Friday 28 November 2014

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Gambling on China’s Energy Revolution

Posted by on 27/11/14

The joint announcement signed by presidents Xi Jinping and Barack Obama at the Asia-Pacific Cooperation (APEC) summit in Beijing brought climate change back to the international headlines. The document set targets for both sides to achieve and was welcomed or damned in equal measure.

Although the announcement binds neither side, it was seen by many politicians and observers as a step forward. Two key global powers, the largest CO2 emitters, had come to an agreement on climate change. China had for the first time committed itself in an international agreement to targets. In the announcement. China stated that it, “intends to achieve the peaking of CO2 emissions around 2030 and to make best efforts to peak early and intends to increase the share of non-fossil fuels in primary energy consumption to around 20% by 2030”.

But the critics and sceptics have been many, especially of the targets China has set. One criticism had been are that the emissions target is too loose, and allows China to continue emitting CO2 without constraint until 2030. Another, focusing on the non-fossil fuel target, has been that it is too easy, in fact setting out no more than what China plans to do anyway.

The announcement made the point, emphasized by President Obama, that meeting the target would require China to install 800 to 1000 GW of zero-emissions energy generating capacity by 2030, which is greater than the current coal-fired generating capacity in China. One man at least, the Australian Prime Minister Tony Abbott, who believes in the future of coal, was happy with the apparent weakness of the target on the grounds that according to him it meant that by 2030 80% of China’s energy would still come from coal. His government predicts that since China will still need to import large quantities of Australia’s coal its economic future is thus assured.

The EU has been pretty much on the sidelines in all of this, but it too has a stake in China’s commitments. The stake is not just political concern over global policy on climate change. Like others, the EU has an interest in the future direction of the Chinese economy. The EU does not have much coal of offer, but it does have environmental and energy technology and know-how that would find a market in a China committed to reducing energy use and emissions.

Predicting China’s future energy demand and emissions is difficult. The variables to be taken into account lead to huge differences in possible outcomes. But one of the most important elements in China will be government policy and its targets. In China this gives some idea of whether it will meet its commitments in the announcement, at least the 20% non-fossil fuels target for 2020.

In 2013 China’s primary energy production (in Standard Coal Equivalent (SCE), the measure used in China) was 75.6% coal, 8.9% oil, 4.6% natural gas, and 10.9% hydro, nuclear and wind. In this mix, coal has recently declined slightly, oil has also declined, while natural gas and non-fossil fuels have been rising. But primary energy consumption shows a different picture. Primary energy consumption in 2013 was 66% coal, 18.4% oil, 5.8% natural gas and 9.8% hydro, nuclear and wind. Coal has clearly declined from a recent peak of 71.1% a few years ago, oil has remained more or less at the same level for several years, while natural gas and non-fossil fuels have increased their share. The difference between primary energy production and consumption is accounted for by imports and exports. China imports most of its oil and increasing amounts of natural gas. In recent years, despite huge domestic production, it has also imported significant amounts of coal.

Table 1: China Share of Primary Energy Production Source: National Bureau of Statistics

 

Table 2: China Share of Primary Energy Consumption Source: National Bureau of Statistics

As these figures show, Tony Abbott’s belief that in 2030 80% of China’s energy will still come from coal is already wrong. He appears to suffer from two possible confusions. While it is true that currently close of 80% of primary energy production is coal this is not the case for consumption, which is what the announcement refers to. Abbott’s other possible error is a belief that even if China meets the target that 20% of energy consumption will come from non-fossil energy in 2020, then the remainder must come from coal.

Will China meet the target? Earlier this year Xi Jinping spoke of the need for a revolution in China’s energy production and consumption. At the time, he referred only to broad principles. The State Council has issued a Strategic Action Plan for Energy Development (2014-2020) which gives some detail on how this revolution will be achieved. The plan sets some targets. Non-fossil fuels are targeted to reach 15% of energy consumption by 2020, natural gas more than 10% and coal less than 62%. Although it is not specified, this leaves about 13% for oil.

The plan also calls for an installed capacity of over 200 GW of wind power in 2020, over 100 GW of solar photovoltaic (PV), 350 GW of normal hydro power and 58 GW of nuclear, with a further 30 GW of nuclear to be under construction. By comparison, at the end of 2013 China had 91.4 GW of grid-connected wind capacity and 19.4 GW of grid-connected solar PV capacity. The goals are reachable. In 2013 added 12.9 GW of solar PV and 16.1 GW of wind capacity, both the largest in the world. It also added 29.9 GW of hydro capacity.

Is not clear whether these targets will be the final word for the 13th Five Year Plan (FYP) which will cover a key period from 2016 to 2020. In recent years targets for renewables have been repeatedly raised as previous ones have been exceeded. One recent article in the Chinese media quoted an official from the planning department of the National Energy Agency (NEA) discussing the 13th FYP as saying the target for 2020 would be for coal to account for less than 60% of primary energy consumption, and he also said that the target for 2030 would be less than 50%.

On the current trend, the target for coal to account for under 62% of energy consumption by 2020 seems feasible. If the target of 15% for renewables by 2020 is achieved, which on today’s rates of installation it probably will be, then another 5% in the following decade will not be difficult. One of the reasons why the target will be “easy” is not because it is low, but because China already is the largest investor in renewables in the world. Even if China merely continues renewable energy installations at the current rates over the next 16 years it will reach the added capacity the announcement says is required in the range of 800 to 1000 GW by 2030 with some to spare.

There are many uncertainties in all of these outcomes. President Obama has taken a political gamble on China’s energy revolution, while Tony Abbott is betting against it without apparently really understanding the odds. From a European perspective, a bet on rather than against China’s energy revolution seems wiser.

What EU funded low-carbon energy solutions in Polish regions?

Posted by on 24/11/14

The low-carbon energy ambitions of Polish regions for future EU funding are very diverse with only a few promising cases as an analysis of the Operational Programmes of Polish regions shows.

by Julia Krzyszkowska, cross-posted from the Bankwatch blog

Poland is currently in the final stages of planning how European funds under EU Cohesion Policy for 2014-2020 will be invested. Yet, beyond the national level, also Poland’s 16 regions (voivodeships) are about to conclude negotiations with the European Commission about the final shape of the Regional Operational Programmes (ROPs).

The results will show whether Poland’s regions are on the path to take full advantage of the potential of EU funds’ for the country’s sustainable development – a potential that is not to be underestimated. More than half of the EUR 9 billion that are earmarked for the low-carbon economy in Poland will be allocated and managed by the regional authorities. (For comparison, the total allocations of Cohesion Policy 2014-2020 for Bulgaria is EUR 7.59 billion, for Croatia EUR 8.61 billion.)

Bankwatch and Polish Green Network analysed the final drafts of the ROPs as they were presented to the European Commission. The analysis shows how ambitious (or not) the Polish regions are to invest in a low-carbon economy, in particularly when it comes to renewable energy and energy efficiency in residential buildings.

Report: Recommendations for the last state of programming of EU Regional Funds 2014-2020 for energy projects (pdf)

An important indicator is whether ordinary Polish households will be able to benefit from EU funds, for example through lower energy bills and greater security of energy supply. For smaller, localised investments, such as improving the energy standard in residential buildings or the production of citizen-owned energy from small renewables installations, the decisions made by the regional authorities will be essential.


Map: Allocation of funds for the thematic objective 4 on low-carbon economy as percentage of the total allocation of the European Regional Development Fund (ERDF) – Click image for full size

As the map above shows the level of ambition shown by Polish regions varies significantly.

While Śląskie in the South of Poland plans to spend almost 30 per cent of its European Regional Development Plan funds for low-carbon economy measures, there are many regions who keep the allocations close to the minimum 15 per cent, prescribed by the Polish Partnership Agreement.

While indicating the overall importance placed on the low-carbon economy objective by different regions, the map does not show their spending priorities within this area.

Energy efficiency in residential buildings

Going into more detail, one of the key elements we evaluated [1] was the availability of funding for energy efficiency in housing. The residential housing sector in Poland consumes over 30 per cent of all energy used in the country. The generally very poor energy standard of buildings resembles that of the 1970s in Western Europe and means a huge waste of energy and heat.

These losses could be avoided thanks to investments in deep retrofitting, estimated to result in up to 70 per cent energy savings.

Graph: Funds for energy retrofit of residential buildings (in euros and as a percentage of all ERDF funds in a region)

Looking at the Regional Operational Programmes, the allocations for improving energy efficiency in residential buildings are alarmingly low in relation to the entire amount of funds intended to support a low-carbon economy, and even more so in relation to the total ERDF allocation in a given region (see graph).

