any climate agreement. In other words actions need to be based on scientific facts and requirements, but also carried out in a fair and people-focused way.

We know that many countries have already started taking actions on climate at a national level.
But we also know that these have not gone far enough. The proposals for closing the emissions gap go a long way in addressing economic and developmental challenges in many countries.

The arguments that action on climate will slow down growth or affect objectives to address poverty no longer hold water. There is enough evidence showing that climate action is good for jobs, health poverty eradication and economic growth. Governments can use this period up to 2020 to begin the just transition to a zero-carbon future.

Those countries that have the responsibility and capacity to do more should lead this transition as well as support others that can do much more if there is financial, technology and capacity building collaboration and support.

We need to see commitments at national level, as well as multilateral commitments – and crucially they need to be turned into concrete actions. Citizens and businesses around the world are ready to do their bit.

Now governments must act.

Climate action is urgent and the planet and its people cannot wait any longer.

We’ve asked 10 WWF colleagues from various countries to analyse and sum up what concrete things their governments could and should be doing now.

From scrapping coal-fi red power stations and increasing renewables to improving energy efficiency, strengthening emissions targets and addressing deforestation, you will see that there are plenty of ways governments around the world can limit their pre-2020 emissions – and urgently close the gigatonne gap.

Read the report here.

Tweet this and help us share the message!

What can countries like South Africa, Mexico and India do right now to cut their emissions? @climatewwf explains: http://bit.ly/17eYMsQ

Our planet can’t wait for #climateaction that starts in 2020. What countries can do NOW (via @climatewwf): http://bit.ly/17eYMsQ


The Energy Union – not as black as it’s painted

Posted by on 11/02/15

The Energy Union is still very much like a yeti. Though no one has seen it yet, it is already feared. But this is to be expected considering that the concept was born out of concern for security in the face of the escalating military conflict in eastern Ukraine. Poland was first to suggest a solution, putting common gas purchasing on the table. In the case of natural gas, Poland and New Member States, as the countries from the region are still described, are very much exposed to the risk of the supplies from Russia being interrupted. Urgent action is required to mitigate this risk, and it is needed now. Older Member States are in a much better position in terms of gas supplies, as their extensive infrastructure for accepting (LNG terminals) and transmitting (pipelines and interconnectors) gas allows them to source gas from many suppliers other than Russia. For the countries which rely on the progressive construction of the European gas market for their energy security, purchasing gas from Russia under a common scheme would be a step back. But who says Poland is against building a uniform European gas market? In fact, it is just the opposite. When I set out to discuss Russian sanctions last year in late April, I argued that gas supplies can be diversified most effectively by creating a single European gas market. Matters to be addressed first include the expansion of existing gas infrastructure, particularly in New Member States, the introduction of standardised contracts, the establishment of a futures market to secure adequate commercial gas reserves, and the removal of limitations on oil and gas exploration. The single European gas market, linked to the American one through pricing arbitrage, should be the cornerstone of the Energy Union, as this would effectively guarantee energy security across the EU in a manner similar to the global oil market today. This solution could break the monopoly of Russian gas, just as the OPEC cartel’s hold on oil trading was loosened with the emergence of the global oil market.

For now, however, new Member States have limited access to the market given their lack of transmission infrastructure and interconnectors. Changing this situation requires considerable investment and the results will only be visible after several years. The LNG terminal in Świnoujście, which will soon come on line, may prove instrumental in improving the security of gas supplies to New Member States, as plans are in motion to connect the facility to the proposed Baltic Pipeline, which will run through southern Poland, the Czech Republic, Slovakia, and Hungary, up to the planned Adria LNG terminal in Croatia. The North–South gas corridor will comprise a number of two-way inter‑system gas connections and domestic gas pipelines, which either already exist or are at varying stages of completion. In October 2013, the European Commission marked the investment as a ’Project of Common Interest.

The single gas market, which is still only a blueprint in this part of Europe, fails to address the problem that EU newcomers are facing today as a result of the rapidly deteriorating relations with Russia. Poland’s proposal, the way I understand it, is aiming to create effective solutions which will enable us and other countries in the region to survive the period of integration with the European gas market. Joint gas purchasing is one of the solutions which can bring immediate security improvement in this part of Europe. If this solution cannot be implemented in practice, a different strategy, one which will be instantly effective, should be used in its place. Energy solidarity is the first step, because without it some countries will make their own desperate efforts to ensure energy security, which would obviously adversely affect the vital process of European integration.

