The major trends of 2015’s world energy have been largely set in the second half of 2014. Undoubtedly, the stunning oil price plunge since past June is the overwhelming development, with major economic and political effects of global scale. Ample consequences have already followed, concerning the patterns of energy consumption and the prospects of technology and infrastructure investments, as well as the economic and geopolitical standing of quite a few oil and gas producing nations.
RADU DUDĂU
A distinctive factor is the expectation that a global agreement on binding carbon emission targets be reached in November 2015 upon the Paris COP21 conference on climate change. This expectation is driven by goals largely opposed to the current fossil fuel-based world economy. However, the energy market trends are affecting the efficacy of climate policies, since the attractiveness of investments in renewable energy sources (RES) and energy efficiency diminishes in a market of cheap and plentiful diesel and gasoline.
In 2015, Romania will be further on dominated by debates about the natural gas price liberalization and the taxation regime in the oil and gas industry. The contentious topic of the past couple of years – shale gas – has uncertain geological prospects. The elements of a final investment decision for the Black Sea deep-water gas will likely come to a head, provided geology goes along and a sound transport solution of that gas output will have been worked out.
The oil and gas price slump
The 50% fall of the Brent oil barrel since June 2014 to slightly over $50 in early January 2015 has stunned through its magnitude. In general terms, the root causes are familiar: oil oversupply resulting from abundant non-OPEC sources (American shale, Canadian oil sands, Brazilian presalt, but also record-level Russian oil) and weak demand in China and the EU.
Some oil producers have suffered tremendous costs. The more they relied on price expectations over $100 a barrel in their state budgets, the worse they were affected. Venezuela and Iran are certainly in that category, although most eyes are on Russia’s plight. Nigeria and Angola are threatened by default, and Libya and Iraq are still marred in internal military conflict.
To be sure, not just oil producing states and their NOCs have miscalculated, but also top-tier banks and consulting companies in the West, who deemed a persistent fall under $100 as inconceivable. In fact, such inflated expectations may well have fed into the producers own overconfidence.
2015 can be a year of opportunity for Romania if its regional role is better understood and acted upon by its own decision-makers
Many a pundit have been inclined to read an American plot into the oil price plunge, aimed at punishing Russia and possibly other defiant countries. However, the unignorable facts are that OPEC resolved, on its November 2014 summit in Vienna, to maintain a production level of 30 million barrels a day (mb/d), about 1.5 mb/d above its “call” – that is, the share of global output that would match current demand. To wit, the move has reflected Saudi Arabia’s decision to fight for market share and challenge non-OPEC producers, deemed unable to withstand a protracted price competition with the Gulf nations, whose barrels are much cheaper to extract.
Saudi Arabia itself has had to absorb much pain in the process, as the Kingdom’s ambitious social spending plans relied on $100 a barrel. Nonetheless, while a number of US shale companies announced plans to reduce the number of operating rigs, the economics of shale energy has proven more resilient than initially estimated, with significant output still expected at prices as low as $40. This is a significantly lower breakeven of shale activities than previously thought. In the meanwhile, OPEC countries outside of the Arabian Peninsula are already hurting much more than many non-OPEC producers.
A brief list of winners and losers of the current supply glut has the large energy consuming regions of the world – North America, China and Japan, and the EU – as having obtained an unexpected boon. Obviously, Russia (which is also constrained by lack of access to the international capital markets, because of the Western economic sanctions over the Crimean annexation) and the Opec states are the losers, while the situation of oil producing industrial countries – the US, Norway, Canada, Australia, UK – is more complex, as these are both major demand and production centers. Depending on the relative economic weights of oil production vs oil demand, such countries have lower or higher net gains from cheap oil.
There is every reason to expect that 2015 will see a drop in natural gas prices as well
Whether the oil price will continue to fall for a while – and if yes, for how long – or will bounce back later this year remains to be seen. It is though relevant to consider that given the intricate links of the oil trade throughout the financial system, the price slump reflects a deceleration of the global economy that may well take more than one year to recover.
