Gateway House (GH): The oil and gas markets have been disrupted since the Ukraine-Russia conflict began. How do you see the supply and demand moving, and where do the constraints lie?
Robin Mills (RM): Oil and gas markets are in different places. Prices in oil markets are above the long-term historic average, but not very significantly. On the supply side there is spare capacity in oil production and the demand side looks slightly clouded due to the global economic situation and the continued Covid-19 lockdowns in China. However, there is potential for supply to reduce this year and the next, primarily because of issues surrounding Russia. The ban on oil imports from Russia into Europe will come into force in November. October will also see the end of the release of US strategic oil reserves. Finally, there are plans to impose price caps on the import of Russian oil – indicating the potential for restrictions on shipping and insurance of Russian oil exports. The market may not be in crisis, but it may be constrained in the coming months.
Gas markets present a different picture, and they are in crisis globally. The prices are at a record high, particularly for LNG, which is how gas is traded over long distances. Prices in Europe are equivalent of $300 per barrel or more. This affects all imports of LNG. Global LNG supplies have been concentrated in Europe to replace Russian natural gas supplies, which have significantly reduced. Other importers of gas are paying very high prices or have been simply unable to afford LNG or get shipments, like Pakistan and Bangladesh.
While high gas prices further have a knock-on effect on electricity, Europe has other electricity-related problems too. The shutdown of nuclear power output in France due to technical issues is driving up prices of electricity. Europe is looking back to alternatives like coal, in the short run.
There is a lack of investment in energy generation and a lack of coherence between environmental policy and energy security. Renewable energy capacity has successfully increased but not enough attention is paid to the period of time when gas and nuclear will still be required, and there is lack of energy efficiency.
These policy problems would have led to an energy crunch, even without the Russia-Ukraine crisis.
GH: What are the structural problems that have led energy markets to the current situation?
RM: Underinvestment is one factor. This is conveniently blamed on ESG policies deterring investment in oil; however, oil prices have been low since 2014 and briefly went to negative levels during the pandemic. This environment does not encourage investment in oil. Following this, the pandemic and the stimulus packages, particularly of the U.S., led to a resurgence in oil demand which was not anticipated. Nearly all OPEC countries, not just countries in the West, have been unable to meet their production targets.
The gas sector too experiences underinvestment. Production of gas in Europe has declined, due to limited resources and certain political decisions. This has created a dependence on Russian gas, until at least the 2030s when renewables can offset energy from Russian gas. Since the various crises of Ukraine, in 2006 and then in 2014, Russia has leveraged gas against European countries, leaving Europe vulnerable.
There is also not enough attention on new gas production. Europe is building new LNG import terminals; Germany plans to build five such terminals. At the same time, Europe is banning the financing of fossil fuel projects overseas. Europe is consuming natural gas but not financing its increased production overseas. There is incoherence in policy here.
GH: What kind of trends and thinking are emerging in nuclear and renewable energy?
RM: For nuclear energy, there is a resurgence of interest. California, Japan, and South Korea have reversed their respective nuclear phase-out policies and are keeping their existing plants running, while restarting others. Germany too has left two nuclear plants on stand-by for emergency, which arguably they currently are in. There is no re-think on building new nuclear energy capacity. It is expensive, projects take a long time to construct, and it is not an immediate solution. This may change if the nuclear industry can convince policymakers otherwise.
The conflict in Europe will however give impetus to renewable energy. Europe has dramatically accelerated targets for renewable energy deployment. US plans on inflation reduction too give support to increased renewable energy. Renewables will see a decade of strong growth.
Any molecule of gas or oil which can be replaced with renewable energy is very valuable, especially in Europe when gas and renewable energy systems can be run at the same time.
The question of reliability and alternative capacity for renewable energy will stay but it is different from building a reliable energy grid and system. It is a difficult task. In the absence of hydro power, and reluctance on using nuclear, the long-term seasonal use of renewable energy is difficult. This is a particular problem in Europe. It has tremendous wind and offshore wind potential, but in case of a dark winter with less wind, problems will arise given the increasing electrification of heating. Here, hydrogen may offer a potential solution, but it remains expensive and will require construction of new infrastructure.
GH: How can we assess the energy security in India given its dependence on coal and oil, and its limited renewable energy capacity?
RM: India has expanded renewable energy capacity significantly and has the resources. Its primary dependence on coal for electricity generation is not ideal, given environmental concerns. It is a long-term task to replace coal with renewable energy.
Use of gas in India’s energy mix is very little and therefore it is relatively unaffected. However, natural gas is an essential input in fertilisers and that is an issue for India. Again, hydrogen offers a potential solution here.
While the prices of oil are high, the Indian economy can cope with these prices. The solution going forward is the adoption of electric vehicles and there already is a strong move for electrification of transport in India.
Robin Mills is CEO of Qamar Energy
Saeeduddin Faridi is Researcher at Gateway House
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