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Lord Howell: Re-Balancing World Energy Markets – Implications For UK Policy

Lord Howell, Chatham House

Comment by Lord Howell of Guildford, (Former Secretary of State for Energy; former FCO Minister for International Energy Security) giving the keynote speech at the Chatham House Conference on Re-balancing World Energy Markets. 30 November 2012

Some implications for UK policy.

The central feature of today’s world energy scene is America’s shale gas revolution. This  is now having a geo-political impact.

As American oil imports decline, and gas imports cease altogether, and even turn into exports, the nature of America’s interest in the Middle East and Gulf regions alters, without necessarily diminishing, while Asia’s interests in the region grow.

In a recent article, Daniel Yergin pointed to  the growing American gains in jobs as low-cost energy attracts new investment. What could be added is that this is also placing America firmly and happily on the downward path of carbon emissions.

The question is whether we can  secure the same benefits here in the UK and whether currently proposed legislation will help or hinder us in doing so.

I believe  that  we can indeed get these benefits  , providing we continue to pursue a sensible, sequential and balanced  energy policy. By ‘balanced’ I mean of course a policy which embraces the shale gas revolution and the big step towards lower carbon emissions and competitive energy costs it brings. Nor should we overlook the immense potential benefits which the new shale technologies are set to bring to numerous lower income developing economies in Africa, Latin  America and central and south Asia, many of them the new stars of the Commonwealth network and our good friends, as well  as reliable and safely diverse suppliers of gas to the UK in due course.

This approach is not in any way anti-green. It is  entirely compatible with a full contribution in due course from   wind power, other renewables, and  a modernised, low carbon civil  nuclear capability – as their costs are hopefully  brought down by technological  innovation  to levels which struggling households can  afford and which allow industry to compete internationally and generate more new jobs. This is still some way ahead.

But meanwhile, for the UK,  the immediate green path, the jobs and prosperity path and the best contribution to  the path of global development, all clearly lie through use of plentifully available gas, and a strong welcome for  shale gas development, both at home  and around the world.

What does this imply ,both on the supply side and on the demand side?

On the supply side it means that we must secure our chains of supply for gas for the next two decades, at least, decisively. We are lucky, and very fortunately placed , to have a range of  gas source options. And we have ample import capacity .

Norway wants to sell us more piped gas; the Russians would like to pipe more to us direct with an extension off their Baltic pipeline, Nordstream: the North Sea has more gas to yield, especially with the West of Shetlands opportunities opening up, although overall the North Sea  source is clearly dwindling; above all, we can be ready and sought-after customers for a widening range of frozen gas (LNG) suppliers shipping to us from around the world.

Why are supplies widening? First, because first the United States no longer has need of imports, leaving a lot more for the rest of us. Second, because on top of the vast increase in America’s domestic supplies, the new recovery technologies are putting a huge number of new gas deposits within commercial range, and doing so all round the world. From Ukraine, to Tanzania, from Indonesia to Canada, from China and, even Japan, to Poland and the UK, from Greece to Argentina, plenty of commercially attractive gas is set to become available.

Nor are Russia and China being  left out of this revolution, but their relative positions are obviously being altered. In the Russian case Gazprom’s immediate market dominance is obviously challenged, although Siberian Russia clearly has enormous new gas deposits to yield up in due course, such as the Bazhenov field in West Siberia, said to be eighty times larger than the already large Bakken shale oil and gas field under North Dakota and Montana.

In the case of China the authorities there clearly have high ambitions for shale gas, although they have hardly started compared to America and the geology is different. Their ‘shale team’ claimed to me in Brussels recently that their shale potential was bigger than America’s! This may or may not in due course reduce China’s huge appetite for imported gas and oil. Time will tell.

Either way, as  many of us have been pointing out for quite a while, all these developments  alter the pattern of  global power and interest considerably, and compel a fundamental re-think not only about energy strategy but about our general foreign policy objectives and positioning in the changing world.

But even more important are the demand side implications.

The countries that take this plentiful gas in – and Britain is one of the best placed to do so – and which maximise its use for gas turbines and electricity production, are the countries which are going to deliver both low carbon AND competitive energy costs most swiftly and effectively.