In the interest of all Member States, energy security is at the very heart of the Energy Union, however. Maintaining energy security requires ongoing efforts, which may differ depending on the time horizon in question. In economics, the points dividing the time horizon into short, medium and long term do not reflect time periods on the calendar, but represent lengths of time necessary to change a rigid system which has been shaped by earlier decisions into a flexible system unfettered by any previous determinations. When dealing with a production process over a short term, we can look for solutions among installed capacities. Over a medium term, existing production capacities may by enhanced using available technologies. Over a long term, possible choices also include technologies which are yet to be ‘produced’. Applied to the notion of energy security, this definition of a time horizon reveals the priorities of Poland and New Member States, and of such countries as Germany. The first group of countries seeks to reduce the risk of gas supply interruptions immediately – using existing infrastructure and assets (networks, interconnectors, and producing gas fields), while the second group does not fear any short-term threats to its energy security, giving priority to medium-term (building a gas market) and long-term (creating a low-carbon economy) initiatives. The Centre for Eastern Studies (Ośrodek Studiów Wschodnich) reports that ‘according to a non-paper published on January 19th, detailing Germany’s unofficial stance on the Energy Union, Berlin declares support for the project in a form which is consistent with the targets of the country’s energy policy… Germany believes that the Energy Union should be an initiative which will lead to a gradual standardisation of the Member States’ energy policies, and that its key objective should be to create favourable conditions for investment in low-carbon technologies, including in particular projects promoting renewable energy sources and energy efficiency, which would ensure that the European industry remains competitive in the future.’

When the proposed design of the Energy Union is presented, which will happen soon – in late February or early March, we will take a look to see how well it serves energy security, which every Member State strives to achieve by taking appropriate steps depending on the time horizon concerned. The different points of view will transform into a concerted effort to create a secure Europe. Then the scary yeti will slowly fade away.

 

European Investment Bank confirms plans to finance Trans-Adriatic Pipeline

Posted by on 04/02/15

On February 2, during the annual meeting between civil society and the European Investment Bank’s (EIB) Board of Directors, the EIB revealed that the Trans-Adriatic Pipeline (TAP) was among its priority projects for 2015 in the Balkans.[*]

by Kuba Gogolewski, cross-posted from the Bankwatch blog

The Trans-Adriatic Pipeline, planned to stretch from Greece via Albania and the Adriatic Sea to Italy, is part of the Southern Gas Corridor, a chain of projects meant to bring natural gas to Europe from the Shah Deniz offshore gas field in Azerbaijan.

The statement comes at a time when public criticism of the Southern Gas Corridor and its individual investment projects is increasingly showing the plans’ flaws. These range from creating an unnecessary and expensive surplus of gas import infrastructure, to propping up an undemocratic regime, to the irony of financing the Russian company Lukoil in order to reduce dependence on Russian gas. The Trans Adriatic Pipeline (TAP) itself is also facing heavy opposition in Italy.

In addition to the EIB’s support, the Southern Gas Corridor is set to be backed with public money via the Connecting Europe Facility, the Project Bonds Initiative, and indirectly via a loan by the European Bank for Reconstruction and Development (EBRD) to Lukoil for the second phase of developments at Shah Deniz, a loan set to be approved in early 2015. It is one of the most important projects on the EU list of Projects of Common Interest which are to receive political and financial backing in the following period.

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* Other discussion points on the meeting’s agenda were the EIB’s climate and transparency policies.

Resettlement process for Kosovo Power Project does not comply with international standards

Posted by on 03/02/15

A report published today analyses the process with which 7000 are to be resettled for the Kosovo lignite mine and concludes that the World Bank-financed process does not comply with the bank’s own standards and is plagued by a slew of other weaknesses.

by Dajana Berisha Executive director, Forum for Civic Initiatives, Kosovo; cross-posted from the Bankwatch blog

Download the report as pdf >>

Arguments against the World Bank-financed Kosovo Power Project (KPP) often highlight the costs and negative impacts of building the 600 MW Kosovo C coal-fired power plant while investments in energy efficiency would be more feasible as Kosovo still wastes a large amount of the electricity being produced. What may be less known internationally is that also resettlement is a problematic issue connected to the project.

The Government of Kosovo is currently preparing to involuntarily displace over 7000 people to make way for an open pit lignite mine as part of the Kosovo Power Project. [1] A report [2] commissioned by the Kosovo Civil Society Consortium for Sustainable Development (KOSID) and authored by Dr. Ted Downing, president of the International Network on Displacement and Resettlement (INDR) shows that the government’s preparations do not comply with international involuntary resettlement standards, including those of the OECD and the World Bank itself that are a precondition for the project to obtain international financing.

The World Bank management provided the Kosovo agencies with a noncompliant legal, policy, and institutional safeguarding scaffolding to guide the anticipated displacement. The Kosovo government willingly complied.