According to our analysis, the public sector seems to have priority in the regional spending plans with more than twice as much funds allocated to improving energy efficiency in state and municipality-owned buildings than in residential houses.

Yet, it is especially in residential buildings where energy efficiency measures should get priority funding given that such investments are more difficult to undertake for private households who — in contrast to public institutions — do not have sufficient financial resources or access to subsidies and preferential loans.

Investments in retrofitting multifamily houses could significantly alleviate the financial burden faced by many Polish families and improve their quality of life. Research by the Polish Institute for Sustainable Development and the Warsaw Institute for Economic Studies shows that Polish households spend on average around 15 per cent of their disposable incomes on energy bills. According to another research paper (pdf) on energy poverty in the EU, more than 20 per cent are unable to afford comfortable temperature levels at home during the winter.

What’s next?

Once negotiations with the European Commission are finalised, it will be up to the regions themselves to prepare the more detailed implementation documents that outline exactly who will be able to apply for funding from the EU budget, for what kind of project and on what terms.

Our report “Green Energy for All: Six recommendations for the last stage of programming of EU regional funds 2014-2020 for energy projects” contains some key demands for the last, crucial stage of the EU funds programming, and recommendations on how to make them reality.

These recommendations regard:

  • allowing for deep retrofitting of residential buildings,
  • supporting RES microinstallations and prosumer energy,
  • investing in renewables to improve air quality in Polish cities,
  • financing environmental education and information campaigns,
  • ensuring high biodiversity protection standards in energy-related projects,
  • providing support for community energy and partnerships.

We call on Polish voivodeships to show ambition, go for quality and to invest rather than just spend.


Notes

1. The other elements are prosumer renewable energy, air quality, environmental education, biodiversity protection and communities and partnerships in the energy sector.

Ukraine will scrap gas subsidies

Posted by on 24/11/14

For many years Ukraine has wasted huge amounts of energy through exorbitant subsidies on gas consumption, coupled with in-transparent multiple gas prices and large-scale corruption. Due to these factors, Ukraine has become one of the most wasteful energy consuming countries in the world. With household gas prices substantially lower than in any other European country and lower than the wholesale purchase prices, this regime had long become unsustainable.

Under the new political leadership it will finally disappear. There will be a single wholesale gas price which will cover the supply costs and yield a decent profit for the state-owned gas company. The IMF and the EU had conditioned their financial assistance to a profound reform of the Ukrainian gas market.

Gas prices will have to more than double, which cannot happen overnight. This huge rise of prices will induce consumers to a much more economic use of gas and higher energy efficiency. By the same token it will dampen the social impact of the price rise.

The future generated profits will be used to financing improvements of the gas distribution, improving energy efficiency and offering specific assistance to vulnerable groups of society.

This will be a revolution for Ukraine and other the countries still indulging in the luxury of fossil subsidies. It will not be easy to “sell” politically. But Ukrainians, having shown they can be tough, are likely to accept a higher gas price in exchange for security of supply.

If the anticipated increase of energy efficiency happens in the wake of the phasing out of subsidies Ukraine might become an example for other developing and emerging countries to be followed.

Eberhard Rhein, Brussels, 20/11/2014

EBRD sticks to ‘business as usual’ in Ukraine

Posted by on 23/11/14
By Iryna Holovko, Bankwatch The need to reform the Ukrainian energy sector is eminent, and yet, some European donors - like the EBRD - continue with business as usual, which does not address the country’s immediate need for improved energy security.

New G20 ‘commitments’ on phasing out fossil fuel subsidies are worthless

Posted by on 20/11/14
By Eberhard Rhein In 2009, heads of government agreed to phase out fossil fuels subsidies by 2020. This month, leaders at the G20 in Brisbane repeated the aim but scrapped the deadline. Is the G20 the 'loosest governing bodies' on earth?

Climate policy’s instrument is more important than its numeric target

Posted by on 16/11/14

Last Thursday, I took part in the Energy Conference in Ústí nad Labem in the Czech Republic. During the debate, the panel discussion moderator asked me why Poland contested the EU climate policy for such a long time only to agree to the elevated emission reduction target. My answer was that I believed that it was not us who had changed, but the European Union, which had seen its mistakes and decided to step back (for more, see: http://napedzamyprzyszlosc.pl/en/blog/eu-s-controversial-climate-policy). Naturally, this will not be a simple task, and success is far from certain, because we have created some strong lobbying groups in the EU, which will not give ground easily. What is good, however, is that we now have a single EU-wide emission reduction target – to cut emissions by 40% below 1990 levels, and a single instrument – the price of emission allowances. I have explained on numerous occasions before, also on this blog, why having multiple objectives is harmful. Under the European Commission’s current proposed framework, the additional targets (27% share of RES in the Energy Union’s overall energy consumption and an energy consumption reduction target of 30%) are not binding.

In the climate policy debate, it is the targets that elicit the strongest emotions. This is probably because those taking part in the discussion take it for granted that the target and the instrument share a strong causal relationship, which they do in the models used to evaluate the economic impact of the climate policy. These models obviously abstract from unpredictable events, including not only recessions and economic crises, but also positive developments, such as the emergence of innovative technologies which alter the pricing balance of energy sources, while the fact of the matter is that reality is teeming with unforeseen circumstances. In effect, such forecasts only manage to approximate actual events, or miss them completely. This holds especially true for long-term projections, such as those used to plan out climate policies. When validating such models against reality, the emission reduction target to be achieved in 20 years is as credible as the projection’s verifiability over the 20-year horizon. What really counts is the instrument, which determines the policy’s effectiveness and cost for the taxpayer.

Theoretically tied only to the target value, the instrument of the EU climate policy – the price of emission allowances – has been designed to react to all favourable and unfavourable developments along the way, which causes the result to be opposite of what was intended. The price of emission allowances drops close to zero in reaction to any unforeseen emission reductions in the wake of a deep recession and the meagre economic recovery that follows. In the end, the policy provokes confusion and discourages investment rather than urges companies on in the right direction. In business terms, it is an increased regulatory risk. Let’s then not be afraid of ambitious climatic targets, as they pose no threat. What is dangerous, however, are the ill-considered instruments employed to achieve such goals, which needlessly add to the already high uncertainty associated with the extremely long-term character of the climate policy.If we were able to introduce an instrument immune to the unpredictable which would be able to differentiate energy prices depending on emission levels, we would set a new direction for businesses to invest in, as well as for developing new technologies. The climate policy would gain credibility. Businesses would choose the cheapest available emission reduction technologies and join forces with scientists in search of new ones. What about reducing emissions? How much of the target would be achieved in 2030 and 2050 would depend on any disruptions that happen along the way and affect economic growth in that time horizon. If we grow faster, emissions will increase. Slower growth, on the other hand, will mean less emissions. Still, irrespective of how the economic situation develops and whatever new technologies emerge, we will be successful in creating a low-carbon economy at a much lower cost. The good news is that such an instrument already exists. Can you guess what it is?

 

¥uan and Waterloo of Petro$ (Part 2/2)

Posted by on 11/11/14

yuan logoU.S. sanctions due the conflict in Ukraine launched Russia’s counter-offensive with bypassing the U.S. dollar system as its spear-head. My previous article ¥uan and Waterloo of Petro$(Part ½) describes this monetary war. The gas contract, signed between Russia and China in May 2014, and a new wave of the EU sanctions in September 2014 are paving the road towards the revival of traditional (neo)realist balance of power.

Besides monetary war the emergencing cooperation on different pro-Russian fields and energy policy are linked to ongoing geopolitical turmoil.The wider picture includes the Sino-Russian cooperation, the BRICS, the SCO, the EEU, the energy war and other bilateral operations.

 

The Sino-Russian cooperation

The Russia-China strategic partnership will keep evolving very fast – with Beijing in symbiosis with Moscow’s immense natural and military-technological resources. Not to mention the strategic benefits. Faced with an increasingly hostile West, Russia is visibly turning East. In particular, China and Russia have become closer, signing a historic gas deal, conducting joint naval exercises, and increasing trade.

Gazprom signed a thirty-year gas contract worth $400 billion. The deal’s importance can be compared with a similar accord concluded in the 1960s that brought Russian gas to West Germany for the first time. Moscow and Beijing vow to more than double their bilateral trade to $200 billion by 2020, that is, roughly half of their current turnover with the EU.

