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    Shale Revolution & the "Double Whammy"



Energy investments require a long-term commitment to see them through, says Alf Henryk Wulf, CEO, Alstom Germany at the Energy Security Summit 2014 in Berlin.

by: Drew S. Leifheit

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Natural Gas & LNG News, News By Country, Lithuania, Germany, Shale Gas , , Security of Supply, Gas to Power, Top Stories

Shale Revolution & the "Double Whammy"

At the Energy Security Summit 2014 in Berlin, Germany, Udo Niehage, Senior Vice President, Head of Government Affairs Berlin and Company Representative for the German Energy Transition, Siemens AG, introduced the session dedicated to “New Energy Markets and Security of Supply,” noting that there had been a clear shift in the power sector towards electrification. He explained, “Based on our own company analysis, we expect that electricity consumption will grow until 2030 annually by an average 2.7%, while energy consumption in total globally will only grow by 2%.

“Within the next 16 years we will add the same generation capacity as is installed today. Looking at the primary source, gas-fired power plants and renewable generation have the strongest growth rates, but in 2030 coal-fired power plants will still remain the most important.”

Despite strongly investing in renewables, Mr. Niehage noted that conventional generation capacity including nuclear would still account for more than 60%. Still, renewables generation would double by 2030 and gas-fired generation would also almost double. Total electricity generation, he said, would grow by 60%.

He showed the “dominating energy nations” according to geography. “Not surprisingly, the strongest economies and countries with the highest population – the US, India and China - account until 2030 for almost 50% of the global installed capacity and the corresponding generational consumption,” he noted.

This meant, he said, that such economies heavily depended on secure supply of conventional energy: coal, but especially gas.

“The US is able to go for affordability, independence and sustainability – meaning declining CO2 emissions, which is achievable because of shale gas,” explained Mr. Niehage, who said that in 2035 shale gas would contribute over 50% of total gas production in the US, but in 2000 it had only been 2%.

He said that by 2020 at the latest the US was poised to become a net exporter of gas, cementing its status as a game-changer. The price for gas gave America a significant competitive edge, according to him, especially in light of the higher prices for gas in Asia.

“In other global regions, shale gas resources are remarkable,” he added, explaining that traditional gas importers could establish their energy independence via their unconventional resources. It was particularly true for China, he said, whose untapped unconventional resources could account for 30% of gas production in 2030.

“No doubt, systematic production of shale gas can and will impact global markets and the global economy,” he said, with traditional oil and gas exporters and like Russia and the Middle East potentially enduring negative effects.

“This might lead to the situation that those exporters need markets like 'good old Europe',” he said, wondering whether this might open up an opportunity for the continent.

“Our future energy supply will depend on conventional and renewable resources,” he said. “I mean coal, gas, nuclear and renewable.”

Germany continued to make significant investment into renewables, while strong growth of more affordable gas generation could be observed in the US, Asia and the Middle East.
Of the former phenomenon, Mr. Niehage said: “Unfortunately, this direction leads to faster rising power prices in Europe in comparison to other economies, and as a consequence this might have a significant impact upon the industrial global footprint long-term or even mid-term, in case new investments in energy intensive activities move to the US, and later new investments into manufacturing might follow.”

Shale gas was, no doubt, a game-changer for companies like Siemens and for industry overall.

How it was possible to implement all of the objectives of politicians?. Was Europe might missing the boat talking about renewables prices when energy transformations were happening elsewhere? This was addressed by Markus Kerber, Managing Director and Member of the Board, Federation of German Industries.

He noted that Europe had taken a tremdendous hit from the global financial crisis and recalled that 4-5 years ago that the Economist had reported on shale gas, that it would make for a major readjustment in the world of energy. “Nobody took notice of that in Germany,” he remarked. “I think Germany as the core nation within Europe will have to, slowly but surely, wake up with its European neighbors to this total reversal of flows that we see in the world. After 50 years, the US will become an exporter of energy rather than an importer, and this will create a huge pull factor for capital, especially industrial capital.”

Mr. Kerber added that for him the key challenge was meeting customers who were able to sign on for 10-15 year contracts at about half the kilowatt hour price. This made for an unintended move of capital from Europe to the US as one major change; the second one, he explained, would be in the reverse-flow of industrial products and services, where the US would become much more competitive, “Because even if they didn't get our companies to invest there, a major major boost in competitiveness, and the more energy intensive you are, you're getting a superb economic boost at at time when the whole world of industry is changing from a more tangible world into a more digital, intangible world.”

He said it was a “double whammy” for the United States of America. “They can only win in this game,” he explained, “and everyone else will see a relative state of decline in their competitiveness and that's what we have to make our governments aware of in Europe: we need cheap and available energy, otherwise the capital will got to the US and other pockets of the world.”

This, he added, was evidenced by BASF's announcement that only half of its R&D efforts would take place in Germany, while 60% of cars in Germany were not German-made. Would German industry stay in Germany? he asked.

According to the European Commission EUR 1 trillion of investment is needed into Europe's energy sector by 2020, but how would it possible for the sector to make such investments given the uncertainty? This was the question addressed by Alf Henryk Wulf, CEO, Alstom Germany, who said there was no “silver bullet” answer. He explained, “The clarity of the framework in which to invest is one of the most important factors for any investment to be allocated. Energy infrastructures tend to be really long-term, so it's no problem to speak with a customer about a repayment scheme of 30 years – it's not strange.

“You need a framework which lasts that long,” he continued. “That's the issue right now."

Energy investment, he said, needed to have a long-term commitment to see through its implementation, but that was not always on hand. One strategy was trying to diversify into different technologies which might be less risky or less subject to a certain decisions, he said.

There were, he reported, power plants that were running but not making any money as they were necessary from a systematic point-of-view, but it wasn't a sustainable situation because of the lack of profit. Mr. Wulf commented: “The discussion now is 'how do we move the framework in a way so at some point they become viable again?'”

How does a developing economy like Lithuania's deal with one of the highest gas prices in Europe?

Jaroslav Neverovič, Minister of Energy, Republic of Lithuaniaexplained that his country had recently successfully negotiated a reduction in price with Gazprom. “Technically speaking, we are more or less back to the level of the German gas price, which is good news for our customers, for our industry because this is a simple question of competitiveness – not to mention that our people pay much more for heating bills than people in southern Europe.”

According to him, this case was an example when European policies were starting to work as they were being implemented in the Baltic states via diversification and de monopolization.

Making mention of the prospect of LNG exports from the US, Mr. Neverovič said Europe needed to do its homework and prepare itself for a global gas market, finish the common energy market, building interconnectors and creating alternative routes of supply as well as allowing indigenous sources of energy to be developed, whether they be biomass or shale gas.

Of Lithuania's pending LNG terminal, he said it would be the first alternative route of supply that would cover the entire potential demand of Lithuania as well as that of Latvia and Estonia.

Drew Leifheit is Natural Gas Europe's New Media Specialist.