There is every reason to expect that 2015 will see a drop in natural gas prices as well. In the EU, Gazprom’s long-term supply contracts are indexed to the price of oil, with a usual time lag of about two quarters between the two price curves. Thus, what has kept Russian gas prices above the European hub levels in recent years will turn into more ballast for the already shaken Russian gas giant.
Besides, as suggested by Financial Times’ Nick Butler, it is likely that Japan will again progressively authorize the use of nuclear power, which will depress natural gas demand – hence prices – on the Asian markets. Indeed, the huge premium that post-Fukushima Asian markets paid for natural gas – almost $20/MMBtu, more than anywhere else in the world – triggered large investments in LNG production and transport capacity worldwide. This trend is likely to stall, however, mainly because of dwindling demand in Asia, but also because of Europe’s mix of forthcoming cheaper gas supplies and slumping consumption.
The diminishing price spreads between the US, on the one hand, and the EU and Asia, on the other hand will probably restrain plans for large investments in American LNG plants. By the same token, Mozambique’s LNG plans will likely be stalled, while Australian LNG is going to face significant cost overruns. All in all, 2015 will see a “reality check for global LNG exports,” as recently put by Belfer Center’s (Harvard) Leonardo Maugeri.
Low carbon energy and RES
Low fuel prices do not square well will high investments in (still) expensive RES. Indeed, SUV sales have sizably increased in the US in the second half of 2014, while hybrid cars were in lower demand than one year earlier.
RES have grown substantially in the EU over the last few years, supported by generous subsidy schemes. The fact has contributed to diminished European demand for fossil fuel-based power generation. Yet presently, the economics of “green energy” is not so robust anymore. On the one hand, cheaper gas will probably expand its share of the electricity mix, while national concerns of the member states about industrial competitiveness, because of relatively high energy prices, have stifled enthusiasm about public subsidies for RES.
Nevertheless, clean energy investments are driven not only by market forces, but also by increasing international concerns about global warming. On November 20, China and USA – the world’s first and second largest carbon emitters – did announce the signing of a bilateral climate pact. The US committed to a target of greenhouse gas emission (GHG) cut of 26-28% as compared to 2005 levels by 2025. For its part, China has envisaged to peak its CO2 emissions around 2030 to 10 billion tons/year, and to strive to peak earlier. Also, Beijing intends to increase the share of non-fossil fuels in its primary energy mix to 20% by 2030.
There is no way that coal can continue on the long-run to be burned with unmitigated carbon emissions, so that the carbon capture and storage (CCS) technology must come into its own.
In December 2014, Lima hosted COP 20 – the 20th Conference of the Parties (over 190) to the United Nations Framework Convention on Climate Change (UNFCCC). COP20 raised high hopes for a global consensus on GHG binding targets. Nevertheless, the conference itself did not result in more than a framework agreement and the ground rules for countries to submit, in Q1 2015, proposals of national contributions to an overarching, legally binding agreement to govern climate action post-2020. This is anticipated to be agreed on at the COP21 conference in Paris, scheduled between November 3o and December 11, 2015.
There is little question that the oil and gas industry must adapt technologically and increasingly turn toward clean energy production, most likely in symbiosis with RES and clean transport and heating systems. There is no way that coal can continue on the long-run to be burned with unmitigated carbon emissions, so that the carbon capture and storage (CCS) technology must come into its own.
At the same time, governments will find it increasingly difficult to subsidize RES: the more RES expand, the more they weight in the energy bills because of their own high capex and of growing network costs they generate. It is therefore paramount that RES come into their own and become economically independent from public subsidies.
However, as mentioned, in ages of cheap oil, investments tend to stagnate – not only in O&G production, but also in RES. The countercyclical way forward is to innovate and obtain cost-sinking technologies both in the O&G and in RES sectors. Such a scenario opens up a world of plentiful and affordable energy, in which consumers can chose not only based on the lowest price, but also on principles, values, and the best available environmental knowledge. 2015 will mark a step in that direction.
Romanian energy topics for 2015
A few topics will continue to dominate the Romanian energy policy-making landscape.