It is clear that Moscow seeks an acceleration of its business ties with China. On Nov. 09, 2014 President Vladimir Putin and Chinese leader Xi Jinping signed a memorandum of understanding on the so-called “western” gas supplies route to China. Russia’s so-called “western” or “Altay” route would supply 30 billion cubic meters (bcm) of gas a year to China. The new supply line comes in addition to the “eastern” route, through the “Power of Siberia” pipeline, which will annually deliver 38 bcm of gas to China. Work on that pipeline route has already begun after a $400 billion deal was clinched in May. Among the business issues discussed by Putin and Xi at their fifth meeting this year was the possibility of payment in Chinese yuan, including for defense deals military, Russian presidential spokesman Dmitry Peskov was cited as saying by RIA Novosti. (Source: RT )

China-Russia gas deal

In addition China and Russia have agreed to jointly build a seaport on the coast of the sea of Japan, which are projected to become one of the largest on the coast in North-East Asia. The facility will be located in our territory and will serve up to 60 million tons of cargo per year.

Also, China has decided to invest 400 billion rubles in the construction of high-speed highway Moscow-Kazan, which is part of transport corridor Moscow-Beijing.

Russia and China are determined to reduce U.S. and North Atlantic Treaty Organization (NATO) presence in Central Asia to what it was before the 2001 invasion of Afghanistan. The SCO has consistently rebuffed U.S. requests for observer status, and has pressured countries in the region to end U.S. basing rights. The United States was forced out of Karshi-Khanabad in Uzbekistan in 2005, and from Manas in Kyrgyzstan in 2014.

“At present, the SCO has started to counterbalance NATO’s role in Asia,” says Aleksey Maslov, chair of the Department of Asian Studies of the Higher School of Economics in Moscow. And the new members, he says, want in to safeguard their interests. (Source: VoR)

China overtook Germany as Russia’s largest trading partner in 2011, Last year, China acquired 12.5 percent of Russia’s Uralkali (URKA:RM), the biggest producer of potash in the world, and China National Petroleum agreed to prepay Rosneft (ROSN:RM), run by Putin associate Igor Sechin, about $70 billion as part of a $270 billion, 25-year supply deal. That was followed by Rosneft’s $85 billion, 10-year accord with China Sinopec and China National Petroleum’s purchase of 20 percent of an Arctic gas project from Novatek for an undisclosed sum. (Source: Bloomberg Businessweek )

The BRICS

The BRICS met 2013 in Durban, South Africa, to, among other steps, create their own credit rating agency, sidelining the “biased agendas” of the Moody’s/Standard & Poor’s variety. They endorsed plans to create a joint foreign exchange reserves pool. Initially it will include US$100 billion. It’s called a self-managed contingent reserve arrangement (CRA). brics cra

During the July (2014) BRICS Summit in Brazil the five members agreed to directly confront the West’s institutional economic dominance. The BRICS agreed to establish the New Development Bank (NDB) based in Shanghai , pushed especially by India and Brazil, a concrete alternative to the Western-dominated World Bank and the Bretton Woods system. With initial authorized capital of $100 billion, including $50 billion of equally shared initial subscribed capital, it will become one of the largest multilateral financial development institutions. Importantly, it will be open for other countries to join.

In addition creation of the Contingent Reserve Arrangement, or currency reserve pool, initially sized at $100 billion, will help protect the BRICS countries against short-term liquidity pressures and international financial shocks. Together with the NDB these new instruments will contribute to further co-operation on macroeconomic policies. According Conn Hallinan – in his article Move Over, NATO and IMF: Eurasia Is Coming – The BRICS’ construction of a Contingent Reserve Arrangement will give its members emergency access to foreign currency, which might eventually dethrone the dollar as the world’s reserve currency. The creation of a development bank will make it possible to bypass the IMF for balance-of-payment loans, thus avoiding the organization’s onerous austerity requirements.

Also it was agreed MoU’s among BRICS Export Credit and Guarantees Agencies, as well as the Cooperation Agreement on Innovation within the BRICS Interbank Cooperation Mechanism, which will offer new channels of support for trade and financial ties between the five countries.

So in near future BRICS will be trading in their own currencies, including a globally convertible yuan, further away from the US dollar and the petrodollar. All these actions are strenghtening financial stability of BRICS – a some kind of safety net precaution, an extra line of defense.

Emerging economic powers such as China, India and Brazil have long been demanding greater share of votes in multilateral development institutions like the World Bank, International Monetary Fund and the Asian Development Bank (ADP) to reflect their recent phenomenal growth. China’s economy is expected to grow to $10 trillion this year, yet its share of votes in the Bretton Woods institutions is only 3.72 percent, compared with 17.4 percent for the United States. The signing ceremony of the Memorandum of Understanding on Establishing Asian Infrastructure Investment Bank (AIIB) took place in Beijing, Oct. 24, 2014 According to ADB, in the 10 years up to 2020, the region requires investments of $8 trillion in terms of national infrastructure, or $800 billion a year. The ADB currently lends out only about 1.5 percent of this amount. The AIIB is expected to have an initial capital base of $100 billion. The AIIB, to begin with, will serve at least five objectives for China. First, it could help China invest part of its foreign exchange reserves of $3.9 trillion on commercial terms. Second, it will play a vital role in the internationalization of the yuan. And fifth, the AIIB will boost China’s global influence and enhance its soft power.

BRICS could be expanded to include the MINT countries (MINT is an acronym referring to the economies of Mexico, Indonesia, Nigeria, and Turkey.), thus furthering the organization’s scope and creating opportunities for a long-term strategic ‘flip’ of those states from their largely Western orientations.

Being in the same organization does not automatically translate into having the same politics on international questions. The BRICS and the recent Gaza conflict are a good example. China called for negotiations; Russia was generally neutral, but slightly friendly toward Israel; India was silent (Israel is New Delhi’s number-one source of arms); South Africa was critical of Israel, and Brazil withdrew its ambassador.

As Russia is taking over the position of the BRICS Chair, the next summit will be held in the city of Ufa in the Republic of Bashkortostan, in July 2015.

The SCO

The Shanghai Cooperation Organization (SCO) is the cradle in which the Russian-Chinese strategic partnership (RCSP) was born and raised. Originally founded as the Shanghai Five in 1996, it was reformed as the SCO in 2001 with the inclusion of Uzbekistan. Less than a month after the BRICS’ declaration of independence from the current strictures of world finance, the SCO—which includes China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan—approved India, Pakistan, Iran, and Mongolia for membership in the organization. Also SCO has received applications for the status of observers from Armenia, Azerbaijan, Bangladesh, Belarus, Nepal and Sri Lanka.

SCO map

It was the single largest expansion of the economic cooperation and security-minded group in its history, and it could end up diluting the impact of sanctions currently plaguing Moscow over the Ukraine crisis and Tehran over its nuclear program. These countries directly fall into the immediate sphere of the RCSP, where either Russia or China can exert some degree or another of important influence to varying degrees. Also, the SCO sets out the foundations of the RCSP, listing the fight against “terrorism, separatism, and extremism in all their manifestations” (thus including Color Revolutions) as their foremost foe. It just so happens that the U.S. engages in all of these activities in its Eurasian-wide campaign of chaos and control, thereby placing it at existential odds with Russia and China, as well as the other official members. Even before the recent additions, SCO represented three-fifths of Eurasia and 25 percent of the world’s population.

For Iran, SCO membership may serve as a way to bypass the sanctions currently pounding the Iranian economy. Russia and Iran signed a memorandum in August (2014) to exchange Russian energy technology and food for Iranian oil, a move that would violate U.S. sanctions. One particular constraint is Russia’s important relationship with Israel, which Moscow will not give up unless Jerusalem drops its neutral stance and joins the U.S.-led condemnation of Russia.

Chinese President Xi Jinping has also promoted new regional security initiatives. In addition to the already existing Shanghai Cooperation Organization, a Chinese-led security institution that includes Russia and four Central Asian states, Xi wants to build a new Asia-Pacific security structure that would exclude the United States.

As for India and Pakistan energy is a major concern the membership in the oil- and gas-rich SCO is quite reasonable. Whether that will lead to a reduction of tensions between New Delhi and Islamabad over Kashmir remains to see, but at least the two traditional enemies will be in same organization to talk about economic cooperation and regional security on a regular basis.

