From Resource Nationalism to Slate and Green Illusions: Shifting Attitude to Hydrocarbons in the West

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Konstantin Simonov

Director General, National Energy Security Foundation; First Vice-Rector, Financial University

No need to explain that the hydrocarbons surely become a significant factor in world geopolitics. We have entered a curious stage when the mainstream discourse on the global role of the oil and gas industry undergoes fundamental transformation. Naturally, we, first and foremost, deal with the Western perception of the hydrocarbon world of today as the West is still a trendsetter.

What do I mean? The 1980s saw the emergence of the following picture. Western states suffered more strongly from the shortage of resources. But, more importantly, they were gripped by the fear of the future phobia. Lacking resources have traditionally dominated academic circles. Let’s recall the Malthus theory, for example. However, it is one thing to adopt a cynical Golden-Billion-like approach (“resource-rich countries will have everything they need, and they cannot care less about the others”). And it is quite a different matter when it dawns on you that you do not keep resources under your control, and you will have to compete fiercely to gain access. Naturally, the energy crises of 1973 and 1979 when Arab producers demonstrated an ability to use oil supplies as a means of exerting political pressure sobered the West. This period witnessed the rise of resource nationalism which took shape in the 1990s. It revolves around the idea that after the collapse of the colonial system resource-rich countries achieved resource independence, regained control over its deposits and made developed countries pay a higher price for energy, above all, for hydrocarbons. They used their resources to pursue their political ends. At the same time, the West believed that its resources had been depleted by its vigorous economy. The West was seized by the panic that rapidly shrinking resources would turn it into an underdog.

King Hubbert’s peak theory can be a remarkable example. In 1974 National Geographic published the renown geologist’s findings that oil production would peak in 1995, which will be followed by the need to look for new energy sources. But more importantly, back in 1956 Hubert suggested a precise formula to predict US crude oil production. He presented an upper-bound estimate, saying that US oil production reach a peak between 1965 and 1970. Later the forecasts about the imminent decline were released on an all too regular basis.

Furthermore, Western corporations operating worldwide began to lose ground. Even the term “New Seven Sisters” in the oil and gas industry was coined to replace the former Western “Sisters”. Initially, this list encompassed Exxon, Mobil, Chevron, Texaco, Gulf Oil, BP, and Royal Dutch Shell. But almost all the reserves belonged to state-owned companies. Then the Financial Times suggested modifying the list of the seven leaders to incorporate the most influential companies, such as Saudi Aramco, Gazprom, NIOC (Iran), PDVSA (Venezuela), Petrobras (Brazil), Petronas (Malaysia), as well as CNPC located in China, although soon China was hampered by the energy shortage. New “kings of the hill” began to limit access of international oil companies to new fields.

Meanwhile, Russia has been added to the list of Western phobias which already involved Arab states. The early 21st century reinforced the trend, especially amid skyrocketing oil prices in 2004. The gap between the countries rich in hydrocarbons and the poor ones has widened. Hydrocarbon reserves were generally believed to have a potential to become a powerful lever against developed states in the Western world (this term can refer to some Asian countries as well, such as Japan or South Korea). China which was picking up steam fit into a situation perfectly, making things more complicated. It turned out that China as well as the West lacked resources, which is why it also faced competition for access to hydrocarbons.

As a result, the West has voiced concern about losing its geopolitical initiative along with control over hydrocarbon deposits. A radical change is underway. Three things have brought it about, namely the shale revolution, the green energy boom and energy efficiency. They have driven the West to believe that it has broken a deadlock over energy future. The hypothesis is simple. The shale revolution has made it possible to approach the exploitation of natural resources differently. The world’s oil and gas reserves turned out to be vast, which implies that everything revolves around mere extraction technologies. Emerging technology has allowed to book new reserves. Westerners relished a feeling that oil and gas were easily extractable, literally within easy reach. In fact, just look at the growing US and, especially, Canadian stocks, where reserves of shale oil and oil sands have been booked.

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Source: BP Statistical Review of World Energy June 2015

Moreover, the United States has managed to considerably increase first gas production, then oil production. It refutes Hubert’s theory, as the US has nearly reached peak oil of the past.

US domestic oil production, mln tons

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Source: BP Statistical Review of World Energy June 2015

Oil shale technology has generated a new hypothesis about the future of energy. Shale oil and gas, in fact, were proclaimed a transition stage to the world of renewable energy. Then technological progress will allow the West to boost the extraction, mainly in North America. Afterwards, it will share its shale oil and gas with partners, particularly with the EU. And a few years later a complete transition to green energy will occur, with oil and gas losing all relevance.

