ENERGY FORUM

A QUARTERLY JOURNAL FOR DEBATING ENERGY ISSUES AND POLICIES CONTENTS

Issue 72 February 2008 Gas as a Transitional Fuel Jonathan Stern Michael Stoppard Burckhard Bergmann Some thirty years ago, Nordine Aït-Laoussine famously labelled Thierry Bros natural gas as oil’s little brother. Gas was then seen as a fuel whose Simon Pirani – page 3 place in the energy slate would always lag behind oil. Later, gas Assessments of Bali was increasingly seen as the transitional fuel that would eventually 2007 replace oil as the leading energy source. Have these perceptions Benito Müller changed? And more broadly, what are the problems now facing David Robinson – page 16 gas and the challenges ahead? These are the topics addressed by Personal Commentary distinguished experts in five articles in the first debate. Nader Sultan – page 22

Jonathan Stern asks whether we expansion of gas use increasing in Asinus Muses – page 24 should be concerned about future the decades ahead. He argues in fa- gas supplies in international trade. vour of a mix of long-term imports To be sure, there is a remarkable contracts and trading spot cargoes expansion of gas trade that will as important for supply security continue until 2012 or thereabouts. and competitiveness. The worry is that new gas projects that will take us beyond that date Beware of unintended consequences are not given high priority by of ideologically inspired poli- exporting countries. To provide a cies Thierry Bros warns us. The context Michael Stoppard details liberalisation of the gas market in the characteristics of the current the UK benefited consumers when expansion: by 2010, LNG supplies domestic supplies were abundant; will have increased by one third, no longer when the UK became a tradable supplies will double and net importer of gas. The reason is surplus capacity will increase in that price signals lead to short-term shipping and re-gasification plants. adjustments but fail when it comes to long-term investments in storage We now turn to policy. In a very and production. substantial contribution Burckhard Bergmann emphasises the interplay Beware also of the paranoia that between the need for competition, seems to prevail in European at- policies to tackle the climate change titudes toward Russian gas policies. problem and to ensure supply secu- Simon Pirani shows that Russia rity in Europe. There are complex is trying to reform its gas pricing trades-off between these objectives system by equalising all prices that simple ideological solutions – domestic, export prices to the cannot solve. Bergmann sees the Ukraine and Belarus, and also OXFORD ENERGY FORUM FEBRUARY 2008 significantly the prices at which it imports gas Both Müller and Robinson are well aware of the from Turkmenistan – on the basis of European obstacles that lie on the path of a global agree- netbacks. Russia is charging more for gas even ment but both remain optimistic. to its own citizens but, at the same time, has ac- The Personal Commentary rubric is intended to cepted to pay more for its Central Asian imports. give the views of those who played an important This is good economics that should be applauded role in the energy field. In this issue, Nader by European authorities and others. Sultan who was the CEO of KPC notes that the Bali 2007, one of whose aims was to put together real current challenge faced by oil upstream is a ‘road map’ for negotiations about the UN cli- not geological scarcity below ground, as argued mate change regime after the expiry of the Kyoto by peak oil theorists, but the scarce resource ca- Protocol commitments in 2012, was definitely a pacity above the ground. Investment problems in major event. Both Benito Müller and David Rob- upstream oil faced in the Middle East by national inson attended Bali, the former as an active par- and private international companies illustrate the ticipant and the latter as an individual observer. issue. His recommendation is that if both sets of companies wish to provide sustainable and secure We publish here Müller’s assessment of what supplies they must seek imaginatively ways to were promising achievements and what apparent- enter in strategic alliances with each other. The ly went wrong. This relates to the convening of alliances will cover the full energy value chain the plenary while another meeting was running as opposed to joint ventures that are narrowly in parallel, thus preventing important delegates focused. Interestingly, strategic alliances can in- from attending the plenary. Unfortunately, the crease the benefits that accrue to both parties. resumption occurred when the parallel meeting was still on. Was this sheer incompetence on the part of the Secretariat, or some plot? Further- Contributors to this issue more, the President tabled a ‘draft decision’ for adoption which was not based on a consensus. Burckhard Bergmann is Chairman of the A loss of trust ensued. There is a road forward Executive Board of E.ON Ruhrgas AG however. Trust needs to be restored by a clear Thierry Bros is Senior Gas Equity Analyst at explanation of the mishaps over the ‘draft deci- Société Générale sion’. The long-term difficulty is to break out of Benito Müller is Director (Energy and the attitude that says: we will only take on com- Environment) at the Oxford Institute for mitments if the others do. This is a very difficult Energy Studies and Managing Director, Oxford task but hopefully not impossible to achieve. Climate Policy David Robinson focuses on changing US at- Simon Pirani is Senior Research Fellow at the titudes on federal climate change policies. He Oxford Institute of Energy Studies sees significant changes visible at Bali which are due to a mix of domestic and international fac- David Robinson is Senior Research Fellow at tors. He points to the striking fact that the Bush the Oxford Institute of Energy Studies administration has ‘taken off its climate change Jonathan Stern is Director of the Gas invisibility cloak’. And he begs to differ with Programme, Oxford Institute for Energy the many sceptics who argue that Bali will not Studies influence US climate change policies. The USA Michael Stoppard is Senior Director, Global will have a significant influence on forthcoming Gas at Cambridge Energy Research Associates international negotiations on issues of competi- (CERA), where he directs CERA’s LNG tiveness, flexibility, and action on deforestation Research Advisory Services in developing countries. Furthermore the Major Economies Process promoted by the USA will Nader Sultan was formerly CEO of Kuwait play a role in defining joint policies. Petroleum Corporation

 OXFORD ENERGY FORUM FEBRUARY 2008 Gas as a Transitional Fuel

Jonathan Stern asks This was the inability of Indonesia’s • Adverse domestic political conse- Pertamina to meet its long-term LNG quences for governments opting for whether the future for export contract commitments. The higher price exports over domestic international gas trade failure can be attributed to a number demand; of country-specific economic and • Substantial financial surpluses is constrained political developments, particularly which have removed the urgency its very large population and rapidly to: growing economy. As the decade has – significantly increase exports Natural gas trade continues to expand unfolded, research at the Oxford In- rapidly both regionally and globally. above contracted levels; stitute for Energy Studies has revealed – rapidly develop reserves (which Large numbers of pipeline and LNG similar trends in a range of gas-export- projects are under development and may already have been identi- ing countries where it is increasingly fied) to support new projects. many trade publications are kept in likely either that exports will not be business by reporting on projects at developed, or may be curtailed short It would be easy to place these various stages of planning. Why then of their potential, due to: developments under the convenient is there any reason to be concerned catch-all of ‘resource nationalism’ or, about future availability of gas in • Increasing domestic demand, for the more paranoid, cartelisation international trade? The problem on fuelled by high economic growth in pursuit of higher prices. However, the horizon is that, after the current and low gas prices; persuasive explanations can be found wave of pipeline and LNG export projects have been completed, addi- Table 1: Largest Net Gas-exporting Countries in 2006a tional export projects do not appear to be a high priority for most countries. Reserves RP Exports % of Gas in Primary The standard approach to estimating (Tcm) Ratiob (Bcm) Energy Demand gas export potential is to look at cur- Algeria 4.50 53.3 61.6 64 rent reserve and production figures, Argentina 0.42 9.0 6.1 53d calculate a reserve to production ratio Australia 2.61 67.0 18.0 21 and make a judgement on the likely Bolivia 0.74 66.3 10.8 37d export availability. For countries with Brunei 0.34 28.6 9.8 76d a reserve to production ratio of less Egypt 1.94 43.3 16.9 44 than thirty years, this can be difficult, Indonesia 2.63 35.6 34.3 31 but for countries with more than fifty Iran 28.13 >100 5.7 53 years of reserves, it should be unprob- Libya 1.32 88.9 8.4 28d lematic. There is however a difficulty Malaysia 2.48 41.2 28.0 54 with this numerical approach as it Myanmar 0.54 40.1 9.0 52d now reveals less and less about actual Nigeria 5.21 >100 17.6 36d developments in individual exporting Norway 2.89 33.0 84.0 0 countries. The crucial missing ele- Oman 0.98 39.0 12.9 71d ments in future export calculations Qatar 25.36 >100 31.1 80 are increases in domestic demand, and Russia 47.65 77.8 151.5 55 the incentives for countries to actually Trinidad 0.53 15.1 16.3 91 develop the reserves that have been Turkmenistan 2.86 46.0 6.0c 76 identified. UAE 6.06 >100 7.1 66 In 2006, 22 countries exported gas by pipeline and 13 in the form of LNG a) Not in this list but also countries which currently export significant (with 5 countries appearing in both quantities of gas or where projects are under construction are: Kazakhstan, categories). The position of the 19 Azerbaijan, Yemen, Timor Leste, Equatorial Guinea, Papua New Guinea, largest net exporting countries in 2006 Angola and Peru. is shown in Table 1. b) years at end 2005; One event in international gas trade in c) outside CIS only, total exports were around 47 Bcm the early 2000s may, with hindsight, be seen as heralding, if not a trend, Source: BP Statistical Review of World Energy 2007, except (d) which are then a warning about expectations 2005 data from Energy Information Administration, International Energy concerning the future of gas trade. Annual, 2005.

 OXFORD ENERGY FORUM FEBRUARY 2008 less in conspiracy theories and more Russia has by far the most complex gas is a paradigm shift which both in first year economics textbooks. set of gas choices with a huge do- acknowledges that the old system was In the vast majority of countries in mestic market in Europe, very large not sustainable, and sets in motion a Table 1, gas is sold to the domestic export commitments in Europe, and gradual transformation of the profit- market at prices which reflect (usu- longer-term potential to develop ability of the huge domestic market. ally) fixed levels set in the 1970s and substantial pipeline exports to Asia, What this means is that by the late 80s, rather than international levels of and LNG exports to both Asia and 2010s, the general assumptions that the late 2000s. It is unfair to be overly North America. But Russia has long gas exports will always be vastly more critical of this situation given that had a problem which is only just profitable than domestic sales, and energy pricing worldwide has been emerging elsewhere: gas accounts for therefore that Russia will continue thrown into confusion not only by more than 50 percent of the Russian to significantly increase exports to recent oil price increases but also by energy balance with consumption Europe, will need to be increasingly the changing relative prices of oil and (including all gas uses) of around 450 questioned. gas, and gas and coal (with or without Bcm per year. allowances for carbon). Prices paid by domestic customers during the Soviet period bore no “Many OECD countries resemblance to the costs of producing continue to use oil as the and transporting gas from remote “research at the Oxford fields in Siberia several thousand dominant mechanism for Institute for Energy kilometres to centres of demand, and setting gas prices, which substantial price rises in the mid 1990s means they are similarly Studies has revealed similar created a wave of non-payment and trends in a range of gas- barter trade. Having extricated the divorced from market exporting countries where industry from this problem, the Putin conditions” administration finally got to grips it is increasingly likely with domestic price levels in late 2006 either that exports will with the announcement that by 2011, The Gulf Oil Producers not be developed, or may prices for industrial (including power generation) customers would be equal Before 1980, Gulf oil producers be curtailed short of their to those of European border prices on flared much of their associated gas potential” a netback basis. This included a firm production, but the past thirty years commitment that by 2011, industrial have seen growing utilisation of this prices will be at least 250 percent of fuel in a range of industrial, feedstock Many OECD countries continue to the 2007 level which would still only and power generation applications. use oil as the dominant mechanism for bring them to around $3.50/mmBtu. In countries such as Iran, where setting gas prices, which means they There is also a commitment to raise reinjection of gas to enhance oil are similarly divorced from market prices for non-industrial customers production (and exports) is a major conditions. But while in OECD to these levels but this seems likely market, it makes absolute sense for countries, this usually leads to over- to take much longer. Nevertheless, governments to divert more gas for pricing of gas (i.e. higher prices than this is an immensely important policy this purpose. In most Gulf countries, the supply/demand balance would commitment because it means that: the position with regard to domestic gas pricing and incentives to develop suggest), in gas-exporting countries • all new production – including gas the growing problem is serious under- gas for domestic markets is similar currently flared at oil fields and to Russia’s in the period up to 2000. pricing of gas. This is commonly production from the supergiant labelled a problem of ‘subsidy’ but Partly because of the flaring tradition, fields on the Yamal Peninsula – will and partly because the value attributed in only a few countries are gas sales be profitable to develop; prices lower than the cost of produc- to gas associated with oil production • for the first time in the history of tion and delivery. The more usual can vary from zero to the full market the Russian gas industry there will situation is that the domestic sales price, depending on internal corporate be a serious incentive to invest price is far below the export price, a methodology and the tax regime, there in efficiency improvements and problem which has been exacerbated has been a tendency for oil producers replacement of capital stock. by the post-2003 oil price increases. to distribute gas in their local econo- Unless (oil and therefore) European mies at low fixed prices as part of the gas prices fall from current levels, social contract. Russia the aspiration of netback equivalence This was not necessarily a problem Russia and the Gulf countries present with European border prices by 2011 until the 1990s when population and two contrasting examples of the will turn out to be over-ambitious. economic growth, combined with domestic/export pricing conundrum But breaking the traditional right substantially increased incentives to faced by gas-exporting countries. of Russian consumers to subsidised export oil and substitute gas for oil in