As joint forum the SCO can ease tensions in Central Asia e.g. between SCO members Uzbekistan and Kyrgyzstan over borders, and both countries, plus Tajikistan, over water rights. Most SCO members are concerned about security, particularly given the imminent departure of the United States and NATO from Afghanistan. That country might well descend into civil war, one that could have a destabilizing effect on its neighbors. From August 24 -29, SCO members China, Russia, Kazakhstan, Kyrgyzstan, and Tajikistan took part in “Peace Mission 2014,” an anti-terrorist exercise to “subdue” a hypothetical Central Asian city that had become a center for terrorist activity.

The BRICS and the SCO are the two largest independent international organizations to develop over the past decade. There is also other developments to reduce old U.S. global dominance. The newly minted Union of South American Nations (USAN) includes every country in South America, including Cuba, and has largely replaced the Organization of American States (OAS), a Cold War relic that excluded Havana. While the United States and Canada are part of the OAS, they were not invited to join USAN.

Eurasian Economic Union (EEU)

Eurasian integration has moved to a higher level, to replace the EurAsEC came a new form of closer Association of the Eurasian Economic Union (EEU) also known as the Eurasian Union (EAU). To him by the old member States (Russia, Kazakhstan, Belarus) was joined by Armenia, the next candidate in the list on the accession of Kyrgyzstan, and later, his desire to join the EAEC expressed and Vietnam. Also the accession of Turkey and Syria are on the way.

EEU mapMoscow began building a Russian-led community in Eurasia that would give Russia certain economic benefits and, no less important, better bargaining positions with regard to the country’s big continental neighbors—the EU to the west and China to the east.

Moldova, Ukraine and Georgia have been offered by both the European Union and the Eurasian Economic Union to join their integration unions. All three countries opted for the European Union by signing association agreements on March 21, 2014. However break-away regions of Moldova (Transnistria), Ukraine (Republic of Donetsk) and Georgia (South Ossetia and Abkhazia) have expressed a desire to join the Eurasian Customs Union and integrate into the Eurasian Economic Union.

Putin is scheduled to visit Japan later in 2014 in an effort to keep Russia’s technology and investment channel to the country open. And Moscow is expected to reinvigorate ties with India, particularly in the defense technology sphere, under the leadership of newly elected Prime Minister Narendra Modi.

The Eurasian union may become an add-on to, or even an extension of, China’s Silk Road project – a common space for economic and humanitarian cooperation stretching all the way from the Atlantic to the Pacific Ocean

 

Treaties and development stages of Eurasian Economic Union/Structural evolution

1991 1996 2000 1995- 2007 2007 & 2011 2014
Eurasian Economic Union (EEU)
Eurasian Economic Space
Eurasian Customs Union (ECU)
Eurasian Economic Community (EurAsEC)
Increased Integration in the Economic and Humanitarian Fields
Commonwealth of Independent States (CIS)

Other bilateral development

Russia is in the process of politically and economically integrating with Kazakhstan and soon Kyrgyzstan under the auspices of the Eurasian Union, and it has mutual security commitments with Kazakhstan, Kyrgyzstan, and Tajikistan under the Collective Security Treaty Organization (CSTO). China, on the other hand, is more of a soft leader in Central Asia, having established lucrative business contacts in recent years and struck extremely strategic energy deals with most of the region’s members, first and foremost Turkmenistan.

A Russian-Iranian strategic partnership would extend beyond Caspian and nuclear energy issues and see implicit cooperation between the two in the Mideast, especially in Syria, Iraq, and Yemen. It can even carry over into Afghanistan after the NATO drawdown by year’s end. This can help to build an alternative non-Western-centric trade network that can bolster Russia’s complex economic interdependence with other states. This would give it the opportunity to expand mutual relations beyond the economic sphere and perhaps eventually associate these states into the multilateral webs of BRICS and the SCO.

Russia is also pursuing bilateral relations with Iran with fewer constraints. This refers to nuclear energy, oil and gas, and arms deals, all based on pragmatic considerations: a Russo-Persian alliance is unlikely in view of many differences between Moscow and Tehran and thick layers of mutual suspicion. For Iran, SCO membership may serve as a way to bypass the sanctions currently pounding the Iranian economy. Russia and Iran signed a memorandum in August (2014) to exchange Russian energy technology and food for Iranian oil, a move that would violate U.S. sanctions.

At the recent summit of the SCO in Dushanbe (11-12 Sep. 2014 )the cooperation with SCO-applicant Iran went wider. Some of the projects were following:

  • The well-known “Uralvagonzavod”, began talks with Iran on the supply of freight cars 40 billion annually.
  • Interestingly, Iran is not on the camera, discussing terms of oil supplies in exchange for electricity, in which Russia plans to build in Iran, the network of hydro – and thermal power plants.
  • Iran and Russia have made progress towards an oil-for-goods deal sources said would be worth up to $20 billion, which would enable Tehran to boost vital energy exports in defiance of Western sanctions. In January Reuters reported Moscow and Tehran were discussing a barter deal that would see Moscow buy up to 500,000 barrels a day of Iranian oil in exchange for Russian equipment and goods.

(Source: EN.XPPX.org )

One particular constraint is Russia’s important relationship with Israel, which Moscow will not give up unless Jerusalem drops its neutral stance and joins the U.S.-led condemnation of Russia.

Putin is scheduled to visit Japan later in 2014 in an effort to keep Russia’s technology and investment channel to the country open. Russia is interested in restarting talks to build a natural gas pipeline between its Sakhalin Island and Japan’s far northern island of Hokkaido, Russia already supplies 9.8 percent of Japan’s LNG imports. The proposed pipeline would deliver 20 billion cubic meters of natural gas every year, which at full capacity would supply 17 percent of Japan’s total natural gas imports. As an additional bonus, using a pipeline does not require the building of expensive regasification plants and natural gas from Russia would probably still be relatively cheap. This is also part of Moscow’s attempt to balance its interests and expand its energy influence eastward.

Also Moscow is expected to reinvigorate ties with India, particularly in the defense technology sphere, under the leadership of newly elected Prime Minister Narendra Modi.

South stream serbiaRussia also hopes that Russian-Serbian trade will reach 2 billion dollars this year. He said that a free trade regime existing between the two countries was contributing to steady development of Russian-Serbian economic ties. “Our reciprocal trade turnover grew by 15% to reach 1.97 billion dollars in 2013. It grew by another 16.5% to reach 1.2 billion dollars in the first half of 2014. We hope to reach the figure of 2 billion dollars this year” Putin stressed. Positive dynamics can be seen in the sphere of investments. The total volume of Russian capital investments in Serbia has exceeded 3 billion dollars, the bulk of which was channeled into the strategically important energy sector.

While Russia is consolidating its influence over the former Soviet sphere with states which it already has cultivated deep relations with, China is moving in due its strategic interest in Central Asia. For China a top priority is to be able to diversify its natural resource import routes in order to avoid the U.S. dominated Straits of Malacca.

The growing influence of China in Southeast and East Asia and the Indian Ocean is explained with “string of pearls” concept (strategic points such as Hainan Island, the Woody Islands/close to Vietnam, Chittagong/Bangladesh, Sittue and the Coco Islands/Myanmar, Hambantota/Sri Lanka etc.). The “string of pearls” strategy is aimed at protecting China’s oil flows, affirming the country as a global naval power with diverse interests throughout the world, and overcoming attempts by the USA to cut off access to or from China via the world’s oceans. Furthermore, an important task lay in minimizing potential threats in the most complex and vulnerable choke point at the junction of two oceans, named the “Malacca Dilemma”. (Source and more in Second Wind for China’s String of Pearls Strategy by Nina Lebedeva ).

Tehran is reaching out to Beijing as well. Iran and China have negotiated a deal to trade Iran’s oil for China’s manufactured goods. Beijing is currently Iran’s number-one customer for oil. In late September, two Chinese warships paid a first-ever visit to Iran, and the two countries’ navies carried out joint anti-piracy and rescue maneuvers.

Importing more gas from Russia helps Beijing to gradually escape its Malacca and Hormuz dilemma and industrialize the immense, highly populated and heavily dependent on agriculture interior provinces.

