Presented to the

Seventh Annual Meeting of the Applied Business and Entrepreneurship Association International (ABEAI)

Waikoloa, Hawaii, USA November 16-20, 2010 1

Global Energy:

Trends and Implications

in the European-Russian Context

Anatoly ZHUPLEV Loyola Marymount University

Los Angeles, USA

Dmitry SHTYKHNO Plekhanov Russian Academy of

Economics, Moscow, Russia

Overview

• Key trends/issues in global energy

• The dynamics in global energy

• Global economic growth and energy

• Russia’s energy sector

• The EU-Russia energy dialog

• Conclusion

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Energy security and dependency

• Energy is a foundation of economic development and growth

• Under the global warming and other environmental pressures energy security - top strategic priority, subject of global rivalry

• Many EU members are 30% - 100% dependent on Russian natural gas supply; some of them also critically depend on Russian oil

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Key issues 1. An emerging post-recession global economic growth requires

energy. Oil, a major fossil energy source, is being depleted but and investments for development insufficient.

2. Russia, a major global energy and inefficient energy consumer is experiencing high rate of economic growth that demands more and more energy for its own domestic consumption.

3. High energy intensity in European economies and limited availability of their own energy sources makes many countries in the European region strategically vulnerable in their energy dependence on Russia.

4. Global energy supply and demand are experiencing profound changes driven by environmental dynamics and politics translating into regional and national regulations along with new energy-saving and green/renewable/ sustainable technologies.

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The dynamics in global energy (1)

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World Total Primary Energy Supply Dynamics by Fuel in 1971-2007,

(Mega ton of oil equivalent - Mtoe)

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1973 and 2007 Fuel Shares of Total Primary Energy Supply

The dynamics in global energy (2)

The dynamics in global energy (3)

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Energy trends in 2007-2035 (IEO 2010) • Liquids are expected to remain the dominant energy

source: projected consumption increase 28%

• Natural gas and coal consumption: projected increase 44%...56%

• Electricity generation: projected increase 87%

• Renewable energy is projected to be the fastest-growing source of world electricity generation

• Differences among developed and developing countries, as well as within the group of developed countries in energy consumption

• China: dramatic shift in energy consumption (+5,5% annually in last 25 years)

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Global economic growth and energy (1)

• Energy intensity , the amount of energy it takes a country to produce a dollar of GDP, - an important part of energy security. Energy intensity in 2004:

– U.S. = 9 mega joules per dollar of GDP (MJ/$),

– Russia = 20.7 MJ/$

• Global energy consumption by sector:

– industrial users (agriculture, mining, manufacturing, and construction) - 37%

– personal and commercial transportation - 20%

– residential heating, lighting, and appliances - 11%

– commercial - 5%

– lost in energy transmission - 27%

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• Different energy sectors (oil, gas, coal, hydro, etc.) vary in their internal economic dynamics and role as driving forces in global politics and economics.

• Energy user may have some alternatives and flexibility.

• Energy supplier in the same energy linkage often does not have alternatives/flexibility due to

– technological, logistical dependence

– significant sunk costs invested in setting up and maintaining the infrastructure of energy production and distribution.

• That causes patterns of complex interdependency where energy is often tied up with other issues in political –economic agenda.

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Global economic growth and energy (2)

Russia’s energy sector (world’s rankings)

• Natural gas reserves #1

• Coal reserves #2

• Oil reserves #8

• Natural gas exports #1

• Oil exports #2

• Energy consumption #3

• Electricity generation #4

• Renewable energy production #5

• Nuclear energy production #4

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Russia’s energy sector (internal and external impacts)

• Energy has been and continues to be the Russia’s dominant economic sector while foreign investment in the Russian energy sector has been slow in coming

• Subsidized gas prices have acted as a disincentive to use energy efficiently among both industry and households

• Russian gas exports: ≈50% to W. Europe, ≈20% to Central and E. Europe, ≈30% to the Baltic states & CIS.

• In 2008 oil accounted for 34.4% of Russia’s total exports (totaling, together with gas, almost half of the overall Russian exports).

