The G-Local Dimension of Energy Markets

Energy markets are at a crossroads. The level of investments in electricity recently reached an unprecedented $700 billion a year. Private funds are progressively redirecting their attention to emerging markets, looking for more profitable business opportunities. Investors are increasingly global.

This was one of the messages delivered at The Changing Dynamics of Global Energy Markets, a two-day conference organized by the London-based think-thank Chatham House. 

At the same time, the participants suggested that European countries cannot remain idle. National governments are called to facilitate investments and actively promote indigenous production. The record investment registered in the North Sea in 2012 was given as the example of a centrally induced production. 

European governments are called to follow similiar examples and intervene now. The so-called developed countries are competing with new markets both as producers and investors, while striving to promote integration of still-inefficient continental markets. 

LOCAL MARKETS 

As the Old Continent is trying to foster a single electricity/gas market focusing on renewables to achieve its decarbonisation targets, other geographical areas could slowly follow United States in its energy revolution. China is the first on the list for several reasons. 

Despite the lack of water in shale-gas-rich Western regions, Beijing hopes to see the first results of its investment in shale exploration by 2020. China, with the largest shale gas reserves in the world according to EIA estimates, is reportedly the only country that could trigger a drastic change in global gas prices. In this sense, despite increasing interconnections, gas markets cannot be anything but local for many years to come. 

According to conference participants, the abundance of gas will not have an immediate effect on regional prices, while oil prices are expected to remain at the same level.

Despite these trends, energy markets are not strictly local. 

CLIMATE CHANGE – THE GLOBAL DIMENSION 

Climate change, the other face of the coin, is a global phenomenon. While most energy markets are destined to maintain a strong geographical connotation, the rise of temperatures requires concerted international policies. 

According to one participant at the conference, governments must intervene immediately.

“The 2050 targets have nothing to do with global climate change,” said one expert under the Chatham House Rule (participants are free to use the information received, but cannot reveal the identity of the speakers).

Looking at policies from a climate change perspective makes the energy debate more articulated. Countries face a conundrum that goes beyond a traditional mercantile point of view. Countries have to achieve competitiveness and energy security while working on climate change targets. 

SHALE GAS – LOCAL PRODUCTION, GLOBAL LINKS

Practically speaking, what does this mean for the future of shale gas? Experts had clearly different view points. 

Some claimed that shale gas is the unavoidable bridge to renewables. Others questioned the consistency of shale gas with climate change targets, presenting a two-sided story. 

In particular, one participant argued that only developing countries should turn to shale gas to carry out the transition from fossil fuels to renewables. Only non-OECD countries could remain consistent with the Copenhagen Accord while simultaneously using unconventional gas.

On the other hand, the so-called developed countries should abstain from resorting to unconventional gas, as this is only relatively less harmful for the environment than coal. Gas contains 75% carbon and, according to the same anonymous expert, commercial production of unconventional hydrocarbos in developed countries would hinder the 2°C commitment stemming from COP15. 

Despite disagreements, no one disputed the idea that shale gas also has a “global” dimension.

“An incident somewhere is an incident everywhere,” stated another participant, underlining that local mistakes could have global consequences. 

As Fukushima changed governments’ minds about nuclear energy around the world, environmental damages related to shale gas could force explorers and producers to abandon their plans. 

With this in mind, operators must pay special attention to all aspects that could inflame public debate. For instance, companies are called to carefully avoid methane leakages, opting for high-standard construction in order to promote the sustainable development of the shale gas industry.

That is particularly the case given the anti-fracking movement can easily transcend a mere regional level. Green groups have an incentive to create an international platform to question the feasibility of unconventional gas, claimed one participant.

In this context, it does not come as a surprise that energy markets and shale gas developments are nothing but a blend of global and super-local factors. Governments cannot take decisions overlooking this. That's why political decisions must consider both global technological changes and local instances, while keeping an eye on competitiveness.

The game and the rules are set. At least for Europe, the solution is still to come. 

Sergio Matalucci