At the International Energy Forum Ministerial in Moscow, experts discussed the key factors influencing the future of global energy security, including the looming threat of Western energy sanctions.

It remains to be seen how the shale revolution in the U.S. and global politics will impact global energy security. Photo: Shutterstock

The 14th International Energy Forum (IEF) Ministerial held in Moscow last week addressed several important questions: Will Russian gas flows be disrupted? Will Ukraine attempt to re-negotiate its energy contracts? What role will OPEC play in mitigating potential energy problems? At the top of the agenda was global energy security, especially in the context of the threat of Western energy sanctions over the Ukrainian crisis.

The new set of Western sanctions, which might be imposed if the presidential elections in Ukraine are disrupted on May 25, may lead to a significant decline in Russian economic growth in the future. Although the West is rather cautious about expanding any restrictions on the energy sector due to significant interdependencies, the possibility is not out of the question. The hope is that, as IEF Secretary General Aldo Flores pointed out, it might be possible “to find common ground” between the West and Russia regardless of the political situation.

Russia’s goal of a stable energy future

The consequences for the Russian energy sector (even if the sanctions do not target it directly) include higher costs and declining budget revenues. Combined, these two factors would affect new energy projects, including those related to liquefied natural gas (LNG) exports. On the top of that, tightening sanctions might result in gas supply disruptions to Europe.

Russian Prime Minister Dmitry Medvedev said at the summit that any disruptions were not in Russia’s interest and Moscow was ready to cooperate to resolve the standoff. Yet, with no compromise, the geography of the energy market might be significantly changed.

All partners are important for Russia and we are not refusing to cooperate with anyone,” he said. “At the same time, Russia has to consider all risks that arise in energy markets. Naturally, if pressure is rising for some reason, the geography of our supplies will be changed.”

Medvedev stressed that Russia is looking for energy stability that will not fall victim to politics. 

Yet today’s transformation in energy markets affects both geography of supplies and balance between the regions. Global producers will be leaning toward the Asia Pacific Region (APR). And Russia is not an exception.

“Russia is an integral part of the APR, and will take active part in all regional developments. APR development is essential not only because it is an important market, but also because this could serve as the basis for development of Siberia and the Russia Far East,” said Medvedev.

While growing demand is coming from Asia, the supply, in recent years, has been coming from non-OPEC producers. Abdalla Salem El Badri, Secretary General of OPEC, welcomes additional energy sources, and warns against the long-term decrease in supply from non-OPEC nations.

Nevertheless, the Middle East and North Africa (MENA) region is highly likely to be “the main hub of global oil supply and will be crucial in meeting the growing demand from Asia,” according to Salem El Badri. This trend will only be reinforced if fewer supplies are coming from Russia for some reason.

Yet how may all these changes impact energy security? As Russia’s Energy Minster Alexander Novak pointed out, in terms of the increasing role of politics, energy security “should be based on transparency and stability.”

“We realize that the situation remains volatile, but keeping to the contracts is an essential factor and it is proved by practice,” he clarified.

Energy security also may be affected by price volatility, among other factors. And here is where the shale gas revolution in the U.S. starting to make its presence felt.

The shale gas revolution and its implications for energy prices

The impact of the shale gas revolution in North America has had some major implications for global gas markets.

Firstly, the U.S. transformed from a net importer to a net exporter of natural gas. Secondly, gas prices in North America have declined, with the follow-on consequences that coal is no longer as important for power generation. This, in turn, led to larger coal supplies to Europe, where coal was more competitive in an environment of higher regional prices for gas.

Yet, the question is how unconventional resources will continue to change the markets over the long-term. As indicated from an interactive survey conducted among the participants of the 2014 International Energy Forum summit – a list that includes energy ministers and experts from Europe, North America, Latin America and Gulf countries - the key challenges for the shale revolution are technology and public skepticism.

Shale gas and shale oil (“tight oil”) were expected by the participants to play a significant role outside North America within 10 years (by the mid-2020s). In this context, Jean-Yves Garnier, Chief Statistician of the IEA, points out an important difference between unconventional oil and unconventional gas.

“Unconventional oil is unlikely to have a significant impact on prices of oil, because if the price falls, the supply will decline,” he said. “Lower prices mean less supplies of higher cost unconventional oil. But the market will need more, not less oil. Unconventional gas worldwide will not be the same story as unconventional gas in North America. Most additional consumption in the world will still be conventional gas from Australia and Russia, and only after that – unconventional. The characteristic development will be spot-based and more liquid gas trade in the regional markets, especially in the East.”

Likewise, Seyed Mohammad Hossein Adeli, Secretary General of the Gas Exporting Countries Forum (GECF), has also pinned his hopes on gas.

“Natural gas is the answer to the 21st century sustainable development challenges,” he said. “Resources are abundant, but the industry needs to pay attention to investment. The impact of unconventional [gas and oil] was mostly present in North America. Progress in other regions is under question. If there is going to be any progress, it is going to be beyond 2020, and there would still be impediments.”

What we also should pay attention is that the process of change in gas markets as a result of production from unconventional sources is not overnight. And the shale revolution as a longer-term process cannot solve short-term political tasks to a full extent, like the task of placing sanctions of Russian gas supplies.

By the time there is physical capability to deal with short-term tasks driven by the political considerations, there will also be more such supplies available in other regions. So, it will no longer just be the U.S. prerogative, as patterns in trade flows will have changed considerably by that time.

So what should Europe do? It definitely is troubled by the fact of high dependency on Russian supplies. The first solution might be renewable energy sources, which, for example, are strongly promoted within the German Energiewende (in English, “energy revolution”) program. Renewable sources have had a striking increase in the past years. Yet, given the controversy in Germany due to its high costs for both ordinary Germans and local energy producers, it will be difficult to implement.   

Another pathway is energy efficiency. “Efficiency is the hidden fuel, and should become the first fuel,” said IEA chief statistician Garnier.

A third option is geographic diversification of sources of supply. Most Importantly, it is much harder to have a set arrangement for supplies from a particular source in liberalized markets (and that is what Europe is striving for, particularly pushing for liberalization of its gas market).

With increase in competitiveness in the market, it will not matter any more where the LNG cargoes come from (or at least this is the idea). Would the U.S. try to push Russia out of the European market playing by market rules?

It certainly can, but that would mean, first, less gas available for the domestic market, thus resulting in an increase in the Henry Hub price and consequent decline in competitiveness of the U.S. economy (which up till now was boosted by lower gas prices). Secondly, it means lower prices in the European market, thus decreasing the premium for American companies.

So it is politics versus business, and it not clear at all which considerations will be prevalent.

Towards a new energy security architecture

International energy is moving in the direction of deeper institutionalization. This is apparent from the growing importance of international organizations. IEF itself, of course, plans to play an important role. But other organizations – like OPEC, GECF (Gas Exporting Countries Forum) and IEF – also are looking to impact the future of global energy security.

As the relationship between energy and politics grows closer, it will be interesting to see how the world’s leading energy players find a way to solve seemingly intractable issues of global energy security. After all, the need to jointly protect the interests of a certain group of countries is one thing, but making an effort to find a workable solution is another.

The opinion of the author may not necessarily reflect the position of Russia Direct or its staff.