Higher prices: a world trend

Claude Mandil is a noted French energy expert with a lot of experience in the field (he was General Director for Energy and Raw Materials at the Ministry of Industry, Post and Telecommunications, president of the Institut francais du petrole – the French Institute of Oil [Hydrocarbons Study Center] – and executive director of the International Energy Agency). In 2012, he co-authored the Energy Report 2050. He is an advisor to the Ministry of Foreign Affairs and a number of governments. He is a member of the board of the French oil company Total. From 1991 to 1998, he represented France at the Nuclear Safety Working Group of the G7, served as president of this group in 1996, and took part in the talks on the closing of the Chornobyl Nuclear Power Station and the completion of power units at the nuclear power stations of Khmelnytsky and Rivne. During the talks, he met with President Leonid Kuchma of Ukraine and signed pertinent agreements. As executive director of the IEA, Mandil worked out proposals on Ukraine’s energy policy, as requested by the Ukrainian government and with financial support from the EBRD. Having met with Ukrainian media people, he was willing to meet with me and my colleagues from Biznes and Komentari at breakfast at the restaurant of the Hotel Cayre in Paris. He answered our questions frankly and to the point.

What prospects do you think Ukraine has in strengthening its energy independence? What would be the role of nuclear power engineering?

“When I visited your country the domestic energy policy boiled down to an effort to find as many nuclear energy sources as possible; to increase gas purchases and lower their cost to provide the population with maximum energy. I’m not saying this was bad. One ought to realize that at the time Ukraine’s energy policy made no attempt to influence the market demand. In other words, no one at the Cabinet thought about ways to lower energy consumption and start saving energy. Ukraine was then the world’s energy-consumption-per-GDP-unit champion.”

Regrettably, we aren’t far removed from that title, just as we haven’t achieved energy independence.

“I don’t like the term. I don’t think that energy independence is playing a crucial role and can ensure the safety and stability of energy supplies. Japan, for example, has no gas, oil or coal deposits. It depends on foreign supplies, and so every effort was made to develop the nuclear sector. Now this is Japan’s biggest headache. Japan cannot be regarded as energy independent, considering that it has focused on only the nuclear power industry.”

You mean it hasn’t pursued an energy diversity policy?

“That’s right. Maximum diversification is what you need to have continuous and truly safe supplies. From what I know, Ukraine doesn’t have diversified energy sources – I mean gas in particular. It is completely dependent on supplies from Russia. I think a policy meant to help the diversification process should be aimed at developing national, domestic resources in the first place; also, at importing energy sources from various countries, not just Russia. Gas could be imported from Azerbaijan and Europe as reverse purchases and supplies; add here the LNG Terminal. There is a problem, however. If Ukraine wants to satisfy its own needs, it must be prepared to pay an acceptable price.”

Acceptable to whom?

“The supplier, of course. I know this is easier said than done. You are not a prospering nation, with some social strata being unable to foot current gas bills. And so the problem has to be solved for precisely these strata. You must find other suppliers who will charge less. You want to lower the price for the poor, you must raise it for the rest of the consumers to make up for this price reduction. The government cannot and should not subsidize the rich who consume lots of energy. Lower energy prices lead to extra unjustified consumption in the absence of energy saving. Precisely what’s happening in Ukraine.

“I wouldn’t want to criticize Ukraine, considering that low energy efficiency is found in a number of countries. In France this problem isn’t as acute and we have higher energy prices. Yet every time these prices have to be increased, politicians start shouting that this will make the poor suffer. I believe that the problem of the poor must be resolved separately while increasing gas and electricity prices. This is the only way to reflect the increase in the energy production costs.”

Our previous government prophesied this energy ideology and the current administration is following suit. Your opinion should be studied very carefully. Do you agree that there is a world energy revolution underway? Do you think it will involve Ukraine. If so, to what degree?

“I think this energy revolution is underway in the United States, considering that it is extracting large amounts of oil and gas, in an attempt to lower its dependence on imports, particularly from the Middle East. However, this may only shift geopolitical emphases for the US. As for the world energy revolution, I’d rather describe the process as energy transition because it is most likely about gradual changes.”

Energy transition?

“The need and necessity for all countries to lower energy consumption and carbon dioxide emissions. This means less coal and more nuclear power engineering, renewable energy sources, CO2 acquisition and retention technologies, and higher energy efficiency. This, however, will not lower the energy prices; most likely these prices will go up. The usage of more renewable energy sources will add to the costs, considering expensive developments. CO2 acquisition is also expensive.

“Costs keep increasing; upgrading the nuclear sector spells increasingly expensive safe technologies. We still have oil and gas deposits, yet developing them and processing the fuel is getting more expensive. In other words, higher prices are a world trend. Of course, they may drop, now and then, but will go up in the end. Therefore, energy saving, efficiency, and economy are a world priority.”

How do you feel about the peak oil theory? What is your oil price forecast for the next five years?

“Speaking of oil in general, including the deposits deep under the surface of the earth, one could say we have enough oil left. I disagree with the peak oil theory, even though it means disagreeing with several other experts. Having enough oil isn’t enough. It is necessary to effectively process oil to receive quality oil products. Upgrading processing technologies requires huge investments and political stability. There are two problems here. First, it is harder to attract investments and invest in the development and processing projects during a crisis. This spells billions of euros. Look at Kazakhstan, although it is rather an exception. My impression is that not enough is being invested in oil and gas. One of the reasons is that no one can be sure about what will happen next in the oil- and gas-producing countries. There is no political stability. Take Saudi Arabia. Its leadership is made up of elderly people. No one knows who will come to power after them, even if they care about continuity. Who can rule out the possibility of public unrest? The same is true of Iran. What the situation will be like in that country? What course events will take? All this is having a powerful impact on oil extraction and investment. I don’t think there will be a world oil shortage, although I can see certain risks, the threat of a world oil crisis. And so I say over and over again: It is necessary to economize.”

Our energy experts describe the world gas market situation as follows: As a result of the shale [gas] revolution in the US, US coal rather than gas started flowing into Europe after being elbowed out of the US market, elbowing out Russian gas from Europe in turn. This is what the energy revolution is all about and how it can lower gas prices in Europe, Ukraine included.

“Yes, a revolution has taken place in the US, although I’m not sure it will have a sequel. US gas prices have dropped and this doesn’t help investment. Also, these prices are in terms of dollar per BTU – British thermal unit, the amount of heat required to raise the temperature of 1 lb. (0.4 kg) of water 1°F. In the US gas sells at three such units; at 10 in Europe, and at 16-17 in China and Japan. That’s why no one wants to invest in such prospecting and development projects, except for gas and condensate deposits that allow to receive byproducts. Indeed, that’s why an increasing amount of coal is being supplied to Europe. How can one meet the CO2 emission quotas? Generating electricity, using coal, is not cleaner production. Another problem (faced by Gazprom) is the lowering of Russian gas prices. Yes, this will cause changes in Europe. This trend is good news for Ukraine. All things considered, the current situation could be described as an energy revolution.”