The revenge of blue gold

 By Demostenes Floros

Natural gas is the only fossil fuel that will see an increase in total consumption over the next decade, with positive implications for the global economy and the environment…

(This article is a preview from print edition 30 of Oil Magazine)

To date, fossil fuels account for 87 percent of the global energy mix, and for decades to come oil, coal and natural gas will continue to be the main raw materials of our economies, while we wait for a powerful, and urgent, development of renewable sources, as well as a much-desired solution to the thorny issue of radioactive waste. Thus, we can no longer postpone considering how to use fossil fuels in the most environmentally friendly way possible.

Among the main fossil fuels, natural gas—in which planet Earth is rich— has clear advantages in terms of reduced pollution, especially in comparison with coal, but also with oil (compared to which it is less expensive). New technologies have allowed for its more efficient use—think, for example, of new car engines compared with those of a decade ago—and it is relatively easy to store and transport. In fact, almost all estimates regarding the future energy mix indicate an increase in the use of natural gas.

It follows that those countries with big reserves of “blue gold” will have the opportunity to play a greater role within the international arena. Above all, the Russian Federation, currently the largest exporter of natural gas in the world, as well as a net exporter of primary energy, will play a more forceful role, which will be further strengthened by its participation in an organization known as the GECF, Gas Exporting Countries Forum, mistakenly renamed by many as the “Gas OPEC.” The aim of this survey is to highlight the link between natural gas and geopolitical influence. This concept has been clear for some time to Vladimir Putin who, noting that blue gold would act as a bridge between the era of fossil fuels and that of renewables, in 2003, noted that “Russia’s role in the global energy markets largely determines its geopolitical influence.”

Future Trends in the global energy mix

In 2014, global primary energy consumption reached 12,928 Million Tons of Oil Equivalent (MTOE). Compared with 2013, it had increased by 0.9 percent, equivalent to 198 MTOE, approximately 133 percent of Italy’s annual consumption (149 MTOE), to give an order of magnitude. In particular, the growing trend of 2013/14 shows a deceleration, both with respect to the +2 percent recorded in 2012/13, when demand was at 12,730 MTOE, and compared with the +2.1 percent annual average of the last decade. The causes lie, in all likelihood, in the economic crisis and, to a lesser extent, in improved energy efficiency.

In 2014, the People’s Republic of China was the world’s largest energy consumer, with 2,972 MTOE, followed by the United States (2,299 MTOE), the European Union (1,611 MTOE) and the Russian Federation (682 MTOE).

China’s level of dependence on imports was 16 percent, slightly higher than that of the United States (13 percent), but much lower when compared to that of Europe (54 percent). The Russian Federation, on the other hand, was a net exporter for 92 percent of its consumption.

China has a total level of consumption higher than that of the U.S., but it should be noted that the former holds approximately 22 percent of the world population, while the latter has only 4.5 percent. More precisely, while China consumes an average of 2.2 tons of oil equivalent (TOE) per capita in one year, an American citizen consumes 7.2 TOE.

The 2014 global energy mix was largely comprised of fossil fuels: specifically, by oil at 33 percent, coal at 30 percent and natural gas at 24 percent. In relative terms, the composition of the basket is substantially unchanged compared with the previous year. Natural gas occupies a role of primary importance since it covers little less than a quarter of the global consumption.

In absolute terms, we have on the other hand witnessed an increase in all sources. In particular, oil recorded +0.8 percent (+1.1 percent in 2012/13), coal +0.4 percent (+2.8 percent in 2012/13, a higher absolute increase +103 MTOE, 42 percent of the new demand), natural gas +0.4 percent (+1.1 percent in 2012/13), hydroelectric power +2 percent (+2.7 in 2012/13), nuclear power +1.8 percent (+0.6 percent in 2012/13), renewables +12 percent (+16 percent in 2012/13). Estimates show that the total global consumption in 2030 will grow significantly, up to 16,720 MTOE. In relative terms, the gas component will remain substantially unchanged compared with the current situation, unlike that of oil and coal which, it is estimated, will drop by 4 percentage points. As we shall see later in detail, the use of gas will increase considerably in absolute terms.

