Hydrocarbon market news releases are getting to be increasingly like front-line reports. At the end of last week North Sea Brent Crude fell below $95 a barrel, the lowest in the past two years – and this considering that Russian Urals Crude is usually sold about $5 per barrel cheaper than Brent’s.
Under the circumstances the Central Bank of Russia is studying stress scenario options with the price of oil going down to $60 per barrel, in which case the ruble exchange rate will drop to 55/$1.
Moscow is putting up an enthusiastic front, saying the price won’t drop lower than $80/barrel, otherwise the OPEC countries and the US will be hurt. Relatively high oil prices make the production of heavy bitumen cost-effective. However, the main oil producers are in no hurry to respond to falling prices. On the contrary, there are reports to the effect that some countries want to increase the output, even though the world’s energy supply exceeds demand, further pressuring the market. Experts in European countries and the United Nations predict a further gradual decline in oil prices, although the limit to the trend remains controversial.
No good news on the gas front for Russia, either. If the oil price drops, so will that of gas. In most Gazprom contracts gas prices are tied to oil prices with some lag. In fact, Russia’s gas monopolist is showing a steady decline in output, ditto exports. September has registered a 23 percent drop in the year’s indices. Even if Gazprom manages to show last year’s level in the final quarter of the year, the overall year’s figures will be modest: 445 billion cu meters. Stopping supplies to Ukraine has played a noticeable role in this decline. Deliveries to Poland and Slovakia have been decreased for political reasons.
Russia’s gas arm-twisting policy has forced countries in Europe to seriously consider their energy safety. At first gas was pumped into the underground storage facilities. The European USFs now contain a total of 75 billion cu m, or some 90.1 percent of their capacity, with 99.6 and 94.3 percent in Poland and Germany, respectively. European countries are also making arrangements for supplies of liquefied natural gas (LNG) from the Gulf and North Africa. Spain is preparing its terminals to take on additional quantities of LNG; the ports of Belgium and the Netherlands also have such capacities. Tentative estimates show that up to 20 percent of Europe’s gas needs will be met by LNG in winter. Norway is prepared to increase output to cover peak loads in case of a cold winter. Naftohaz CEO has confirmed that Norway began delivering gas to Ukraine as of November 1. Media reports point to some 2.2 billion cu m to be supplied through Slovakia in the next five months.
Profound changes are taking place on the energy market that may well alter the structure of consumption in five or six years. Shale gas is displacing coal in the United States in the production of electricity, and this trend is spreading to Europe where power generation using coal is on an upward curve. The European trend is in line with the global one. According to Wood Mackenzie analysts, in 2020 world coal consumption will reach 4.5 billion tons of oil equivalent, exceeding the demand for oil (4.4 billion tons), with gas consumption dropping accordingly. In fact, Germany produces brown coal (lignite) for its power plants and this fuel constitutes 26 percent of the national energy balance.
Strange as it may seem, lower oil – and eventually gas – prices are not affecting the generation and consumption of electricity using renewable energy sources. According to the German agency Agora Energiewende, green energy placed first in the energy balance of Germany in nine months of this year. AE statistics point to alternative energy as accounting for 27.7 percent of energy consumption in Germany (including 9.5 percent from wind generators, 8.1 percent from biomass, and 6.8 percent solar energy); power-generating coal makes up to 18.5 percent and nuclear powers 16 percent of the national energy balance, with gas constituting less than 12 percent.
Alternative energy sources started being discussed in Germany after the Fukushima Daiichi disaster, when the federal government resolved to start using more conventional fuels. At first most nuclear power generation would be converted to gas – mostly from Russia, but then Germany apparently made a bid for renewable energy. High production costs were the biggest problem at first. However, the authorities in Europe, especially in Germany, took a serious approach to the subsidization of green energy sources. Sergei Agibalov, section head, economic department, Institute of Energy and Finance, says Germany spent €24 billion on such projects last year alone: “As a result, producers of inexpensive green energy appeared on the market en masse, with gas power plants being unable to compete and having to step down.” Agibalov adds that gas power plants start generating practically when there is no wind and sun. Their working hours have dropped from eight to one thousand a year. In other words, gas power engineering in Germany is in a state of depression, with no prospects in the near future. There is a serious risk of decline in the consumption of Russian gas, just as there is little doubt that other Old World countries will follow in Germany’s footsteps.
Add here progress in nanotechnologies, an increase in optical energy efficiency, and environmental benefits. Coal consumption is accompanied by heavy carbon dioxide, phosphorus, and sulfur emissions. This is an additional incentive to increase the share of green energy in the European energy matrix. According to the European 20-20-20 targets, this share must be up to 20 percent by 2020, with carbon dioxide emissions dropping by 20 percent.
Russia is not prepared to drastic change in the situation on the energy market psychologically or politically. Sergei Chernin, chairman of the ecology commission, Civic Chamber of Russia, appears unperturbed, considering that Gazprom’s share in the European market last year exceeded 30 percent: “Any alternative to Russian gas is impossible in principle, at least for the next five to six years.” Apparently, big progress compared to Gazprom CEO Aleksey Miller who insists that shale gas is nothing but a big speculative soap bubble that can burst any moment. Well, it is still there and is behaving contrary to Miller’s forecasts. The extraction of shale gas and oil from heavy bitumen is increasing, with production costs decreasing by 14 times in the past seven years. Shale gas in the US today costs some $80 per 1,000 cu m, with more and more of this gas being produced across the world. Russia’s key partner, China, has started producing it, yet all this is no proof for the Gazprom leadership.
Russia and Gazprom won’t get away with their gas blackmail of Ukraine and then Europe. Until recently major European governments believed that there should be no gas problems with Moscow as no one [in the Kremlin] wanted to lose this source of hard currency for the Russian budget. Big money should prevail over the desire to “collect the lands of Rus’.” How wrong they were! Authoritarian leaders, dictators, tsars, and emperors vested with unlimited powers pay no attention to what they regard as petty economic and financial problems compared to the grandeur of the empire.
Putin went further than seriously worsening relations with the West. He destroyed all ways to restore these relations in the long run. Gas gradually turned from a weapon into an ordinary resource that had now to be sold somehow. Europe is getting increasingly aware that it is better to import gas, oil, and coal from distant countries, even from across the ocean, than to deal with such an unpredictable partner.
This awareness of danger embodied by Moscow is slowly but surely penetrating the minds of leading politicians in the West. They are not inclined to make sharp moves. They are following a course aimed at becoming completely independent of Russia in terms of resources.
Even a 10 percent reduction of Gazprom deliveries to Germany, against the backdrop of expanding green energy, spells billions of dollars of losses and budget difficulties for the Kremlin. Wind and solar energy may well bankrupt Russia before its leadership can realize what’s happening.
