Power Plays

By Neville, Laurence | Global Finance, February 2007 | Go to article overview

Power Plays


Neville, Laurence, Global Finance


After a year in which energy dominated the headlines as never before, the world's political dynamics are now arguably more about this precious resource than anything else.

When the Group of Seven nations met in St Petersburg last July, Russian oil giant Rosneft had just completed its $10.4 billion IPO-the fifth largest in the world. The timing of the float was not coincidental. Rosneft's IPO fulfilled two seemingly contradictory goals: First, it enabled the Kremlin, which retained 85% of Rosneft, to demonstrate that it was happy to allow international investors to buy into its energy assets. Second, and more crucially, it reminded everyone how important Russia is: A third of Western Europe's natural gas comes from Russia, and this figure will rise significantly. Last winter Russia cut off gas supplies to Ukraine due to a political dispute and only restored them at higher prices. This winter Russia is similarly using energy as a political tool in Belarus-much to the disgust of the European Union.

Russia and other countries have also demonstrated their nationalistic tendencies in other ways. In December the Kremlin forced Shell to quit its stake in the world's biggest liquefied gas project, the $20 billion Sakhalin-2 scheme in the far east of Russia, in favor of state-owned energy group Gazprom. Meanwhile, China has embarked on a courtship with a number of African countries, signing deals giving it exclusive rights to energy and a range of natural resources.

"Economic nationalism in energy means that some supply is being contracted for on a bilateral basis," says Fred Cohen, partner and global advisory leader for the energy, utilities and mining sectors at PricewaterhouseCoopers (PwC).

"That means that supply and liquidity is potentially constrained, resulting in greater volatility because there is greater exposure to the threat of disruptions of supply."

Energy Security

While concern over energy is a global phenomenon, there are some key differences between the energy debate in the United States (and to a large extent Asia and Latin America) and that in Europe. While there is a strong grassroots environmental movement in the US, green issues have not gained traction in the political mainstream. Instead, the energy debate in the US, while touching on many of the same issues of the more environmentally focused approach of Europe, concentrates more on energy security.

In some aspects, energy security and environmental concerns coincide. The United Kingdom's push for wind power-it announced plans in December for the largest wind farm in the world to be sited in the Thames estuary-is as much to do with voter and consumer pressure to go green as it is to do with reducing the country's dependence on Russian gas, given concerns about the direction it is taking under President Vladimir Putin.

However, in other instances the divergence of energy security and environmental concerns is acute. Biofuels are seen by some as a panacea for the United States' energy woes, given that they can replace gasoline. However, biofuels require an energy source-usually natural gas-for production, and the US has a shortage of indigenous natural gas. Consequently, there are currently proposals in the US to produce biofuel using coal-generated power. Such a suggestion might make sense from an energy security perspective, but it makes a mockery of any environmental pretensions given that burning coal produces vast amounts of carbon dioxide.

Coal is also much more available in the US than gas, and the price is far more stable, which encourages electricity producers to use more coal. "In the United States, gas prices are two-and-ahalf times more volatile than coal prices," explains Jim Rogers, president and CEO of Duke Energy, one of the largest power producers in the US. "Therefore, there is an incentive to use more coal. As a supplier, we want smooth increases in price over time because it reduces the political and consumer reaction to price shocks. …

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