 OXFORD ENERGY FORUM FEBRUARY 2008 the domestic economy, created rapidly Table 1 to which these observations appraised. Despite the importance rising internal demand. In most Gulf do not apply, to a greater or lesser of the moratorium for global gas countries, domestic gas prices in 2007 extent. From Turkmenistan where gas and LNG development, there is no did not exceed $1/mmBtu despite is given away free to the population, official document or speech setting LNG export prices of up to ten to Western Australia where, although out the criteria which will determine times that figure. This was thrown customers pay a commercial price, whether new exports will be consid- into sharp relief with the start of the State is insisting that 15 percent ered post-2011. The Qataris – very the Dolphin project last year when of gas in fields being developed for understandably – do not want to make Qatar began to export pipeline gas to LNG exports must be reserved for the future export commitments which UAE and Oman at a price of around domestic market. In most countries, for a variety of reasons, they may not $1.40/mmBtu, while these importers domestic politics will determine the wish to pursue. were exporting LNG at prices of priority given to domestic markets $6–10/mmBtu. (Justin Dargin, The despite the clear economic benefits of Dolphin Project: the development of a increased exports. Politics will also Gulf gas initiative, OIES, 2008) determine the continuation of very “breaking the traditional low gas prices usually on the grounds right of Russian consumers that poor people cannot afford to pay market prices for gas. This may be to subsidised gas … “there has been a tendency true and – as in Russia where winter sets in motion a gradual for oil producers to temperatures mean that lack of access transformation of the to affordable energy is life-threatening profitability of the huge distribute gas in their local for residential customers – special economies at low fixed measures may need to be extended domestic market” prices as part of the social to vulnerable groups. But arguments contract” about ‘poor pensioners freezing to death in winter’ are too often used to Looking around the gas world, justify subsidised pricing to consum- there are just a handful of countries ers well able to pay market prices as which can realistically be expected Failure to introduce mechanisms to well as industries where governments to substantially (that is by more than adjust domestic prices to the market are seeking to boost employment. 30Bcm/year) increase exports over conditions of the 2000s, means that and above their current contractual Middle East countries increasingly This takes on a dangerous circularity commitments by 2020. These are find themselves ‘short of gas’. Without where prices have to be kept low in Australia, Turkmenistan, Libya, the a strong government commitment to order to maintain the social contract East Siberian and Far East regions increase domestic prices, there will be with the population, but these same of Russia, and possibly Azerbaijan, no incentive for private investment in policies encourage wasteful and Kazakhstan and Nigeria. On reserve gas production and infrastructure for sub-optimal use of gas which means grounds Saudi Arabia, Venezuela, domestic markets. This means that that reserves are used up more quickly Iran and Iraq would also qualify without price reform, most govern- with little incentive for new explora- but for a variety of reasons ranging ments will incur increasing costs to tion and development. Not only will from current government policy to maintain this part of their social con- these problems not go away, but they long histories of project failure (or at tract. This throws up counter-intuitive are likely to get worse. least lack of progress) to problematic situations like that of the UAE where Another increasingly common internal politics and political relation- profitable development of domestic argument is that with the post-2003 ships with potential major importers, sour gas reserves exceeding 6 Tcm, increase in international oil and gas the prospects are poor. will require domestic gas prices to be prices, exporting countries have no raised at least fivefold. The gas price need to increase their revenues and There is no short-term crisis of global problem is compounded by a lack of would rather conserve their resources gas supplies; projects under develop- electricity price reform with power for domestic use and ‘future genera- ment will take the industry through prices in most countries nowhere tions’, than increase exports. the mid-2010s. But lead times mean near levels which make new domestic that the next generation of pipeline gas-fired power generation viable. In and LNG projects will need to be this situation, there can surely be no Qatar signed in the early 2010s. At present, economic rationale for developing A special case here is the current aside from the very few countries much higher cost alternatives such as Qatari policy of a ‘moratorium’ on listed above, it is difficult to see nuclear power. future gas projects until the techni- other sources of substantial additional cal repercussions of the enormous internationally traded gas. A crucial increase in production from the North question will be whether domestic gas Other Exporting Countries Field from around 50 Bcm to more prices in exporting countries will be There is virtually no country in than 240 Bcm in 2012 have been fully raised to levels that encourage new gas

 OXFORD ENERGY FORUM FEBRUARY 2008 development and efficient utilisation, These assertions may surprise some. their existing projects. The investment even if those prices remain substan- The trade press is currently littered decisions on these projects were taken tially below export levels. Russia with reports of substantial delays several years back, yet their conse- has made a significant move in this to LNG projects, a slowdown in quences are still to be seen. direction (although there is a long way project sanctions, tougher upstream Given the boom in construction, it is to go) which other exporting countries terms, joint-venture misalignments, not surprising that many projects are need to follow. To the extent that they and spiralling costs. These factors do reporting a whole host of delays in the are not able, or choose not, to do so, indeed raise major questions about the face of stretched construction teams the outlook for incremental gas in pace of growth of LNG beyond 2010 and growing equipment lead times. international trade beyond 2020 will and its ability to deliver. They do not, But these delays – serious as they become highly uncertain. however, materially affect the growth are – do not change the fundamental rates over the next two years to 2010 growth story. that are ‘baked in’, based on mo- mentous investment decisions made The new LNG supply will be much several years ago. The LNG armada more market flexible than of old. has already set sail, so to speak. Traditionally, LNG supply was pre-sold under long-term contracts to The driver of change is the much- a specific country and end-user. What vaunted globalisation of gas. Until the LNG industry often calls ‘tramline now, natural gas has been predomi- trade’ where ships ply a regular trade nantly a regionally-bound fuel with between fixed points of dispatch and some important exceptions. Compare delivery. It was said that these rigid gas with the other energy com- contracts were necessary to finance Michael Stoppard modities. In 2006, about half of all the large capital investments required oil and some 15 percent of coal were both by the LNG producer and by looks at LNG growth to sent across water in intercontinental the LNG importer. trade. By contrast, seaborne trade of 2010 natural gas was less than 8 percent. The growing separation of the world’s It is sometimes said ‘the best way to gas resources from the major demand “The growing separation predict the future is to invent it’. In centres means that seaborne gas trade must increase. LNG – whereby of the world’s gas resources many respects that is what the LNG from the major demand industry is doing. The LNG business natural gas is cooled to the point it will be radically different in 2010 than turns into a liquid and can be loaded centres means that seaborne it is today. It will be different in size, onto specialised ships for transporta- gas trade must increase” but more importantly it will be differ- tion – will be the primary technology ent in regional scope, in its business to transport gas across the world’s models, and in its trading practices. oceans. Other niche technologies may also emerge and prosper over time. Yet over the last several years, there And the implications of these changes has been a dramatic change to the na- will affect gas markets and pricing The rate of growth of the LNG ture of these contracts. The change has across all the major continents. industry is dramatic. LNG supply, as not been fully recognised since most To be sure, the full consequences of measured by liquefaction capacity, will LNG supply continues to be sold a wider role for LNG on markets are increase by approximately 30 percent under long-term contracts. Talk of uncertain, but the underlying drivers in the next twenty-four months; an ‘spot’ trade is somewhat exaggerated. of change rest on firm and tangible extraordinary rate of growth for an But many of these newer contracts are investments under way today. Namely, industry that has spent 45 years build- not dedicated to a specific market or over the next 24 months: ing to its current level. Supply will end-user; rather the counterparty is an increase from 190 Mt (262 Bcm) today aggregator who will seek to move the • Global LNG supply will grow by to 247 Mt (341 Bcm) by early 2010. LNG to the market of highest value almost one third Qatar spearheads this drive – about – as with any regular commodity. • Flexible or ‘tradeable’ LNG supply half the investments in LNG supply These aggregators – most often the will double today are taking place on a single in- largest International Oil & Gas Com- dustrial estate at Ras Laffan in Qatar. • Global LNG shipping capacity will panies (IOGCs) and/or their National In addition, Russia (the high profile grow by more than one half Oil Company (NOC) partners – have Sakhalin project in the Far East) and in effect assumed the volume risk of • LNG regasification utilisation in Yemen will join the exclusive ranks of LNG in return for the privilege and the Atlantic basin which was about LNG-exporting countries before the opportunity to trade globally. The im- 52 percent in 2007 would have decade is out. Australia and Indonesia portance cannot be over-estimated: the fallen to 43 percent by 2009. will also be adding significantly to new model combines the security of

 OXFORD ENERGY FORUM FEBRUARY 2008

Figure 1: Flexible LNG Supply Growth by 2010

Existing Supply Committed Supply Existing plus (January 2008) Committed Supply

Undedicated Undedicated Undedicated Supply Supply Supply 14% 40% 21%

Dedicated Dedicated Dedicated Supply Supply Supply 86% 60% 79%

Source: Cambridge Energy Research Associates long-term contracts with a transition the need for longer trade routes, but For aggregators surplus regasification to a more traded world. LNG projects this is unlikely to be sufficient to is essential to be able to move ship- can continue to develop with the prevent a growing availability of ships. ments between regions according to security of long-term offtake contracts Abundant shipping will allow for new need. For aspiring buyers regas has but with a new in-built flexibility. novel solutions – for example ships become the table stakes for playing are increasingly to be used not only the global gas procurement game. CERA estimates that 40 percent of for transporting LNG, but as floating LNG supply under construction is regasification and storage vessels. A recent CERA report The Great ‘non-dedicated’ and flexible to trade Available shipping will allow greater Regas Dilemma argues that, in spite of (see Figure 1). Most is either in the arbitrage. an apparent growing surplus of regas Atlantic Basin or the Middle East, capacity, some investment in duplicate with the Pacific Basin continuing Moreover, just as for supply, so for regas may make sense as a price and to favour old-style contracting. The shipping the industry is also set to volume hedge, a form of insurance. amount of flexible trade will double become more flexible. Most of the Nevertheless, as more regas is put in by 2010, and will surely transform existing ships are dedicated under place, it follows that the utilisation of thinking within the industry. Al- long-term charters to specific LNG these facilities must decline and the though it should also be noted that projects. Yet of the ships on order, 16 costs for unused infrastructure must supply – whether flexible or tramline percent are contracted to aggregators be borne. – is set to remain, as it always has, in and 20 percent are speculative – builds the hands of a relatively small number with no fixed charter arrangements. A rapidly expanding number of coun- of key players. Shipping may well be the first link tries are looking to join the global gas in the LNG chain to commoditise as network adding to competition on the So LNG supply is growing fast, more spot charter deals develop. buyers’ side. Countries considering and yet apparently not fast enough. building LNG import facilities range Investments in both shipping and Regasification terminals are the vital from Brazil and the Netherlands, regasification are moving at a faster portals that connect local markets through to Pakistan and New Zealand. rate still. Take shipping. The capacity into the emerging global gas system. of the world’s global LNG shipping Investments in regasification are also Where will all the incremental LNG will increase by more than half by proceeding apace, well in excess of go? A part of it will be eagerly bought 2010. 2008 will see a record level of associated liquefaction. This should up by the dominant buyers Japan and ships delivered – 58 ships added to not surprise: regas represents only Korea but their short-term needs can an existing fleet of 251. The fact that some 10–15 percent of the costs of the only accommodate a small part of shipping is growing faster than LNG full LNG chain and therefore should the growth by 2010. The emerging supply can be partially explained by always be in excess over liquefaction. markets of China, India, and Brazil

