Europeans Doomed to Keep Losing Ground, Say NOC Experts
Despite the great disparity in electricity prices in Europe from a high of 0.2 €/kWh in Cyprus to a low of 0.077 €/kWh in France, there are many similarities within the Old Continent: gas prices across Europe are and will remain significantly higher than in the United States. This is the certainty for Europe.
On a global level, experts expect greater volatility in the near future due to technological changes, with an increasing weight of variable costs on total costs. In this sense, while a shale gas revolution in Europe is unlikely given legal and social-demographic factors, other continents might equally have serious problems tapping their unconventional reserves. These were the main messages of the second day of the National Oil Companies Congress in London.
PROBLEMS FOR EUROPE
Europe is losing steam and the American industry is gaining the upper hand, Leo Drollas, Independent Energy Consultant, firmly claimed in his presentation.
“The United States is experiencing a renaissance,” Drollas said, referring to industries like petrochemicals, fertilizers and steel.
The consultant presented his econometric analysis on the relation between the consumption and the price of electricity, also suggesting that higher prices lead to lower consumption.
“After adjusting for inflation, the consumption of electricity in the UK’s industrial sector is sensitive to changes in the price of electricity,” added Drollas, former Director and Chief Economist of CGES.
In this context, problems for Europe will continue in the future, unless strong measures and policies.
According to Drollas, there are six main reasons that could push European gas prices down. Firstly, Europe is called to decrease its dependence on Russia. Secondly, the Large Combustion Plant Directive has to lose pace, while Europeans have to accelerate investments in gas-fired capacity. Thirdly, the consultant said that nuclear power generation has to be revived and renewable cut back. Fourthly, Europe has to quickly embrace fracking. At the same time, there are two other factors that are related to international events. A weak US gas demand growth would keep US gas exports higher or prices lower. At the same time, the future of European gas and electricity prices have also to do with the speed of Asian growth. Sustained growth would turn into a parallel increase in gas demand and higher prices for Europe.
In other words, the world is interconnected, but Europe has still some cards to play. At the same time, one positive repercussion of the Ukrainian crisis is that it highlighted the need of gas supplies' diversification. Now, Europeans are well aware of the problems. And, as said by the American Writer Dorothea Brande, “a problem clearly stated is a problem half solved."
PROBLEMS FOR NOCs
Despite the grim prospects for Europe, other countries outside North America are not having better time. The changing nature of the industry and the technological innovation are indeed a threat for classical business models.
“The price volatility is a much greater threat for producer governments,” Paul Stevens, Distinguished Fellow at Chatham House, said on Thursday.
In this context, the National Oil Companies, which are said to have more bargaining power with the IOCs now than 20 years ago, are called to be attentive and take difficult decisions. But this does not come without difficulties. Frictions with service companies are said to be common, and the problems could even rise in case of exploration of unconventional resources.
“Different plays are totally different,” warned Stevens, explaining that shale gas requires a great number of drilled wells and ad-hoc exploration plans.
The Chatham House's economist said that the need of continuous activity with shorter time frames could be incompatible with NOCs, which might have problems embracing the learning-by-doing approach necessary to nurture shale gas developments.
Amid all these uncertainty, there is something clear. All the challenges and difficulties for both IOCs and NOCs could soon bring to new business models and to new room for other companies to earn their share of the cake.
Sergio Matalucci