Future prospects in the major global economies

By looking at the energy mix of the most important economies, we can draw a number of conclusions.

The E.U. shows the least use of fossil fuels (76 percent) compared with a global average of 87 percent. This is no doubt due to its greater use of nuclear power and renewables. In the other major economies, however, the percentage of fossil fuels is between 80 percent and 90 percent. In Japan, the third largest economy in the world, it reaches 93 percent.

Japan (43 percent), the E.U. (37 percent) and the United States (36 percent) show a greater percentage of oil in their energy mix than the global average (33 percent), and compared to that of the other major economies. The People’s Republic of China (17 percent) and the Russian Federation (22 percent) are the lowest consumers of oil in relative terms. In absolute terms, the U.S. is the largest oil consumer in the world. The energy mix of China (66 percent) and India (57 percent) show the highest use of coal among the major economies, while that of the Russian Federation (12 percent) and Italy (9 percent) show the lowest use. In absolute terms, China is the largest consumer of coal, followed by the United States and India. The energy mix of the Russian Federation and that of Italy are characterized by a greater use of natural gas: 54 percent and 34 percent, respectively. Even the U.S. energy basket shows a significant use of gas (30 percent), of which, however, a significant amount is derived from fracking. According to the IEA, in 2013, the percentage of shale gas over the total amount of gas produced in the U.S. amounted to 39.5 percent. Based on estimates by Gazprom—not officially confirmed—this value will reach 52.5 percent in 2015. The People’s Republic of China (6 percent) and India (7 percent), on the other hand, make the least use of the least polluting fossil fuels.

The above considerations must be assessed in the light of the level of each individual country’s foreign dependence. Among the major raw material importing economies, the only that has reduced its dependence (measured by the ratio between the energy raw materials imported by a country and the total amount of primary energy consumptions of the same country) is the United States—from 21 percent to 13 percent in the period between 2011 and 2014—thanks to the revolutionary—if environmentally questionable—technique of hydraulic fracturing. On the contrary, China has seen an increase in its dependence to 16 percent (in 2011 it was 6 percent). In the decade 2003-2012, China’s consumption has more than doubled in absolute terms, by increasing its share of the world total from 12.5 percent to 23 percent. The Russian Federation is the largest net exporter of energy. In 2014, Moscow sold 629 MTOE on the international markets, equal to 48 percent of that produced and 92 percent of that consumed internally. We will now consider the trends in energy consumption to 2030, which will increase to up to 17,720 MTOE, according to estimates by the International Energy Agency. Showing  strong growth will be China (4,010 MTOE), India (1,364 MTOE), the Russian Federation (770 MTOE) and the rest of the world (6,384 MTOE); in slight decline will be the U.S. (2,197 MTOE), the E.U. (1,552 MTOE) and Japan (434 MTOE).

The gas demand in the countries of Asia-Pacific will increase from the current amount of 280 Gmc3 to the 400 Gmc3 expected for 2025. This situation is generally irreversible in addition to being the logical result of the rapid geographical redistribution of manufacturing activities towards Asia

Gas: Present and Future

The Russian Federation leads the world in  proven natural gas reserves, with just under 50,000 Gmc3. It is followed by Iran, Qatar and the U.S..

The world’s largest gas producers and consumers are, respectively, the United States and the Russian Federation. More precisely, in 2014, the United States was world’s top gas producer, at 782 Gmc3. In 1996, its output was equal to 528 Gmc3, which decreased slightly to 515 Gmc3 in 2006. This considerable growth is attributable to the country’s shale gas effect. Although the U.S. leapfrogged the  Russian Federation—the latter produced 579 Gmc3 in 1996 and 632 Gmc3 in 2006—due to the amount of its total consumption of 815 Gmc3, Washington is, however, forced to import gas from abroad.

The output of U.S. gas— conventional and unconventional—has been decreasing for the past three months due to the effect of stopping a large number of drilling rigs. According to Bank of America Merrill Lynch, in 2016, for the first time in a decade, production could record a decrease.

