The discoveries of natural gas deposits in the South East Mediterranean are without a doubt, very good news for the countries concerned and for the region. However, if these discoveries will constitute a game changer with long term affects for these countries will not only depend on the decisions taken by the countries themselves – Israel, Cyprus, possibly Lebanon and maybe others – but what is happening in the global energy market within which these discoveries will be functioning. This global energy market context is what I want to address here.
Lets look at the changes that have taken place in the world energy market in the last few years and the changes forecasted to take place in the immediate future by category.
- Technological advances: The first thing to point out is that the discoveries of natural gas in the South East Mediterranean would not even have been possible if the technology had not advanced so rapidly. These deposits only became extractable following recent technological advances which have made possible deep sea drilling at such depths. However, technological advances have also meant that it is now possible to extract even more gas from wells that exist and that in the past would have been abandoned as being depleted. For example, 22,000 fewer wells are needed on an annual basis now to develop the same amount of oil and gas reserves as were developed in 1985. Technological advances have made also possible to extract shale gas – gas that is found between rock formations that can now be extracted by pumping water and other chemicals into these cavities and forcing the gas out. Shale gas is currently revolutionising the world energy markets. The USA alone is expected to be a net exporter of energy in the next few years – some even say by 2015/6 framework – just on the basis of the huge shale gas exploitation alone that is taking place there. Which brings me to the second category of changes: geopolitical developments.
- Geopolitical developments: Ensuring access to energy sources is fundamentally about national security. If a country cannot ensure that it has access to energy sources – it cannot function.
US foreign policy for the last decades has focused among other global areas, on the Mediterranean and the Middle East partly because this area was the source of about 13% of energy supply to the US. Currently, a lot of analysts have started to argue that the US strategic interests in the Middle East have drastically changed and the interests of the US in the region are more now with respect to potential export markets.
Russia supplies about 33% of EU oil and 34% of EU natural gas. Russia’s economy is highly dependent on tax revenues from oil and gas exports. The EC launched last year an investigation into an anti-trust competition case against Gazprom which is currently on-going which could potentially have an effect on existing and future contracts with Russia and beyond.
China and India, with their rapidly increasing populations and its very fast increases in energy needs are becoming key drivers in the global energy market. In fact, the global energy demand is increasing predominantly pushed by the non-OECD countries and by the year 2030 global demand is expected to be up by 33% with respect to today’s demands. European energy demand in the last year has actual decreased.
The Arab Spring and the instability in the Middle East region have affected major energy exporting countries and have changed the world energy exporting routes. Egypt for example has gone from an oil exported to an oil importer in the period of a couple of years with major consequences to the supply of energy in the region and beyond.
- Fukoshima nuclear disaster: Following the tragic accident at the Fukoshima nuclear power station in Japan in March 2011 the global energy market has not been the same. Many countries have taken decisions to move away from nuclear energy. For example Germany took a sudden decision in May 2011 to phase out all nuclear power plants by 2022. Others have re-thought their long term investments in nuclear power plants as a result of the accident.
- Renewables: In the last few years there has been a significant move towards increasing energy efficiency and the introduction of renewable energy sources in the energy mix. Technological advances have meant that energy from renewable energy sources was cheaper and more competitively priced so that more and more countries have turned towards renewables. Wind, solar, geothermal, hydropower are now becoming more popular and more feasible. The EU has set a target of 20% of the EU energy being from renewable sources by the year 2020 and others are doing the same.
- The global economic crisis: The global economic crisis has had a very major effect on the global energy market because energy infrastructures are very costly. In addition, although oil can be exported relatively easily by loading onto tankers and transporting where the markets are, natural gas requires huge investments in pipelines or LNG plants. At a recent conference, an energy expert said that the relation between the oil exporting and the oil importing country can be considered as a “one-night stand” the relation between a gas exporting country and the natural gas importing country can be considered as a “marriage without a possibility of a divorce”. This is due to the huge infrastructure investments that need to be made in order to export natural gas. The crisis has meant that there has been a fall in private investments and very tight financing conditions which drastically affects the economic viability of natural gas investments.
- Energy prices: Anybody making decisions regarding energy supply needs to forecast energy prices of the future. However, in the last few years so many factors have influenced energy prices – that predicting what energy prices would be in the future has been compared to making long term weather forecasts. For example, on the 28th of August 2013 – when the US and Western Allies where considering military action in Syria resulted in fears of oil supply disruptions and this resulted in a 6% increase in the price of Brent to $117 per barrel which was the highest we had seen since 2011. If the temporary agreement just reached with Iran is maintained this will also impact energy supplies in the East Mediterranean and Asia markets.
The other fundamental thing that has to be stressed with respect to energy prices is that since energy is a global commodity and no country or region can act independently. In Europe we are functioning as one interconnected energy market – it is impossible for a country to be isolated from fluctuations and developments in the rest of the European market. As Lord Browne said yesterday in an interview concerning UK shale gas potential “We are part of a well-connected European gas market and, unless it is a gigantic amount of gas, it is not going to have material impact on price”.
Another important issue to keep in mind, is that due to the need to have massive investments in infrastructure in order to address emerging markets and also to other issues such as proximity of suppliers to importers, long term contracts versus shorter term contracts, oil indexed or non oil indexed contracts, etc, there is a huge price differential of 35-50% between natural gas sold to Europe and Asian market prices.
- Other new discoveries of oil and natural gas: in the next years discoveries off the coast of Africa in Kenya and Mozambique are expected to be providing energy into the world energy market. Discoveries of oil also in central Australia estimated to be worth trillions of dollars will be having their affects on the market.
The brief analysis provided above highlights the complexities of the of global energy market. It is sometimes easily forgotten that the South East Mediterranean is not functioning on it own but in the world context. This very complex and very beautiful part of the world, with its traditional alliances and animosities between the countries of the region, this very explosive at times region of the world, functions in a broader world order and any decisions that are taken on its future energy policies need to take this global context seriously into consideration. The other issue to be reminded is that other developments in the world are changing the context within which decisions in the South East Mediterranean are going to be taken and that the clock is ticking.
29th of November 2013