BEC Summary Report No:5
Navigating through new transformation and
turmoil in energy, investment and geopolitics
11 October 2016 | Lütfi Kırdar International Convention Center | Istanbul
in partnership with
Special Session of Prime Ministers and Ministers
Building bridges and forging partnerships in energy
The Bosphorus Energy Club is an exclusive membership-only gathering of senior leaders and executives in energy, investment and geopolitics. It serves as a Track-II energy diplomacy channel as well as a discreet but powerful summit of the top decision-makers for regional issues and projects in Eurasia, the MENA, the Gulf, and Southeast Europe.
Executive Chair : Mehmet Öğütçü, Executive Chairman, Global Resources Partnership, UK
Advisory Board Chairman : Michael Ancram, House of Lords, UK.
By Mehmet Öğütçü Chairman1
√ The era of hydrocarbons is not over. We like it or nor; they will still account for 70 percent of our energy mix by 2050, despite significant breakthroughs in renewables and efficiency. Many new players come in the energy market promising additional and cheaper resources, and changing the rules of the conventional game.
√ There is a growing tension between public policy and private money. The under-investment that we observe now due to lower prices and risks will become chronic and the global output of energy resources will inevitably lead to supply deficit and new unpredictable price spikes, eventually hitting both producers and consumers.
√ Even if there was an agreement today by everybody to ‘phase hydrocarbons out’ it would easily take the better part of two generations to get everything running on alternative sources, never mind the plastics, fertilizers, pesticides, pharmaceuticals and just about everything else that modern society uses them for.
√ Oil companies face a challenge: if they truly believe that a shortage is coming they need to continue investing (IEA says investment fell 24% in 2015 and 25% in 2016) or at the very least, protect core investing functions for the future, including exploration spending.
√ OPEC faces a challenge as, for the first time in its history, two low-cost, large-reserve base members signal their intention to increase production . Iran and Iraq will force Saudi Arabia to consider new approaches. Saudi Arabia will certainly not cut its own production to see Tehran and Baghdad increasing their own.
√ Gas is believed to gradually replace coal, which is a source of distress for some producers. The world is facing a proliferation of LNG supplies that are already impacting on gas markets and competing with pipeline gas. Some of the largest and most significant consuming nations are contemplating reform or unbundling, which could mean some take or pay contracts become stranded and an increasing oil price
is likely to reinforce the price arbitrage between long-term and spot pricing.
√ We still have massive and cheap resources of coal. Given the reality of climate change, any talk of coal must be clean coal, an approach which enables the utilization of the most abundant domestic energy resource so that at least the impact on the climate is minimized. Clean coal has a number of variations, but all of them involve stripping the CO2 out of the coal, either before or after it is burned and then
√ Further investments should be made in renewables, but lower oil, gas and coal prices and increased efficiency might slow this down. It is still easy to shift back to old mentalities, yet whomever adapts to the new needs of the energy economy will remain competitive in the market.
√ Renewable power is replacing or has the potential to replace fossil fuel generation in some countries. Smart grids are delivering the potential for greater interactivity with customers. And the scope for even more transformative technological breakthroughs is being taken more and more seriously all the time.
√ A breakthrough in the cost and practicality of battery storage technology could be a quantum leap enabler, opening up the possibility of off-grid customer self-sufficiency when used in combination with ‘own generation’. ‘Power to gas’ is also a potential transformative technology. All bring opportunities for power companies but many also have the effect of eating away at a utility company’s traditional revenues and undermining the traditional utility business model.
√ Pipeline politics are fascinating, but it is the smaller stuff that is really crucial: reverse flows, interconnection, LNG terminals in the right places. Cables vs pipelines are gaining added importance.
√ Unfortunately, economic and financial crisis had relegated environmental concerns to second place because of the false choice so often presented between economic growth and environmental action, with the latter treated as a luxury which could be postponed to better times. Yet, climate change has emerged as an undisputed reality that must be factored in every business and government decisions.
√ A world without nuclear energy is considered to be a tough one because without nuclear energy we would have burned millions more tons of coal and billions more barrels of oil. This would have brought about climate change of such proportions that what we have today would have seemed negligible.
√ In emerging economies like Turkey where energy demand growth is strong, nuclear energy will continue to be popular with governments. Yet, there is need for a strong, independent regulatory body to assure the public and secure nuclear energy development.
√ Cyber threats to critical energy infrastructure requires a much deeper, hybrid approach bringing together governments and different institutions including G-7/G-20.