 OXFORD ENERGY FORUM FEBRUARY 2008 will certainly be in the market, but Burckhard Bergmann from six countries. In 2006, E.ON their own needs will be bounded by Ruhrgas received the largest share of their own domestic alternatives and by assesses European its gas supplies from Norway, some affordability. The bulk of new supply 27 percent, while Russia accounted will flow into the Atlantic Basin and, gas markets and for around 25 percent. About 19 in particular, into North America. the interplay of percent came from the Netherlands, North America is the world’s largest 16 percent from indigenous sources, natural gas market and the most open competition, climate 9 percent from the UK, and 4 percent in terms of liquid traded hubs and protection and supply from Denmark and other sources. accessible gas storage. With its own security It is a fact that the largest gas reserves production reaching a plateau, the are in the hands of a few producer North American appetite for LNG countries, and concentrated there will be strong. As a foretaste of things All current forecasts on global en- among a few powerful oil and gas to come, LNG imports to North ergy consumption expect worldwide companies. To respond to this real- America reached record levels in 2007 demand for gas to rise considerably in ity, it is essential to carry on seeking – but the sharp step-up in imports will the years ahead. the diversification of gas supplies as come in 2009. In the efforts to ensure gas supplies well as long-term cooperation. E.ON The increased role of North America to European energy markets and Ruhrgas’s contracts with Norwegian in LNG will challenge the pricing especially to the German market, one and Russian suppliers have a duration and contracting practices of old. Sales challenge in particular is emerging: of up to thirty years in some cases. into North America will necessarily given rising demand and falling indig- The investment needs for safeguard- be shorter term in nature and involve enous production, the strategic task ing Europe’s future gas imports will more spot price risk. A three-way ac- will be to prevail over demand coming increase. Only long-term import commodation will need to be reached from other regions of the world. contracts will provide the necessary between the needs of the traditional security and prospects for investments Asian and Continental European What is more, in the coming years, totalling billions of euros, which clients with their focus on the long European gas markets will not only be are needed to implement upstream term and security of supply, the confronted with increasing globalisa- projects in increasingly inhospitable market-based needs of North America tion and internationalisation, they regions. and Northwestern Europe, and the will also have to develop against the proliferation of scattered smaller backdrop of ambitious climate protec- market entrants. tion targets. “In future, the coexistence Many of the elements are thus in place for a shift to a more freely-traded and Global Competition to Obtain Gas of long-term import complex global gas market. A growing Today Europe is the world’s largest contracts and gas trading at and more flexible supply, available gas importer, followed by South- exchanges will constitute transportation capacity, the develop- East Asia and the United States. To the right mix for the sake ment of a network of regas portals to safeguard long-term gas supplies, the allow arbitrage to take place, and the European gas industry will have to of supply security and bringing together of the great markets mobilise additional imports of approx- competitiveness” of Asia, Europe, and North America. imately 150 billion m³ in the period And the players who are making this up to 2020. In other words, after 2010 happen are not predicting the future; a new long-term import project for Furthermore, long-term import they are busy inventing it. a supply volume of approximately contracts for specific supply volumes 15 billion m³ will have to materialise ensure that new import infrastructure every year. is used to capacity and are thus the prerequisite for investments in the In the period between 2010 and 2020, transmission and storage sectors. the USA will be looking for approxi- mately 100 billion m³ on the world Increasing spot trading at exchanges market as additional imports, and is not at variance with such long-term South-East Asia will be seeking 200 gas supply. On the contrary, open billion m³. This means that competi- trading places within Europe give tion to obtain supplies will become far market players a chance of optimisa- fiercer between the major gas-consum- tion, create conditions for competitive ing regions. supplies to regional markets and widen the customers’ choice. E.ON Ruhrgas sets standards with its broadly diversified gas supplies On the other hand, reliable long-term

 OXFORD ENERGY FORUM FEBRUARY 2008 gas supply in Europe cannot be positioned Europe-wide. If private- and worldwide competition to obtain achieved solely by setting up such sector European companies are clearly supplies. trading places. The supply situation in weakened against this background Yet, this will occur less dynamically the UK in the winter of 2005/2006 is by the European Commission’s new than anticipated one or two years ago an example warning us that temporary energy package, it will be more and because LNG costs have risen steeply market scarcity leads to dramatic price more difficult to negotiate on an equal of late, and projects are repeatedly be- fluctuations. A region like the EU footing with the limited number of ing delayed by political decisions. This which is heavily dependent on imports powerful producers. might slightly dampen the euphoric cannot rely solely on short-term This applies to negotiations with predictions of a rapidly expanding interaction of supply and demand Norwegian and Russian partners and LNG market worldwide, but it will but must take long-term measures to above all when entering the global not be able to stop the underlying ensure sustainable energy supply. In LNG market of the future. trend. After all, adequate reserves are future, the coexistence of long-term available in LNG-exporting countries, import contracts and gas trading at the technology is advanced and the LNG as an Additional Option? exchanges will constitute the right mix projects remain economically viable for the sake of supply security and E.ON Ruhrgas is pursuing a broad- on the whole. competitiveness. based LNG strategy in order to In the long term, E.ON Ruhrgas is further diversify its supply sources aiming at linking a fully integrated and benefit from a rapidly expanding European Demands for Ownership LNG chain to its equity gas produc- market. With the aid of LNG the Unbundling tion. On the subject of LNG supply, company intends to tap hitherto inac- talks are currently being held with On international procurement mar- cessible supply sources and make new various gas producers. Inciden- kets, European energy companies will volumes available for the European tally, the producers that are already be able to occupy a stable competitive market. position only if they can negotiate important for the EU market are also with producers on an equal footing major stakeholders in the new LNG in future. They must have a critical projects. Parallel to activities on the economic mass so that a large demand “Ownership unbundling procurement side, we are pursuing potential can be aggregated and concrete projects concerning LNG capital-intensive projects shouldered. forces private owners alone unloading and regasification. Incompatible with this are the to relinquish their assets, E.ON Ruhrgas is currently dealing regulatory ideas of the European while … the networks of with terminal projects in Germany, Commission which significantly state-owned companies can the UK, France and the northern weaken private-sector companies stay in state ownership” Adriatic coast. like E.ON. Above all, ownership It would be a sensible arrangement if unbundling should be mentioned in in 2020 Germany could cover 10 to 15 this context. percent of its gas needs with LNG. Here, even more than is the case with Ownership unbundling and the other gas procurement markets, the so-called alternative of an independent German and European gas industry Climate Protection by Pipeline system operator (ISO+) are unsuitable faces the challenge of having to oper- for strengthening competition and An old ‘new issue’ will determine the ate in a global environment. LNG, energy agenda in future not only in contributing towards lower energy which is transported by tanker, will prices. Ownership unbundling forces Germany and Europe: climate protec- in future increasingly be delivered to tion. In the EU it has been decided to private owners alone to relinquish destinations where the highest prices their assets, while – according to the reduce greenhouse gas emissions by prevail at a particular time. The USA 20 percent, raise energy efficiency by Commission’s proposals – the net- and South-East Asia in particular works of state-owned companies can 20 percent and increase the share of will to a growing extent compete renewables on the heat energy market stay in state ownership. Paradoxically, with Europe to obtain LNG. The far greater intervention is envisaged by 20 percent by 2020. Germany even geographically favourable location of wants to exceed those targets: green- in free-enterprise markets than in the main producers (e.g. Qatar) and markets with dominant state-owned house gas emissions are to be cut by 40 the different forms of price indexation percent by 2020 compared with 1990. companies. worldwide (coexistence of oil and At the same time, the recent mergers gas price indexation) combined with All in all, this means that Germany of Statoil and Hydro in Norway or selective rerouting of LNG cargoes has to reduce an even greater quantity

Gaz de France and Suez in France depending on the price situation all of CO2 than in the last twenty years, show that on both the producers’ basically offer a potential for arbitrage but in half the time. The targets are and the traders’ side there is a trend and are likely to expedite the develop- to be reached primarily by doubling towards power and gas champions ment towards a global LNG market energy efficiency by 2020 compared

 OXFORD ENERGY FORUM FEBRUARY 2008 with 1990 and by increasing the 2) simultaneously reduce CO emis- 2 Thierry Bros considers market share of renewables. At the sions significantly and forefront of this very ambitious cli- 3) at the same time keep the cost- that the UK gas model mate policy is the heat energy market, benefit ratio acceptable to the is a system hard to the main sales sector for gas. At least consumer and industry? for Germany this means that, due to justify intensified promotion of renewables Gas has great advantages in all three and increased energy conservation, for dimensions of efficiency. It can pave example by improved thermal insula- the way towards an energy sector with After the Second World War, the UK tion on buildings, gas consumption on generally lower CO2 emissions. This gas industry was nationalised with the the heat energy market will decrease. way leads, on the one hand, via the passing of the 1948 Gas Act. British natural gas pipeline system as univer- Gas used to have the monopoly as sal infrastructure for fossil fuels and a natural gas supplier in the UK. for renewable energies ranging from Liberalisation which started in the “to make proper use of bio natural gas to hydrogen using USA in 1978 was followed in the UK the product and market photovoltaics. On the other, it leads in 1986. The UK thus became the first via highly efficient and innovative market in Europe to open up, long benefits of gas for climate natural gas technology, which will in before any other EU country. The protection, we need a future be increasingly combined with ‘National Balancing Point’ (NBP), debate and policies that renewable energies. created in 1996 as a market exchange, are not encumbered with has boosted trade and is the most liquid gas trading hub in Europe. To Conclusion: More Competition, ideology” create a level playing field, the regula- More Climate Protection – More tor, Ofgem, pushed for increased Supply Security? transparency across the system. Today, However, it is obvious that neither The importance of gas for the energy the NBP is the most transparent gas Germany nor Europe as a whole can industry will tend to increase in the exchange, allowing a number of play- attain the ambitious but necessary coming years because of the growing ers to trade gas and providing a major climate protection goals without thirst for energy in newly industri- European price index. systematically exploiting the ecological alising countries like China or India benefits of gas. It is the fossil fuel with and because of ever more stringent Until 2004, the UK was awash with the greatest climate protection poten- climate protection measures. Global gas. Prices on the NBP were set on tial and the widest use. The famous competition to obtain supplies will the basis of gas-to-gas competition Hamburg-based Institute for the World become even stiffer, while the expan- and were therefore lower than in Economy stated in a recent study: sion of renewable energies in tandem Continental Europe, where most gas is priced using long-term take or Due to its properties – low CO with intensified energy conservation 2 will transform the German and pay contracts based on an oil price content and direct use without formula. Until 2004, liberalisation conversion losses as an energy European heat energy markets in the medium term. New regulatory actions was seen as bringing down prices and with highly efficient technology in benefiting consumers. many fields – gas can ensure high and debates are causing the market security of supply and reconcile situation for gas to become highly The UK is a deregulated market where the goals of climate protection complex. Consequently, far-sighted tariffs are set not by the government. and energy supply at minimum resource management and the early The UK is considered to be the most economic cost. conclusion of long-term contracts competitive market in Europe. It is are more important than ever for the an unbundled market which meets However, to make proper use of the purpose of ensuring security of sup- the criteria contained in the third EU product and market benefits of gas for ply. At the same time, the potential of package of proposals published in climate protection, we need a debate gas must be tapped systematically and 2007. and policies that are not encumbered be promoted in energy policy for the with ideology. The one-sided claim sake of economically viable climate The UK used to be viewed as the that climate protection is synonymous protection. perfect liberalised market, but percep- with exclusive use of renewables is tions changed dramatically in 2004 of no use to anybody. Anyone who when the country switched from be- wants to accomplish something in ing an exporter to becoming a net gas practice must answer the following importer, for the first time since 1995. questions without ideological blinkers: The UK is the world’s seventh largest natural gas producer after Russia, How can I the USA, Canada, Iran, Norway and 1) achieve truly more efficient use of Algeria. Production peaked in 2000 energy, and has since fallen by 26 percent. UK

10 OXFORD ENERGY FORUM FEBRUARY 2008

Russia, Iran and Canada; it is also the Figure 1: UK Production and Consumption Bcm EU’s biggest gas market by annual consumption, ahead of Germany and 120 Italy.

