Tag Archives: US

Nabucco, and the distant love of Europe

Nine lives or no lives? That is the prospect for Nabucco.

Noise or game changing events: another round of alternative pipeline plans, the re-positioning of political actors, makes another act in the Nabucco opera either more intriguing or increases the restlessness of the audience.

Separate actions inflict little wounds on Nabucco but collective cuts may be eroding the ground underneath. Does the U.S. still fully support Nabucco? What’s the purpose and/or reality of  the new South East Europe Pipeline project?

Will there be any life for Nabucco?

All these questions lead to separate and diverse perspectives of what the future may hold for Nabucco. The doubts begin to settle in as the relationship between EU backers and the governments in the two distant regions move beyond the courting phase of their relationship and seek to build a solid gas link.

Reassessment of relations

There comes points in a long-term relationship where an assessment of what each partner wants…. is it true love, infatuation or is there a true coupling where each partner brings important elements to the relationship? Europe must decide whether it wants to develop the relationship further with the countries of the Caucases and Central Asia. The recent – warning shot – provided by the U.S. State Department Special Envoy for Eurasian Energy, Richard Morningstar should begin to focus attention in Brussels. The ‘misinterpreted’ comments that smaller pipeline projects that are more commercially viable may be better.  While the U.S. embassy rushed out a ‘clarification’ it still states that the sooner a commercially viable pipeline is built the better.

Reality or love

There are always reasons why a relationship will fail over the long term. Particularly when you put two ‘individuals’ together from two different cultures. Maybe now is the right time to review these. What are the worries that prevent countries from the EU to solidify their relation with potential supplier countries for Nabucco?

Financial:  “How are we going to pay for it?”

Distance: “But you are so far, can we really have a long distance relationship?”

Distractions: “What if you find someone else, while I’m away?”

Parental approval: “My mother wouldn’t approve” (i.e. Mother Russia)

“Your father has other plans for you.” (i.e. US wants EU to use shale gas)

Hometown girl: “Maybe you want a girl from home.” (i.e. shale gas)

Like most love story, it is the parents that get in the way. Those guardians that seek to steer their children in the right direction. Mother Russia certainly has a strong interest to insure that the EU is only supplied by Russia. The United States, is attempting to force a gas strategy on Europe – shale gas. The recent Baker Institute Study that projects a drop in European gas dependency from 27% to 13% because of the full utilization of European shale gas, has unfortunately – I believe, influenced US policy to push the EU to delay or stop the Nabucco Pipeline. Therefore comments emerge that discourage investment into Nabucco and encourage switching to a lower capacity pipeline that is commercially viable in the short term.  Pursing the most commercially viable pipeline option today does not provide the long term boost to security of supply nor provide the foundation the EU needs to have gas fill its power plants.

Multilateral and multicultural relations are at the heart of everything the EU does. Also central to the EU is the role of energy – the foundation of the EU rests on energy. Providing the will and reasoned justification for building a robust pipeline that will serve the long term interests and needs of Europe requires significant commitment today. Many of the issues that are meant to derail Nabucco are not strong enough to trump the security of supply implications that expanded gas supplies, that are not controlled by Russia, offer. Just as love can overcome obstacles, the large and abstract notion of security of supply serves as the impetus to take resolute steps to cement a relationship. It is time to stop worrying about what the future in-laws think.

Skewing Geopolitics of Energy: US researchers mix French wine with Hungarian Goulash, producing gas

The potential of shale gas to alter the geopolitical landscape of energy is becoming too delicious to ignore. The recent report by researchers from the James A. Baker III Institute for Public Policy at Rice University determines that Russia will become a shriveled supplier to the European market by 2040. Russian exports  will only comprise 13% of the European gas mix, compared to 27% in 2009. The dramatic impact, as determined by the researchers, will be the scrapping of South Stream. Europe will thwart Russia’s energy weapon by utilizing the increased liquidity in the European and global gas market. The findings suggest that the overall impact on Europe, of exploited shale gas plays, will be a more secure and more US orientated Europe.

Will energy provide the context for a new Cold War between Russia and the US?

 

First, it must be stated that the authors do a robust job of developing a global model that accounts for the impact of gas extracted from shale formations. The model and the scenarios they develop do well to demonstrate the impact that recent interest into shale gas can have over the long term. In addition, expanding the analysis to consider the geopolitical ramifications is commendable. However, despite using a robust model that can adjust for regional differences, they fail to be more effective at setting up the scenarios and to account for present and future regional market and infrastructure conditions. This failure leads to wrong assumptions that may influence US foreign policy in relation to promoting shale gas technology and undermines support to the Nabucco gas pipeline project.

For this short analysis I’ll state there is a significant methodological problem that  skews how shale gas will liberate ‘Europe’ from the powerful clutches of Russia, thus enabling the Europeans to become more friendly with US foreign policy.

There are three scenarios the researchers provide that ‘demonstrate’ the impact of shale gas on the geopolitics of energy. In my own words these are:

  1. Everything global, shale gas is exploited from all countries globally
  2. Life in 2005, US shale from 2005 discoveries is used and no shale gas exploited outside the US
  3. Limited US/Everything global, US environmental  regional restrictions limit US output

Developing US foreign policy advice based on these limited and constrained scenarios only extends the distorted/neglected picture that US policy makers have on Europe, and more specifically Central Eastern Europe (CEE) and South East Europe (SEE). This is where my criticism lies. If the researchers are able to account for regional variations in the US, then surely, they can also develop a scenario where regional variations in Europe are accounted for. Painting Europe with a single brush obscures regional variations. In addition, a more limited global output of shale gas should be considered in an additional scenario, as this is certainly more realistic than the first two scenarios.