Multiple mistakes were and continue to be made, most importantly related to the requirement to prepare a full resettlement plan required by the World Bank’s Operational Policy on Involuntary Resettlement (OP 4.12). Such a resettlement plan can only in very limited situations be substituted with an abbreviated, resettlement policy framework. Yet this is precisely what has been prepared for the Kosovo Power Project.

In the report (pdf), KOSID points out that such a shortcut of a policy framework is not applicable and a resettlement plan for the entire displacement must be prepared.

Other shortcomings include:

  1. The preparations overestimated the institutional capacities of the government.
  2. The preparations fail to align the project with the international policy’s prime objectives of assuring involuntary resettlement is a development project, with livelihood restoration, benefit sharing, meaningful consultation and participation.
  3. Lacking focus on the primary objectives, the costs of involuntary resettlement are seriously miscalculated and underestimated, raising investment costs, thereby delaying the profitability phase of the overall KPP. Prudent applicants for the private concessionaire, financiers, government, civil sector and those threatened with displacement should request a recalculation of a fully compliant involuntary resettlement component for the lifespan of the project. These costs should be folded into a revision of the projects’ overall investment costs.
  4. The uncertain structure of the project financing also creates downstream, political risks for the government, potentially seeding a future exacerbation of existing civil discord and political unrest. Cost overruns to complete the resettlement will be paid through increases of electricity prices, not by the government or the private concessionaire, leading to future conflicts between Kosovo electricity consumers and those being displaced.

After millions of dollars in technical assistance, this analysis shows the proposed resettlement policy framework is little more than a weakly disguised cash compensation plan that closely follows the failed patterns of the former government-owned mining company.

In sum, the World Bank management and the Kosovo government are responsible for constructing an unreliable safeguard framework that will cause delays and added costs to the KPP project. Their poor decisions have increased, rather than decreased the financial, environmental, social and health risks for Kosovars, their government, investors and, foremost, those threatened with forced displacement.


Notes:

1. The project envisages replacing the Kosovo A Power Station with a rehabilitated existing power plant (Kosovo B) and a new power plant (Kosovo C) as well as the development of a mine.

2. The report was presented today during a roundtable on resettlement organised by KOSID, unfortunately without the participation of World Bank representatives as a KOSID update on twitter noted:

The implications of oil price slump

Posted by on 03/02/15

Low crude prices are now a fact and likely to remain so for the next few (or more) quarters. This is how long it will take the market to absorb the current supply glut and non-OPEC producers to cut output. The OPEC cartel has already made the decision to keep producing at current levels (at least for the time being) and rely on the market for output reduction, which has further depressed crude prices. The oil price slump will eventually bring about lower output and higher demand, but this will take a while.

An upstream project cycle, from spudding the first well to feeding the first oil into the pipeline, lasts from several months to several years, depending on the technology used. The time needed to bring new oil on tap is the shortest for unconventional deposits. Spud-to-completion times for tight oil in the US average about three months. In contrast, developing an offshore oil deposit takes three to five years in shallow waters (Europe) and an average of eight years in deep waters (Brazil), with some big projects consuming as much as 15 years. The ongoing upstream projects are at different stages and become unprofitable at different oil price levels. The projects in progress are unlikely to be suspended on the prospect of crude prices sagging further, although some of them may face financial hardships due to investment portfolio adjustments made to reflect the new oil market reality. The lion’s share of these projects are expected to survive and expand their production potential over the years to come. Much more at risk are long-term investment projects that have been approved for execution but not yet started. Some of them will be launched on the hope that oil prices will have rebounded when they come on stream. The projects that will bear the heaviest brunt of the oil price slump are investments awaiting the green light (accounted for in estimating global output growth) and development plans in the upstream sector. It is estimated today that in the next two or three years several million barrels a day-worth of output may be lost due to the collapse in oil prices. The first symptoms are expected to be felt in the US in mid-2015. Until then the market will be flooded with more oil as supply reacts with a delay to the current price falls.

Oil prices could be buoyed by a sudden increase in demand, but this is highly unlikely in the next year or two. In its outlook update of January 19th, the International Monetary Fund cut its forecast of the global economic growth for 2015 and 2016 by 0.3pp relative to its September projections. The downward revision has been largely caused by a weaker outlook for emerging and developing market economies, which comes as an effect of China’s economic slowdown (growth forecast reduced to 6.8% and 6.3%, or by 0.3pp and 0.5pp, for 2015 and 2016, respectively) and sanctions that may push Russia into recession (GDP fall of -3.0% in 2015 and -1.0% 2016 relative to a growth of 0.5% and 1.5% in the September projections). The IMF forecast accounts to some extent for the effects of the decline in oil prices from USD 99 per barrel to USD 57 per barrel in 2014 (down 41% year on year) and their recovery to USD 64 (up 13% year on year) in 2015 and 2016.

