Energy security is a two-way street: Fuel for Thought

US Energy Secretary Rick Perry’s recent claim that energy independence is within reach overlooks a fundamental principle of interconnected global trade: Producing countries need security of demand as much as consuming countries need security of supply.

While the US Energy Information Administration projects the US will become a net energy exporter within the next few years, as it already is for natural gas, the country will still need to buy heavier and sourer crude to blend with its lighter sweet grades and will be reliant on the political and economic relations it fosters with other energy suppliers.

Dependence can be as much a strength as a weakness, helping to guarantee security of supply and security of demand for both parties.

“History tells us that energy independence does not necessarily equate with energy security; Winston Churchill’s wise advice on achieving energy security through ‘variety and variety alone’ is as valid today as it was a Century ago,” said Carole Nakhle, CEO of consultancy Crystol Energy.

Nakhle points to the Persian Gulf countries’ growing relationship with Asia, not only through bilateral oil trade but through direct energy investment as an example of the interdependency of long-term supplies.

“However, competitive market structures give consumers stronger bargaining power simply because they have more choice,” she added.

GAS SUPPLY CONCERNS

With gas supply, the debate has centered around Russia and its hegemonic supply of gas through pipelines across Europe. With oil, it has focused around the US and Iran and key oil and shipping routes in the Middle East.

On the gas side, Gazprom tried to assuage the EU’s fears earlier this year by suggesting the rising Russian share of the European gas market should not be a concern as customers are merely choosing the cheapest option for their gas needs.

That hasn’t stopped the jitters. Especially with plans afoot to build Nord Stream 2 across the Baltic Sea along a similar route to its 55 Bcm/year Nord Stream pipeline that will allow Russia to send up to 110 Bcm/year to Europe through the Baltic Sea route.

Neither the threat of US sanctions nor legal efforts by the European Commission have succeeded so far in derailing the project.

While it is true that Gazprom’s share of the European gas market has risen from about 25% earlier in the decade to around 34% in 2017, it is also true that Europe has a diversified supply.

EU security rules have promoted more two-way gas links in Central and Eastern Europe, allowing more gas to flow from other directions if there is a problem with supplies.

LOTS OF OPTIONS

LNG import terminals provide access to new gas sources, including the US, with more potential infrastructure being planned, though at present, three-quarters of Europe’s existing LNG import capacity lies idle with economics being the arbiter of the EU’s gas imports, not politics.

Then there is the Southern Gas Corridor, with a network of ventures designed to bring gas from the Caspian region to Europe.

Three gas pipeline projects will provide a continuous route through Azerbaijan, Georgia, Turkey, Greece, Albania and Italy and is expected to provide 10 Bcm a year of gas to Europe starting in 2020.

Russia has never directly cut off gas to Europe.

In 2009, a dispute between Ukraine and Russia led to gas supplies to Europe being disrupted for 13 days and it is this fragile relation which is the biggest risk for the EU.

Even then, the standoff between Russian and its neighbor came down to money.

OIL PARALLELS

Despite the relative tightening of global oil supplies after OPEC and its allies slashed output to rebalance the market, fears of a supply shock at this stage are overhyped.

While Venezuela, Libya and Iran remain output risks, there appears plenty of oil in the strategic stocks in the big consuming nations US and China, while the IEA – a body set up to promote energy security and respond to disruptions – has released oil stocks three times in its 40-year history to handle emergencies.

Indeed, the concerns appear over two critical sea routes. The Strait of Hormuz sees 18.5 million b/d of crude pass through its Persian Gulf choke point and Bab al-Mandab sees 5 million b/d of crude travel through its “gate of tears” on the Red Sea.

Iran has threatened the supply of oil from fellow OPEC members should it lose market share as US sanctions from November 4 take their toll.

Analysts believe 1 million b/d could come off the market by the end of the year which could be replaced by Saudi Arabian, Russian and Gulf barrels. The US Navy stands by to protect key waterways and analysts doubt that any blockade could last for long.

Houthi rebels, meanwhile, have upped their attacks on key Saudi infrastructure, which saw the temporary closure of the Bab al-Mandab even if that only raised eyebrows rather than hackles.