The Economist on energy: wishful thinking and outright lies

[Tenten]

Excelent paper. Debunking lies and propaganda.


Source: http://www.eurotrib.com/story/2007/1/13/105442/268

The Economist on energy: wishful thinking and outright lies

by Jerome a Paris
Sat Jan 13th, 2007 at 10:54:42 AM EDT

Predictably, the Economist has an editorial this week on the European Commission's energy package (the unbundling bit, they don't even mention the carbon reduction targets) and on the evil Russian antics against Belarus.

They are even worse than the others, who only repeat the mantra ("more liberalisation is needed"), because they try to present arguments to justify that - which are outright lies or falsehoods.

Here we go again, wading in deep neolib goo.

Do you want Putin's paw on the pipe? http://economist.com/opinion/displaystory.cfm?story_id=E1_RVNNDSR

The row with Russia shows how much Europe needs to liberalise its energy markets

ENERGY is so important that it must be treated differently. That is the easy and seductive argument of Europe's “national champions� —firms like E.ON of Germany and EDF of France. Only vertically integrated monopolies, they argue, can guarantee secure supply, by investing enough in local grids and capacity, and by using their might to strike advantageous long-term deals with powerful outside suppliers, like Russia.

Give them credit, at least, for decently presenting the arguments they want to oppose. Apart from the unnecessary adjectives ("easy and seductive"), this is mostly correct.

Energy monopolies and cartels do not like deep, liquid markets that turn energy into a commodity. They like energy islands, which allow them to extract premium prices from consumers. So they do not invest in the vital interconnectors that allow energy to flow from places where it is cheap and plentiful to where it is costly and scarce. That's why it is so hard for gas-poor Germany to import from the neighbouring, gas-rich Netherlands.

The funny thing is that energy is cheap and plentiful in the main continental European market, and more expensive in the "islands", i.e. the peripheries with fewer connections to the main market:

Some of that lack of connection is linked to geographical factors (mountain ranges, sea), and some to sheer lack of planning over the years by the relevant authorities.

And that sentence about Germany and the Netherlands is just weird: Germany has been getting half of Dutch gas exports (http://www.hollandtrade.com/vko/sectoranalyses/ShowBouwsteen_enw.asp?bstnum=1184) over the past decade - exports which themselves represent about half of Dutch production. How is it "hard" for Germany to import gas from the Netherlands? It's so hard that Germany even exports some gas back to the Netherlands itself... (http://www.hollandtrade.com/vko/sectoranalyses/ShowBouwsteen_enw.asp?bstnum=1185)

So, playing fast and loose with facts, right from the beginning.

Worse, the supposedly secure long-term deals negotiated by the national champions have proved flimsy. Germany, particularly under its previous left-wing government, cultivated embarrassingly close ties with Vladimir Putin's Russia in the name of energy security. But this did not stop the Kremlin casually cutting off oil supplies to Germany (and other European countries) this week as it tried to bring its errant satellite of Belarus to heel in a row over pipeline transit costs (see article). Last winter in a spat with Ukraine it cut the gas off.

There are few long term deals in the oil business - and those that exist are not that constraining - and are usually put in place for the seller to prove that it has a buyer for its oil (a requirement from banks to finance them). Such long term contracts are also quite flexible and a temporary interruption of deliveries for a few days is unlikely to signify a breach of contract.

The fact is, Russia is under no obligation to deliver its oil to us. And Belarus is under no obligation to us to guarantee transit, because there are no long term, all encompassing contracts like on the gas side.

On the gas side, I've written enough about it, but let it be said that Gazprom did not breach its contracts last winter, despite all the hoopla, and has been very careful, over the years, to fulfill their terms. Typically, there's a tolerance for 10-20% variation on the designated volumes, and last year's cut fell easily within that range.

The fact is, despite the prevalent hysteria, it has yet to be proven that the long term contracts with Gazprom proved "flimsy"; GDF and ENI seem to think that they are not, as demonstrated by their recent announcements to extend their existing contracts with Gazprom.

Russia likes to say that it is a reliable partner—and the dispute with Belarus was soon over—but Moscow is reliable only when it wants to be. A combination of political shenanigans and a looming shortage of gas (because of bad management and under-investment) hardly makes Russia look like a dependable partner, especially if you care about consumers, not producers. Cosy deals with Russian energy giants such as Gazprom may suit their Western counterparts; but such murky, inflexible arrangements are bad for customers.

Again, that widely pushed, but little justified idea of a "looming shortage of gas" because (what else?) of bad management and under-investment - with the solution, naturally, being to let Western companies to invest in Russian instead of the obviously incompetent Russians. For a level headed discussion of future Russian gas production, see this paper by Jonathan Stern (THE NEW SECURITY ENVIRONMENT FOR EUROPEAN GAS: WORSENING GEOPOLITICS AND INCREASING GLOBAL COMPETITION FOR LNG (pdf)) (http://www.oxfordenergy.org/pdfs/NG15.pdf) , who sees the threat to European imports coming more from the fact that Russia's own domestic demand is likely to grow as its economy picks up again, or this more gloomy outlook by *Luis de Sousa* over at the Oil Drum (Natural Gas: How Big is the Problem?) (http://europe.theoildrum.com/story/2006/11/27/61031/618#more), which focuses on total reserves and "peak gas".

In any case, if we are facing "looming shortages", shouldn't we worry just a tiny bit about controlling our demand? Nah, that's for wimps and losers (or the poor, the same thing in the mind of the people at the Economist).