If the low crude prices are here to stay, what shifts are they going to drive and what are they likely to affect the most, apart from the direct implications for the upstream sector? In addition to the overall impact in the upstream sector, the tumbling oil prices are bound to have certain macroeconomic and geopolitical implications.

The former are related to how global demand and supply are reacting to the price declines. Falling oil prices are shifting income from producers to consumers. In oil importing countries cheaper oil benefits consumers by reducing fuel and energy bills, as lower oil prices mean lower natural gas and coal prices. They also enable businesses to save on the costs of energy and transport and to enjoy the knock-on effects of reduced production costs and lower prices in the economy. Higher disposable incomes left after deducting lower expenses create a powerful stimulus to demand, similar to a tax cut − they boost consumer and investment spending, improve trade balance and fuel GDP growth.

Based on simulations presented in the quoted WEO, the IMF suggests that oil prices falling by 60% relative to the September projections  and staying low (which corresponds to the current prices) would add an additional 0.4% to 0.7% to China’s GDP and an additional 0.2% to 0.5% to US GDP in 2016. Cheaper oil means losses to producers and governments in countries producing oil (as well as natural gas and coal). However, the ultimate magnitude of GDP contraction in those countries will depend on whether governments, which take over most of oil revenues, will adjust spending. In countries with huge reserves, like Saudi Arabia, the adjustments can be implemented gradually and will help contain the negative impacts of plunging oil prices on economic activity. But the Russian case demonstrates that countries which cannot afford to accommodate the oil price crash may suffer a deep GDP contraction. However, in the global economy the upside effects will prevail, with the global GDP growth projected at 0.7% to 0.8% in 2015−2016 provided that oil prices remain low in 2015 and 2016.

One of the outcomes of low oil prices is deflation, which can be beneficial to some countries and detrimental to others. In the eurozone the pressure is growing to keep interest rates near zero in the long term and to take unconventional measures that would devalue the euro against other currencies. As the ongoing deleveraging process is a barrier to demand growth, the prospects of lower prices fail to drive consumption, additionally slowing down the deleveraging process itself due to an increase in the ratio of debt to nominal income. In the developing economies falling oil prices also increase the risk of or exacerbate deflation, as is the case in Poland. But for most countries it is the positive sort of deflation, which has the effect of raising disposable incomes and encouraging spending rather than saving.

Yet another effect of the oil price slump is the currencies of emerging market economies and the euro depreciating against the US dollar. The US economy is growing, and the market is expecting interest rates to be raised there, which will cause outflow of capital from the oil and oil derivatives market.

The geopolitical implications stem from the risk of increased tensions over lost income in the countries producing crude oil and other mineral resources. IHS estimates the transfer of income from oil‑exporting countries to oil‑importing countries to be worth between USD 1.5tn to USD 2.0tn (Who will rule the oil market? Daniel Yergin, NYT, 25/01/2015). The OPEC countries need an oil price of over USD 80 per barrel to balance their budgets, with such countries as Iraq, Algieria, Nigeria and Iran needing USD 110-plus per barrel. Russia relies on oil revenues for 45% of its budget. The country’s 2015 budget is based on oil trading for approximately USD 100 per barrel, hence Russia will be forced to tap into its currency reserves (slightly more than USD 70bn) and cut back on planned spending.

In the energy sector a shift is taking place in the relationship between the prices of renewable and nuclear energy and the prices of fossil fuel energy. In the next few years, this shift will mainly touch natural gas and coal prices (already falling on oil price declines), as the share of oil as a fuel in the global energy mix is no more than 5%. Lower-than-expected gas and coal prices projected for the period undermine the profitability of renewable energy projects that are already in progress or have been approved for execution. Over the longer time horizon, the current oil market developments will have no material impact on the growth of the renewable energy sector. The profitability of capex projects will continue to depend on price dynamics within the energy sector, but with the immense amounts of capital invested in the development of renewable energy technologies, we may be in for unprecedented falls in renewable energy prices.

 

Two mobility revolutions transport policy has had nothing to do with – yet

Posted by on 02/02/15

By Jos Dings, Transport & Environment’s director

What have been the two sustainable mobility revolutions of the past decade? Of course, that is an impossible question. I am sure that if you asked 10 different people you would get 10 different answers.

Some would say nothing much has happened. Others would say cleaner cars. Or ticketless public transport. Or high-speed rail. Or travel planning apps.

All these are fine answers, of course; but still I would go for two different developments. Both have grown roughly 20-fold over the past decade and are genuinely new ways of getting around.

They are e-bikes and car-sharing. E-bike sales are around 1.5 million units now, up from around 75,000 in 2005. Some eight million Europeans now own an e-bike, if you do the maths. The number of car-sharers stands at over two million, up from around 100,000 in 2005. In other words, both have gone from being niche to rather common. In progressive parts of countries like Germany and the Netherlands both are even approaching mainstream.