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Russia: energy production patterns

• Gas output has been stagnating for years, low investments, output at existing gas fields declining

• Oil boom since 1999 was achieved primarily through the rehabilitation of existing fields and the use of more efficient production technologies but the conditional nature of property rights and the selective enforcement of excessive regulations along with high marginal taxes reduce incentives to increase output

• Production, distribution and consumption of electricity remain wasteful

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Russia’s Energy Strategy 2030 (1)

• 2013-2015 - the energy sector will be recovering from economic crisis and building a foundation for future development

• 2015 to 2022 - the introduction of modern innovative technologies to the energy sector

• 2022 to 2030 - focus on energy efficiency, beginning point for Russia’s transition to the use of fuels not based on hydrocarbons.

– Expected outcome: domestic consumption of energy is estimated to rise by a minimum of 40%, trading of energy resources at Russia’s exchanges as a share of the volume of the domestic market should reach at least 30%.

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Russia’s Energy Strategy 2030 (2)

• Internal needs are met and Russia remains a strong energy partner for foreign customers.

• The current capacity of Russian power plants is 225 gigawatts (GW), and it is expected to grow to 355 - 445 GW by 2030, a staggering 58-98% increase.

• The efficiency of gas and coal electric power plants will grow by 40% by 2030. The efficiency of nuclear power plants will rise by 15%.

• Alternative ways for generating energy are given special priority as well as improvements in the refining process of hydrocarbons.

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Russia and Europe in the energy context

• In the emerging geo-political and economic environment, the development of the world energy will depend primarily on such countries and regions as the U.S., the Middle East, Russia, China and the EU.

• The recent natural gas supply-demand balances in Europe and North America, and their implications for the future, are affecting investment and future production plans in Russia.

• Russia is investing in infrastructure, including ports to serve the Asian market. Its proximity to Asian importers could allow Russia to become a key Asian supplier.

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Russian Natural Gas as % of Domestic Consumption, 2006

Russian assertive foreign energy policy

• Additional profits, “energy power”, expansion of Russia’s energy and metals conglomerates across Europe

• Russia has increased its market share of coal supplied to European countries, the primary market for U.S. coal exports.

• In the long term Europe as a region is expected to rely less on coal to meet its energy needs, so that the U.S. will face increasing competition from lower cost Russian supplies to satisfy a declining European market for coal

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European leaders face a dilemma: to embrace dependence

on and deepen their political- economic partnership with

Russia or look for alternative sources of supply?

EU – Russia energy talks

• Energy Charter Treaty

• EU – Russia Energy Dialog: early discussions were dominated by Russia’s short-term and sector-specific goals , long-term conceptual vision includes the separation of energy issues from the question of overall economic relations, mutual guarantees for suppliers and consumers, and reciprocity in access to the market.

• The EU will develop alternative energy resources but still, it agrees that the Russian-EU energy partnership is a long-term one, as a new resource to replace gas will hardly be found at once (The EU Energy Commissioner Guenther Oettinger on November 10, 2010).

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CONCLUSION (1)

• Global energy supply: oil 34%, coal/peat 26.5%, gas 20.9%, combustible renewables and waste 9.8%, nuclear 5.9%, hydro 2.2%.

• Liquid fuels are projected to be the dominant energy source for all major consuming economic sectors except for transportation.

• Russia itself is a big emerging market with high rate of growth, energy consumption. Foreign investment in the Russian energy sector has been limited due to a challenging investment climate, inadequate legislative framework, rampant corruption, growing government control, poor corporate governance, and other problems.

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CONCLUSION (2) • The Russian Energy Strategy 2030 looks ambitious, although

some industry experts remain skeptical whether it can be fulfilled.

• The Russian Energy Strategy will have a profound impact on both European and Global Energy business through the planned geo-regional reconfiguration of Russia's exports of major sources of energy.

• EU is investing US$1,38 into single energy market development to increase energy efficiency and to cut fossil fuel imports and fight climate change.

• Russia plans to spend its gas revenue on modernizing its energy sector which contributes to the strategic partnership, and provides for the stability of gas exports to Europe.

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Thank you

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Global Energy:

Trends and Implications

in the European-Russian Context