100 The future of UK gas demand is un- certain given moves in climate change 0 policies and volatile prices. Annual consumption hit an all-time high in 60 2004, but has fallen back since then. Bcm Gas consumption Extremely high prices are the likely 40 culprit for demand destruction in the Gas production winter of 2005/06, although it is dif- 20 ficult to determine whether price was the underlying cause of the declining 0 winter demand growth rate in 2006/07, as the season was unusually warm. 10 1 10 1 10 1 2000 200 As global warming is now a major Source: SG Equity Research/BP Statistical Review 07 concern for customers and political leaders alike, natural gas may no longer production will continue to decline storage as a low return asset. Facing be regarded as the ‘fuel of choice’ going sharply regardless of the regulatory fierce local opposition, storage was forward. In fact, gas is now a transi- environment and investment condi- left on the back burner until it was tional fuel that must compete against tions. too late. Today the few lucky storage other energies. We believe that going owners are making huge profits and forward the UK’s natural gas demand Since the gas supply crunch of 2005 companies are running to fast-track will fall by an average of 2 percent per the UK model failed to ensure lower any storage project they can find. annum (weather-corrected) for the resi- gas prices and has not encouraged Meanwhile, the UK lacks anything dential and small industry sector on the much needed investment in infrastruc- like the ratio of storage capacity back of better energy saving measures ture networks. This has caused some relative to annual demand enjoyed by in buildings. As oil, coal, gas and CO to express doubts as to whether the 2 other European countries. (Figure 2) prices move up, the order of merit UK market should be used as a model of electricity producing plants can for the rest of Europe. Indeed, on 13 change rapidly, with gas competing Demand has reached an Undulating March 2006 National Grid issued a against other fuel sources. We believe Plateau Gas Balancing Alert for the first time that any increase in demand from the because demand could not be met by On a worldwide basis, the UK is the power industry will be insufficient to the available supply. (Figure 1) Prices fifth largest gas market after the USA, offset the expected 2 percent decline in spiked to 255 pence per therm (p/th), causing a reduction in demand and Figure 2: Main Storage in Europe thereby allowing the system to cope. This warning showed that investment had been insufficient to offset declining 20 Storage (bcm) 0 domestic production. Storage in % of 16 annual demand 40 Investment in Storage was neglected EU-2 average until it was too late (%) 12 30 During the 1990s, when gas prices were depressed, companies went Bcm  20 Percent through an ‘asset sweating’ phase to reduce any spare capacity. The decline in swing production in the North 4 10 Sea should have triggered an increase in storage capacity, but this failed 0 0 to materialise. The fall in North Sea a a y k n output was initially under-estimated, Italy UK Austria France Poland Spai Slovaki BulgariaRomani Hungar GermanyDenmar and companies found it more attrac- Netherlands tive to invest in LNG re-gasification Czech Republic terminals with the hope of making lucrative US/UK arbitrages, viewing Source: SG Equity Research

11 OXFORD ENERGY FORUM FEBRUARY 2008 domestic consumption. All together, UK gas consumption has reached an Figure 3: NBP quarterly gas prices (history, estimates and forward curve undulating plateau and should vary with historical max and min) mainly according to weather (winter 0 Historical Price and SG consumption can vary from +/-13% Forecast depending on weather conditions). 60 Forward Price @ 2/12/0 0 More Import Capacity… Forward Min In response to the extremely high 40

p/th Forward Max winter prices of 2005/06 (intra-day 30 maximum of 255p/th vs 26p/th on average in winter 2006/07), efforts 20 to increase the UK’s import capacity were made, with the Langeled pipe- 10 line from Norway and the Teesside Gasport now on stream. October 2007 0 saw: Q1 03 Q3 03 Q1 04 Q3 04 Q1 0 Q3 0 Q1 06 Q3 06 Q1 0 Q3 0 Q1 0e Q3 0e Q1 0e Q3 0e • The start-up of commercial flows from Norway’s giant Ormen Lange Source: SG Equity Research/Datastream gas field. Like all producers, Norway aims to Our assumptions are: • The start-up of the Norway/UK maximise return. Tampen Link offshore. • New import capacities will have only a bearish effect during sum- • An increase in the UK–Belgium What is the Future Trend? mer, while in winter, the UK will Interconnector’s reverse flow (from have to compete to attract the extra A tough equation is facing this mature Belgium to UK) capacity. volume needed. Therefore, we market: domestic supply is declining see winter prices continuing to be Increases in import capacity more by 10 percent per annum, demand expensive. than offset the ongoing decline in has reached an undulating plateau, supplies from the UK Continental and foreign supply is insecure. Big • For 2008, we assume the Norwe- Shelf. On top of this, two new LNG investment is delivering new import gians are not going to repeat their re-gasification terminals (Dragon capacity, but storage is still badly ‘mistake’ of flushing the market and South Hook) in Milford Haven lacking. with too much gas and that they should be commissioned during the will try to keep summer prices Greater import capacity does not first half of 2008. above 20p/th. The summer/winter guarantee security of supply. Once spread will allow for storage to The range of potential supply avail- import capacity is available, security continue generating a lot of cash. ability is wide, reflecting not only the of supply can be achieved either with Prices have more upside in winter normal risks associated with major internationally binding long-term take and more downside in summer. infrastructure projects, but also com- or pay contracts or with higher prices mercial uncertainties associated with to attract the available (if any) spot gas. • Winter 2008/09 should trade at a competing markets on the Continent discount to winter 2007/08 because and LNG on a global scale. by then the two Milford Haven Prices Matter re-gasification terminals should be New import capacity will depress running with, at least, some Qatari … may not translate into more prices temporarily. Given the gas. supply: the Norwegian Question substantial investments in new UK It is important to emphasise again infrastructure, after hitting a low of On 2 October 2006 tests run on the that winter weather represents a very 30p/th in 2007 due to a mild winter southern leg of the Langeled pipeline important risk factor that can substan- 06/07, we expect annual prices to stay caused gas prices to hit an all-time low tially impact gas prices both on the in the 33–36p/th range until 2010. of negative 5p/th (intraday). While upside and the downside. the situation was short-lived, Norway (Figure 3) We also recognise that learned the hard way that it could lose upward spikes are always possible this After 2010, we expect natural gas money monetising its hydrocarbon winter in response to global shocks prices to increase due to the lack of resources. This experience might have (like British and Japanese nuclear out- worldwide investment to offset declin- changed the way Norwegians do ages). In the event of severe disruption, ing North Sea and US gas production. business, possibly pushing them to the UK will have to turn to LNG and The Nord Stream Baltic gas pipeline is exercise more market power (i.e. being the price this winter will be set by being delayed due to political pressure more selective) when selling their gas. Japan. from neighbouring countries, and the

12 OXFORD ENERGY FORUM FEBRUARY 2008 2011 start date now seems optimistic. Having sufficient storage capacity Simon Pirani explains The huge Russian Shtokman gas field is important not only for security in the Barents Sea will not be devel- reasons, but also because of the lever- the pricing policies oped before 2013. And the list goes age it provides in negotiating with big on: the Nabucco pipeline is at risk suppliers. If storage capacity remains for Russian gas of being stuck in limbo forever; the low, UK prices will probably remain based on European Norwegian GNE was just stopped; volatile, with a crisis likely to cause the Qatari moratorium caps LNG price rises so as to dampen demand netbacks production to 104bcm/year for the in order to achieve a balance between foreseeable future, and so on. All of supply and demand. The former Soviet Union is moving these developments suggest major After relying on North Sea pro- supply bottlenecks after 2013. towards a new natural gas pricing duction (which is being rapidly system, linked to Western European exhausted) and pushing for increased contract prices on a netback basis In the Context of High Energy liberalisation, the UK is, with every (European prices minus export duties Prices, Liberalisation has Failed passing winter, on its way to look- and transit fees). Gazprom is forcing ing more and more like Continental The old assertion that liberalisation the pace. The Russian government and Europe, i.e. suffering from a shortage ‘will drive down prices and improve Gazprom intend that this substantial of domestic supply. This means it may the competitiveness of our industries’ shift should be completed in three have to compete for piped gas with has signally failed to materialise at a years’ time. But European prices are Continental Europe, where natural gas time of high energy prices. Yes, we linked to oil prices, and if these keep is indexed to oil and, on a worldwide have a choice, but in various markets, increasing at the present rate, it’s hard level, for LNG. Meanwhile, Norwe- the exercising of this choice implies to see how this timetable will be ad- gians are understandably looking to choosing to pay sharply higher prices. hered to. In any case, the consequences maximise their return on investments Thanks, but no thanks. will be far-reaching for Russia’s, and its made in fields and pipelines. neighbours’, economies. Even security of supply which was taken for granted before is now at “The old assertion that risk. The UK is selling its gas cheap in “The former Soviet Union liberalisation ‘will drive summer to Continental Europe and is is moving towards a new down prices and improve buying it back at very high prices in winter, when demand is higher! natural gas pricing system, the competitiveness of our The UK gas market was indeed a linked to Western European industries’ has signally model when it relied on domestic contract prices on a netback failed to materialise” production. But as soon as the coun- try became a net importer, the ‘one basis” size fits all liberalisation ideology’ In an attempt to liberalise markets, led to unintended consequences. Gas Russia completed negotiations on political leaders applied the same is a strategic commodity, and market this year’s prices with almost all of formula to the energy, telecommunica- design in Europe must take into ac- the largest players (Turkmenistan and tion and transportation sectors. This count the fact that all producing states Uzbekistan as sellers, Ukraine and worked pretty well for UK consumers have sovereign control over their Belarus as buyers) in November and when the UK was a gas exporter. But resources. This means that a serious December, and although some aspects by liberalising commodity markets, energy policy which examines changes of the old politically-influenced the unintended medium-term conse- in the demand/energy mix between settlements remain, prices rose steeply. quence was to shift most of the value now and 2020 must be devised and Moreover, it was done without the away from the downstream sector enacted quickly. political drama and supply inter- and towards the upstream sector. And ruptions that preceded the deal with with gas resources concentrated in just Ukraine in January 2006, or threats of a few countries – the vast majority of supply interruptions, in Belarus’ case which have one national company that in January 2007. The new frameworks also enjoys an export monopoly – the established during those clashes passed power is now in the hands of just a a significant test. few national companies. In Russia itself, the government did not flinch – as some had thought it The UK Faces Tough Decisions would – from the 25 percent price The UK has insufficient storage capac- rise for domestic industrial customers ity and must address this issue soon. prescribed by its own strategy for