Are there many attributes common to both of these revolutions? Sure. Both developments enable lower car ownership and are a cheaper, more rational and more fit-for-purpose ways of getting around. More and more people realise that buying a car and then seeing that €20,000 in value crumble just by sitting on the kerb 96 per cent of the time does not make sense.

Both are perfect complements for intermodal journeys. If you arrive at a station and you have car-sharing and e-bikes at your disposal – as well as trams, buses, etc – you are perfectly set up, and another step away from needing to drive your car into an urban centre or even owning a car at all.

E-bikes and car-sharing are complementary options; if you are not willing or able to have a car, an e-bike serves many needs, but a car works for long distances, heavy loads, foul weather, rural destinations, or all four. I am an avid cyclist myself and don’t like to be overtaken by an e-bike, but you have to admit that in many circumstances – heat, hills, trips greater than five kilometres – for many people it is a more feasible alternative to a car than a regular bike.

And both booms have, I am almost sorry to say, not much to do with transport policy.

Both come primarily from huge leaps in technology and are helped by economic and cultural trends. E-bikes have simply become much better themselves. Car-sharing has boomed also because it has become so incredibly easy to manage with a smartphone. And the more shared cars there are around, the more attractive car-sharing becomes – a virtuous circle at work. The weak economy is a factor too; most without a job cannot afford to have a car. And let’s surely not forget the cultural change; you have to be quite old, uncool, or both, to still derive status from having a car.

So although transport policy has not done much to push both trends, can Brussels policymakers now do anything to support and accelerate them? Sure.

For one thing, since the economies of scale of car-sharing are so important, it would be great if you could easily switch between different schemes. Sign up for one, use more, or even all. Common standards and flexible billing arrangements are surely something policymakers can help happen.

One other, perhaps surprising, answer is pushing electrification much harder in all possible ways, including stretching CO2 standards for the car industry. Why? Because electric cars are very expensive to have, but very cheap to use. And that makes them perfect for sharing.

Third, e-bikes are simply not on the radar in Brussels; they should be taken much more seriously in all the R&D and demonstration projects it finances, just like small non-car electric vehicles such as e-mopeds, e-scooters or Renault Twizy-like vehicles. The type approval rules for these below-car vehicles leave quite a bit to be desired too.

Electrification is one of these rare cases in which trends in technology, energy, environment, mobility and culture can reinforce each other. It can enable lower carbon emissions and improved energy efficiency as well as more vehicle sharing and smaller vehicles.

The Commission has an excellent opportunity to push a cross-vehicle, cross-modal electrification of transport in its forthcoming strategy for its much-vaunted ‘energy union’. It should not waste it.

Waiting for expectations – how will the oil supercycle end?

Posted by on 26/01/15

The oil price slump has come as a huge surprise for the market. The very scale of the phenomenon is astounding, of course, but what is really interesting is that although everyone knew about the spectacular upsurge in oil supply in the US, which lay at the root of the declining prices, it did not feature as a material factor in any price projections or scenario analyses prepared by prominent think tanks, including the International Energy Agency. Naturally, the impact of America’s growing oil production on prices was mitigated by generally proportionate slumps in North Africa and Middle East, but what has fallen will eventually rise back again. At the same time, however, the prospect of low oil prices, which the consumers readily welcome, is a substantial challenge not only to the upstream sector, but also to renewable energy and nuclear power industries. Oil prices were expected to remain high due to prolonged geopolitical turmoil in oil-producing regions and the belief that OPEC, loath to see prices dip for budget reasons, would take action to prevent any excessive slumps. And because projections released by international organisations are tool for managing expectations, everyone would rather let sleeping dogs lie. Waiting was a preferable course of action. Maybe the dogs will not wake up?

But the dogs did wake up after all, causing all sorts of trouble. Most importantly, expectations that oil prices would remain high were crushed (including short-term and two-year projections) and we currently have nothing to put in their place. As OPEC has stopped intervening, the market is looking to the marginal costs of production to support oil prices. These, however, are not easy to determine, so the process might take a while. The obvious course of action is to turn to the American tight oil sector, which is suspected to be behind this state of confusion. The price pressure which has already become to affect the sector (which is much more sensitive to price changes than conventional production) brings to light a number of facts about it, such as that marginal costs tend to differ considerably between individual wells, some forty thousand of which are drilled each year. The discrepancy stems from the fact that the cost of a well is more or less the same in each case, but the output can fluctuate hugely. Some wells flow less than a hundred barrels a day, while other can yield more than a thousand. Falling prices hit risky undertakings first, including low-efficiency projects. Wells close down, yet no proportional changes in production follow. Instead, the consolidation within the sector gathers pace, driving marginal costs down. A similar thing happened when the price of shale gas on the US market forced out a large number of independent producers, which caused the number of wells to decline sharply. Despite that, gas production went up. OPEC, which is a material source of uncertainty, has not had its last word yet, and it is hard to say when the cartel is going to step in again. The country which can tip the scales is Saudi Arabia, which not only sits on top of the lion’s share of global unconventional oil reserves with low marginal costs, but also has financial reserves to keep it floating until the marginal barrel is found.