The Russian Federation, Qatar and Norway are respectively the largest gas exporters, while the European Union, Japan and China are the main importers of blue gold.

Finally, future estimates regarding global gas consumption indicate a 3.5 percent increase by 2030, from the 2,844 Gmc3 of 2012 to 3,797 Gmc3. In particular, the largest increases will occur in China (from 123 Gmc3 to 353 Gmc3, +287 percent), India (from 49 Gmc3 to 116 Gmc3, +237 percent) and the rest of the world (from 1,192 Gmc3 to 1,712 Gmc3, +144 percent).

According to the arguments put forward by Laura Cozzi during the 15th Italian Energy Summit, natural gas will be the only fossil fuel that will see an increase in absolute consumption in Europe by the end of the next decade.

The Russian Federation: from a “relationship of constraint” with Europe to a “two-furnace market” with Eurasia

The energy relationship between the European Union and the Russian Federation has, to date, been one of a sort of mutual constraint. In the medium term, the more rapid growth, compared to that of the EU, of the gas demand in the countries of Asia-Pacific offers Moscow the opportunity to move into a new Eurasian energy context, which has long been stigmatized as “the two-furnace market.” To be precise, the gas demand in the countries of Asia-Pacific will increase from the current amount of 280 Gmc3 to the 400 Gmc3 expected for 2025.

This situation is generally irreversible in addition to being the logical result of the rapid geographical redistribution of manufacturing activities towards Asia. China has been the world’s leading industrial country since  2011, with 21.7 percent of global manufacturing production.

Meanwhile, the European Union was unable to resist American pressure to isolate Russia in response to events in Ukraine. It contributed to this failed attempt, apparently convincing itself that it can do without Russian natural gas, , as repeatedly called for by the former Commissioner for Energy, Günther Oettinger. In doing so, it seemed, instead, to have achieved an acceleration of Russia’s process of looking to the east, strengthening political and trade relations between Moscow and Beijing to the extent that they appear to have gone back to those of the early 1950s.

According to recent assessments, China has been the world’s largest consumer of coal for the last 25 years, using more than all of the other world economies combined. And acording to Matteo. Verda, it won’t be the only country heavily using coal in the years to come: “Thanks to its low cost, coal is in fact consistently the main source of energy of the major emerging economies, a situation that, in the predictions of the IEA, is expected to continue over the coming decades. In the benchmark scenario, China’s consumption could grow steadily over the next decade, reaching 10,200 MTOE in 2030. The latter, is today already almost 2.5 times that of all 28 EU countries combined and, in 2020, will be double that of the United States.” Meanwhile, however, the government of Beijing has already announced that it could continue to grow until 2030.

These data highlight the urgent need, especially that of China, but also of India, to change the structure of their energy mix, by moving from the massive use of coal—amounting to 66 percent and 57 percent, respectively, of their total consumption—towards the “cleaner” and less expensive (even compared with oil) natural gas, to date constituting only 6 percent of Beijing energy mix and 7 percent of New Delhi’s.

The Russian Federation and the People’s Republic of China have further strengthened their strategic alliance aimed, that is, towards reconstructing a new world order, by recently signing a number of new agreements in terms of energy, especially in the gas sector, as well as towards constructing the so-called Western Route and Eastern Route.

Over the next 30 years, the Altai gas pipeline will transport 30 Gm3 of gas from the Yamal Peninsula and Western Siberia to China through the Kanas Pass, without passing through the territories of Kazakhstan and Mongolia. This agreement is complementary to that reached for the Eastern Route and includes the Russian-Chinese thirty-year “take or pay” agreement signed in May 2014 for the supply of 38 Gm3 of natural gas via the Power of Siberia pipeline, which will not be supplied from Yamal, but from the reserves of central and northeastern Siberia. Supplies could be paid for using the yuan and ruble instead of the dollar. Work on the construction of the Eastern Route has already started in both directions, although it is likely that these supplies will be postponed by until a year or two after the nonbinding 2018 date agreed to by both countries. The Eastern Route will carry gas to 8 provinces of northeast China (including Beijing). For the Western Route, however, some aspects remain to be established regarding the price of the raw material.