The deregulation of natural gas prices, for all the clear and indisputable nature of Bucharest’s international commitments, will likely continue to be subject to political interference. Indeed, the new leadership of the Energy Department decided to postpone until July 1 the first step of the price deregulation schedule for household consumers – a step that was initially set for October 1, 2014. Unsurprisingly, the Government plans to capitalize on the coming wave of cheaper gas and low household demand in the summer time. It remains to be seen whether the European Commission – which is yet to validate the delay proposed by the Government in September 2014 in the price liberalization calendar – will agree to yet another change that risks lending an erratic note to the entire process.
Another thing to watch on the topic of gas market liberalization is the transition for non-household consumers from the formerly regulated to a liberalized, unregulated market, as of January 1, 2015. On 6 November 2014, the National Authority for Energy Regulation (ANRE) made the decision that in the brief time left till the year’s end, the gas utilities were to negotiate with their regulated clients new contracts in free market terms, or the old contracts would otherwise simply be extended with gas prices set by suppliers. Yet such a precarious information and negotiation process was not a proper start into developing a workable unregulated market.
The deregulation of natural gas prices will likely continue to be subject to political interference
The O&G fiscal regime is yet another piece of unfinished work of ample consequences. Announced as imminent for the end of 2014, a new royalties system was expected as of January 1, 2015. Instead, the Government procrastinated and referred the matter to the Parliament. The issue has been hyped in the public opinion mainly through the notion of too small a Government’s take, and accordingly used in contests of populist politics that capitalized on confusion and poor public information.
For instance, there is a widespread belief that the “old” royalties of the 2004’s Petroleum Law were due to expire at the end of 2014, yet this notion has rested on confusion about the 10-year stability clause in Petrom’s 2004 privatization contract. In effect, oil and gas royalties were fixed for 30 years as per the concession agreements closed by the title holding companies with the Romania Agency for Mineral Resources (ANRM). Therefore, new royalties can only apply to new concession agreements.
Another reason why the issue cannot just linger for yet another whole year is that ANRM announced its intention to open a new – the 11th – tender round for oil and gas perimeters this summer, hence any new fiscal O&G regime ought to enter in force before that date.
Oil and gas companies are themselves interested in clarity and predictability in fiscal and regulatory matters, generally, so they are keen to see the royalties matter decided upon and stabilized for at least 20 years.
The fate of RES and their legal support scheme – Law 220/2008 – will also need clarification. Since 2013, the number of green certificates bestowed on each RES technology type was reduced by Government Ordinance, with the difference due to be paid as of April 1, 2017. Combined with the drastic price fall of green certificates and the diminished capacity of the National Transport System of electricity to take up growing volumes of intermittent power generation, the future of Romanian RES is uncertain. The problem is only compounded in a context of low oil and gas prices, in which investments in relatively expensive RES equipment are discouraged. By the same token, costly energy efficiency spending becomes harder to justify economically. Thus, the context does not really favor climate protection actions by means of RES, energy efficiency and capped carbon emissions.
Other than the policy making sector, some major energy development directions will mostly (though by no means exclusively) depend on geology. Shale gas prospects are a case in point. The results of Chevron’s exploration works in Vaslui county, finished in 2014, will define the future of shale energy in Romania. For the Black Sea offshore, a final investment decision is expected in 2015 and, there again, deep-water geology has to play along.
Finally, 2015 will be the year of new gas transport projects, which are to connect at regional level the Southern Gas Corridor to Central Europe’s North-South Corridor. Domestically, the Black Sea coast will have to be linked to the National Transport System. One such proposal is Transgaz’s Danube Pipeline, meant to link Giurgiu to Arad and to extend to Tuzla (Constanța county). Another notable concept, Eastring, was proposed by Slovakia’s TSO, Eustream. Eastring endeavors to connect Romania’s Isaccea (Tulcea county) to Medieșu Aurit (Satu-Mare county) and go across 85 km of western Ukraine to Slovakia’s Velke Kapusany. In any event, one gas transport solution will have to be pinned down in the first months of 2015.
All-in-all, 2015 can be a year of opportunity for Romania if its regional role is better understood and acted upon.
Radu Dudău is co-founder and director of EPG. He is Associate Professor of International Relations at Bucharest University.
This article is an exctract from the EPG’s consolidated Romanian Energy Market Monitor for 2014. More of EPG’s publication can be found here.
