Without readiness by European utilities to commit to long-term gas deals, it is difficult for big oil companies to invest in long-term projects.
Last week at the COP27 Conference in Egypt, Ursula von der Leyen emphasised that “We are not just reducing our dependence on Russian fossil fuels – that is good, but not enough – but we are also massively accelerating the development of RES.” In addition, this week European Commission (EC) vice-president Frans Timmermans supported a proposal by India to phase-down all fossil fuels, likely by 2040, starting in 2030.
The EU confirmed this week that its member states have agreed to raise their 2030 climate change emission target as soon as possible, beyond the current 55 per cent. They have also agreed to extend emissions cuts in buildings, transport, agriculture, waste and small industry, aiming for a 40 per cent reduction by 2030 compared to 2005. These targets cannot be achieved without a significant reduction in the consumption of fossil fuels, including natural gas, with potential consequences on the future development of East Med natural gas and RES resources.
EU natural gas views
So far this year, the EU has reduced natural gas consumption by 16 per cent. In fact, the year-on-year reduction achieved last month was 25 per cent. The REPowerEU strategy commits to expanding this to 30 per cent by 2030, on the way to net-zero by 2050.
The events in Ukraine have changed Europe’s energy policy fundamentally. The goal of reaching net-zero before 2050 still stands. But the immediate priority, now, is to secure energy supplies for the coming winter and mitigate the economic and social impact of the dramatic increases in oil and natural gas prices.
If anything, energy is now a much more immediate political concern than it was a year ago. In the short term, weaning off Russian gas raises concerns about energy security, and that includes securing fossil fuel supplies.
The EC considers natural gas as the main source of energy insecurity and reducing its use has become one of the primary goals of its transition agenda. As a result, the EC sees the shift to low-emission energy sources as even more imperative.
If anything, Europe is speeding-up its exit from fossil fuels, as evidenced by its REPowerEU strategy and recent statements from the European Commission.
But is it realistic? Renewables are coming, but they are not yet reliable and are not an overnight solution – the energy transition is a slow process and will take time. In the meanwhile, uninterrupted, secure and reliable electricity supplies can be ensured only with back-up from fossil fuels, preferably gas. In fact, despite advances in renewables, since 1970 fossil fuels have been providing about 80 per cent of global energy.
A recent World Meteorological Organisation (WMO) report showed that climate change is causing unusual “lazy winds” in Europe – that is, prolonged periods of slow winds – that make wind power unreliable, requiring support from natural gas, as happened in 2021 – contributing to the energy crisis – and is likely to happen this winter. Similar problems apply to hydropower.
The global goal remains to transition to green energy and eliminate carbon emissions. But until we get there, the world will need secure and affordable supplies of oil and gas, and for some time to come.
Unless Europe realises this, it will sleep-walk into the next energy crisis later this decade, as the need for natural gas to offset unreliable renewables becomes apparent. Without new discoveries and production, gas supply will be tight, with gas and energy prices going up…again.
However, there are signs that some rethinking may be taking place. Germany is close to breaking its gas-funds pledge made at COP26. Its new position is “we reserve the right to do what is necessary to make gas available as an energy source, stressing at all times its transitional nature.” Will the EU follow suit before the next crisis? There are already signs of efforts to postpone key Green Deal legislation.
East Med
In the East Med we are stuck with the idea that Europe needs our natural gas now and we must help it by producing and exporting as much gas and as fast as we can, ignoring Europe’s stated policies to accelerate the energy transition and reduce fossil fuel consumption as much and as quickly as possible.
Whether this EU strategy succeeds or not is not the point. As long as Europe sticks to it, such policy does not favour or support increasing gas exports from the East Med to the EU.
And the big oil companies know it. Without certainty about what the EU’s gas demand will be after 2030, and without readiness by European utilities to commit to long-term gas deals, it is difficult to invest in long-term projects.
That’s what Tristan Aspray, director of frontier exploration at ExxonMobil, said last month at the Economist Summit in Nicosia. He pointed out that oil companies require assurances of future security of demand, in other words long-term gas purchase contracts, to facilitate investing in future gas production projects. With Europe’s current strategy, that will not happen anytime soon.
Except of course the exports covered by the EU-Egypt-Israel Memorandum of Understanding, which expires in 2030, and hopefully the Energean and VTTV partnership to export LNG from Vasiliko. VTTV’s contribution is important because together with Energean they can also offer natural gas to the Cypriot market at competitive prices.
Another challenge is that neither Chevron nor ExxonMobil plan to significantly raise their medium-term spending targets, as they told their shareholders. Chevron aims to increase oil and gas production by 3 per cent a year and ExxonMobil by 2 per cent, largely from investments made in past years. Such plans limit funding for new projects.
But ultimately, and hopefully before the next energy crisis, I hope that Europe will recognise that it needs natural gas in the longer-term. This would then pave the way for the East Med to contribute more natural gas to Europe.
As I have been stressing repeatedly, with the EU accelerating its transition to green energy and hydrogen, the future of energy in the East Med will depend on a strategy based on the rapid development of RES, combined with energy storage, upgrading of electricity grids, electricity interconnections and use of natural gas at regional level to support RES during energy transition.
In the longer-term, the shift towards RES and green hydrogen production has the potential to radically change the energy geopolitics in the East Med.
This article is based on Charles Ellinas’ presentation at the 10th Energy Symposium that took place in Nicosia on November 17, organised by Financial Media Way (FMW) and the Institute of Energy for South-East Europe (IENE). Dr Charles Ellinas, @CharlesEllinas, is a senior fellow at the Global Energy Centre of the Atlantic Council