The Northern East-West Freight Corridor (Eurasian Landbridge) is an idea to link the Far East and Europe by rail takes its origin with the construction of the Trans Siberian railway linking Moscow to Vladivostok, completed in 1916. With a length of 9,200 km it is the longest rail segment in the world. It was initially used solely as an inland rail link, but in the 1960s the Soviet Union started offering a landbridge service from Vladivostok using the Trans Siberian to reach Western Europe.

east-west freight corridor

Energy war

U.S. ally inside OPEC, the kingdom of Saudi Arabia, has been flooding the market with deep discounted oil, triggering a price war within OPEC, with Iran following suit and panic selling short in oil futures markets. The Saudis are targeting sales to Asia for the discounts and in particular, its major Asian customer, China where it is reportedly offering its crude for a mere $50 to $60 a barrel rather than the earlier price of around $100. When combined with the financial losses of Russian state natural gas sales to Ukraine and prospects of a US-instigated cutoff of the transit of Russian gas to the huge EU market this winter as EU stockpiles become low, the pressure on oil prices hits Moscow doubly. More than 50% of Russian state revenue comes from its export sales of oil and gas. The US-Saudi oil price manipulation is aimed at destabilizing several strong opponents of U.S. globalist policies. Targets include Iran and Syria, both allies of Russia in opposing a US sole Superpower. In fact the oil weapon is accelerating recent Russian moves to focus its economic power on national interests and lessen dependence on the Dollar system. If the dollar ceases being the currency of world trade, especially oil trade, the US Treasury faces financial catastrophe.

The shale gas revolution and a greater availability of LNG technologies, EU regulatory initiatives and implementation of the Third Energy Package provisions play a key role in transformations of gas markets.

ME pipelinesNow there might be a global oil war underway pitting the United States and Saudi Arabia on one side against Russia and Iran on the other.

In July 2011, the governments of Syria, Iran and Iraq signed an historic gas pipeline energy agreement which went largely unnoticed in the midst of the NATO-Saudi-Qatari war to remove Assad. The pipeline, envisioned to cost $10 billion and take three years to complete, would run from the Iranian Port Assalouyeh near the South Pars gas field in the Persian Gulf, to Damascus in Syria via Iraq territory. The agreement would make Syria the center of assembly and production in conjunction with the reserves of Lebanon. This is a geopolitically strategic space that geographically opens for the first time, extending from Iran to Iraq, Syria and Lebanon. As Asia Times correspondent Pepe Escobar put it, “The Iran-Iraq-Syria pipeline – if it’s ever built – would solidify a predominantly Shi’ite axis through an economic, steel umbilical cord.”

In ongoing oil war the U.S. shale oil producers will suffer most. According to experts’ estimates, the cost of production is around 80-90 dollars a barrel, 4-5 times more than the traditional oil. It means that the current price – 85 dollars a barrel as of October 17 – makes the companies operate in the red. Some producers will have to suspend operations facing mass bankruptcy in case the oil price falls lower than 80 dollars as shareholders start getting rid of zero profit bonds. The shale oil «soap bubble» will blow like the housing construction industry «bubble» blew in 2008. Of course, as time goes by oil prices will go up but it’ll be a different world with some US oil producers non-existent anymore…

Russia insists the South Stream project should be exempt from the effect of the Third Energy Package because it signed bilateral inter-governmental agreements with the EU countries participating in the construction of the gas pipeline on their territory before the EU’s new energy legislation came into force. Therefore, Russia says that the European Commission’s requirement to adapt these documents to the Third Energy Package contradicts the basic law principle that legislation cannot have retroactive force. The Third Energy Package requires, in particular, that a half of the capacities of the pipeline built with Russian money must be reserved for independent suppliers, i.e. for cheap and free transit of Caspian gas to Europe independently from Russia. Therefore, Russia does not recognize the legitimacy of applying the Third Energy Package to the South Stream gas pipeline project.

Bottom line

Russia has accelerated its building of the Eurasian Bridge: Russia has the geostrategic opportunity of being an air, land, and sea bridge between Europe and East Asia. In line with China’s Silk Road and New Eurasian Land Bridge projects, the concept of the Northern Sea Route, and international air routes traversing Siberia, Russia can use its geographic position to reap the resultant dividends of East-West trade and thereby increasing its middleman importance.

The geopolitical situation is now transforming from traditional Sino-U.S. relations to U.S.-China-Russia triangle in which China, rather than the United States, will be the central player.

In addition the EU is worried that Russia will turn east and Europe will lose much of its Russian market share. At a time when the euro area threatens to collapse, where an acute economic crisis has led the U.S. into a debt of up to 14 940 billion, and where their influence is dwindling in the face of the emerging BRICS powers, it becomes clear that the key to economic success and political domination lies mainly in the control of the energy source of the century: gas.

With China signing the natural gas deal with Russia and the president of China publicly stating that it’s time to create a new security model for the Asian nations that includes Russia and Iran, it’s clear China has chosen Russia over the U.S. Today the US-backed wars in Ukraine and in Syria are but two fronts in the same strategic war to cripple Russia and China and to rupture any Eurasian counter-pole to a U.S.-controlled regions. In each, control of energy pipelines, this time primarily of natural gas pipelines—from Russia to the EU via Ukraine and from Iran and Syria to the EU via Syria—is the strategic goal.

So far U.S. has bullied its way around smaller nations for too long now. It seems to me that finally there is coming to be a coalition of new axis with Eurasia and China. Russia and China are leading of developing a network of “parallel structures” to existing international organizations and institutions. The end goal is create an alternative reality for international engagement, so that China can expand its own influence while escaping the restrictions of the current U.S.-dominated system.

eurasia revolution

Good performance is welcome but will not change the condition of refineries

Posted by on 11/11/14

The performance of oil companies in Q3 2014 was strongly affected by an increase in refining margins, which was primarily attributable to a surprising decline in crude oil prices. How will oil prices and margins change in the future? Not long ago, I explored the reasons behind the dip in crude oil prices. Now, I would like to take a closer look at refining margins.

The financial performance of companies operating in the petrochemical industry – which transform one commodity, such as crude oil, into another commodity, such as diesel fuel, gasoline and heavy fuel oil – is strongly dependent of the difference between the market price of petroleum products and the price of the crude consumed to produce them. The difference is what we call a margin.

When talking about individual products we use the term ‘crack spread’ (price of diesel oil minus price of crude, price of gasoline minus price of crude, etc.). In reference to a refinery’s entire product output, however, the term ‘refining margin’ is used. As product composition of output is adjusted according to demand structure and product prices, which are not fixed, as well as depending on product yield from individual crude types, refineries calculate model refining margins, which are based on constant product shares, average in past periods.

It should be noted that short-term margin fluctuations are something to be expected as fuel prices are strongly affected by the seasonality of consumer demand, which has no bearing on the crude oil market. Temporary / seasonal production stoppages at refineries (maintenance shutdowns) also affect fuel prices by reducing fuel supply and oil consumption. In consequence, fuel prices are out of phase with oil prices when it comes to short-term fluctuations, often changing in opposition to each other, which may result in margin ups and downs.

Let’s look at PKN Orlen’s model refining margin in 2014. Initially negative in January (USD -0.10/b), the margin grew to USD 4.3/b in April, then shrank to USD 1.5/b in May, and remained at that level in June, but only to rise again in September (to USD 5.5/b). When we relate these fluctuations to changes in crude prices, we will see that the rising crude prices were accompanied by falling margins, and vice verse – when oil prices fell, margins went up. Knowing that crude prices reduce margins, this is no surprise.

However, margins behave like this (i.e. react strongly to changing crude oil prices) only in very specific circumstances:

  • when crude oil prices change abruptly, increasing in reaction to actual or anticipated supply disruptions (fear premium) or decreasing as a result of production growth, which is considerably less common, and
  • over the short term, when product prices have not yet adapted to new crude prices.

In some respects, crude oil is a financial asset, and its price is affected, through financial markets, by unexpected changes more strongly and rapidly than the price of fuels (products of crude processing), which typically react no sooner than when actual changes materialise.

In situations where global GDP and liquid fuel demand projections fall down abruptly, as it is happening now (the same took place in 2012), crude oil prices react by decreasing more sharply and quickly than the prices of petroleum products, which change gradually and over longer periods of time.

Knowing this relationship, one can expect that an actual decline in crude oil prices (if it is sustained) will likely result, within a period of several months, in lower fuel prices, which will in turn cause margins to shrink. The opposite holds true as well: if the price of crude goes up, due to geopolitical factors or other reasons, refining margins will decrease at first, and after some time fuel and petroleum product prices will follow the new oil price trend, resulting in higher margins.