Indeed, remarkable progress of green energy projects can be tracked. Over the last two or three years, the new green world concept has gained momentum, implying that the growing popularity of electric cars will be an irreversible trend or that people will supposedly be able to produce renewable energy at home and save it with innovative ultra-effective batteries.

Obviously, this approach is highly controversial as we are given only one scenario, which is deeply flawed. However, nowadays this fact is ignored and these speculations are used as a tool to change reality. Still, the approach to the situation should be pragmatic and no-nonsense. For the time being, green energy plays only a marginal role, whereas media campaigns substantially overrate its role. The share of the renewables in the primary energy consumption accounts for just a few percent. There is a yawning gulf between hydrocarbon consumption and the use of solar and wind energy. The imbalance can hardly be redressed in the years and decades to come. One should also remember about the growing world population and climbing income rates in India and China, with each populated by over 1 billion people. Societies become increasingly urbanized while Western consumption patterns are still followed. Energy efficiency is a useful innovation, but the number of gadgets in Europe and America is skyrocketing. Previously, the rise of green energy rested on public subsidies but they are very likely to be cut amid low oil prices in the foreseeable future. Thus, it is still unclear how the world will develop, especially given the new market trends. Electric cars are but one option, and a most controversial one. Speculations about the fact that solutions to the energy storage problem will be worked out as early as tomorrow and electric vehicles will replace petrol engines, are rife and commonplace. Nevertheless, cheap oil gives a chance to hydrocarbons. Consider, for instance, that the current disposable incomes will hardly push China and India into giving up conventional transport in favor of electric cars. Moreover, last year the United States saw a drop in electric vehicle sales – their market share made up for less than 1%. The trend is mostly conditional upon low petrol prices. Still, it is a fact that electric and hybrid vehicles – the sales of the latter decreased by 15% in 2015 – have completely failed to supersede internal combustion engines. By the way, it concerns the current sales alone, but there is also air and sea transport. Even if paraffin and other petroleum products are replaced, natural gas, rather than electricity will come to the fore.

Shale oil and gas are produced on a large scale only in North America while it is not in demand in the EU and China. What is more, today’s hydrocarbon prices make their advance impossible in the near future. This can be explained by different reasons ranging from lacking technologies, drilling machines and water resources to densely populated areas in Europe and sensitiveness to environmental issues. US oil and gas supplies are also a matter of fiction. Despite all ado about US oil exports, it remains the world’s second oil net importer. The prospects of US shipments solely hinge on the margin of American oil companies. They do not benefit from processing shale oil of high quality because of low revenues. In other words, the more oil the USA sells abroad, the more it has to import, especially against the backdrop of declining production – expensive shale technologies and falling prices cannot but adversely affect the industry. Conversely, gas production exceeds domestic needs, but gas shipments to Europe are not cost-effective. Nowadays they would cost more than 50% more than the current Russian exports to the EU.

However, it does not mean that Russia cannot take advantage of a new Western energy vision. For starters, it dispels all fears about hydrocarbons that in turn will prevent artificial consumption cuts. Moreover, one cannot simultaneously declare war on global poverty and deliberately rely upon more expensive energy. It can hardly occur to one’s mind that the poorest countries in Asia and Africa may start building wind-farms and solar power plants. Nowadays 17% of the world population have no access to electricity at all and more expensive solutions will not work.

Low prices can also play into the hands of Russia: consumers’ confidence rises and fears abate allowing Russia to compete for a bigger EU market share, which European countries seek to limit for political reasons. Falling prices make the Russian offer more competitive. Not surprisingly, that Russia is playing a more important role in the EU gas market, despite all the EU efforts. It is an illustrative example of a wide gap between the reality and its media coverage. It seems to everybody that the EU has found a substitute for Russian energy.

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Sources: Gazprom, National Energy Security Fund (NESF)

At the same time, Russian hydrocarbons are becoming increasingly attractive for China. Therefore, it is possible to state that gas and oil still have preeminent positions in the world. Rather, the current geopolitical map is being redrawn.

 In general, we are witnessing curious changes in the geopolitical aspects of the oil and gas industry. Being critical of Russian and Arab attempts to politicize energy issues, the USA itself has started using the energy lever to advance its political agenda. The shale boom allowed the United States to sell the idea of freeing their political partners from the energy trap. Europe has been the first ally to receive this help, although it is still of an abstract character. Nowadays, Europe’s energy decisions are becoming the matter of the biggest intrigue.

Clinging to the belief in the new energy future, Europe may be left without any contingency plan, if this future is distant in comparison with what Europeans think about it. Meanwhile, Russia is rapidly increasing its share in Asian markets while China is drastically boosting the consumption of Russian gas. The first pipeline shipments have been contracted. Despite all the speculations, the Chinese economy keeps growing and needs more resources. The same applies to India. Thus, the struggle for hydrocarbons will go on.

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