Issue 378 / April 2013 Energy Economist EU: new technology, new market model 3 Finding a policy path that meets the EU’s troika of energy sector goals was never going to be easy, but the number of perverse economic effects in EU electricity markets is growing. Policy-makers have created a sector heavily split between subsidization and ‘energy-only’ competition. Neither element appears sustainable and the feedback effects between the two are negative. Ross McCracken Myanmar sets out market stall 6 Myanmar is rushing out of the cold after years of political controversy and sanctions. Having sold most of its current and upcoming gas supply for export, it needs a surge in new oil and gas exploration to support domestic economic growth. Explorers, warmly welcomed, are circling warily looking for deals, but fear that some of the country’s investment terms may reflect government inexperience. Chris Cragg East Mediterranean gas options 10 Financial meltdown in Cyprus and a surprise rapprochement between Israel and Turkey could alter the course of East Mediterranean gas development. Proposals for an Israel- Turkey gas pipe may be back on the table, despite the risk of competition with cheap supplies from Iraqi Kurdistan. Cyprus’ ability to develop its gas resources alone looks limited, but its need for revenue has become much more urgent. David O’Byrne The political tailwind of Superstorm Sandy 13 What a difference a storm can make. The political tailwind of Superstorm Sandy may prove more powerful than the storm itself. Sandy eroded not only the shoreline of the US Northeast last October, but political support for electric monopolies that has held for decades. Proposals are being put forward that these lifetime monopolies should face periodic auctions to retain their franchises. Elisa Wood Egyptian stability 16 The removal of Hosni Mubarak from power lifted the lid on the simmering discontent of Egyptian politics. Two years on from the Arab Spring, the military has shown that it is prepared to tolerate an Islamist government. However, questions on the imposition of Sharia law, on economic policy, on relations with the West, and on Egypt’s place in the wider Middle East remain unanswered. Neil Ford Gas glorious gas 21 Shale gas and oil has increased the energy sector’s susceptibility to a belief in revolutions. Thanks to Japanese research, a new enfant terrible may be emerging – methane hydrates. Not only does the research highlight the dichotomy between the supposed consensus on global warming and the direction of technological innovation, but gas hydrates have their own special place on the Godzilla scale of disaster. Black Sea oil and gas 24 Exploration in the Black Sea has been overshadowed by large discoveries elsewhere. The region lacks support services, making deepwater drilling, in particular, expensive. Corruption, unstable political and regulatory environments complicate operations in many of the littoral states. Beyond the state-run operations of Ukraine, exploration remains piecemeal, last year’s significant gas discovery in Romanian waters notwithstanding. www.platts.com The McGraw Hill Companies EDITORIAL Contents Cypriot haircut Features Apart from the general wisdom of taking what might be EU: new technology, new market model 3 Russian mob money without permission, the Eurogroup, Myanmar sets out market stall 6 IMF and European Central Bank have set a terrible East Mediterranean gas options 10 precedent in asking Cypriot bank depositors to undergo The political tailwind of Superstorm Sandy 13 a severe haircut. Regardless of the origin of the money, Egyptian stability 16 banks depend on confidence that deposits are safe. The Gas glorious gas 21 ‘troika’ have shown they are not. Black Sea oil and gas 24 There is now every reason to expect a massive destabilizing outflow of funds from Cypriot banks. This Events/Letters may dismantle a dubious offshore banking industry, but dodgy money won’t be the only funds to leave. Savers Forthcoming conferences and events 27 will also look at the other financially weak members of Letter from Jo’burg: BHP’s power deal exposed 28 the Eurozone and reconsider whether their deposits are Letter from Sofia: Domestic devils 29 safe there too. If the Eurogroup is prepared to smash Letter from Moscow: Chinese agreements 30 and grab in one country why not in another? A Cypriot exit Letter from Washington: More is less 31 from the Eurozone may be averted, but only at the cost Letter from Brussels: Skint EU mulls 2030 targets 32 of long-term recession on the island and a severe dent in the confidence of savings across the entire currency bloc. Market News Highlights For the European energy sector, the Republic of China reforms oil product