From a long-term perspective, the oil price slumps seen since mid-2014 mark the last stage of the oil supercycle, which IHS believes to have begun in 2000 with a demand boom and supply bottlenecks. At that time, oil demand was driven by rapid economic growth in China, which joined the International Trade Organisation at the end of 2001, becoming an appealing destination for transferring production. Supply bottlenecks, on the other hand, were a consequence of the prolonged period of low oil prices after the 1980 Iranian revolution. In the following years, the oil price continued to go down, and once oil became an exchange-traded commodity in 1988, its price hovered around USD 18/b in 1990–1999. The first stage of the supercycle came to an end in 2007, gradually progressing into the second phase (2005–2011), which was about breaking the supply barrier. At that time, the price of oil grew rapidly – from USD 55/b in 2005 to over USD 111/b in 2011. While oil prices fuelled fears that the fast-growing demand will outstrip supply, the brisk pace at which the prices rose opened the way for new and expensive deepwater drilling, horizontal drilling and fracturing technologies. The oil rush also inspired exploration efforts in geopolitically unstable areas, such as Central Africa. As a result, 2012–2014 saw an upsurge in oil and natural gas production from new sources outside OPEC, which marked the third phase of the cycle. The 10 years of uninterrupted price growth – from USD 38/b in 2004 to USD 109/b in the first half of 2014 (over USD 5 a year) – resulted in substantial and lasting reductions in demand in developed economies. Oil prices remained high throughout that stage of the cycle, reaching USD 112/b in 2012 and USD 109/b in 2013, and were further cemented in the first half of 2014 on the back of geopolitical developments and production slumps in North Africa and Middle East. The third stage of the supercycle took place at a time when the global economy oscillated between stagnation and weak recovery, and oil demand was additionally undermined by China’s protracted business cycle (bracing for the hard landing after government-sponsored stimulation of investment in infrastructure). This situation triggered, in mid-2014, the ongoing oil price slump.

The price slump ushered in the fourth phase of the cycle, which brought still lower prices as the oversupply of oil was being absorbed by the market and the search for the marginal barrel continued. The price decline will erode production potential, which will have to be adjusted to new pricing conditions. The adjustment process will not be a smooth transition for several reasons. Having lost the compass that OPEC’s strategy was, the market is now groping in the dark. The search for the marginal barrel has begun on the American market, progressing from the physical market (OPEC) to the paper market (NYMEX), which is much more volatile. Price projections on the latter market have a bearing on the capital market and affect the availability of financing for American upstream companies and their CAPEX as well as future production figures, which in turn shape future oil prices. The duration of the current phase of the cycle is uncertain. Taking into account the oil market’s structure (paper and capital market transactions are prevalent in the US) and technological considerations (production sector reacts quickly to changes in price expectations), experts estimate that it may last for one to three years. However, looking at past events, we will remember that the price decline and the subsequent stagnation of prices at low levels which followed the second oil shock in the wake of the Iranian revolution persisted for nearly two decades.

It is hard to say today what the price of oil will be in two or three years, but following the line of thought presented above we can expect that the future price trajectory will be lower than we had anticipated just half a year ago. At the same time, oil prices can be expected to be much more volatile than in the last three years. During adjustment periods, such as the one we are currently going through, price expectations are not unlike self-defeating prophecies. The greater the expected strength and duration of the price slump anticipated by the market, the quicker and stronger the future supply reductions will be (more and more production projects become unprofitable, financing becomes difficult to obtain). As a result, future supply shrinks even more, driving future prices beyond today’s expectations. Given the existence of such a mechanism, the market prefers to adjust its price expectations in small increments. In consequence, rather than portend a rapid increase, the steep contango seen in futures price graphs points to oversupply as the reason behind the current oil price dip.

 

Governments must hurry and tax ultra-cheap oil

Posted by on 25/01/15

International oil prices have declined to $ 50/barrel, levels not seen for years; but governments fail to neutralise these ultra-low prices by raising excise taxes. They seem to be much more interested in pleasing consumers than in seizing the opportunity for reducing their budget deficits and fighting climate change.

This is irresponsible! Have governments completely stopped being guided by long-term concerns. Are they no longer able to be flexible?

Why have we not heard calls from IEA or OCDE to resort to higher oil taxation?