Over longer time periods, the refining margin ceases to be a simple price difference and becomes a parameter tied to technologies used in the global petroleum industry: margins are set in relation to the most expensive technologies required to meet global fuel demand. In such a situation, the petroleum industry’s cost-based fuel pricing mechanism kicks in, setting the marginal cost of processing crude oil according to the formula: crude price + technological margin (for the least efficient producer / technological process). Growing fuel demand creates room on the market for less efficient refiners, and it is them who ultimately set the market price (production must be profitable over the long term). When new, more efficient refineries enter the market, on the other hand, supply increases, margins go down and the marginal cost of producing fuel is reduced, forcing less efficient refiners out of the market. To remain on the market, refineries must produce fuels at the lowest possible cost. An unexpected increase in margins is always good news, but it must not be taken as a foundation for the future.

 

China can reduce air pollution when it has to

Posted by on 06/11/14

From November 3 to 11 Beijing is hosting an APEC Summit, which 20 Heads of Government from the Pacific region will attend.

To that end, the local authorities have undertaken utmost efforts to clean up their city, which is one the most polluted on earth.

The streets are “empty” because schools, local government, public and private companies send their students and staff on temporary leave. This enables the authorities to halve the number of cars on the roads, according to even and uneven number plates.

The air is “clean” because some 300 energy-intensive factories around Beijing have to close down or reduce their activities during the Summit. Public works within the city are temporarily suspended.

The APEC meeting can therefore take place in a beautiful, clean and quiet city that in reality does no longer exist; and the international visitors can return home with the impression that China is finally coming to grips with pollution, something its citizens have been demanding for years.

After this impressive “clean-up” in Beijing popular pressure on local and central government is bound to grow to tackle air pollution and thus help reigning in rising health costs and climate-related natural catastrophes.

This will require phasing out coal-fired power plants,and introducing equipment to eliminate small particles in factory-chimneys as well as less-polluting vehicles.

The Chinese political establishment is becoming increasingly aware of these risks and would be well advised not to further delay urgent action.

The Chinese position at the Paris Climate Conference in December 2015 will show to what extent awareness will have turned into action.

Eberhard Rhein, Brussels, 5/11/2014

 

ABC of the power segment – part 2

Posted by on 03/11/14

Although the share of renewable energy sources is growing, fossil fuels, supplying more than 80% of global primary energy demand, play the dominant role. In 2011, fossil fuels, which include crude oil, coal and natural gas, met respectively 32%, 27% and 22% of global energy demand. In the power sector, proportions are different, with coal accounting for 41% and natural gas for 22% of electricity generation, and a meagre 5% attributable to crude oil, which has been effectively eliminated as a means of producing electrical energy in the wake of the oil crises of the 1970s and 1980s. Crude oil has a lower share in electricity generation than nuclear power (9%), hydropower (6%) and other renewable energy sources (16%). Until the inception of the revolutionary (unconventional) technology allowing natural gas to be extracted directly from source rock, fossil fuel production did not attract much interest. Today, these unconventional technologies are successfully applied in crude oil extraction as well. We have no reason to believe that coal, whose natural deposits could supply the energy sector for a few thousand years, will escape the technological revolution. However, before the coal revolution unfolds, let us have a look at how hard coal is extracted around the world. Are lignite and hard coal mined differently? How is natural gas produced? What technology is used to extract the gas trapped in unconventional deposits?

How is hard coal produced around the world?

70% of coal is mined underground, while 30% is extracted in open-pit mines.

Open-pit mining is less expensive, with the average production cost (translated into the złoty) in the region of PLN 20–24 per tonne, compared to as much as PLN 680 per tonne for underground mining. The open-pit method is suitable for exploiting coal strata located at relatively shallow depths. Since the disadvantage of surface mining is its highly destructive environmental impact, once environmental costs and site reclamation expenses are taken into account, the cost of production goes up significantly.

The advantage of underground coal mines is that they can carry out extraction activities even in highly urbanised areas, as they do not occupy a lot of space on the surface. Naturally, mining in urban areas gives rise to various problems, mining damage being the most serious. The necessity to protect urban areas from mining damage entails choosing more expensive extraction methods, which adds to production costs. Sometimes a mine has to refrain from exploiting a deposit and leave it as a special protective pillar ensuring the safety of surface structures.

Underground mines can reach deposits located as deep as over one kilometre below the surface.

High hopes are currently pinned on technologies for tapping the energy from coal without extracting the material to the surface (deep borehole mining), which allow reaching deposits located at the depth of several kilometres subsurface.

Are lignite and hard coal mined differently?

No, they are not. In both cases, the production process is similar, except that lignite is produced predominantly in open-pit mines (some 97%) rather than underground mines (about 3%).

Gas

Natural gas is extracted through wells drilled in subsurface rock formations. This method, known as borehole mining, dates back to the mid-19th century. Although we have seen consistent technological progress since then, natural gas is still extracted using the same method (Canada’s oil sands are an exception). Natural gas occurs in reservoir rock, which have different physical and chemical characteristics. According to a recent typology, crude oil and gas can accumulate in formations characterised by good reservoir quality (conventional reservoirs), medium reservoir quality (tight oil and gas) or poor reservoir quality (shale). The last two categories are known as unconventional reservoirs. Shale is also a reservoir rock, which means that it contains organic matter and is able to generate and expel, as well as accumulate, large amounts of hydrocarbons. As such, shale is a hydrocarbon generator and collector at the same time.

What technology is used to extract the gas trapped in unconventional deposits?

There are three stages involved in the production of natural gas: exploration – geological surveying and drilling; appraisal – appraisal well drilling; and development – production wells are drilled and surface infrastructure for producing, processing, storing and transporting natural gas is erected.

Finding ‘sweet spots’

Critical to any shale gas production project’s profitability is the accurate identification of ‘sweet spots’ – areas where the concentration of hydrocarbons guarantees profitable production. American and Canadian operators, engaged in unconventional hydrocarbon production, have the most extensive experience in this respect. However, given that significant differences exist between Polish and North American shale, this expertise cannot be easily transferred onto the Polish ground. Among Polish companies, it is licence operators, such as ORLEN Upstream, that have access to the best know-how.

Some facts about wells:

vertical drilling

  • Vertical drilling is used in unconventional projects in the same way it is traditionally used to produce crude oil and natural gas from conventional deposits.
  • In the central part of the drilling rig, there is a drill string (lengths of coiled steel tubing) with a mobile drilling bit attached at the end. During the drilling operation, special drilling fluid is fed into the drill string and bit nozzles to accelerate the drilling process, cool the drill bit, stabilise the well, maintain appropriate pressure, and carry out drill cuttings. Drilling fluid is a mixture of water and additional substances (which may, for example, increase fluid weight and density).
  • As drilling progresses, steel casing is inserted into the space between the drill pipe and the rock wall, and then cemented to provide stability and strengthen the well, as well as to seal the borehole off from aquifers and other rock formations. Well casing and cement also prevent the contamination of water intakes with the drilling fluid and, at the later stage, with the fracturing fluid.
  • The latest technologies enable vertical wells to be drilled to depths ranging from a few thousand to more than a dozen thousand metres in extreme cases. Shale deposits in Poland can be found at depths from about 2,000 metres in the east of the country, to above 5,000 in the west.

horizontal drilling

  • Once the vertical well has reached its target depth, a directional well (which may be horizontal or slanted) is drilled into the gas-bearing shale formation, whose thickness typically ranges from several to several dozen metres. With the available technology, the maximum length of directional boreholes permitting economically viable production can be in excess of 3,000 metres.
  • Given their substantially larger contact with the field, horizontal wells enable more efficient production from unconventional gas deposits than vertical wells. Approximately 8 directional/horizontal wells branching off from a single drill site are enough to access a field which would normally require several dozen vertical wells to begin production. Horizontal wells have been drilled in Poland since the 1980s, and the longest horizontal sections, dating back to the 1990s and reaching in excess of 2,400 metres, were also used to stimulate wells (through fracturing). The work was carried out by Polish engineers aided by a few specialist foreign companies.

well cementing and perforation

  • Once the horizontal sections have been drilled, casing is again inserted and cemented to ensure well impermeability, which is verified through pressure testing.
  • Subsequent well sections are then perforated to enable hydraulic fracturing treatment.

hydraulic fracturing

  • During the hydraulic fracturing procedure, fracturing fluid (mostly a mixture of water and sand) is injected into the wellbore under pressures often exceeding 600 bar (more than 300 times that in a car tyre). When a sufficient number of fractures appear in the treatment zone, a mixture of appropriately-grained sand and water is introduced into the cracks, keeping them open and enabling gas flow into the well. There exist many variants of the hydraulic fracturing technology. To ensure that the procedure is successful, the fracturing fluid is mixed with small amounts (0.5–1%) of chemical additives, which are able to regulate certain fluid parameters, including its viscosity, water content and specific weight. Other proppants may be used instead of sand, such as ceramic materials or polymer fluids, which create networks of interlacing fibres.