pricing mechanism 33 Cyprus is a small market, but the impact of austerity Canada advances Arctic E&P prospects 34 across the Eurozone more broadly means further years PDVSA reports heavy oil progress ahead of snap election 35 of miniscule growth in energy demand. In a sector Libya starts oil and gas law revisions 36 undergoing significant structural change, it is hard to see Ukraine negotiating non-Russian gas imports 37 where – in such a low growth environment – the billions Japanese utilties look to diversify LNG supplies 38 of euros of investment will come from that are needed Morocco set for a series of exploration wells 39 to make the changes demanded by policy makers. Indonesia formulating coal production controls 40 For both bank bailouts and energy sector investment, Cheap coal won’t necessarily boost imports 41 the provider of last resort is ultimately the cash-strapped Wildcat strikes hit South African mining sector 42 consumer – as both Cypriots and Bulgarians have UAE commissions world’s first 100 MW CSP plant 43 discovered all too directly of late. Tax payers are already ACAL heralds fuel cell breakthrough 44 being tapped across the EU by the growth of renewables Trends in Middle Eastern power generation 45 subsidies and socialized levies for investment in transmission and distribution. This represents a Data fundamental deviation from the intended private sector sources of funding that the EU’s internal energy market EU carbon prices rise on signs of intervention support 46 is supposed to promote, one that will likely prove Brent drops $6/b in March 47 unsustainable. — [email protected] Energy Economist Issue 378 / April 2013 ISSN: 0262-7108 Editor Energy Economist is published monthly by Platts, a division of The McGraw-Hill Companies, Ross McCracken registered office: 20 Canada Square, Canary Wharf, London, UK, E14 5LH. To reach Platts [email protected] Officers of the Corporation: Harold McGraw III, Chairman, President and Chief Executive E-mail:[email protected] Officer; Kenneth Vittor, Executive Vice President and General Counsel; Jack F. 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Corporate policy prohibits editorial personnel from holding any financial interest in compa- Asia Pacific Sarah Cottle nies they cover and from disclosing information prior to the publication date of an issue. Tel:+65-6530-6430 Editorial Director, Global Power Copyright © 2013 by Platts, The McGraw-Hill Companies, Inc. Larry Foster Permission is granted for those registered with the Copyright Clearance Center (CCC) to Advertising Vice President, Editorial photocopy material herein for internal reference or personal use only, provided that appro- Tel : +1-720-548-5508 Dan Tanz priate payment is made to the CCC, 222 Rosewood Drive, Danvers, MA 01923, phone (978) 750-8400. Reproduction in any other form, or for any other purpose, is forbidden Platts President without express permission of The McGraw-Hill Companies, Inc. For article reprints con- Larry Neal tact: The YGS Group, phone +1-717-505-9701 x105 Text-only archives available on Dialog File 624, Data Star, Factiva, LexisNexis, and Westlaw. Manager, Advertisement Sales Platts is a trademark of The McGraw-Hill Companies, Inc. Kacey Comstock The McGraw Hill Companies 2 ENERGY ECONOMIST / ISSUE 378 / APRIL 2013 ANALYSIS EUROPEAN UNION POWER EU: new technology, new market model Finding a policy path that meets the EU’s troika of energy sector goals – affordability, sustainability and security – was never going to be easy, but the number of perverse economic effects in EU electricity markets is growing. Having spent years in pursuit of smooth functioning markets, policy-makers have created a sector heavily split between subsidization and competition. Neither element appears sustainable and the feedback effects between the two are negative. Ross McCracken Thuega Aktiengesellshaft, a conglomerate of 100 Policy reflected the market economics embedded in the German municipal energy utilities, has published a paper EU’s DNA – its treaties. The aim was to roll back the calling for a new energy market design. The report says state, break-up monopolies and introduce competition at the combination of long-term Feed-in Tariffs for every level from generation to transmission and renewables combined with an energy-only market for distribution in pursuit of electricity at least cost. This conventional power plants based on marginal cost “is drive was adopted with differing levels of enthusiasm by not suitable to implement the energy revolution.” member states, those less neoclassically-inclined modifying, delaying and disrupting the deregulatory thrust The group proposes a model that integrates both of policy over decades.