13 OXFORD ENERGY FORUM FEBRUARY 2008 bringing those in line with European that had persisted throughout the to be followed by five further rises, to prices by 2011. early 2000s. Against a background of $125/mcm in 2011. If European gas rising European gas prices (reflecting prices are higher, that number will be the secular increase of oil prices to higher too. Ukraine, Belarus and Russia which they are indexed), Gazprom’s – Second, in January 2007, that The key turning point was the Russo- commercial interest had found itself other troublesome customer on Ukrainian settlement of 4 January increasingly at odds with Russia’s Russia’s western borders, Belarus, 2006 – not because of the sumptuous political/state interest, in which cheap was knocked into line. Its president, advantages it provided for Gazprom’s gas was often used as a bargain- Aleksandr Lukashenko, did what his ally, the trader Dmitry Firtash, that ing chip with western neighbours. pro-European Ukrainian counterparts were so widely criticised at the time, Gazprom lobbied to close the widen- had not been prepared to, and agreed but because it marked the beginning ing differential between European to sell to Gazprom a 50 percent share of the end of the system of intergov- and CIS prices. After the ‘Orange in Beltransgaz, which owns the export ernmental agreements that dominated revolution’ of late 2004, Russia’s pipelines to Europe. He also agreed to the CIS gas trade in the immediate political leadership felt less inclined to end a lucrative transfer-pricing scheme post-Soviet period. The agreement was compromise with Kiev. The discord under which oil products had been a commercial one between Gazprom, between Gazprom’s line and that refined in Belarus from Russian crude, Naftogaz Ukrainy (the state-owned of the government was resolved. bought net of duty. In return for Ukrainian oil and gas company) European netback prices were fully these concessions by Minsk, Moscow and Rosukrenergo (the Swiss trader embraced as a strategy by the Russian agreed that Belarus should progress owned 50 percent by Gazprom and 45 government. to European netback much more percent by Firtash): the participants slowly than Ukraine. The two sides trumpeted the fact that they, rather set a timetable similar to the one being than politicians, had negotiated the used for the Russian domestic market. terms. “Russia is not only Belarus agreed to buy Russian gas at As a result of the deal, Ukraine, the charging more for gas, it is $100/mcm in 2007, at 67 percent of largest CIS gas importer (about 55 also paying more” the European netback level in 2008, Bcm a year) and the transit route for at 80 percent of that level in 2009, 90 most Russian gas to Europe (about percent in 2010 and 100 percent in 120 Bcm a year), stopped getting Rus- It is hard to envisage the harmony of 2011. If European prices keep moving sian gas in lieu of transit fees. Since state and corporate interests around upwards, the Belarusian timetable then its imports have been Turkmen the European netback principle being seems likely to be slowed further. gas, acquired by Gazprom Export at disrupted soon, particularly now The Russo-Belarusian agreement the Turkmen border and resold to that the chairman of the Gazprom provided for the exact level of prices Rosukrenergo, Kazakh and Uzbek board, Dmitry Medvedev, has been to be set, within these parameters, gas bought by Rosukrenergo, and a nominated to succeed president Putin annually. The 2008 negotiation was minimal amount of Russian gas from in March. Certainly, since the Russo- conducted between president Lukash- Rosukrenergo. Ukrainian agreement of January enko and his Russian counterpart, In 2006, this ‘cocktail’ cost Ukraine 2006, these interests have continued Vladimir Putin. Russia granted Belarus only $95/thousand cubic metre (mcm), to converge. There were two further a $15 billion state stabilisation loan, much less than many had feared, notable turning-points: over fifteen years with a five-year partly because, in exchange, it handed – First, in December 2006, the Rus- grace period, to help pay for dearer Rosukrenergo a 50 percent share in sian government thrashed out with gas. Although price levels for the a new monopolistic domestic trader, Gazprom and the power industry a whole of 2008 were not disclosed, it UkrgazEnergo, and storage near the scheme by which prices in the biggest was announced that they would be Slovak border at rates 40–50 times gas market of all – its own – would $119/mcm in the first quarter, and a lower than the European market rise to European netback levels by Russian minister indicated publicly average. Ukraine’s import prices rose 2011. The decree that ensued states that they will average $125/mcm for in 2007 to $130/mcm (a 36.8 percent that wholesale prices should be set for the year – well short of the 67 percent rise) and this year to $179.50/mcm (a industry according to ‘a formula that of European netback to which they 38.1 percent rise). ensures equal income from the sale of were due to rise. The supply interruptions in the days gas on foreign and domestic markets’. The cushions provided by Russia to prior to the January 2006 deal being And the industry ministry says that, Lukashenko for 2008, in the form signed damaged Gazprom’s reputation assuming a constant European gas (probably) of prices that fall short in Europe. But in the broader scheme price, this year’s 25 percent increase of the timetable, and (certainly) of of things, the agreement marked a – which takes the nominal wholesale the stabilisation loan, show that the success for the company, because it industrial price (unadjusted for transition from politically-influenced resolved a tension in Russian policy transport) to $63.30/mcm – will need haggling to European netback is not

14 OXFORD ENERGY FORUM FEBRUARY 2008 complete, and will not be smooth. The The way that Gazprom has acceded In the Russian, Ukrainian and Belaru- same could be said of the surviving to steep increases in Turkmen sales sian economies, European netback will add-ons to agreements with Ukraine, prices is probably also influenced by further tell against energy-intensive such as the favours granted to Firtash. pipeline politics. Soon after this year’s manufacturing industries. Even A significant test of Moscow’s deter- Turkmen sales prices had been settled assuming they replace capital stock mination to implement its principles upon, on 20 December, the Russian, and become more efficient, they will evenly will arise in Ukraine soon as a Turkmen and Kazakh governments become substantially more expensive result of the return to the premiership signed an agreement on the construc- to run. In the long term, this effect of Yulia Timoshenko, the former gas tion of a gas pipeline around the will be felt in Central Asia, too. Euro- trader and populist politician. She has Caspian shore, with an input capacity pean netback for industry will increase consistently demanded the removal of of 20 Bcm per year, to meet the exist- pressure on governments to find Rosukrenergo from the import chain. ing line at Aleksandrov Gai. answers to the problem of extremely In Moscow Medvedev, among others, low prices, and excessive consump- has indicated that there is no objection tion that persists among residential in principle to such a reorganisation. consumers and in the district heating If sales were made directly from “The way that Gazprom sector. Gazprom Export to Naftogaz has acceded to steep All this is in the future. At present, Ukrainy, the complex buy-sell ar- increases in Turkmen sales the observation that may best be rangements by which Rosukrenergo made with confidence is that the ships Turkmen gas to Ukraine were prices is probably also former Soviet countries’ ability to scrapped and Russian transit tariffs influenced by pipeline reach European netback as soon – a key component of any pricing politics” as Gazprom proposes depends on structure – were made public, then the the level of European gas prices. If means of implementation of European they continue to rise, then the price netback would be more transparent It is unclear whether and how Turk- increases that would be required for and therefore more rigorous. men production will be increased Belarus and Ukraine to catch up with to justify building the new line them by 2011 could become politically unsustainable, and pull the intra-CIS Central Asia Gains and/or expanding the existing line via Uzbekistan, which is also proposed. gas trade back into a vicious circle Russia is not only charging more But for Turkmenistan it amounts to of debt and non-payment. This year, for gas, it is also paying more. Turk- an additional export route to Russia Belarus has already fallen behind the menistan, the principal Central Asian that avoids Uzbekistan. For Russia proposed timetable; Ukraine resisted supplier, sold gas to Gazprom and its it further weighs the scales against Russian pressure to hand over trans- trading allies for $44/mcm in 2005, EU- and US-supported projects aimed port assets in return for more gradual $50–$60/mcm in 2006 and $100/mcm at opening up a ‘fourth corridor’ of price increases, but has still achieved in 2007. Turkmenistan will receive pipelines from the Caspian to the EU import prices far short of European $130/mcm in the first half of this year avoiding Russia. netback. The road has been mapped and $150/mcm in the second half. out; the timing of progress remains in Sales prices for the smaller Uzbek and question. Kazakh volumes (less than 10 Bcm The Brave New World of European a year each) are not disclosed, but Netback they seem to track Turkmen prices. There is little doubt that European Gazprom announced in December netback prices will be achieved across that it had agreed to buy Uzbek gas the former Soviet space, but it is not this year at ‘the rates prevailing in the clear when. regional market’. Kazakhstan, which Eventually, Russian and neighbouring reportedly received $140–$165/mcm energy markets will be transformed in 2007, was demanding $190/mcm beyond recognition by the pricing in 2008; at the time of writing, no reform. If the differential between agreement had been reported. European and domestic prices is These prices reflect Russia’s depend- removed, much of the incentive for ence on Central Asian gas. As Russian Gazprom to prioritise European critics of Gazprom’s delay in pushing over domestic sales will also disap- forward crucial domestic investment pear. Its role in meeting growing projects constantly point out, that demand in Western Europe may well dependence is increasing year by year, be diminished. The bar on other while western Siberian fields’ output producers making export sales may be levels off or declines. reconsidered.

15 OXFORD ENERGY FORUM FEBRUARY 2008 Assessments of Bali 2007

Benito Müller provides would accept whatever model the G77 and China, on the one hand, and the endorsed. EU, on the other. This was, in part, impressions from the In time, the Bali meeting established due to informal private discussions Thirteenth UN Climate an independent Adaptation Fund that led, among other things, to a cou- Board − with members selected by ple of influential opinion pieces on the Change Conference issue of making the AF operational by and under the direct authority of 1 the COP/MOP − as an operating lead G77 and China negotiators. The aim of the recent UN climate entity for its financial mechanisms, This was in stark contrast to the change conference in Nusa Dua (Bali, independent of the previously only other key negotiations strand on the Indonesia) was widely held to be operating entity: the GEF. The role Bali Road Map which, particularly in twofold. To finalise the operational of the GEF in managing the AF had the final phase, turned out to have a details of the Kyoto Protocol Adapta- been, and remained to the very end, number of very unfortunate surprises tion Fund (AF), and to put together the most contentious issue in the with a concomitant loss of trust. a ‘Road Map’ for negotiations on attempt to make the Fund operational. In fact, the involvement of the GEF strengthening the UN climate change The Bali Road Map: The many plots even for merely secretarial purposes regime beyond the initial commit- of the Ides of December ments of the Kyoto Protocol which was by no means uncontroversial. expire in 2012. Both aims were However, in the end, it was decided Of Contact and Small Groups achieved, albeit not with the same that the Board should usually meet At the beginning of the conference, a degree of ease. Keeping in mind the at the seat of the UNFCCC (Bonn, contact group of officials was tasked aphorism that UN conferences can Germany) with the GEF Secretariat to determine the next steps on enhanc- only be either ‘successful’ or ‘very providing dedicated secretariat serv- ing long-term cooperative action to successful,’ there is little doubt that ices. The organisational set-up of address climate change. The group was the Bali climate change conference has the AF differs in another important asked by the COP President Witolear been a very successful one. respect from that of the other UN ‘to agree on or narrow down options funds with funding for climate change for consideration by ministers on the (The LDC, Special Climate Change The Adaptation Fund future process under the Convention.’ Funds, and the GEF Trust Fund). Fol- They presented their conclusions To the surprise of many who − like lowing the wish of many developing to a small group of ministerial-level the Secretariat − had thought the country Parties, particularly the most representatives from all the relevant Adaptation Fund negotiations would vulnerable ones, countries are given UN groups convened by the COP carry on until the bitter end, an direct access to the Fund, without President, which finished its informal agreement on how the Fund should be having to go through ‘implementing consultations at 2 am on the 15th day managed was reached during the first agencies’ such as the World Bank, (the Ides) of December. The outcome week of the Conference and finalised UNDP, or UNEP. of these deliberations was a draft text on Monday 10 December. The out- proposing the launch of comprehen- come was seen by many as ‘a major sive two-year negotiations under the victory for the developing world in “To the surprise of many Convention with a key aim to enhance setting a new governance system for national and international greenhouse funding of adaptation activities,’ to who … had thought gas mitigation in developed and quote the South African Minister, the Adaptation Fund developing countries. Marthinus van Schalkwyk, who led negotiations would carry the final stages of the negotiations on Given that post-2012 commitments behalf of the G77 and China. on until the bitter end, an for industrialised Kyoto Parties are to be dealt with in separate negotiations The battle, however, was not a simple agreement … was reached North-South affair. The ultimate during the first week of the 1 Operationalising the Kyoto Protocol’s fault line concerning the role of the Conference” Adaptation Fund: A new proposal (2006), Global Environment Facility (GEF) by Amjad Abdullah (Maldives), Bubu in the running of the Fund, ran both Pateh Jallow (The Gambia), and Moham- through the developing and the in- The key to the astonishingly smooth mad Reazuddin (Bangladesh); and On the dustrialised world. Indeed one of the Road to Bali:Operationalising the Kyoto progress and the early breakthrough Protocol Adaptation Fund (2007), Enele key factors for the early success of the in the negotiations on the AF was no Sopoaga (Tuvalu), Lydia Greyling (South negotiations was the pre-Bali declara- doubt the absence of surprises and a Africa), David Lesolle (Botswana), Emily tion by the European Union that they raised level of trust between the G77 Massawa (Kenya), José Miguez (Brazil).

