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Increased fossil fuel production won’t solve Europe’s price volatility: Panel

17 March 2022 Cristina Brooks

Fossil fuel production must not increase despite high energy prices amid war in Ukraine, according to a panel at the 14 March Energy Transitions event hosted by UK policy institute Chatham House.

European governments have discussed allowing new domestic oil and gas production to source more gas supplies amid high oil and gas prices.

Platts Dated Brent was assessed at $106.48/bbl on 16 March, down from a 14-year high of $137.65 last week, S&P Global Commodity Insights data showed. Dutch gas futures were trading around €110 per megawatt-hour (MWh) on 17 March, having declined from the record high of €345/MWh hit last week.

In the UK, Prime Minister Boris Johnson on 14 March met with oil and gas company executives to discuss increased natural gas production in the North Sea. The UK has also vowed to stop consuming Russian oil. Russia accounts for 8% of the UK's oil consumption and 4% of its natural gas imports.

Despite pledging to reach net-zero in 2019, the UK has also launched a consultation on future North Sea oil and gas licensing rounds, provided they were consistent with a proposed "climate compatibility checkpoint."

Norway's state oil company Equinor announced on 16 March it will ramp up natural gas production from the Troll, Oseberg, and Heidrun fields to meet high European gas demand.

Likewise, after Germany suspended certification for Russia's Nord Stream 2 gas pipeline, Finance Minister Christian Lindner said it should consider removing a ban on North Sea oil and gas production.

Already, Germany plans a new LNG terminal in Brunsbütte to import natural gas from abroad to reduce dependence on pipeline gas imports from Russia, which contributes 55% of Germany's gas supplies.

Germany will have to comply with the EU's proposed mandate that gas operators fill storage to 90%, creating even more demand pressures.

Production timeline raises questions

However, fossil fuel production is not expected to provide relief from the energy price crisis.

One reason is that production projects take years to start operating. The General Manager of the Federal Association of Natural Gas, Petroleum and Geoenergy (BVEG), Ludwig Möhring has said it is not possible to increase domestic gas production in the short term.

Climate experts say new oil and gas infrastructure will not solve the problem and will only reverse climate progress. "The key is to avoid those siren calls, we're hearing more and more … in the US but not just, to open up all sorts of new supply opportunities for investment," said Michael Lazarus, director of the US arm of the Swedish non-profit Stockholm Environment Institute.

"Brand new LNG terminals, offshore investments, and ending restrictions on licensing: All that won't yield returns until three, four, five, or 10 years from now. It will not address the current crisis, but it could lock us in, and undermine our ability to not only get to a more climate-safe future, but a more energy-secure one, as well," said Lazarus.

International production

The EU's response to the Ukraine crisis includes increasing its fossil fuel imports from the US, the Middle East, and Africa by January according to a Communication on 8 March.

Drawing on African countires, it plans to import LNG from Egypt and pipeline gas from West Africa and Algeria.

But fossil fuel production burdens should not be merely shifted internationally, another panelist at the Chatham House event argued.

"With regard to the Russian invasion of Ukraine, [before the crisis] 60% of energy investment that was coming to Africa was going to fossil fuels, and so it was effectively hooking Africa on a dirty environment, and now, as Europe looks for energy security away from Russia, it unfortunately looks into Africa, and especially North Africa, as the new gas producer," said Mohamed Adow, director of Kenyan energy policy think tank Power Shift Africa.

Europe must not only phase out fossil fuel production, but it must also help to finance Africa's energy transition away from fossil fuels and ensure transition costs are shared "fairly -- based on historical responsibilities," he added.

Europe can support energy transition in extraction-dependent poor countries in Africa so that they can decarbonize quickly, Adow said.

Treaty on managed decline

Likewise, South American countries require financial assistance to transition their energy sectors. "Let's face it, there are a number of countries right now that are considering expanding [production], like Ecuador in the heart of the Amazon, just to feed their debt," said Tzeporah Berman, chair of the Fossil Fuel Non-Proliferation Treaty Initiative.

The Initiative is campaigning for an international treaty that would see states legislate for managed declines in fossil fuel production.

"An international treaty on fossil fuel production can deliver negotiated legal instruments on managing the transition from fossil fuels, and the fact is that right now, without that, you have countries only just starting to look at regulating production within their own borders. You have very little collaboration on critical issues like debt forgiveness that are going to be essential for an actual global just transition," said Berman.

Without new legal frameworks, the Organization of the Petroleum Exporting Countries (OPEC) would decide oil and gas production levels, she said.

Adow argued for so-called "supply-side" policies, or regulations that place the burden of fossil fuel decline onto producers. "What I'm trying to say is supply-side policies simply seem to turn off the tap rather than plug a million holes," said Adow.

Lazarus agreed that switching off the tap on production was necessary. "We need to both clean up production and wind it down," Lazarus said. He noted that policymakers had for a long time ignored the need to look at winding down supply and focused on winding down demand.

A minimum of 60% of existing oil and gas reserves can be developed for the world to have a 50% chance of limiting global warming to 1.5 degrees Celsius, according to a September paper by the Institute for Sustainable Resources, University College London.

The International Energy Agency in May published a report saying there could be no new fossil fuel production for the world to reach the Paris Agreement aim of a 1.5 Degree Celsius limit to global warming.

Posted 17 March 2022 by Cristina Brooks, Senior Journalist, Climate and Sustainability

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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