Intl Energy Forum head - EU's energy independence dreams won't be realized anytime soon

Ukraine is refusing to pay its energy bills, and Moscow turns off the taps – there is now a real concern another gas war is going on, and it may get out of hand. The game for energy has too many players locked in it – Europe, Russia, Ukraine, and the US – but who will suffer the consequences if things go wrong and the agreement is not reached? Can shale gas save the day? We ask these questions to the Secretary General of the International Energy Forum. Aldo Flores-Quiroga is on Sophie&Co today.

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Sophie Shevardnadze: Aldo Flores-Quiroga, Secretary General of the International Energy Forum, welcome to the show. It’s great to have you with us. I’m going to start from the latest: Europe wants energy independence – what do you think, can it ever achieve that goal when it has no significant natural energy reserves of its own? Is it something doable?

Aldo Flores-Quiroga: Energy independence as a concept on its own is a very weak concept for pursuing energy policy. No country is energy independent, and it’s very unlikely that anyone can achieve that. The world of energy is one of interdependence, it’s a message we constantly emphasize in the context of producer-consumer dialog conducted under the IEF.

SS: You know how Europe is dependent on Russian gas – it seems something of a cliché. Is it really Russia or the transit countries that is causing the problems? I mean, Russia is a reliable supplier; it has never halted the flow of gas to Europe. It only had to reroute the gas when Ukraine would stop the transit…

AFQ: Look, this goes beyond whether countries are causing or not problems. The structure of long-term, safe, reliable trade between countries requires a commitment of many players. In the energy dialogue we have learned that security of demand is as important as security of supply. And what we’re seeing now in the context of Russian-European trade and Ukraine as a transit country is a responsible behavior from all sides. There’s conversation going on, which is the right approach when there is a divergence of views, and we welcome this very much. Of course issue is not simple, but to the extent that the interested parties are participating in this dialog, it should be welcomed by everyone.

SS::OK, but now we have a special situation on our hands. There is a civil war going on in Ukraine. Russia is Europe’s biggest gas supplier. Now half of the gas flow to Europe is passing through Ukraine. Is it safe for Europe’s supply right now?

AFQ: Is it safe for Europe’s supply right now?

SS: Yeah, because, you know, it’s an unusual situation right now in Ukraine. It’s beyond just being a safe supplier or safe transit route, there is a civil war going on in the country.

AFQ: Again, the fundamental component of any country’s energy policy involves diversification. Suppliers and demanders, producers and consumers always have to have diversification as one of the objectives of energy policy if they want to enhance the energy security. The fact that European countries have pursued a policy of diversification, the fact that Russia itself is pursuing a policy of diversification, both of energy sources and of markets: it’s just a sensible policy regardless of the circumstances.

SS: But if we talk in terms of today, not in one year or two or three years, but, like, today – the way things are looking right now, remembering 2006 and 2009 Ukraine was late with its gas payments and intercepted Europe-bound Russian gas. Could that happen again right now?

AFQ: The first thing to keep in mind is that we’re in a different world right now from 2009. Europe has made investments in diversification, Russia has also approached this with a mindset of diversification, investments that it has done to go with Europe now are looking towards markets in the East, and there is also a stronger political infrastructure, to call it somehow, to address this issue, so… we’re not exactly facing the same situation. And investments in diversification involved not only the inter-connectedness in Europe, but new markets – Europe is set to increase its energy imports, as we have also seen. Russia, as I have said, is looking for markets elsewhere – and this should strengthen the energy security for all interested parties.

SS: OK, but talking of diversification, you would think that the South Stream pipeline project would have taken care of many things – it would be so beneficial to Europe; but then you see Bulgaria all of a sudden halting its construction. What do you think happened there? What went wrong?

AFQ: As usual in this cases, it is never simple to bring all the various interests to coincide. That’s why investments in gas are long-term – usually they take a sometimes protracted negotiation process, and what we’re seeing is precisely that. It’s not necessarily easy to bring this many countries and companies to agree on what is a best approach to these very sizeable investments.