 

 

 

Governments should benefit from low oil prices to end subsidies

Posted by on 02/11/14

With oil prices having declined to less than $90 per barrel, a low level not seen for more than a decade, oil/gas subsidies are becoming a costly affair to countries with high production costs like Russia, Egypt, Yemen, Venezuela, Indonesia. At the same time, due to the lower prices consumers enjoying them will hardly feel the abolition of the subsidies.

This is therefore the right moment to abolish them or at least start phasing them out. At the forthcoming Climate Conference in Lima, the IEA should therefore make a renewed plea for their abolition; and the international community should lend its full-hearted support for such action.

A decision to phase out oil/gas subsidies in Lima it would be the first time ever that a climate conference produces a tangible result by ending an unforgivable incentive to fossil energy.

Eberhard Rhein, Brussels, 20/10/2014

Gas talks stall as Russia pushes for EU guarantees on Ukrainian gas payments

Posted by on 30/10/14
Update 11.50 30/10/14:
Reuters is reporting that an EU spokesperson has said a deal is "very close" and talks will continue today, as we note below. As we also say below, a deal is still doable and likely, the question remains whether any form of EU payment guarantee will be needed and if this can get sufficient support within the broader EU member states.

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Despite another round of talks between Ukraine, Russia and the EU which ran late into the night yesterday the negotiations seem to have reached somewhat of a stalemate.

Earlier in the year the halting of gas supply between Russia and Ukraine (for Ukraine’s own use at least) was not seen as too big of an issue and it was hoped Ukraine would be able to leverage the combination of economic pain from sanctions and the Russian government’s reliance on commodities exports for funding to secure a relatively favourable deal. However, on the cusp of the harsh Ukrainian winter the power balance has steadily shifted and Russia has continued to hold firm and even broadened its demands.

What has been agreed so far?
Quite significant progress has actually been made compared to the starting point:
  • Ukraine has agreed to pay for previous gas supply at a price of $268.5 per thousand cubic metres. This means $1.45bn will be paid by the end of October and $1.65bn ($3.1bn total) by the end of the year. Ukraine’s Naftogaz has set aside $3.2bn in an escrow account to pay for this.
  • Going forward Ukraine will prepay on a monthly basis for its gas this winter at a price of $385 per thousand cubic metres. Russia has agreed to pay transit costs.
Russia has clearly shifted from its original price demand (at least with regards to back dated payments), but Ukraine has also compromised by agreeing to prepay and pay off existing debts.

What are the key sticking points?
There is really only one, but it’s a biggie. While Ukraine has proven that it can afford to pay off its existing debts there is much less certainty about its ability to prepay going forward.

We have noted before the significant downward spiral in the Ukrainian economy. While the fighting has calmed down to an extent, things are still far from normal, not least because the conflict has become frozen in the East with part of the country still de facto cut off.

Ukraine is now totally reliant on external funding from the EU and IMF. As we have seen in the Eurozone crisis the release of such funding is often more complicated than expected and creates a staggered cash flow linked to economic reforms. Such reforms should pick up following the election but remain tricky to implement in a country caught in the proverbial no man’s land in the sanctions war between Russia and the EU.

For these reasons Russia has continued to demand some form of explicit guarantee from the EU that Ukraine will be able to pay for the supplies over the winter – they are expected to cost around $1.6bn, though this could increase if the winter is particularly harsh.

Is a deal likely?
It’s looking difficult as this meeting was earmarked as the most likely one for a deal. Russia seems to be using this arena to flex its muscles given that it believes it has the upper hand. That said, the economic costs of sanctions and a falling oil price are creating problems for the Russian economy, though it’s not always clear whether economic logic is sufficient to alter Russian President Vladimir Putin’s position.

Getting explicit EU support for around $2bn to guarantee prepayment would be difficult. But, so far, the EU has been fairly supportive of Ukraine and may be willing to offer a more tacit agreement to provide further funding rather than outright underwriting of the payments. Furthermore, without a deal there will be a huge temptation for Ukraine to siphon off gas which it is transiting from Russia to Europe. This could cause Russia to halt all gas flow through Russia, something Europe is keen to avoid to say the least.

Talks are set to resume later today according to RIA Novosti. With all this in mind, and the fact that a deal remains in all sides' interests, we would think one could still be struck.

What are the lessons here?
Ultimately, this dispute is teasing out a key question for the EU in the wake of this crisis. It is becoming increasingly clear that Ukraine is economically devastated in the wake of the war and the sanctions. The offer of opening up markets in the EU is unlikely to be sufficient and the EU and IMF will have to face up to the fact that in the short and medium term they will probably have to offer significant amounts of cash to Ukraine to help stabilise its economy, currency and energy supply.

Putin is aware of how politically sensitive this is for the EU – it has just gone through a series of its own bailouts in the Eurozone crisis and now countries are being asked to stump up cash for a country which is not even a member (and is unlikely to be one for the foreseeable future, if ever). As with the sanctions, this narrative is likely to expose dividing lines within the EU and set the tone for the negotiations over the future of Ukraine.

¥uan and Waterloo of Petro$ (Part 1/2)

Posted by on 30/10/14

yuan logoOngoing western sanctions due Ukraine are pushing China and Russia to close cooperation – the great Eurasian axis is already in motion. Despite the headlines in mainstream western media related to civil war in Ukraine the primary war is being fought monetarily. The Russia-China Strategic Partnership (RCSP) is truly global in scope, having come to encompass the entire world to varying degrees. The Ukraine War might be the U.S. Dollar Waterloo event.

As the Americans and their allies are trying to squeeze Russia and Iran with a combination of economic sanctions and political isolation, alternative poles of power are emerging that soon may present a serious challenge to the U.S.-dominated world that emerged from the end of the Cold War.

The Russian response to ongoing western sanctions has been launching a counter-strategy that could bring the cost boomeranging right back to Washington. Namely, the formation of a potential non-dollar trading block among major players in the global energy markets including Iran and China.

 

 

The end of the Petrodollar

(In 1971 Richard Nixon was forced to close the gold window taking the U.S. off the gold standard and setting into motion a massive devaluation of the U.S. dollar.In an effort to prop up the value of the dollar Nixon negotiated a deal with Saudi Arabia that in exchange for arms and protection they would denominate all future oil sales in U.S. dollars. )

For decades, virtually all oil and natural gas around the world has been bought and sold for U.S. dollars. Since World War II, America’s geopolitical supremacy has rested not only on military might, but also on the dollar’s standing as the world’s leading transactional and reserve currency.

Last year Russia produced about 10.5 million bbls. of oil per day and exported 70% of it. That amounts to nearly 2.6 billion barrels with a value of nearly $250 billion at world market prices. It also exported the equivalent of nearly 1 million barrels per day of natural gas with a market value of upwards of US$50 billion. The truth is that Russia is the largest exporter of natural gas and the second largest exporter of oil in the world. If Russia starts asking for payment in currencies other than the U.S. dollar, that will essentially end the monopoly of the petrodollar.

China just overtook the US as the world’s largest economy. The US national debt is now past €17 trillion. China – their biggest creditor – has been cutting on US debt holdings and hoarding gold on the side to be prepared for the possible collapse of the dollar. The US federal government ran an estimated budget deficit of $486 billion, or 2.8 per cent of GDP, in fiscal year 2014. By contrast, Russia just posted a federal budget surplus of 2 per cent of GDP.

dollar collapseWhen U.S. politicians started plan economic sanctions on Russia, they probably never even imagined that there might be serious consequences for the United States. But now the Russian media is reporting that the Russian Ministry of Finance is getting ready to pull the trigger on a “de-dollarization” plan. For decades, virtually all oil and natural gas around the world has been bought and sold for U.S. dollars. As I will explain below, this has been a massive advantage for the U.S. economy. In recent years, there have been rumblings by nations such as Russia and China about the need to change to a new system, but nobody has really had a big reason to upset the status quo. However, that has now changed. The struggle over Ukraine has caused Russia to completely reevaluate the financial relationship that it has with the United States.

The largest natural gas producer on the planet, Gazprom, has signed agreements with some of their biggest customers to switch payments for natural gas from U.S. dollars to euros. If other nations start following suit – start trading a lot of oil and natural gas for currencies other than the U.S.$ – that will be a massive blow for the petrodollar, and it could end up dramatically changing the global economic landscape.

