The full picture on energy. Three days full of energy, with plenary and parallel sessions. Over 10,000 participants and speakers from all over the world, called to address technical aspects and geopolitical issues. It was impossible to attend all the sessions. We must therefore limit ourselves to the main points.
Gas Becomes King
Let's start from a key point: gas consumption will grow faster than that of other hydrocarbons. Gas is an environmentally friendly, economically competitive and, above all, increasingly accessible fuel, thanks to LNG (liquefied natural gas). While the share of gas in the world's energy balance is currently 23 percent, estimates for 2035 are expected to rise to 27 percent. “Compared to today, in 2040 gas sales around the world will increase by 600-700 billion cubic meters (m3), and about 70 percent of this increase will be due to liquefied gas,” said Alexander Novak, the Russian Energy Minister. The number of countries consuming LNG increased from 13 in 1990 to 36 in 2017 and is expected to increase further. Russia does not want to miss the boat. The spokesman for this new challenge is Leonid Mikhelson, the Chairman of Novatek, a permanent speaker at Energy Week and the Eurasian Forum in Verona (scheduled for October 24 and 25). “Russia mined 670 billion cubic meters of gas in 2018, or about 17 percent of the world's gas, while Russian LNG accounts for 7 percent of the world production. I think Russia’s share of LNG can and should be around 20 percent of the world’s,” Mikhelson said. In Novatek's development plans, 57 million m3 of LNG is expected to be produced per year by 2030, but Mikhelson raises the forecast to 75 million.
Russia, Europe's Largest Supplier
Europe's internal resources are gradually diminishing. Although Europe must now import half of the gas it consumes, it is expected that in the future about 70-80 percent of gas will be imported. This additional proportion is forming the battleground for competition from new stakeholders such as the U.S., whose LNG is seen as the “freedom molecule”. Ironically, the attendees at Energy Week admitted that there is some pressure from American politicians on economic issues, particularly on how, from whom and at what price to buy gas. Viktor Zubkov, the Chairman of Gazprom, pointed out that the Russian giant holds a 37 percent share of the European market (last year Gazprom exported more than 200 billion m3 of gas to Europe), while the share of LNG in Europe is only 8 percent, with the United States in only fifth place.
The Main Pipeline Route and Geopolitical Risk
Zubkov added that “the length of the Nord Stream 2 pipeline is the same as that of Nord Stream 1, but obtaining the permits took much longer, despite European interest.” Zubkov attributes this outcome to U.S. protectionism and pressure it exerts on European partners. Legislation on harsh sanctions against the Nord Stream 2 project and the countries involved is currently before the U.S. Congress. Some companies, such as Royal Dutch Shell, have therefore asked for these measures not to be implemented.
Some Eastern European countries, however, are opposed to the project, which I believe could exclude Ukraine from Russian gas transit. Denmark has not yet given authorization to the use of its territorial waters. However, Russian President Vladimir Putin stated from the Energy Week podium that work on Nord Stream 2 is underway and more than 82 percent of the route has already been mapped out. Putin also stressed that the construction of the Nord Stream 2 pipeline is based on a purely commercial project, that there is no political context. “It is up to Denmark to demonstrate its independence and show that it has sovereignty. If that is not possible, there are other routes. It will cost more and delay us a little, but I think the project will be completed,” Putin concluded.
Alongside Putin was Rainer Seele, Chairman of the Board of Directors and CEO of the Austrian energy company OMV. “Europe,” he said, “needs gas at competitive prices that we import from Russia. I don't even want to think about any interference from third parties, but the United States is trying to prepare a political response in a situation where Europe is aiming at energy independence. We have been importing Russian gas in accordance with agreements for over 50 years. Our experience therefore means we can say there is interdependence. Europe pays its bills, Russia receives foreign currency, so investments in Nord Stream 2 are investments in diversification.”
In terms of the Ukraine route, Putin said he was ready to sign a transit agreement if Kiev succeeds in implementing the European energy package by the end of the year. If not, the option of a one-year transitional contract is available. “Ukraine is trying to implement European energy legislation,” Putin said. “If it succeeds before the end of the year, we are ready to work under European legislation. This is important information, which I am stating publicly for the first time,” the Russian president stressed. “We will sign a transit agreement with Ukraine in accordance with European law. If Ukraine fails to do so – a likely scenario because there are internal legislative and political procedures that the Ukrainian partners still have to face – we are ready to extend the existing transit agreement for some time, for example for a year,” Putin explained.
Other pipelines have also been discussed, such as the Turkish Stream and Power of Siberia. Both, Mr. Novak said, will be completed this year.
Stable Oil Prices
The strategic alliance between Russia and the Gulf Cooperation Council (GCC) countries in recent years has led to the signature of the OPEC Agreement, which has determined the new paradigm of the global energy market. The expected production cut in July 2019 ensured the predictability of oil prices and maintained a stable flow of investment in the oil sector. Not even the recent attack on a major Aramco site in Saudi Arabia, which burned 5 percent of the world's oil supplies in a matter of moments, had much effect on prices (other than for a few days). Saudi Arabia’s new energy minister, Abdulaziz bin Salman, spoke about how the emergency was handled. Even for Exxon Mobil Chairman and CEO Darren Woods, the Saudi government has responded efficiently, by trying to satisfy customers and maintain market stability. Managers of large companies and politicians agree on the relative stability of oil prices in the future, but they did not wish to state precise numbers. It is a stable situation, provided no “black swan” flies in.
Renewables and Digital Transformation
New renewable energy sources, the increasing possibility for consumers to make informed choices about energy consumption and the use of digital technologies in the sector will change the global energy system in the coming years. Russia is also preparing for these changes. “The oil and gas industry is on track to be a true driver of the IT industry and a major consumer of digital technology. The fund represents two trillion rubles (more than €28 billion) of potential investments in digitization and annual expenditures of RUB 300 billion (€4.2 billion) in software and IT. Technology enables the processes to be run twice as quickly and operational effectiveness to be increased by 30 percent. A working group named “Digital Oil and Gas” has been established, with the aim of forming a hub to transform business processes. The priority is to evaluate existing practices, establish a model for the future and define obstacles to development and priority projects. Forty initiatives have already been formulated,” said Pavel Sorokin, the Russian Deputy Energy Minister.
Russia has begun to make considerable effort in terms of renewables, too. “Russia now has one of the cleanest energy plans in the world, with low CO2 emissions,” Vladimir Putin told Energy Week. “More than one-third of our electricity generation is hydroelectric and nuclear; another 50 percent comes from gas. In the last five years, 800 MW's worth of renewable energy plants have been built in our country, half of which last year alone. Another 4,700 MW is being built or planned.” At the same time, Fortum Corporation Chairman and CEO Pekka Lundmark said that in Europe “23 percent of electricity is produced with coal.” So, despite enormous efforts, European electricity production is dirtier than Russia’s. There are only two roads ahead: to increase the use of either renewables or gas. Europe is taking both these routes, not to mention its work towards energy efficiency.