SS: Look, I’m not insinuating anything…

AFQ: Now, that said, it is of course important that there’s a responsible behavior from all sides, producers consumers and transit countries, and, well, the fact that there are complications, does not imply that there is an irresponsible behavior per se. There are just various points of view that have to be made compatible in the process of these negotiations.

SS: And every country has the right to decide on its own whether they want to be part of a pipeline project, or not. But if Russian gas was no longer available, what alternatives are there? For example, Norway’s Statoil announced it could increase gas supplies to the European Union, but it just wouldn’t be enough in terms of quantity to make up for all of the Russian gas. So, what are the alternatives as of today?

AFQ: First of all, I would not start from that premise. I don’t think that the Russian gas will not be available. Second, let’s keep in mind that gas consumption as such of total energy consumption in Europe is 5 percent. This means that Europe is diversified and has options, and together with new measures that are being taken in Europe, approaches to diversify – like I have said – their energy needs and their sources of gas supply, I don’t see a scenario of any major disruption and I do see that Europe has many options on the table to deal with any situation. Europe has a diversified energy system, even taking into account that Russia is such an important gas supplier to Europe.

SS: And can the US make up any shortfall in energy supplies for Europe?

AFQ: Well, that’s a question that everyone is asking, what’s going to be the impact of the “unconventionals revolution” as it is now called, the rise of production of gas in the US, of oil and gas in the rest of the world, and gas markets in general. We have yet to see many other developments unfold before we can say with any certainty how it’s going to happen. Right now, the main project is for LNG export in the US from the Gulf coast. It appears to be dedicated to supply both Asia and Europe, but it is just one of many projects, it may not have the size right now for anyone to suggest that this will make up for shortfalls in the supply. Again, this is a much more complex subject with many players, with many suppliers. What is clear, of course, is that to the extent that exports from the US to Europe or from any other country for that matter to Europe are sustained or increased, this will also enhance the energy security in Europe.

SS: I remember European Commission president José Manuel Barroso saying that the EU can’t create the illusion that gas from the US is going to solve all of its problems, and there are so many different estimates of how much it could take, but in your personal opinion – what’s your estimate? How much time does the US need to put their shale gas export into action?

AFQ: Now, that’s quite speculative. We know that there is one project approved in the US, and there are many more on different levels of probability being explored, so it is unclear. And moreover, the US is increasing its own demand for its own gas, so it is too soon to tell, in my view.

SS: But you know how people like to speculate, and when we announced that we’re having you on our program, it was going to be about gas, there is this viewer of ours who sent us this question – he is asking, is there any weight to the idea that this Russian-Ukraine gas conflict is being stirred up by the US, and it is to force Europe to switch suppliers?

AFQ: Well that’s just pure speculation. I certainly don’t agree with that point of view. Let me insist, there are serious issues with serious players and actors and governments and companies. The idea that with the amount of resources involved, the size of investments that are behind the oil and gas industry, and the very important relationships between states that this type of simplistic mindset would be used…anyway, it’s just hard to imagine.

SS: I do want to continue talking about this whole shale gas revolution, because Europe and Ukraine have shale gas reserves, and they are untapped. Now, is the crisis situation going to advance their development – what do you think?

AFQ: Well, we have seen that any disruption to energy flows does increase attention to policies of diversification, and fracking, the possibility of using hydraulic fracking to increase oil and gas production in Europe is therefore now with more emphasis on the table, and well, it’s part of the search for energy security. It is indeed one of the components of diversification, it’s not the only one, but, currently, given the issues that we have now seen, with respect to gas trade between Russia and Europe – well it becomes more interesting to see what can be done with oil and gas.

SS: Well you certainly know much more about fracking than I do. So how safe a technology is it? Because, we do see a lot of anti-fracking protests worldwide, like Bulgaria and France have rejected shale gas due to the harm it poses to the environment. What do you think of it?

AFQ: We have seen so far practices that seem to be compatible with environmental protection. There have been experiences that have not been positive, that are under study, that have been addressed so far. So, it seems from what we know up to this point that production from shale resources is safe enough. So far, without any instance of major disaster for the environment or major issues socially, the industry seems to be progressing well, but of course everyone should be vigilant and every effort should be made that no harm to the environment and to other civic and societal concerns is made.