But even in their logic, I fail to see how the long term deals are bad for consumers. If the big gas companies bought too much gas, than they'll be forced to sell it at lower prices on the market or to their consumers to get rid of the excess, and if they bought too little, well then either them or the consumers can go for alternatives. The consumers are not taking the risk - the big companies are taking a risk, by committing to bulk purchases form Gazprom to guarantee availability. There is a quid pro quo - stable demand for stable supply, which seems to be forgotten by the Economist. But of course, such a contract, which reduces risks for the parties without the need for hedging products form investment banks, has to be labelled 'cosy' instead of 'smart'.

That is why the second leg of the commission's energy strategy, a strategic review also unveiled this week, is so important. It wants to use EU money and political clout to build interconnecting pipelines and power lines, such as electricity hook-ups between Germany, Poland and Lithuania and between France and Spain.

Oh, "EU money"?! you mean, public money?! I thought that markets were best to decide and implement infrastrcture investment?! Of course, no mention that, for instance, the France-Spain connecting lines have been blocked because of local opposition, not because EDF or the French government were against it (quite the opposite) - and I fail to see how the markets or EU clout are going to change anything about that.

But public action is okay, so long as it's not French or German, it would seem - or, more to the point, public money to be used for the benefit of market players.

Even more importantly, the commission underlines the need for diversity of supply. One important new route is the Nabucco pipeline which aims to connect Europe with gasfields in the Middle East, Caucasus and Central Asia via the Balkans and Turkey. That bypasses Russia altogether, greatly strengthening Europe's bargaining position, regardless of how much gas it actually carries. Similarly, Europe needs to build more terminals for the import of liquefied natural gas (LNG).

Diversity of supply is indeed a good thing, but again why should this be pushed by the EU? Can't markets do that on their own? Surely diversification and security of supply have a price?

And I must admit I fail to see the logic of the argument that Nabucco "strengthens Europe's bargaining position" (who is Europe, again, in a market context?) regardless of how much gas it carries. The point precisely is (leaving aside for a moment demand-side measures) that we depend on Russian gas because there are not enough alternative supplies - so the volume of these alternatives is highly relevant in such a context; And i won't even delve into the fact that Nabucco brings gas from Turkey to Central Europe - and that Turkey's main supplier is, again, Gazprom, so we may just end up giving another export route to Gazprom gas...

The best way of achieving this is to have a competitive, liberalised market. It is no coincidence that Britain, which has gone furthest in this respect, has the most diverse supply, the strongest infrastructure (including new LNG terminals) and—over the past decade—the lowest prices.

I am bolding this paragraph because this is where the usual claim about more liberalisation being needed is made, and it is backed here by an incantation to the fabled Uk market- all the components of which are false.

Let's see:

Most diverse supply

From the most recent Energy Trends (pdf) (http://www.dti.gov.uk/files/file34201.pdf )by the UK government, we find this:

In the second quarter of 2006, (...) imports of gas accounted for 16.7 per cent of gas available for consumption, compared to 11.2 per cent one year ago. Thus, overall, the above figures reflect the UK’s growing dependency on gas imports as UKCS gas reserves decline.

(...) Imports to the UK are from Belgium via the interconnector and from Norway via the Statfjord and Vesterled pipelines. In the second quarter of 2006, Norwegian gas accounted for 71.3 per cent of UK natural gas imports, compared to 91.1 per cent a year ago.

So, for the second quarter of 2006, we have the following "diversity of supply":

UK: 83%
Norway: 11%
Belgium/Netherlands: 6%

Now let's have a look at France (using evil monopoly GDF numbers as a proxy) (http://www.gazdefrance.com/FR/public/page.php?iddossier=176)

Strongest infrastructure

This is a map for 1998 (from this 1999 presentation (http://www.mines-energie.org/Conferences/CR_991021.pdf), a good date to compare what investments were made in liberalised markets (the UK) and non liberalised ones (continental Europe):

I see one market with several LNG terminals, pipelines from many different origins (Norway, Algeria, Russia), and one with none of that. Which is which?

Would the difference be whether a market needs imports or not, and the governments act accordingly, including via the creation of strong national companies which focus on ensuring security and diversity of supply?

Sure, the UK is building LNG terminal now (as well as a pipeline form Norway) - but that's linked simply to the fact that domestic gas production is declining and alternative sources are needed, along with the corresponding infrastructure. Market structure has little to do with it.

And storage? That graph, courtesy of the FT, speaks for itself, considering that the UK consumes almost as much gas as Germany, and almost 3 times as much as France...

Lower prices

The Economist hedges its assertion by mentioning the "last decade", so it's not an outright lie, but UK gas prices are no, by far, the lowest and, in fact, have been the fastest increasing...

From the most recent EU data (pdf) (http://ec.europa.eu/energy/electricity/publications/doc/review/2006_09_qr08.pdf):

Note that market spot prices for Zeebrugge (the "continental" hub in Belgium) and the UK are very close, whioch suggests that arbitrage between the two markets is actually happening and thus that the UK and continental markets are fully interconnected. So, not only does the UK have access to the wider continental European market, but despite this, its prices are higher! Inefficiencies are not where on would think they are, then?

The same document has similar graphs for electricity, which show a similar picture.

So ALL arguments to say that the liberalised market performs better are actually FALSE. Every single f*cking one of them.

I'll spare you a couple of paragraphs sliming Germany because Schröder went to work in the Gazprom-led Baltic pipeline company and skip to the conclusion:

When EU ministers consider the commission's proposals in March, they should remember that energy is indeed important and that governments should indeed treat it differently. But that difference should be in using the state's armoury of powers to take on their own champions, not stifling competition in the name of a bogus security. Otherwise, you had better trust Mr Putin.

You don't need to trust Mr Putin to deal with him, just to understand his interests. And if you don't want to dela with him, well, don't put yourself in a position to need the gas he controls, and don't whine if you do.

**Sigh**

('Sigh' is too kind, of course. Rage is more appropriate, but i lack the proper target to direct it towards.)