16 OXFORD ENERGY FORUM FEBRUARY 2008 under the Kyoto Protocol, the para- But a closer look will reveal that it draft decision be suspended because graph delineating the scope of these is substantive: in (α), measurability, the heads of key G77 delegations, Convention-track negotiations for reportability and verifiability refer including China, were at that very developed countries − namely only to developing country mitiga- moment engaged in discussions with (1.b.i) Measurable, reportable and tion actions, while in (β) they cover the Indonesian Foreign Minister verifiable nationally appropriate developed country technology, finance outside the plenary, and thus unable mitigation commitments or actions, and capacity building support. Given to make their views heard. including quantified emission this, it will not be surprising that the The plenary was duly suspended for limitation and reduction objectives, latter was the version supported by 20 minutes, but that was unfortu- by all developed country Parties, the G77 and China. nately not the end of it. The President while ensuring the comparability returned to where the plenary had left of efforts among them, taking into The Multi-plot Plenary off and invited the head of the Indian account differences in their national delegation to repeat his reservation, At around 8 am the same day, a draft circumstances only to be told that unfortunately, Decision was disseminated among the he was again in consultation with the − was essentially aimed at the only conference participants and soon after Indonesian Foreign Minister outside remaining developed country non- tabled by the President for adoption the plenary − as was, it turned out, Kyoto Party: the United States. by the COP. Having acknowledged the head of the Chinese delegation! the failure of the small ministerial Clearly, whoever was responsible for group ‘to eliminate fully options in convening the plenary this second one of the paragraphs’, the President “other key negotiations time was not doing as good a job as continued by reminding the delegates could possibly have been expected. strand on the Bali Road that ‘reaching agreement requires a To paraphrase Oscar Wilde’s Lady Map … turned out to delicate balance to be struck. I believe Bracknell ‘to miss the absence of that the proposal for a draft decision one minister may be regarded as a have a number of very that I have placed in front of you … unfortunate surprises with misfortune … to miss two seems like strikes this delicate balance.’ carelessness.’ a concomitant loss of trust” After officially requesting the COP By now, one of the Chinese lead plenary to adopt the draft decision, negotiators had rushed back into the the President opened the floor for plenary from these parallel consulta- The one issue that eluded consensus interventions. Portugal, on behalf of in the small ministerial group was tions. He demanded to know why the EU took the floor to express their the plenary was again convened while the relevant paragraph (1.b.ii) on support for the text. ‘So under the the scope of developing country G77 was meeting the Indonesian good spirit and with the notion that Foreign Minister. He could not mitigation activities to be considered there are no perfect texts for all, the in the proposed Convention-track imagine that this repetition could have EU supports this text and we call for happened unintentionally. After this, negotiations. The draft text of the all Parties to support it.’ small group submitted to the COP the plenary was duly suspended for a President in the early hours of At this point the drama started to second time. Saturday morning consequently still unfold. Seven seconds after the EU To be fair to the Chinese delegate, included two bracketed options for intervention, the President declared it is indeed difficult to see how this paragraph, namely: ‘I see no other wish to ask for the – after the uproar that followed the floor, so it is decid … oh, India, … (α) Measurable, reportable and first convening of the plenary in please take the floor!’ India’s literally parallel to the other meeting – this verifiable nationally appropriate last second intervention together mitigation actions by developing repeat performance could have been with the subsequent G77 and China a coincidence. But then he was not country Parties in the context of interventions made it clear that the sustainable development, supported present when the President invited the text presented to the plenary was not absent Indian Minister to repeat his by technology and enabled by − as assumed by many (including, financing and capacity-building; reservation, which proves, in fairness judging from their intervention, the to the podium, that they were clearly (β) Nationally appropriate mitigation EU) − a consensus document. It only ignorant of the fact that the parallel actions by developing country contained version (α) and left out ver- consultations were still ongoing when Parties in the context of sustainable sion (β) of the contentious paragraph they reconvened the plenary. development, supported and ena- (1.b.ii) without G77 consent to do so. The only consolation to be drawn bled by technology, financing and After the Indian Minister finished his from this sorry story is that it should capacity-building, in a measurable, intervention, another disconcerting reportable and verifiable manner. put to rest the inevitable conspiracy plot line appeared when China called theories, at least with regard to the At first glance, one may be puzzled for a point of order and demanded parallel-meeting plot line. What about the difference between the two. that the adoption of the proposed happened in the plenary that morning

17 OXFORD ENERGY FORUM FEBRUARY 2008 was clearly not intentional. After all, The second act of the drama began makes sense in the context of second bungling hardly ever is! soon after with the United States reading (β.2). Fortunately, South Af- But there remains the initial conun- taking the floor and rejecting the rica clarified the situation: ‘Developing drum: how the COP President came G77 proposal. Returning to the sort countries are saying voluntarily that to table a ‘draft decision’ for adoption of language used earlier by the COP we are willing to commit ourselves that was not consensus-based. What is President to recommend the contro- to measurable, reportable and verifi- clear is that, unlike the plenary events, versial draft text to the plenary in able mitigation actions. It has never this cannot be put down ‘to genuine terms of ‘balance’, the American head happened before. A year ago, it was misunderstandings about the multi- of delegation argued that the USA totally unthinkable.’ In other words, plicity of the settings of the meetings.’ had to reject ‘the formulation that has the first reading was meant to be the Even if the person or persons who de- been put forward … because it does intended one. cided to drop the G77 proposal (β) of represent a significant change in the When the head of the US delegation the contentious paragraph mistakenly balance that I think many of us have said that they had ‘specially listened thought it to be synonymous with truly worked towards over the last to what has been said in this hall the other one, it would still have been week.’ today, and we are very heartened by completely unacceptable to remove the comments and the expression of it without consulting all the major firm commitments that have in fact groups, in particular its sponsor, the “to think that the USA been expressed by the developing G77 and China. Egypt summed up the countries,’ she was referring to the events of that morning by comparing was swayed by this, or interventions by South Africa and it to ‘a movie with a lot of plots.’ This indeed by the jeering after others that clarified the G77 proposal. was one plot that the process could their initial intervention, is Contrary to some press reports, it have done without. simply naïve” thus stands to reason that there never Given that the G77 language ulti- was a US ‘U-turn’ – all there was is mately did make it back into the Bali a clarification of the G77 proposal that satisfied the concerns of the US Road Map, some might be inclined The US intervention was about to forgive and forget in the spirit delegation. Of course, it makes for developing country mitigation, and better headlines to report on Papua of ‘all is well that ends well.’ The claimed that in this respect, there is problem – as UN Secretary-General New Guinea’s demand for the USA a substantive difference between the to ‘get out of the way!’ But to think Ban Ki-moon put it – is that, ‘this is original proposal of the President’s just a beginning and not an ending. … that the USA was swayed by this, or draft (α) and the G77 alternative (β). We’ll have to engage in many com- indeed by the jeering after their initial The problem is that (β) does lend intervention, is simply naïve. plex, difficult and long negotiations.’ itself to different interpretations in And they will require a lot of trust. this regard, namely The unfortunate events of the final morning have turned this into a rather (β.1) Nationally appropriate mitiga- inauspicious beginning, as far as trust tion actions by developing country “According to the White building is concerned. Conspiracy Parties in the context of sustain- House, the Bali Road theories are already flourishing and able development, supported and Map does not fully have to be dealt with for the good of enabled by technology, financing the process. This is why there is still and capacity-building, all in a reflect the principle of a need to get to the bottom of how measurable, reportable and verifi- common but differentiated the G77 language got to be dropped able manner. responsibilities” without G77 consent: reconciliation (β.2) Nationally appropriate mitiga- requires truth! tion actions by developing country Parties in the context of sustain- However, a sub-plot – the attempt by An American ‘U-turn’? able development, supported and Bangladesh to mirror the developed enabled by measurable, reportable When the plenary convened for the country paragraph (1.b.i) by including and verifiable technology, financing third time – finally with all key del- a reference to ‘differences in national and capacity-building. egates present – Portugal, on behalf of circumstances’ in (1.b.ii) that failed the EU, took the floor to support the With respect to developing country due to vehement opposition by China proposal of India on behalf of G77. mitigation, there clearly is no differ- and India – should caution one not to However, the hopes of those who ence between the proposal contained misread the South African clarifica- cheered at this point believing that in the President’s text (α) and this first tion: The G77 and China committed this endorsement marked the elusive reading (β.1) of the G77 language: itself to ‘measurable, reportable and breakthrough were soon dashed, it both are about mitigation actions that verifiable mitigation actions,’ but turned out to be merely the end of act are ‘measurable, reportable and verifi- not to ‘measurable, reportable and one. able.’ The US intervention thus only verifiable mitigation commitments,’ as