Why does the UN in charge of the December Climate Conference in Paris remain silent? Should a rise or the introduction of excise taxes on gasoline, diesel and heating fuels not a be a simple “contribution” against climate change which it has invited all governments to submit before the Paris Climate Conference ?

Why has the EU Commission not recommended member states to raise their taxes ?

If it takes so long to decide on a simple excise tax, how long will it take governments to take more complex action against climate change?

In a rapidly changing world, governments must learn to act much faster than last century!

Brussels 25.01.2015 Eberhard Rhein

EU Energy Future: What Role for Nuclear?

Posted by on 20/01/15
Guest blogpost by Hans Korteweg, Communications & Government Affairs Manager at Westinghouse Europe, Middle East & Africa 2015 promises to be an exciting and crucial year in which European Union (EU) energy policy-makers will play a particularly important role. Over the next months, members of the European Parliament’s Industry and Environment committees will be shaping the [...]

Boeing and Embraer deepen sustainable biofuel collaboration

Posted by on 20/01/15

Boeing and Brazilian aerospace firm Embraer announced the opening of a joint centre for sustainable biofuel research in Sao Jose dos Campos, Brazil. Through this centre, the companies will coordinate and jointly fund research at Brazilian universities and other institutions, with a special focus on how to develop a sustainable aviation biofuel industry in Brazil.

The collaboration will be led by Boeing Research & Technology-Brazil (BR&T-Brazil), one of Boeing’s six international advanced research centers. Boeing also has active biofuel-development projects in the United States, Middle East, Africa, Europe, East and Southeast Asia, and Australia. Globally, more than 1,600 passenger flights using sustainable aviation biofuel have been conducted since it was first approved for use in 2011.

“Boeing and Embraer, two of the world’s leading aircraft manufacturers, are partnering in an unprecedented way to make more progress on sustainable aviation biofuel than one company can do alone,” says Donna Hrinak, president of Boeing Brazil and Boeing Latin America.

When produced sustainably, aviation biofuels can reduce CO2 emissions by as much as 80 per cent compared to conventional jet fuel. On the EU policy side, Boeing urges the new Commission and European Parliament to focus on policy measures that can support aviation biofuels development and commercialisation.

 

The Real Value of Arctic Resources

Posted by on 18/01/15

By Nina Jensen, Secretary General of WWF-Norway

As the annual Arctic Frontiers meeting starts in Tromso Norway, much of the talk and media coverage will once again be centred on Arctic resources. This is usually code for oil and gas development in the Arctic, and the potential geopolitical conflict over the exploitation of these resources. This focus is entirely misguided.

The Arctic’s most significant renewable resources are ice and snow. The ice and snow in the Arctic reflect significant amounts of the sun’s energy. As we lose that reflective shield, the Arctic absorbs more solar energy. A warming Arctic warms the entire planet, causing billions of dollars’ worth of avoidable damage, displacing millions of people, and throwing natural systems into disarray. We continually undervalue the critical role of the Arctic is shielding us from wrenching change. Instead, we ironically look to it as a source of the very hydrocarbons that are melting away the Arctic shield.

Apart from the question of whether we should be developing hydrocarbon resources anywhere in the world, let us look at the question of specifically developing them in the Arctic, which in many cases means the offshore Arctic, under the ocean.

We know there are no proven effective methods of cleaning up oil spills in ice, especially in mobile ice. Even without ice, the effects of a spill in Arctic conditions will linger for decades. Oil from the Exxon Valdez spill in Alaska still pollutes beaches, more than 25 years later. We know that drilling for oil in the offshore Arctic is extremely risky – just look at the mishaps that Shell has encountered in the last couple of years in its attempts to drill off the Alaskan Coast. So there is a high risk of mishap, and no proven effective method of cleaning up after such a mishap. No matter what the price of oil, $50 or $200 a barrel, is it worth the risk?

We do not need to make the same mistakes in the Arctic as we have made elsewhere. We can instead use the Arctic as a proving ground for greener, cleaner technologies. Tidal power, wind power, hydro power, all have potential in the Arctic. The Arctic, with its smaller population centres is ideal for smaller scale technologies to produce such renewable power.  Such local power generation can create local jobs, and make Arctic communities more self-sufficient, able to withstand the fluctuations in price of petroleum-based fuels that will eventually bankrupt them.

This message is not just coming from WWF. If you look at the US government plans for its chair of the Arctic Council starting later this year, it also recognizes the value of replacing fossil fuels with community-based renewable power sources – it also just put the valuable fishery of Bristol Bay off limits to oil and gas development. So it’s not just NGOs and Arctic peoples who are questioning the value of fossil fuels in the Arctic, versus the real value of the Arctic to the world – as a regulator of our global climate.