√ The European Union is in full swing to complete all legislative acts before the end of 2016. A single European energy market will allow Europe to increase its security of supply by allowing energy to flow freely across borders, therefore offsetting any oversupply on one side of a border with any supply deficit on the other.
√ The EU is more confident that it has developed sufficient alternative supply. Russia knows it would be shooting itself in the foot to disrupt supplies. Even a “mad man in the Kremlin”, who decided to attack EU e rgy markets despite the costs to his own country, was a less dangerous prospect than he would have been seven years ago.
√ Russian perceptions of energy security are different than those of the EU and primarily about predictability and stability of energy prices because they heavily rely on hydrocarbon revenues. Wielding great power influence particularly in its own spheres of influence is another objective. Russia does not want to be vulnerable to Ukraine transit problems, so will accelerate development of alternative routes including
Nordstream-2 and Turkish Stream.
√ With Europe increasingly becoming the dumping ground for the world’s surplus LNG, 2016 should see a continuation of the oversupply situation in European gas markets. Those who invested in gas storage or gas-fired power have all burned their fingers, if not their entire arm. Thee is no real penetration of US LNG into the EU yet. But the possibility of such imports if necessary helps energy security.
√ EU Neighbourhood Policy was supposed to generate a “ring of friends”; instead, we got a ring of fire.
√ Nord Stream 2 may very well get resurrected, but for now, the new Russian gas pipeline into Germany is one of a string of failed projects designed to get more of Gazprom’s gas into Europe. The politics are challenging (EU/Ukraine, Germany/Poland) perhaps too challenging for it ever to be built. That currently leaves for Russia just two pipelines left: Power of Siberia and the Turkish Stream.
√ One leg Turkish Stream is fine but a two-string Turkish Stream, viewed as a political project, could go against Turkey’s interests, as Gazprom’s ability to flood the Turkish market would increase the risk premium associated with investments in alternative supplies (ranging from the Eastern Mediterranean to Iran, Northern Iraq, the Caspian and new FSRU platforms). It might also delay the long awaited
liberalisation of the gas market. The second leg can go ahead only if the EU is willing and needs to receive additional gas.
√ Turkey needs to clarify whether its long-term ambition is, as often stated, to become a regional gas hub or a simple transit country. A hub is a competitive market place where gas from multiple sources is stored and traded at spot prices. Any version of Turkish Stream larger than one string would likely put such an ambition in danger by dis-incentivising investments in Turkish storage, LNG, alternative pipelines and
√ Iran’s strong re-entry into the world energy markets may not be as fast as we have been led to believe. Political risks, uncertainties and some sanctions are still in place, but the country offers immense potential for energy investment if financiers can possibly be persuaded. Iran and Turkey are bound to work together in this geography either more collaboration or more competition with each other.
√ When Mosul and Raqqa are re-taken and Aleppo is settled, the reconstruction and re-governance phase will be long and arduous. No one is saying that there will be easy choices ahead for the governing authorities in Baghdad and Damascus. The aftermath of the Mosul operation in particular will have serious implications for the new configuration in Iraq, with KRG’s security and claims to Kerkuk and
parts of Mosul possibly creating continued disputes. Turkey will not be able to stay away from the war going on at its immediate proximity.
√ Accessing Kurdish gas may arguably be less urgent for Turkey today than it appeared a year ago, with political turmoil; the threat to a new gas pipeline posed by the PKK; the slowing Turkish economy; and lower international oil and gas prices which ease the burden of expensive energy imports. KRG faces competition from not only the Turkish Stream but also Azerbaijan, Iran, Qatari LNG, and possibly Israel’s Leviathan following the recent Turkish-Israeli détente. However, bear in mind that there is a special relationship between Ankara and Erbil which is beyond pure commercial considerations that could make the gas deal possible, with Turkey’s support.
√ International energy governance is in flux. Is it worth giving a push to the IEA’s efforts to secure a greater global role without damaging its current value for members? How can we achieve synergies and avoid duplication with IEA, IEF, Energy Charter, OPEC, IRENA?
√ None of us have reached where we are today merely through our own personal endeavours. This way or another we have benefitted from our seniors, sometimes through a couple of wise words, sometimes by way of introduction to potential employer, patient coaching, and mentoring. As we enter a new critical era of game-changing developments in world energy millennial young people have to be given the opportunity to progressively grow, mature, build their leadership capacities, develop right attitudes to people and job, and reinforce emotional intelligence.
The Club members will support YLE initiative to continue.