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A difficult year for energy

major delays in public transport due to snow in oslo
More extreme weather events caused by climate change will force many countries to fall back on fossil fuels, delaying energy transition.

With demand up and supplies lower, oil prices are expected to rise

If 2022 was a difficult year for energy, 2023 is expected to be even harder as the Russia-Ukraine war continues to destabilise global energy markets.  The impact of the embargo imposed by the EU on imports of Russian oil on 5 December, as well as the price cap on Russian oil, currently set at $60/barrel, will be felt during the first-quarter of 2023.

The likely result could be a reduction in Russian oil exports in the range 1-2million barrels/day (mb/d) at a time of tight global oil and natural gas supplies due to years of under-investment by the oil companies. This comes on top of the 2mb/d cut in the oil supply agreed by OPEC+ in October.

On the other hand, Chinese oil demand is expected to grow by more than 3mb/d as the country comes out of its Covid-19 lockdowns. This will more than balance any reduction in demand in the western world if fears of serious recession materialise.

With demand up and supplies lower, oil prices are expected to rise, averaging $100-$110/barrel in 2023. With Russian oil trading at a-third discount to Brent, such prices would trigger the oil price cap. If President Putin stands true to his word and stops oil supplies to countries that apply it, things can become trickier, with the global oil supply becoming even tighter and prices possibly rising further.

And if that is not enough, EU’s plan to apply an embargo on oil products on 5 February, will have an additional impact on prices, especially of diesel that is already in quite a tight supply.

Europe’s decision to apply a €180/MWh cap on the price of natural gas will prove to be more of a political decision, difficult to apply in practice, and will not have much impact on global prices. But if LNG prices rise above this level, which is quite likely during the second half of 2023, LNG will be diverted to Asian countries that are willing to pay the asking-price and leave Europe facing likely shortages.

This will be exacerbated if this winter turns-out to be harsher, causing depletion of gas storages. With Russian gas supplies lower and limited growth in global LNG supplies, Europe could then face serious challenges next winter and inevitably high prices. Energy markets are expected to remain unbalanced, experiencing another turbulent year in 2023.

What will be the key issues in 2023?

It is not surprising that energy security is expected to remain top priority in 2023 at the expense of energy transition and climate change, with coal use continuing to increase, impacting global carbon emission levels.

The emergence of China out of Covid-19 will be one of the most important factors for energy markets is 2023. With its energy demand and imports expected to rise strongly as its economy recovers, while global oil and gas supplies remain tight, it could exacerbate another energy crisis, impacting energy, oil and gas prices. Europe is unlikely to be able to count on weak energy demand in China in 2023 to bail it out.

With Russian gas supplies more limited, European natural gas and power markets will be very tight in 2023. In fact, the International Energy Authority has warned that Europe could face a natural gas shortage of about 30billion cubic meters in 2023. For the EU key will be its ability to source more LNG in what will be an even more challenging year. It will press joint-purchasing of natural gas, but it will also redouble its efforts to accelerate deployment of renewables. But high energy prices and uncompetitiveness of European industry, may force a rethink of EU energy policy later in the year, especially regarding exiting natural gas, or face the risk of de-industrialisation.

Some European energy-intensive manufacturing sectors have started to move to places offering cheaper energy, such as the US or the Middle East. This may accelerate in 2023.

With recession likely to impact many economies and inflation and interest rates remaining high, energy security and pressure to bring energy prices down will be top priority. As a result, the need for government interventions to reduce energy costs will continue in 2023.

Higher interest rates and inflation will also increase the cost of renewable energy projects, slowing down the pace of the energy transition.

In addition, more extreme weather events, such as low-speed winds and drought, caused by climate change, will force many countries to fall back on fossil fuels, delaying energy transition.

This means that reliance on coal will continue in 2023, not only in Asia but also in Europe. Its plentiful and offers affordability against expensive natural gas and reliability against intermittent wind and solar generation, but at the expense of higher emissions. Nuclear energy will also see a comeback.

High energy prices will give a further boost to renewables, especially household solar. But with government and household budgets continuing to take a hit, investment in renewables may be well-below the levels required to achieve Paris agreement goals. The climate change conference, COP28, to be held in the UAE end of year, will highlight the challenges.

Clearly, the energy crisis has exacerbated social inequality within and between countries. This is likely to worsen in 2023, threatening unrest and pollical instability.

Cyprus and the East Med

The first victim of 2023 is likely to be the LNG import project at Vassiliko. The news is not good. Completion of the project by the end of 2023 now looks impossible and there are even doubts that it will become operational in 2024.

What is happening and the lack of transparency in such an important project is unacceptable. The economic impact will be huge. Who takes responsibility? When will it finish? What I have been warning since 2019, and what the Auditor General said, is all coming true. The new government will start its energy programme with a huge challenge.

With uncertainties in global energy policy continuing, as Europe and the US continue to push for a faster energy transition, and elections in Cyprus, Greece and Turkey, oil companies operating in Cyprus EEZ are unlikely to announce and major new initiatives in 2023. Chevron’s appraisal drilling at Aphrodite may produce more questions than answers.

Most activity in the East Med will be in Egypt, where oil company interest will remain strong. Success with the new bidding round will boost exploration.

For Cyprus the priority for the new President must be to take all necessary measures, including grid upgrading and electricity storage, to unlock the uptake of renewables, matching European and Greek levels.

Dr Charles Ellinas is a Senior Fellow at the Global Energy Centre, Atlantic Council


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