Energy (In)Security and the World’s First Demand Shock

(Photo: AFP)

Today the FT published their 2007 Energy supplement, which includes a plethora of important information on the energy industry and the geopolitics of security of supply. The newspaper is quite timely with this report, coinciding with a number of panicked news headlines announcing a new gloomy report from the IEA, and bold claims of the world’s first “demand-led energy shock.” As noted below, the special section also carries an article by Bob. After the cut, I share some of the best bits from Ed Crooks, Catherine Belton, Dino Mahtani and others.

From Ed Crooks in the FT: “Security of supply: Delusional dream of independence“

Similarly in Europe, nature has ensured that the abundant gas reserves that are easiest to deliver to consumers are in Russia, and there is no escaping that fact. A recent Cera report observed that while liquefied natural gas might provide some alternative supply options for the EU, “natural gas by pipeline will remain the ‘fuel of default’,” while for Russia the EU was likely to remain the only substantial export market. As a result, it argued, both sides needed to “protect and sustain the relationship in order to achieve realistic and sustainable interdependence”.However, the International Energy Agency warned in its latest World Energy Outlook that the rapid growth in global energy demand, which is making consuming countries increasingly dependent on imported oil and gas, brought mounting risks.The market shares and hence the market power of the Middle Eastern countries and Russia are set to grow, giving them more power to raise oil and gas prices and increasing the risk of disruptions to supply through a few critical trade routes. In that environment, the IEA says, it makes sense for consuming countries to curb their energy use and open up alternative sources of supply.While the dependence between producers and consumers may be mutual, some countries are more dependant than others.

From Catherine Belton in the FT: “Russia: Moscow’s tightening grip“

Already, Gazprom is spending more on expanding into other sectors of the economy than on developing fields. State oil giant Rosneft has been unable to progress investment plans for this year and next because it has been so busy integrating its acquisition of Yukos, once Russia’s biggest oil major. But Leonid Fedun, Lukoil’s deputy chief, says $300bn is needed just to keep Russia’s oil production at existing levels for nine years.Gas production, meanwhile, is already declining, and the International Energy Agency has warned Gazprom might not be able to meet demand at home and abroad by the end of the decade if it does not invest. But against that backdrop, some analysts say, Gazprom is showing a readiness to strike deals with foreign partners to share the risks and technical challenges of developing the next generation of supergiants.The company last year granted BASF of Germany a 25 per cent stake in the operating company to develop the mid-sized YuznoyeRusskoye gas field. In return, BASF agreed Gazprom could raise its stake in its Wingas joint venture for distributing gas in Germany to 50 per cent minus one share. As Gazprom seeks stakes in downstream distribution assets in Europe, it has looked to conclude similar deals for access to Russian gas fields with E.ON and BP.The new model for partnership, however, analysts say, could be threatened by European Union plans to guard against Russia’s energy clout amid fears Moscow wants to use energy as a political weapon.This autumn, the European Commission forwarded a proposal to restrict Gazprom and other non-EU companies access to European distribution markets. Mr Blakey warns that, without a great deal of care, the EU risks undermining energy security by forwarding such plans.

From Dino Mahtani in the FT: “Resource nationalism: State groups give majors a run for their money“

In the meantime, high oil prices have deepened the pockets of national oil companies that are not subject to the taxes or capital expenditure requirements of the many international companies they deal with. “There is an enormous tectonic shift going on,” says Robin West, chairman of PFC Energy, the consultancy. “There is a difference between oil business and oil wealth and the initiative is shifting away from the international oil companies.”Recently, there have been a number of high-profile expropriations that illustrate just how that balance is shifting, most notably Gazprom’s acquisition of a majority stake in Shell’s Sakhalin-2 project in Russia late last year. Since then other countries have flexed their muscles. Venezuela’s PdVSA in June took over ExxonMobil’s and ConocoPhillips’ assets in the country after the companies chose to walk away and seek compensation rather than hand over greater control.Kazakhstan has also stepped up pressure on a consortium led by Eni to hand over a greater share of its stake in the Kashagan field, one of the world’s biggest, to the state owned company KazMunaiGaz.Even a country such as Nigeria, long considered by industry executives as having relatively easy commercial terms, is looking to review contracts on offshore developments as part of a strategy of revamping its national oil company, NNPC.While national oil companies everywhere try to redefine themselves, many are far more advanced than others when it comes to their scale, scope and competence. “Some are clearly determined to be significant international players,” says Daniel Yergin, chairman of Cambridge Energy Research Associates. “But others do not have the global perspective.”

From Ed Crooks in the FT: Who’s who: Ten top powers to be reckoned with

Victor KhristenkoIndustry and energy minister, RussiaVictor Khristenko has led Russia’s energy policy when the country, under the leadership of Vladimir Putin, has pursued a strategy of taking control of strategic energy projects. Government pressure helped secure controlling stakes for Gazprom, the state-controlled gas company, in Royal Dutch Shell’s Sakhalin 2, which was operated on an agreement signed under Boris Yeltsin, Mr Putin’s predecessor, and in the Kovykta gas field, which was controlled by BP’s 50 per cent joint venture TNK-BP thanks to a deal done in the early years of Mr Putin’s presidency. Now observers detect a more conciliatory approach from Mr Khristenko and the rest of Mr Putin’s administration, as evidenced by the offers to let Total of France and StatoilHydro share in Gazprom’s vast Shtokman project. Nevertheless, he is still outspoken in support of Russian interests, recently criticising the European Union for its plans to restrict Russian ownership of energy assets in the EU. Born in 1957, he was an academic before moving into local politics in 1991 and national politics in 1997. He is spoken of as a future chairman or chief executive of Gazprom, where he has been on the board since 2002.