 

 

What’s up with the oil market?

Posted by on 15/01/15

The summer of 2008 saw the price of Brent crude rise to its record high, reaching more than $144 per barrel on July 3rd, and some speculated it would continue growing. However, the price fell to below $40 in late 2008, having shrank 77 per cent over just six months. Last year on June 19th, a barrel of Brent crude cost $115. This year on January 13th, it traded on the London commodity exchange for little more than $45 – the price had sunk 60 per cent over seven months. What is happening on the oil market?

Adjustment of expectations

Demand and supply in the oil industry are characteristically slow to react to price signals, lagging one or more quarters behind. As a result, anticipated demand and supply are more important than current prices, as it is these expectations that shape future prices, which can be secured using forward transactions.

Early last year, the global demand for crude oil in 2014 was projected to climb to 1.6 million barrels a day (mbd) and supply to 1.7 mbd. Prices were expected to decline marginally in these conditions. As it turned out half a year later, the echoes of the economic sanctions imposed on Russia reverberated more strongly across the Eurozone than originally anticipated. Worrying economic signs could also be seen in China, resulting in global growth forecasts being cut in the second half of the year and oil demand projections being revised downward as well. According to the most recent estimates, the demand for crude was up by a mere 0.7 mbd in 2014.

A different kind of surprise came mid-year, when Libya-sourced oil returned to the market and Iraq’s production prospects improved, prompting oil supply projections to be adjusted upward. As a result, there was 1.9 mbd more oil on the market than a year earlier, instead of the 1.7 mbd anticipated in early 2014.

With oil supply suddenly outstripping demand by 1 mbd, projections had to be revised and prices cut. There can be no doubt about the unexpected oversupply and the price slump. The question we should answer, however, is whether the low prices are a temporary phenomenon or maybe we are seeing a structural change bringing a permanent reduction of oil prices in the future.

I believe that the upstream sector’s technological revolution behind the US shale boom has caused a material adjustment of the oil pricing mechanism so that oil prices will now be more dependent on production costs rather than the budget needs of OPEC members. Since the marginal cost of producing a barrel of oil for which there is demand on the market is below the price needed to balance the budgets of most OPEC members (and Russia), the current market developments are a downward revision of future price trajectories in respect of projections made half a year earlier. In other words, the change looks permanent. We must bear in mind, however, that neither the technological revolution nor the shale boom will protect the world against geopolitical upheaval, which may drive up the price of oil. That being said, in the present circumstances the effects of any such events on the oil market will be less profound.

Flexible production

The OPEC cartel adheres to a policy of limited oil production (maintaining substantial reserves), which aims to keep oil prices at a level balancing the budget needs of key OPEC members (USD 100 per barrel on average). This level is substantially higher than the marginal cost of producing oil or tapping oil reserves in Saudi Arabia. It is also higher than the cost of tight oil production in the US, allowing the production to grow dynamically.

The process of extracting oil from unconventional deposits is characterised by a significantly diffused production potential. Several dozen thousand new wells are drilled in the US each year by thousands of small and large companies. Drilling enough new wells is critical to sustaining production, as 80% of oil will come within the first two years of production from a well. It should also be remembered that the cost of individual wells may differ, as may their productivity. Some yield below 100 barrels a day, others 800 and more. It is estimated that more than 70% of a typical well’s cost is financed using credit facilities, which is why future production has to be insured against the risk of falling oil prices. Because of this diverse structure and organisation of unconventional oil production in the US, the cost of producing a barrel of oil oscillates widely and the production business is highly sensitive to changes in crude oil prices (the process of change is virtually unbroken). When the price of oil slumps significantly, oil producers are not only pushed up against the profitability barrier, but they also face the limits of their ability to obtain external financing. As a result, fewer wells are drilled and production falters.

When on February 27th OPEC resolved not to slash production in order to buoy prices, the decision was taken with the specific character of the American oil production market, where production potential reacts rapidly to changing oil prices, in mind. What stood in the way was the divergence of interests within OPEC – the countries making a comeback to the market (Libya, Iraq and Iran) want to sell their growing output for an appropriately high price, while Saudi Arabia, sitting on top of crude oil reserves, hopes that low oil prices, which are bound to rise one day, will only do so after killing costly production projects (including some of American production), which gives an advantage to Saudi Arabia, affording it a larger share of the global oil supply pie.

Although the low oil prices (less than $50 per barrel) we are seeing today are not sustainable over the medium term, they may last for some time (one or two years), because the current oversupply (which has overtaken the anticipated annual demand growth) will not be absorbed immediately and the negative consequences of limiting investment in production will likely not become apparent earlier than after a year. Therefore, it is difficult to predict today how the prices will change over the long term, but they can be expected to be lower than we thought just six months before.

 

 

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