Oct 29, 2021
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Energy transition shouldn’t be a catastrophe

The crisis in Europe requires a new assessment of the role of traditional energy in the global economy

The energy crisis in Europe predicted by the end of the year, or even until spring, caused not least of all by the generously subsidized, forced “green” restructuring, led to a burning interest of the participants of the XIV Eurasian Economic Forum in Verona, held on October 28-29, to a discussion about the future of this second, besides money, the bloodstream of any economy.

Europe could freeze. Who is guilty?

Natural gas prices on European exchanges / hubs this fall went off scale, sometimes exceeding $ 1300 per 1,000 cubic meters, plunging into despair both industrial consumers of electricity produced from this raw material, and ordinary citizens.

The sacramental question was in the air: who is to blame? Since no one canceled one of the key elements in the hybrid war against Russia – its demonization, a heap of peremptory accusations was thrown onto the doorstep of Gazprom as the leading supplier of hydrocarbons to Europe.

The origins of the crisis were analyzed at the forum by former German Chancellor Gerhard Schroeder, who plays in the Gazprom team. In the first place, Schroeder put the factor of imbalance between supply and demand. Many countries, especially in Asia, having overcome the peak of covid passions, are slowly but surely restoring their previous rates of economic growth. In the first half of the year, Schroeder reinforced his thesis, demand for natural gas increased by 12 percent in the six largest countries. As for Europe, the unusually cold winter forced the underground gas storage facilities to be emptied substantially.

If we look at the statistics of hydrocarbon imports by European wholesale buyers, then Russia looks exemplary in comparison with the second supplier – Norway. If Gazprom’s exports grew by 9% this year, then in the first half of the year, Norwegian gas supplies fell by two percent, in the second by 11%.

Speaking at another session (Natural Gas and Green Economy), Viktor Zubkov, Chairman of the Board of Directors of PJSC Gazprom, recalled that the energy giant from Russia, which has been feeding the European economy for more than half a century, has always complied with its contractual obligations. “During the abnormal cold weather in Europe in the first quarter of the year, Gazprom supplied record volumes – over 1.7 billion cubic meters per day.” It is not true that there were no supplies in excess of those stipulated in the contract: Gazprom, Zubkov stressed, has already consoled Europe with an additional 11 billion cubic meters of gas and is ready to cheer up another 55 billion cubic meters.

Isn’t it better to turn to yourself, godfather?

Since it is obvious to understanding Europeans that invectives against Russia are only part of an information war, that attempts by limitrophes within the European Union to “bring Russia to justice” have no judicial perspective, and the electorate will certainly ask where the legs of the rewritten price tags come from, you will have to look for real intruders … Or those who have shown strategic myopia, official negligence and ideological blinkering.

A detailed analysis of a series of ill-considered management decisions, aggravated by a fatal coincidence, indicates that the European Commission’s bet on spot platforms and short-term contracts was wrong. The winners were the holders of long-term contracts with a fixed but flexible price linked to oil prices.

A spot trading system would most likely work if there were many competing energy suppliers in terms of volume, price and logistical advantages. In theory, the spot could represent a cozy alternative for buyers, but this is only in theory, but in life the basic principles of the market (market fundamentals), based on the relationship between supply and demand, prevailed. The supplier-manufacturer market is back.

“Due to the lack of long-term contracts, gas storage facilities were only 75% full, compared with a 10-year historical level of 90%. Now this level has dropped even more, to 65-70%, – Igor Sechin, head of Rosneft, explained the importance of long-term planning and prudent accumulation of inventory. “Thus, the gas crisis did not happen for any one reason, but because of a combination of a number of factors that had a simultaneous effect.”

LNG bill loves

Four fifths of all natural gas supplies to Europe are carried out via the pipeline route, and only one fifth comes in tankers. The hope for imported American LNG has always warmed the souls of European bureaucrats in Brussels, but the current crisis has become a moment of truth.

The winner in the price bargaining takes all or almost all. China has awakened from a covid half-hibernation. Having experienced a bout of hunger for energy, the world’s leading economy intends to justify the major forecast of GDP growth at the end of the year in the amount of 8%, which exceeds the forecast for the eurozone (5%). China’s appetite is excellent: oil consumption is expected to grow by about 10% compared to the previous year, and gas demand by 7-8%.

Ruled by a pragmatic communist leadership, the former Middle Empire sits on nearly three trillion gold and foreign exchange reserves. The client for energy suppliers is monetary, and therefore reliable. The anticipation of profit outweighed not only all US assurances of its commitment to transatlantic solidarity, but also the promise to flood Europe with its LNG in exchange for the funeral of the Nord Stream 2 gas pipeline. Unlike dirty Siberian gas, Washington argued, American LNG is a “molecule of freedom,” and therefore the Europeans are obliged to sink a pipe that promises them an additional 55 billion cubic meters of Russian gas.

However, there was an attack of chronic shortage of energy supplements. Where have the “molecules of freedom” gone? Yes, sky-high spot prices in Europe attracted American LNG: imports increased by 47%, but during the same period, supplies to Asia increased 2.6 times! Solidarity is solidarity, but money is still apart.

Prices say: they kept us in chains for a long time

Markets will usually calm down over time. However, it will now be different. Viktor Zubkov said that Gazprom sees no reason to return to the previous level of prices. And he is not alone.

Prices for natural and liquefied gas will no longer fall to the levels of 2019, says Leonid Mikhelson, Chairman of the Management Board of NOVATEK. Recalling that before our very eyes, electricity prices in Europe rose by more than 800 percent, and for LNG – by more than 1,100 percent, he cited as one of the reasons the lack of support from governments and investors in the creation of new production facilities for the production of natural gas. gas and LNG.

Moreover, according to the assessment of banks Citi and Goldman Sachs, Igor Sechin said, “Ultra-high prices for natural gas can create additional oil demand of up to 1 million barrels per day, which will serve as an impetus for an imbalance similar to gas, and will further heat up oil prices”

This prediction is coupled with the often repeated words: the era of cheap fossil fuels is coming to an end.

Green renewable energy sources are not yet ripe. Wait?

The high degree of attention to this issue was due to the disagreement in the forecasts of what will happen tomorrow. The fiasco of solar panels and wind turbines, first in Texas, then in Europe, forced a critical look at the nature, pace, technological maturity and cost-effectiveness of the transition to green energy. And, accordingly, it encourages to re-evaluate the place and role of traditional energy.

Green energy companies should be concerned not so much with the rapid growth of capitalization by increasing prices for consumers, but with ensuring a consistent energy transition that does not create shocks for the economy and consumers, Igor Sechin said. In his opinion, achieving carbon neutrality “Does not require a complete rejection not only of oil and gas, but also of coal”… The risks of abandoning oil, low carbon gas generation and coal must be fairly weighed. This makes us rethink not only the timing, but also the need to completely abandon traditional generation, Sechin added. And Leonid Mikhelson noted that it is necessary to calculate “The pace of energy transition”: by disrupting the withdrawal of one energy carrier from the market, “we cause a rise in the price of another energy carrier”

The logic of this approach to “greening” the energy industry is clear: the energy transition to a low-carbon economy, to use the expression of the philosopher Alexander Zinoviev, should not be a “catastrophe”.

Specialist. corr. FSK,
Verona, 29 October 2021

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