18 OXFORD ENERGY FORUM FEBRUARY 2008 developed countries did in (1.b.i). but to mend the loss of trust resulting developed country Parties of their The White House, apparently, was from the unfortunate incident, and commitments under the Conven- all too aware of this when its Press if necessary to establish procedural tion related to financial resources Secretary raised ‘serious concerns safeguards to prevent anything like it and transfer of technology... about … aspects of the [Bali Road in the future. The Bali Road Map negotiations have Map] Decision’ on the same day. As to the medium term, the difficulty shown (yet again) that progress can According to the White House, the will be to find tools to ‘square the be made with regard to this delicate Bali Road Map does not fully reflect global mitigation circle,’ that is issue, but only if due respect is the principle of common but differ- to break out of the we-will-only- given to the joint responsibility/duty entiated responsibilities. The climate take-on-commitments-if-they-do’’ enshrined in this Article. Measurable, change problem ‘cannot be adequately stalemate which has bedevilled the reportable and verifiable developing addressed through commitments for climate change process ever since the country mitigation commitments will, emissions cuts by developed countries passing of the notorious Byrd-Hagel if at all, only be possible as a package alone. Major developing economies resolution in the US Senate in 1997, deal with measurable, reportable and must likewise act.’ In line with the and which was implicitly reiterated verifiable commitments to provide Bangladeshi demand, the White House in the above-mentioned White House technology, financing and capac- also insisted (i) that the responsibility Press Statement. No one ‘in the know’ ity-building by developed countries. to mitigate must be differentiated will underestimate the difficulty of Indeed India’s closing statement can ‘among developing countries in terms this task. But it is not impossible. and should be read in this spirit: of the size of their economies, The road to Bali was in principle their level of emissions and level of strong, the road from Bali must be energy utilization, [and ii] that the “the whole debate about much stronger. We need to move responsibilities of the smaller or least forward to Poland to Denmark, developed countries are different from the developing country and beyond, for what is at stake the larger, more advanced developing mitigation paragraph in the is saving our future generations. countries.’ Bali Road Map may well And therefore it is not a question It is doubtful whether this differentia- hold some clues as to how of what you will commit or what tion scheme will cut much ice with I will commit. It is a question of these larger developing countries, to proceed” what we will commit together to particularly in the absence of any meet that challenge! reference to population size. But it For one, one might want to draw gives a good indication as to where a lesson from the Adaptation Fund the ‘battle lines’ in the forthcoming negotiations and try to continue the negotiations will be drawn. sort of informal dialogue that was crucial in creating the conditions that The Way Forward: To Ensure a Safe led to the early breakthrough, even Journey though that may be more difficult given the demand on time from the For the Bali Road Map to succeed, the formal additional negotiation sessions. way forward requires both immediate and medium-term actions. For one, Second, the whole debate about the the making of the Adaptation Fund developing country mitigation para- operational must be completed swiftly graph in the Bali Road Map may well David Robinson through the adoption of governance hold some clues as to how to proceed. focuses on the procedures which ensure that the The key lies in the difference between Fund is the success which all Parties asking developing countries to act on significance of the US would like it to be. The one thing their own or asking them to act with decision to support which has to be avoided at all cost is the support of developed countries. to have this new instrument tainted This, of course, is nothing new at the Bali Action Plan with some mismanagement scandal. all. It is what everyone (including those that have not ratified the Kyoto The Adaptation Fund Board has to be At the United Nations Climate Protocol) signed up to in Article 4.7 above all suspicion, and the rules of Change Conference in Bali, about of the Framework Convention: procedure have to ensure that it is! 190 nations adopted the Bali Action Immediate action is needed to estab- The extent to which developing Plan, which aims by December 2009 lish clarity on how the President’s country Parties will effectively im- to replace the Kyoto Protocol when text came to be presented as a draft plement their commitments under it expires in 2012. This note analyses decision, not only to counter existing the Convention will depend on the significance of the US decision to and avoid further conspiracy theories, the effective implementation by support that Plan.

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The US decision was important, but percent of the electorate tends to be an increasing economic and political not a great surprise. According to concerned about climate change. The challenge to the USA, makes it all many, the question was not whether passage of climate change legislation the more likely that negotiations over to participate in the UN-led negotia- by Republican and Democrat leaders climate change will become part of the tions over the post-2012 framework, in many US states and in hundreds of highly politicised debate over trade it was how and under what condi- US cities has also put pressure on the and protectionism. tions. Bali was the opportunity for Federal administration. Furthermore, Second, this is happening in the midst the US administration to influence the experience of extreme local weath- of a Presidential campaign. Although the aims and the road map for those er conditions in the USA, especially climate change is not as high on the negotiations. in the south, has increased public agenda as other issues (e.g. health care, We should not forget that the USA awareness of the dangers of climate Iraq, the economy) it is rising quickly. was a signatory of the United Na- change; notably among evangelical It attracts the independent voters, who tions Framework Convention on religious movements. Many major may swing the election in key states. Climate Change (UNFCCC) in 1992. US corporations are also pressing As a party to the UNFCCC, under for federal mandatory cap and trade President Clinton the USA signed the legislation. Finally, Al Gore’s movie, Kyoto Protocol in 1997. The Clinton his Oscar and the Nobel Peace Prize “the evidence suggests that have all raised public awareness about administration never sent the Kyoto destruction of tropical Protocol to Congress for ratification climate change. because it had no hope of Senate Other factors may be described as forests is causing as much ratification. international. There is a growing sense as 20 percent of greenhouse of unease in the USA at its isolation in gas emissions” the world. The USA could be a world leader on climate change, a point made “the Bush administration by Senator Kerry in Bali. Further- Third, Bali will have influenced more, many world leaders have put has recently taken off its participants from the USA, as well as pressure on the USA to join them in climate change ‘invisibility people at home following the debate. fighting climate change, and indeed The glare of the world’s press was cloak’” to lead the way. Most important, US on the US Delegation. When, in the concerns over energy security (i.e. final moments, the representative energy import dependence) are key It is nonetheless striking that the Bush of Papua New Guinea called on the drivers of US federal climate change administration has recently taken off USA to lead or ‘get out of the way’, policy. its climate change ‘invisibility cloak’. that small country was expressing That is because climate change is So, when the USA eventually agreed a view that was widely shared by now politically ‘hot’. Domestically, to the Bali Action Plan at the very last many in Bali. Perhaps the heaviest the Leiberman-Warner Bill is being minute, there was great relief but no pressure on the US Delegation came debated on the Senate Floor and has great surprise. from its own citizens, especially those had bipartisan support in the Com- who were in Bali. The enthusiasm mittee stages. The centre-piece of that of representatives from thousands The Impact of Bali on the USA legislation and other competing Bills of US municipalities and US states is the ‘cap and trade’ of greenhouse There is a sceptical view that Bali, which had adopted measures to fight gases. Many observers expect legisla- or for that matter any international climate change was striking. Most will tion like it to be signed by the new climate change negotiation, will not have returned home with a sense of president. On the international front, influence US domestic politics and renewed enthusiasm and responsibility in September, the USA initiated a legislation. I beg to differ for three to make a success of the upcoming dialogue with the 17 major emitters reasons. negotiations. of CO , under the Major Economies 2 First, these negotiations have al- Process, to exchange views on how to ready begun to have an influence. US Impact on the International ‘reduce greenhouse gas emissions, pro- International scientific and economic Negotiations vide for energy security, and support opinion has started to influence a The USA will influence the direction economic prosperity’ (US Department growing body of the population and the outcome of international of State). and decision makers in the USA; negotiations. Five issues will be Some of the factors behind this change proposed legislation in fact adopts paramount. of stance are domestic. The Democrat- emissions reductions that reflect the ic Party victory in the 2006 elections international consensus over the First, the USA will be concerned put climate change high on the federal longer term. The fact that China and about ‘competitiveness’. It will resist agenda. In addition, the ‘purple’, or India are major emitters of greenhouse accepting obligations that favour its independent, vote that makes up 30 gases, and that those countries pose competitors, in particular China.

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The environmental concern about hand, participants were concerned that emerging powers to cooperate. There ‘leakage’ is far less influential than the decentralised architecture would is room for optimism. the economic one – namely the not be up sufficient to meet the global Finally, US influence will be greater loss of competitiveness, leading to challenge. The question was how and and more obvious once it passes industrial relocation and the loss of when to bring the two architectures federal legislation. It is possible that jobs. This concern is easily converted together. such legislation will be passed in time into protectionism, which can be Third, the USA will support meaning- to reach an agreement at Copenhagen found in proposed US climate change in December 2009. Much will depend legislation. The Leiberman-Warner ful action to reduce deforestation and forest degradation in developing on whether the new president decides Bill has a clause that aims to ensure to push hard personally for domestic that other countries do not free-ride. countries. The Kyoto regime offers re- wards for storing carbon in trees only legislation and an international agree- Imports from large countries that do ment. Obviously, the US decision over free-ride will be ‘taxed’ at the border, in cases of reforestation or planting new forests. However, the evidence its own emissions targets will have a with importers having to buy emis- direct influence on the negotiations. sion certificates to reflect the carbon suggests that destruction of tropi- content of their products. cal forests is causing as much as 20 percent of greenhouse gas emissions. Climate Change Policies, Energy This is both good and bad news. It The new approach identified in the Security and International Energy is good news that the USA is deter- Bali Action Plan would turn Indonesia Markets mined to fight for an agreement that and Brazil into two of the world’s is enforceable and that includes all largest ‘emitters’, lessening somewhat To understand the US position on cli- the major emitters. One of the worst the pressure on developed countries. mate change it is best to see it through features of the Kyoto Protocol is that Federal US legislation is also likely the lens of US energy ‘security’ policy it is not enforceable, and that it left to support ‘offset’ projects to protect – i.e. reducing US dependence on oil out major emitters. With the USA the forests of the poorest countries imports from ‘unstable’ or ‘hostile’ involved, an agreement has a much because they do not compete directly countries. The bulk of world oil and higher probability of being effective. with economic activity in the United gas reserves are now under the control States. of national oil companies (NOCs), The bad news is that proposed US which are also moving quickly into legislation involves unilateral trade trading, refining, LNG trains and sanctions that could lead to sanctions electricity generation. The recent being imposed by other countries “Meanwhile, the USA announcement by Gazprom to partner and even to trade war. Assuming becomes increasingly with Nigeria in developing their energy sector is a sign of the times. these border taxes were simply a dependent on oil and gas way of equalising carbon taxes paid Meanwhile, the USA becomes in- by domestic and foreign producers, imports from NOCs in creasingly dependent on oil and gas they would not necessarily be against countries that are perceived imports from NOCs in countries that WTO rules. However, it is easy to see as hostile or unstable are perceived as hostile or unstable how domestic climate change legisla- politically” politically. In total, the USA depends tion may become, or be perceived as, a on imports for 60 percent of its protectionist trade weapon. liquid fuel consumption. In 2006, it imported 4.8 million b/d of crude oil Second, the USA will seek flex- Fourth, the Major Economies Proc- (48 percent of imports) from OPEC ibility. One of the more interesting ess is important. Some observers are countries, including 2.2 million b/d discussions in Bali had to do with the convinced that the USA intends to from the Persian Gulf. The USA is architecture of the post-2012 climate use this forum to define the terms concerned that reliance on these coun- change regime. In particular, would of the climate change debate and to tries will grow further. In the face of it be centralised (like the Kyoto propose a solution that the rest of this perceived threat, it is looking for Protocol) with agreed national emis- the world will have to accept as a fait alternatives, at least two of which have sions limits at least for all developed accompli. This could undermine the important implications for climate countries and a set of common rules UN-led negotiations, especially if a change and for world energy markets: for trade? Or would it be a bottom- large number of smaller countries feel the defence of domestic coal and the up, decentralised, model that was disadvantaged. On the other hand, an promotion of energy efficiency. based on a set of national, regional, agreement among the major econo- sector and voluntary agreements? The mies over climate change could go a The US intends to defend its coal sense in Bali was that the decentralised long way towards defining a genuinely industry. The US EIA expects coal model is a reality and that the world workable solution. And to achieve use to grow by 1.1 percent per annum simply does not have the luxury to such an agreement, the developed up to 2030, mainly for new electricity wait for a comprehensive, centralised countries and particularly the USA generation (which already accounts top-down agreement. On the other will have to convince the major for 50 percent of generation), but also