Or put the other way round, the economies and countries which penalise gas use and discourage gas turbine building, whether by adding charges and tax levies to gas, or heavily over-subsidising the operation of expensive alternatives, are going to be the countries with the poorest record in reducing carbon emissions, the highest energy bills and the weakest industrial competitiveness. That would be folly on a grand scale.

So compare where we are in Europe, and compare where they are in America – regrettably going in quite opposite directions. Those who keep telling us that energy costs will always go on rising ,and that we must just pay up, seem not to have heard of what has happened in the United States .

I find this deeply worrying.

  • It is worrying from a climate concern point of view – because we will be foregoing the quickest and clearest route to low carbon, as exemplified by the United States, who have already cut emissions by twice the levels aimed for in the Kyoto protocols – which of course they did not subscribe to.  (Whereas the latest UN figures remind us that world-wide carbon emissions are rising fast and current climate policies are simply failing ).
  • It is worrying because instead of committing us to a path of lower energy costs it locks us into a pattern of higher costs and sky-high subsidies to renewables for decades to come.
  • It is worrying because it will hurt millions of households and families already  struggling with their energy bills.
  • It is worrying because higher energy costs will delay economic recovery in Britain while our trading competitors, or some of them, especially in Asia, but also in America, will power ahead.

Already our more far-seeing industrialists here are expressing fears that America, with its low energy costs and cheap gas , will pull new investment away from us and undercut our export industries. Worse still, if the returns on gas-fired generation are curbed and distorted, either by high taxes and charges, or by prolonged and over-generous subsidies to unpredictable renewables, we will get inadequate investment in new power plants and a weak and unreliable electricity  generating structure in Britain – which could cause immense hardship and demoralisation.

All this suggests that the priorities – which the necessary legislation should underpin – must be:

a) On the supply side , to secure the best and most diversified and therefore reliable gas sources for a long while ahead. This would also point to developing our own indigenous  shale gas resources as quickly as possible. It is true that we have a marvelous supply line of LNG from our good friends in Qatar, but over-reliance on one source, however friendly, is not wise. Some 80 percent of our daily LNG supplies come from that single source. If the Straits of Hormuz are closed, even temporarily, that supply route is cut off . Oil may find a way round but gas and LNG carriers could not. So increased diversity of supply sources – of which there are going to be plenty of new ones – is going to be our true strength.

b) On the demand side, fair and level market conditions must be maintained to allow gas turbines to be financed, built and operated competitively. If wind power and in due course nuclear power can deliver the same benefits as gas, competing on level terms, then let that investment go ahead as well. But if conditions are going to be deliberately weighted against gas expansion that is taking us down a false track. Furthermore it would be a track which, by delaying the switch from coal fired generators to gas-fired – the big switch that  has already occurred in the USA –  ironically leads to higher, not lower emissions. That is already happening in Germany, to which cheap coal is being exported both from America and the Czech Republic.

In the end the choice will be made for us. Try as we may to divert resources into more and more wind farms, cheap gas will constantly undercut high cost renewables until the day they get their own costs dramatically down. The fact that wind farms on a large scale will anyway need massive back-up of gas fired stand-by stations when the wind does not blow, is a further ironic twist and complexity in the unfolding story of modern energy.

Our limited resources should be spent not on trying to keep cheap gas out but on research into getting the costs of wind power down so that it no longer needs protection from  other fuels, so that the environmental damage of wind pylons  is minimised and so that off-shore wind projects can  compete squarely.

Our future success in an ultra-competitive world depends crucially on completely reliable, low-cost power supplies.

Our future welfare depends upon lower, not higher , energy bills in millions of homes.

Our future environment will depend on steady advance in CO2 reduction through the switch from coal to gas, rather than a premature rush  to costly and uneconomic renewables, which then backfires politically  as consumers revolt, as seems to be happening in Europe now.

That is the complex but balanced trio of objectives  the nation’s energy planners must take into account as we move forward both on the legislative and strategic fronts, starting now.