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Winners and losers in the energy transition

Hydrocarbon Engineering,

Below are highlights from a speech given by Maria van der Hoeven, International Energy Agency Director at the Deltalinqs CEO Meeting on the winners and losers in the energy transition.

The Netherlands

“Though the Netherlands still has work to do in living up to 2020 EU climate goals, a number of very interesting initiatives are underway. Indeed, we already see some winners in the region. We have companies pursuing innovative energy storage technology, in the form of hydrogen. Netherlands is one of the leaders in the development of ideas for a transition to a bioeconomy, and Rotterdam is already the European hub for trading of a range of biobased fuels including wood pellets, bioethanol and biodiesel. And of course we have ROAD, demonstrating the economic and technical feasibility of carbon capture and storage. These are the kind of innovative and exciting developments that we will need to see, as global shifts in the energy field are directly affecting Rotterdam, the Netherlands and Europe as a whole.”

“But for Rotterdam as a port and a region, low prices can mean a critical economic boost. During the first quarter of this year we saw significant growth in total cargo traffic, 7.2% in only a few months’ time. This was significantly better than last year.

“Also, the storage of crude oil and oil products has shown growth of nearly 15%. And then there is the explosive growth of imports and exports of fuel oil, at more than 27%. The drop in oil prices has also brought good news for refineries. Margins are now much greater, because the price drop has not yet been fully passed on to consumers. These are very positive developments, but the trick is to stay alert in good times, to stay on the winning team. The trick is to keep an eye on the long term trends and to continue working on structural improvements. In your case, to further strengthen the position of the Port of Rotterdam.”

Long term trends

“All signs point to a much slower recovery in prices. Light tight oil from the US has made oil production from non-OPEC countries much more price elastic than in the past. If oil demand in the US goes down and prices fall, theoretically speaking, production can be reduced in a few weeks’ time. This points to the increasing flexibility of the system. At the moment price rises, production can again be gradually increased.

“On the other hand, we see that the demand for oil worldwide has become less price elastic. This may mean that the market reaction to the drastic fall in prices will be slower, and possibly the price recovery will be less drastic. And that means potentially lower prices will remain longer than in the past. And this, of course, is good news for Rotterdam.”

Less pleasant developments

“We see that oil production in Russia, for example, will be hit hard by the collapse in prices combined with international sanctions and a devaluation of the rouble. Unfortunately it is expected that these developments will be felt here in Europe. A decrease in production in Russia also means less economic activity in this region, for we all know that refineries in Russia use Rotterdam as a kind of hub, to store fuel oil and then export it to Asia.

“Indeed the greatest demand for refined products is shifting to the East. As such, refining capacity will move to other continents, not to mention the recent capacity additions in the Middle East which will have a direct impact on pricing in Europe. Competition for European industry will continue to increase. This also means that some of the more vulnerable and less competitive parts of the industry in Northwest Europe will increasingly be hit, with implications for a significant part of the economy given the integration of this sector to the rest of the Dutch industry, including segments like the storage and logistics sector.”

The effects of low oil prices do not stop with oil

“We have also seen a decline in natural gas prices. February 2015 marked the first time in many years that spot market prices for gas in Japan were lower than spot market prices at the National balancing Point in the UK. It is expected that LNG prices will remain low worldwide, also because large volumes will come online in Australia and the US in the coming years. Between now and 2020, 164 billion m3 of additional volume will reach the market even as demand in Asia is flattening. It is therefore expected that the supply of LNG to Europe will pick up again. That’s good news for the Gate terminal.”

“Many people are already thinking that the low prices and the increase in imports will lead to a natural gas revival in Europe, particularly as a fuel for the electricity sector. But this will not take place soon. There is much more to be done before gas can stage a comeback.

“To begin with, gas prices will need to fall much more, CO2 prices would need to drastically increase and to reform of the ETS system should be introduced. Things that, unfortunately, will not occur in the short term, let alone simultaneously.

Carbon pricing and a shift to low carbon energy are coming

“Gas is already in a position to adapt, at least for now. In addition to providing flexibility and improving energy security, gas as a transition fuel can make a significant contribution in reducing CO2 emissions. But ultimately, the availability of sufficient and relatively inexpensive gas will be the only way to allow gas a substantial share in the energy mix. The industry must now prove that it can continue to deliver gas at prices that are significantly lower than the relatively high price of recent years.”

“Though gas, especially as a flexible source of power, will absolutely continue to play a pivotal role in the future of the Netherlands and Europe as a region, the growing competitiveness of renewables also is good news for energy security. Since 2005, the expansion of electricity generation from biomass, wind power and solar in Europe has over compensated for the reduction in domestic gas production, assuming that gas would have been used in efficient power plants. And this is likely to extend to 2020 at least.”

The many faces of the energy transition

“Changes are taking place everywhere. We see climate policies influencing energy policies; the share of renewable energy increasing; Asia consuming an increasing portion of energy worldwide; and geopolitics continuing to impact the sector. These challenges require the capability of all players to adapt continuously to this evolving reality, keeping an eye on the future. The best way to do this is to maintain perspective not only on what is happening right now, but also long term trends. This is the compass that will guide you through the energy transition, and ensure that you, all of you, end up winners.”

Edited from speech by Claira Lloyd

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