21 OXFORD ENERGY FORUM FEBRUARY 2008 for new Coal to Liquid (CTL) plants. significantly reduce energy demand There are also proposals in the USA and, along with other measures, put to make electric cars a competitive al- downward pressure on world oil ternative for road transport. Given the prices. Personal importance of coal in Chinese, Indian Commentary and US growth plans, investment in Conclusions new coal-based generation and CTL plants would undermine all other The USA came to Bali determined Nader Sultan to influence the framework for the global efforts to cap CO2 emissions if there were no means of capturing and upcoming negotiations over the storing the carbon released during the post-2012 climate change framework. lives of those plants. It achieved a number of objectives, in particular avoiding any reference to Over the last few years, there have The USA will take a lead in promot- specific targets for cutting greenhouse been many articles, and even a best- ing carbon capture and storage (CCS) gas. Nevertheless, the Action Plan selling book, warning us about the technology. If CCS is successful and is a reasonable compromise and did potential crisis the world faces as a coal use grows as planned, this will achieve more than many participants result of dwindling oil reserves. The lower demand for other internation- had expected. It calls for ‘deep cuts’ in expression ‘peak oil’ has entered the ally traded fuels. If CCS is not emissions and fixes a deadline of 2009 dictionary of most energy journalists successfully deployed on a widespread for reaching an agreement. It promises basis, and it is still far from clear that as well as US politicians! more money for poor countries to it will be, then either coal use will not It may be because I worked for 34 adapt to climate change and to adopt grow as planned, or the world will years at a reserve rich National Oil green technologies. And although it face serious climate change problems Company, that I do not share this does not specify which countries will even sooner than expected. fear. I am in agreement with the IEA bear the burden of emission reduc- who recently acknowledged that there tions, all countries will have to play are sufficient energy reserves to meet their part. the projected growth in demand until “if the entire USA were The US decision to participate in the 2030. However, a critical challenge to achieve the per capita UN-led negotiations over climate for the upstream in the medium term change is an important turning point. is the scarce resource capacity above electricity consumption Without the United States at the table, the ground. What I am referring to of California by 2020, US the prospects of a meaningful climate include the human capital dedicated electricity demand would change agreement are very poor. The to the industry, the capacity avail- USA will be in a position to bring fall by over half” able at engineering and procurement significant influence and new ideas companies, the availability of raw to the table, once they have passed materials for construction, and the their own domestic climate change capacity at building yards. Second, US policies to improve energy legislation. The latter will depend As this issue is affecting all parts of efficiency could put downward pressure fundamentally on two things: who the energy value chain, my concern is on world oil prices. The USA is a large the next president is and, ironically, twofold; firstly, that we are not giving and inefficient consumer of energy, the weather. The more dramatic the especially of domestic electricity and weather becomes, the more likely we enough attention to it; and secondly, it transport fuels. It consumes more are to see US legislation being passed is not clear how long the situation will than twice the amount of energy per and an international agreement in last. So the question is, as we enter capita as the rest of the OECD, and Copenhagen in December 2009. the uncharted waters of $100 oil, are more than ten times as much as the we also facing a prolonged resource non-OECD countries. Although some capacity crunch? of this can be explained by distances What is unique about the current travelled and industrial activity, the period is that all the diverse activi- potential savings are enormous. For The editor welcomes ties in the energy chain (upstream, example, if the entire USA were downstream, chemicals, tankers and to achieve the per capita electricity letters contributing to so on) have enjoyed parallel financial consumption of California by 2020, success and now have massive and US electricity demand would fall by debates in this issue concurrent expansion plans. This is a over half. And if the USA were to departure from a history of different adopt the 40 mpg standards being pro- cycles of investment. posed by presidential candidates, US The investment challenge in the oil imports would fall steadily. Energy Middle East is a good example of the efficiency measures could therefore issue.

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APICORP projects that the energy increase is attributed to EPC costs, I believe that there is a need for a investment requirement in the MENA of which some 30 percent is due to greater pooling of resources between region for the period 2008–2012 is raw materials. Bechtel estimates that the key players in the industry. At a about $490 billion. Petrochemicals the cost of building an LNG plant simple level it could just be that IOCs capacity is expected to double in the is currently close to $600 t/y versus and NOCs add a new dimension to next ten years. Qatar alone anticipates $200 t/y in 2000. their potential cooperation, whereby $70 billion in energy investments over The second is the potential negative IOCs provide additional resources the next few years. impact on project economics – for in- to the NOCs to meet their national Parallel to this vast expansion in the stance in refining and petrochemicals. objectives. energy sector, the region is also enjoy- What assumptions about future refin- However, if both the NOCs and ing an economic boom. So we are ing margins should a company make IOCs wish to achieve their mutual witnessing huge construction projects when it assesses a grassroots refinery goal – to provide sustainable and in hotels, shopping malls and offices. project in the region that involves secure energy to feed the insatiable This combination of a general eco- the fantastic costs of $16 billion? No appetite of the developing countries nomic boom and the massive energy realistic assumptions will make the – then I believe that it is important to investments has caused a shortage in project profitable. go beyond simple joint ventures and critical resources such as manpower, In the upstream, the Middle East, consider strategic alliances across the not only engineering and construction because of its relatively low lifecycle full energy value chain. What I am labour but also skilled engineers with production costs, should be able to suggesting is that individual IOCs experience, materials and equipment, absorb high project costs. However, and NOCs should embrace the model EPC contractor capacity and finally this does not apply to other regions. of a broad strategic alliance which construction logistics. A recent Goldman Sachs report in- extends beyond individual projects As one example of the huge man- dicated that some 4 million bpd of and countries. Such an alliance could power demand, in Saudi Arabia, Saudi marginal oil fields now cost $70/bbl cover working together globally in Aramco and SABIC will require more to produce. Will this lead to a higher one activity only, say the upstream, or than 200,000 construction workers in cost of the marginal supply, thus set- across a number of activities, such as the period 2007–09 to work on $95 ting a floor to oil prices? chemicals, downstream and so on. billion of projects. At the same time, The third clear impact has been As an example, in Kuwait, on the across all the businesses in the Gulf, delays or cancellations of projects. We chemicals front, we were able to take whether it is the service or industrial are all aware of the higher projected our relationship with Dow Chemical sectors, senior executives commonly costs and delays to the ‘mega’ up- beyond an individual joint venture cite that the most critical strategic stream projects such as Sakhalin and into a global strategic alliance, tied to issue they face is to recruit experi- Kashagan. The Kuwait fourth refinery a portfolio of products. In the process enced staff for their rapidly expanding is already two years behind schedule genuine additional value was created businesses. and the same applies to many projects for each side. On the construction side, the reality across the Middle East. In Qatar, I believe that such a model can is that in the last two years there has Exxon cancelled its GTL project as equally work between IOCs and also been a ‘sellers’ market’ for EPC cost estimates rose to $20bn. Recently NOCs. The complex challenges that contractors in the region. However to India postponed an upstream licensing the industry faces today, whether it be fair to them, these contractors are round due to a shortage of rigs. These concerns below the ground reserves or recovering from years of poor results delays are leading to a prolonged above the surface resources, requires and a prolonged buyer’s market. tightness in the energy supply chain that we consider new structures for So what are the implications of this across all the sectors. cooperation, more suited to aligning resource tightness? With this background, some may the interests of each side. The two The first and most obvious one even argue that we are in a ‘perfect sides bring complementary assets and is the increased cost of new projects storm’, where all the elements con- capabilities to the table. The strategic leading to higher capital and operating cerning resource capacity both above alliance model is a better mechanism costs. As an example, Shell’s GTL and below the ground are acting to create mutual value. project in Qatar is now rumoured to against us. cost close to $18bn, a vast increase Although some steps can be taken from an original estimate of $5bn. In by individual companies to mitigate Kuwait, bids for the fourth refinery the impact of high project costs, the came in at $15–16bn versus a budget signs in a $100 per barrel oil world of $6bn. At the same time, costs of are there to indicate that investors will petrochemical projects in Saudi Ara- be competing for the same scarce re- bia have increased about 60 percent sources, whether it is for rigs or expe- in the last 18 months. Most of the rienced engineers or other resources.

23 OXFORD ENERGY FORUM FEBRUARY 2008 Asinus Muses

The road to Bali …and planes and ships From which end? Factoogles.

Who won what at Bali? Some say the The ubiquitous owner of Virgin Air- I also wanted to combat detailed mis- USA because it convinced others that it lines with the name like livestock feed information about livestock emissions. had entered into the spirit of environ- (Rich Hard Bran Some) has plans to Scientific sources say that 80 percent of mentalism; others say the EU because run one engine of a 747 on ethanol, but methane emissions are due to burping of their cuddly behaviour towards the I could not persuade him to fly me to and not to the emission of wind from group of 77; others say the 77 won be- Bali running each engine on a different the other end. That the popular view is cause everyone else had to please them. biofuel. I did, however, find the Con- the opposite can be established by the My comrades and I, however, are in no tainer Shipping Information Service, use of a factoogle. This is not a scientific doubt that, as always, the bipeds won. recently set up to improve the bad fact but a presumption derived from This is the verdict of the Quadruped environmental image of long distance comparing numbers of hits in two or International to which Asinus proudly shipping. They claim that the carbon more Google searches. For instance, a belongs. emissions from transporting goods in search for ‘burp AND global warming’ a container ship is about one fifth of produced 56,500 hits while ‘fart AND QUILS and QUIPS the emissions from road traffic and one global warming’ produce as many as fiftieth of those from air transport. This 201,000. Fortunately, this whole issue To be specific, my section of the organi- sounded good to me so I selected a ship will soon be illuminated by modern sation is the Quadruped International for the trip. BHV science. The Swedish University Livestock Section (QUILS). We aim for Agricultural Sciences has received to represent what FAO statistics say To what end? $590,000 from the government to inves- are the roughly 3 billion quadruped tigate ‘how bovine methane levels are livestock in the world (dominated by I went to Bali to denounce the bi- affected by the animals’ diet…the cows 1.4 billion cattle and including 40 mil- ped plot to blame global warming on in the study will be stuck on different lion of what the FAO calls ‘asses’). On quadripeds, most particularly on the diets and the methane monitored by a environmental questions we often work emissions of methane from livestock. device strapped to their necks’ (from hoof-in-paw with the more conservative The most influential source of this ‘Swedes to probe cow-belch threat to and pro-biped Quadruped International slanderous idea is a document produced planet’, The Register (internet jour- Pets Section (QUIPS). It was QUILS, in 2006 by the FAO (part of the Biped nal)). When will somebody do this to however, which sent me as its observer International known as the United Na- BHVs? to the conference at Bali. tions). Livestock’s Long Shadow –Envi- ronmental Issues and Options blames My intervention at Bali Trains… livestock for producing 18 percent of all greenhouse gas emissions – more than Alas and ironically my contribution to Getting to Bali was a problem. There the whole transport sector. An imperti- the debate at Bali did not take place. are no facilities for voluntary quadru- nent suggestion, given that virtually all The owners of the shipping line on ped transport in the world. The trans- livestock are slaves of bipeds, human which I travelled had decided, as a port companies, however, stung as if variety (BHVs), and so they produce contribution to reducing carbon emis- by a sextuped by accusations that they emissions while they are being fattened, sions, to reduce the ship’s speed from are responsible for global warming, are skinned, or ridden or forced to pull or 24 to 20 knots which meant that we falling over themselves offering green carry heaving loads by BHVs. So, in arrived in Bali to find the BHVs in their transport. So Eurostar claim that all our opinion, all quadruped emissions final session, doing their equivalent Eurostar journeys are now carbon neu- should be put on the negative side of the of braying, barking, mooing and even tral, meaning that they pay (in advance) account of BHVs. With this argument some crying. Next time I may get there something in the order of £500,000 a I hoped to join China which is also because at the end of January a giant year to carbon reducing schemes. So accused of excessive emissions. Many version of a wonderful new device (the you travel safe in the knowledge that of these, however, arise from making shape of a modern parachute), was due the carbon that Eurostar is churning exports to the developed countries. to be attached to a transatlantic ship to out on your behalf is somewhere being Emissions should surely be attributed increase its speed without increasing its breathed in by a little tree. But it could not to the producers of goods and emissions. It is called a sail. BHVs are only get me to Paris. services but to their consumers. so clever.

Oxford Energy Forum. ISSN 0959-7727. Published by Oxford Institute for Energy Studies, 57 Woodstock Road, Oxford OX2 6FA, United Kingdom. Registered Charity 286084. Tel: (0)1865 311377. Fax: (0)1865 310527. E-Mail: [email protected] EDITOR: Robert Mabro. Annual Subscription (four issues) £45/$85/a65. © Oxford Institute for Energy Studies, 2008. Indexing/Abstracting: The Oxford Energy Forum is indexed and/or abstracted in PAIS International, ABI/IN- FORM, Fuel and Energy Abstracts, Environment Abstracts, ETDE and CSA Human Population and the Environment 24