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In 2014, Beijing purchased 36 percent more oil from Moscow (665,000 b/d) and 8 percent less from Riyadh, which, while remaining the Empire of the Center’s leading supplier, at 997,000 b/d, has seen a decrease in its share from 19 percent to 16 percent. Moreover, in May, the Russian Federation became China’s leading oil supplier, overtaking Saudi Arabia. In 2015, Riyadh is still Beijing’s leading supplier of crude oil, followed closely by Angola, but exports of Russian oil to China have increased by a third compared with May 2014. This change of pace does not seem motivated by a preference for less expensive quality Russian crude oil, but rather by a political choice.

As reported in the Financial Times, in 2015 Gazprom Neft began to peg its oil exports to China in renminbi rather than in dollar. From an oil market perspective, the supremacy of the dollar is not currently under discussion. However, the overriding centrality of the dollar is a concern, particularly given the role of Federal Reserve monetary policies in pushing down oil prices.

The link between natural gas and geopolitical influence was clear when the Russian Federation aimed its center of gravity towards Asia, even orientating itself in the direction of consumer countries such as Japan and South Korea, thus clashing with liquefied natural gas producers such as Australia. The latter, while managing to avoid the abandonment of major projects under construction relating to LNG exports due to excessively low prices per barrel, will face less favorable margins.

The Russian Federation, also thanks to gas, is more clearly outlining the new concept of Eurasia, the pivot of which in the recent political-economic integration reached on May 28, 2015 by the Customs Union with Belarus and Kazakhstan (which are close to the full membership of Armenia and Kyrgyzstan) and the increasingly consolidated diplomatic-military alliances of the CSI Collective Security Treaty Organization (CSTO) and of the Shanghai Cooperation Organization (SCO).

A resource that should benefit the greatest number of people

Natural gas undoubtedly offers one of the answers—if not the ultimate answer—to the challenge for sustainable development and the planet’s fight against pollution by virtue of its relatively low emissions compared with other traditional fossil fuels. The problem we face is to determine how to use this resource in the best possible way in order for the greatest number of countries and people to derive benefit from it. It is therefore an issue whose importance extends far beyond its benefits to any individual country.

In the knowledge that its role in the global energy markets will largely determine its geopolitical influence, the Russian Federation, in 2001 strongly promoted the foundation of an international body known as the GECF, Gas Exporting Countries Forum, the aim of which is to promote natural gas’s use in sustainable development. It comprises 12 states and another 2 countries with observer status. Unlike OPEC, the GECF does not agree to production levels or aim to influence prices. Perhaps, it is for this reason that it was defined by Jonathan Stern, Director of the Oxford Institute for Energy Studies, as “a relatively chaotic organization.” It is certainly no secret to anyone that around the South Stream, Nord Stream, Turkish Stream and Nord Stream II gas pipelines, a series of contradictions that resulted in a war. Specifically, the events in Ukraine represent a real geopolitical conflict that has the United States of America, on the one hand, and the Russian Federation on the other as its protagonists. This clash involves China supporting Russia (not to be misled by the UN’s stance on Crimea), albeit from a more secluded location. From an energy perspective, the U.S. administration has pursued a strategy seeking the reduction of Russian gas supplies to Europe to be replaced by that from American shale.

Currently, the United States is essentially the world’s largest gas producer, thanks to fracking, the limits of which, however, are becoming increasingly evident. Doubts have arisen about whether the U.S. can able maintain its current production of tight oil, of which shale gas is a by-product. If so, in all likelihood it would also have a negative effect on the currently declining trend of Washington’s level of energy dependence. In fact, of the 2,010 MTOE produced (compared with the 2,299 MTOE consumed) the main item is gas itself with 668 MTOE, followed by oil with 520 MTOE.

about the author
Demostenes Floros
Geopolitical analyst, is a professor of the Masters’ in International Relations Italy – Russia, at the University of Bologna Alma Mater, as well as being the head and professor of the third course in Geopolitics, established at the Open University of Imola (Bologna). He collaborats with the Energy International Risk Assessment (EIRA) and geopolitical magazine Limes.