Moscow, allied with the BRICS, is actively working to bypass the US dollar. The core point is that Russia is not alone. Besides the BRICS also the G-77, the Non-Aligned Movement (NAM), the whole Global South is critical to U.S. led bullying and would like to have other alternative in international relations. This past summer, the BRICS countries created an alternative to the largely U.S.-controlled World Bank and International Monetary Fund (IMF), and the Shanghai Cooperation Organization (SCO) added 1.6 billion people to its rolls.

G-7 vs E-7

Back in 1971, it was necessary to assure that the dollar would retain its position in world trade as the world’s premiere currency, in spite of the fact that it was no longer backed by anything. The U.S. reached an agreement with Saudi Arabia that, in trade for arms and protection, the Saudis would denominate all future oil sales, worldwide, in dollars. The other OPEC countries fell into line, and the “petrodollar” was assured.

Now the Sino-Russian cooperation is challenging the Americans, and there are many countries that would be happy to join them in dethroning the US dollar as the world’s reserve currency. The historic gas deal between Russia and China is very bad news for the petrodollar – it might be start of the “de-Americanised” world.

 

Yuan replacing the Petrodollar

petrodollarOn April 24th 2014 the Russian government organized a special “de-dollarization meeting” dedicated to finding a solution for getting rid of the US dollar in Russian export operations. Top level experts from the energy sector, banks and governmental agencies were summoned and a number of measures were proposed as a response for American sanctions against Russia.

Over the last few weeks there has been a significant interest in the market from large Russian corporations to start using various products in renminbi and other Asian currencies, and to set up accounts in Asian locations,” Pavel Teplukhin, head of Deutsche Bank in Russia, told the Financial Times, The renminbi is the official currency of the People’s Republic of China. literally means “people’s currency”. The yuan is the basic unit of the renminbi, but is also used to refer to the Chinese currency generally, especially in international contexts.

Moving the yuan towards internationalisation involves three distinct phases: turning the Chinese currency into a) a trading currency, b) an investment currency, and c) a reserve currency.

Some recent developments:

  • Chinese credit rating agency Dagong has downgraded U.S. debt from A to A- and has indicated that further downgrades are possible.
  • China has just entered into a very large currency swap agreement with the eurozone that is considered a huge step toward establishing the yuan as a major world currency.
  • Back in June 2014, China signed a major currency swap agreement with the United Kingdom. This was another very important step toward internationalizing the yuan.
  • China currently owns about 1.3 trillion dollars of U.S. debt, and this enormous exposure to U.S. debt is starting to become a major political issue within China.
  • Mei Xinyu, Commerce Minister adviser to the Chinese government, warned (on Oct 2014) China may decide to completely stop buying U.S. Treasury bonds.

China is the largest producer of gold in the world, and it has also been importing an absolutely massive amount of gold from other nations and in addition China plans to buy another 5,000 tons of gold.) There are many that are convinced that China eventually plans to back the yuan with gold and try to make it the number one alternative to the U.S. dollar.

If China does decide to back the yuan with gold and no longer use the U.S. dollar in international trade, it will have devastating effects on the U.S. economy. If other nations stopped using the dollar to trade with one another, the value of the dollar would plummet dramatically. One could claim that the entire way of life in U.S. depends on the U.S.$ being the primary reserve currency of the world. (Source: The Economic Collapse )

eu-china trade map

The dollar does not just predominate in China’s trade with the United States, but with other countries as well. The first steps towards the internationalisation of the yuan emerged in 2008-2009. At that time, businesses and companies were allowed to use the yuan in trade with Hong Kong (Xianggang), Macau, and ASEAN countries. In 2012, every Chinese company with a licence for export and import transactions was able to use the yuan. An active transition to foreign trade settlements in yuan is happening alongside an increase in the use of the national currencies of China’s trading partners. This is being facilitated by the signing of bilateral currency swaps between the People’s Bank of China (PBC) and the central banks of China’s trading partners. To date, the PBC has signed more than 20 currency swap agreements. At the end of 2013-beginning of 2014, the yuan overtook the euro in terms of the amount of payments used for international trade, and took second place after the US dollar. According to the People’s Bank of China (PBC) , there was more than 1.3 trillion yuan overseas at the end of 2013, which is equivalent to approximately US $250 billion. In fact, this money is forming an offshore yuan market. At present, the yuan can be directly converted with the US dollar, the Japanese yen, the Australian dollar, the Russian rouble, the Malaysian ringgit, and the New Zealand dollar. The latest such agreement was signed between China and New Zealand in March 2014. (Source: Strategic Culture Foundation )

 

My conclusion

In my conclusion the era when the IMF, World Bank, and U.S. Treasury could essentially dictate international finances and intimidate or crush opponents with sanctions, pressure and threads are drawing to a close – the BRICS and the Shanghai Cooperation Organization are two nails in that coffin. These independent poles (BRICS, SCO, USAN) are developing fast and it remains to see what their ultimate impact on international politics will be – my scenario is that the impact will be a drastic shift from U.S. dominance to more balanced juxtaposition of U.S. and Eurasia.

the end of dollar

Technological breakthroughs against climate change brighten the horizon

Posted by on 28/10/14

Humanity will be unable to combat climate change without profound transformations in the way it generates energy.

Two such transformations have been recently announced, one in Singapore, the other in USA.

In Singapore, a team of scientists of the Nanyang Technological University have developed a new type of ultra-fast recharging batteries which are claimed to charge a car battery up to 70% of capacity within five minutes. This breakthrough will revolutionise e-mobility in terms of range and costs and make electric cars superior to the most efficient diesel vehicles.

European manufacturers should therefore urgently reassess the situation and adapt their proven, but old-fashioned engine technology at the risk of losing out to US and Chinese competitors.

The new batteries will provide us with truly clean motor vehicles and give a powerful boost to solar and wind energy, because millions of cars may form big energy storage systems helping to overcome the inherent intermittences of renewable energies.

Separately, the US defence company Lockheed has announced a breakthrough in fusion energy. Within a year it will build a test reactor to be followed five years later by a prototype of a 100 MW reactor of tiny dimensions (2×3 meter!).

Assuming the problems linked to nuclear fission, in particular safety and waste storage, to be solved this might usher in an era of non-fossil electricity generation based on wind, solar, biomass and nuclear fusion.

The demand for oil and gas will also fall dramatically as the global car, shipping and possibly even aircraft industry will phase out the internal combustion engine, say by 2050, reinforcing the decline of C02 emissions.

Add to these two technological breakthroughs the introduction of a magnetic super high-speed train by the Japanese railways until 2045.

Running at a speed of up to 500 km/h the train will largely replace domestic air transport, also a significant source of C02 emissions. The Japanese industry will no doubt export the new train to other parts of the earth, from North America, to Brazil, Argentina, Russia and Europe, with the consequence that there too it is likely to replace domestic air traffic on distances of less than 1500 km.

The news from Singapore, USA and Japan unfortunately show that Europe has lost its momentum in coming up with courageous technical and political solutions both to tackle climate change!

We are closer than ever to technical solutions allowing for a largely emission-free future. By establishing strict emission targets heads of government will help accelerate the technological breakthroughs that are arising on the horizon.

In conclusion, one year ahead of the World Climate Conference in Paris, there is reason for guarded optimism, provided policy makers will show the courage to fix ambitious long-term targets and avoid getting again lost in minutiae.

Brussels 20.10 2014 Eberhard Rhein

Klima

Posted by on 24/10/14

An einem Klimagipfel teilnehmen zu müssen erinnert an Zähneputzen: Es ist wichtig, aber lästig.Lange schritt Angela Merkel beim Klimaschutz voran. Teils so forsch, dass sie sich den Titel Klimakanzlerin einfing. Jetzt ist das Geschrei groß: Statt bis 2030 EU-weit 30 Prozent Energie zu sparen, stehen nur noch 27 Prozent auf dem Papier. Merkel verrate ihren Titel, monieren Kritiker. Und tatsächlich verlässt Deutschland seine Vorreiterrolle als oberster Klimaschützer. Dies aber ist kein Einknicken gegenüber Kritikern wie Großbritannien oder Polen, sondern Strategie: Den Weltklimagipfel 2015 in Paris im Blick, weiß Merkel, wie wichtig die Einigung auf EU-Ebene ist. Nur wenn sich die 28 Staaten trotz unterschiedlicher Ansprüche verständigen, kann dies Beispiel geben für Paris.

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