The high reliance of CEE countries on Russian oil and gas supplies means defining a single European market is deeply problematic. (This reliance does not exist in Western Europe). The future does indicate the integration of the European energy network along with gas diversification through LNG. These aspects will increase security of supply in the CEE/SEE region. However, they do not exclude the need for Nabucco, as this provides another avenue for energy diversification. The authors do not present these regional variations and dependency in Europe. The extremely high gas dependency of Hungary, Bulgaria and even Poland on Russia should not be mixed with Western European countries’ ability to tap other pipelines for their sources.

Regional variation is important to consider. Nabucco is primary meant to increase the gas diversification in the CEE/SEE region – which is highly reliant on Russian gas. Therefore, if the model can account for regional US variations it should also be able to provide a scenario that accounts for European variability and the impact shale gas will have within the CEE/SEE. This would be extremely useful to have and provide a more accurate picture of the future geopolitics of energy that weighs heavily on these regions.

Shale gas is no panacea for future energy developments, as I have written before. The conclusions in this report provide some good insight into what could happen with shale gas and its global impact. However, while the authors emphasis the benefits the US can incur by the spread of the US technology, their findings are limited by neglecting more effective regional analysis in Europe and globally. More effective policy advice could be given by accounting for regional variations, particularly over Europe’s Southern Gas Corridor and the future gas relations with Russia.

Postscript: for a longer and more developed review of the study, please visit Natural Gas for Europe, where I published a more in depth assessment of the report.

 

Second Wave FDI Strategy in Energy hits SCEE

The energy and consumer resources of the SCEE region are now in play for global players. Traditionally dominated by European utilities which pushed into the region when countries began to privatize their electricity and gas distribution companies, the likes of E.ON, RWE, EDF etc… now a second wave of investment may be occurring.  It may be too soon to be calling it a full wave, but there is no doubt that constrained home markets and past expansion plans by a range of energy companies have hit a wall with the global economic meltdown resulting in new strategies being deployed.

Just as the first wave of privatizations altered the energy landscape in the SEE and CEE regions, the second wave represents strategic actions that will cement companies into the region for decades. First let’s run through the slew of stories that serve as the foundation of this proposed second wave, it looks like a grab from Cold War foes.

Today there is the setting up of the joint venture between Gazprom and the Hungarian Development Bank (MFB) called ‘éli Áramlat Magyarország’. It is the company that is meant to operate the South Stream Pipeline through Hungary.  However a decision will be made in 2011.  Although you would think that MOL would actually be involved in operating a pipeline through Hungary, it is already committed to South Stream.

The Russians are still in the headlines in the noisy affair in Croatia of whether they are or are not interested in taking over INA. They continue to deny it, and MOL continues to come under political pressure for ‘corruption’ allegations over how MOL gained control of the company from the Croatian state. Nonetheless, less file this under ‘interested FDI’. As it could be seen with the previous story that if South Stream doesn’t pass through Hungary then it would pass through Croatia, thus having to deal with the technical competence of INA-MOL. Either way, MOL and Hungary stay in the South Stream story – thus the current sour grapes between MOL and Russian Surgutneftegas may go by the wayside before 2011, when actual construction decisions on South Stream (and Nabucco – with US support) are made.

But waiting to put both these pipe dream pipeline plans into disarray is Exxon Mobil, with the aid of MOL, which continue to explore the Mako gas field in Hungary. With Mako possibly holding huge potential reserves – if it can be extracted. Two earlier tests wells have failed which may have helped to prompt Exxon Mobil to buy Texas-based XTO which has expertise in shale and tight-sands deposits.  Very useful expertise for the Hungarian tight-sands, and other countries’ deposits in the CEE region. This should mean if  gas is extractable, XTO will be able to bring the technical expertise to make it happen.

Lest we forget that we are at the beginning of a green revolution, US based Fagen Inc will be setting up a bioethanol plant in Hungary. With Hungary a top 10 global exporter of corn and wheat. Hungary may be well positioned to use its natural resources to its advantage. And this is the true story of the second wave of foreign investment into the region.

This partial list of FDI, coming out within the same week, does indicate change in how foreign companies are participating in the local energy markets.  There is much more activity on the production and resource provision side then on the consumer-services side of the business chain. This represents a maturing of the business market in the region. The privatization of distribution companies was ripe for the injection of private capital which governments lacked at the time and for managerial expertise. The newest round is focused more on investments of energy resources that feed into the consumer side of the business. The result will be a new supply sources that will compliment existing sources. From a security of supply view, diversification of sources is a good thing. But part of any evaluation of security of supply are political and geopolitical elements.

The competing/complimantary projects  (depending who you talk to) of Nabucco and South Stream no doubt must be assessed from a geopolitical point of view. But I think that is for another posting. What is important is that the investments by these companies represent a long-term regional investment. The necessary skill sets will be fostered with local talent and infrastructure improved. This is a good start to what will become a larger wave of investments set to transform the infrastructure for energy production to low and zero carbon energy sources. Gas and ethanol are key in the near and mid-term transition process. Expertise and the development of infrastructure in these businesses will lead the transformation necessary to reduce the regional carbon footprint.

Update: to underscore this second wave of investments, and into renewables there is now this story:

The European Bank for Reconstruction and Development (EBRD) has decided to invest up to EUR 125 million to take a 25% stake in the Hungarian and Polish subsidiaries of Iberdrola Renovables. link