SS: What about, like, minor disasters, not major, but minor disasters – are they OK? Is it worth the big idea?

AFQ: Well, no disaster is fine, right? None of that should be acceptable. The industry, and of course the governments should make sure that this production is done in the safest way possible, that no serious affectation is made. So, whatever type of accidents or concerns that have happened, both with production of shale, and production of unconventionals, or any other resource has to be addressed.

SS: I’ve been reading up on this a little bit, and there is in Britain, in Romania and even in US locals report seismic activity in their neighborhoods, and they say their tap water catches fire – I mean, that’s seems crazy, and there’s this issue of water pollution with the chemicals used for hydraulic fracturing. Is this serious, is this big?

AFQ: The evidence is not strong in that regard. We have seen claims about earthquakes associated with fracking, about water contamination. Interestingly, some of the concerns have been voiced also do involve the environment per se, but the level of traffic that is associated with the moving back and forth of trucks that are participating or are part of fracking process. But, the evidence, again, so far, is not strong to suggest that the environmental effects of fracking are adverse.

SS:I want to get back to our part of the world, because this is what worries us the most. Now, the price Ukraine pays for Russian gas is $485 per 1,000 cubic meters. I just want your expert opinion, leaving the politics aside – it wants to pay half the price, is that a fair request?

AFQ: This is a commercial decision between supplier and consumer. What is, I think, clear to everyone, is that the supply bringing gas and oil to market is costly, and no one can reasonably expect that production should not be compensated. Likewise, it’s not wise, from the producer side to think that taking measures that will affect consumers will be in anyone’s interest – certainly not for the long-term. So, a solution must be found that is fair to the producer and the consumer in this case. What we are seeing is a process for finding that solution, and I’m confident that it will be found.

SS: What would you advise, because Ukraine is unwilling to pay for gas, Russia is unwilling to budge – what would your expect advice be in this dispute? They have kind of reached a deadlock right now…

AFQ: It might be a deadlock, but it’s part, again, of the process, and in the past we have seen that these deadlocks are solved, this are positions that are not fixed through time, as conversations evolve, greaterlearning of what are their concerns and the possibilities will be available, and I’m sure there will be a solution found. To insist, producers must be compensated, without a doubt, this is not a cheap business, and consumers must also count with the certainty that they will have the energy they need. The energy, as you may recall, in the international arena is more and more regarded as a human right – and this is usually assumed or taken into account in the context of energy property; but, energy is crucial for development of every country, and the solution, to insist, will have to involve producers and consumers alike – and this is part of the job, by the way, that of course we have to promote at the IEF.

SS:Yeah, but it’s quite unfortunate that this basic right is not free and cannot be free. Now, Ukraine wants to buy gas from Europe, as one of the solutions, and the deal is supposedly better than the one Russia is offering. Does Europe have enough supplies to sell extra to Kiev, and be a reliable long-term supplier, what do you think?

AFQ: Well, right now, this doesn’t seem to be evident, but I don’t see why it should be a problem for any country to diversify its sources of supply, or of demand. That’s, as I’ve said in the beginning, a sensible energy policy.

SS: Oh no, diversification is not a problem for anyone, I’m just saying this option of buying gas from Europe instead of Russia – is that a viable option as of today? That’s what I’m asking.

AFQ: As of today – well, no. Europe needs much more interconnections, and if I understand the question correctly, it involves mainly the countries of Central or Eastern Europe, and in all that part of Europe greater infrastructure is needed for distribution of gas, and investments will have to be made.

SS: Now, there is this other idea that’s been tossed around, specifically by George Soros, I think he is the one who came up with it and then everyone sort of started talking about it. It is some kind of coordinated action to bring down price of oil – do you think it is a realistic possibility, will the OPEC countries agree to lose revenues in order to follow US foreign policy goals?

AFQ: Coordinated actions to manipulate prices or to move prices in particular direction are hardly useful or beneficial. What we need is markets that work better, more freely, and that are more resilient. So, the actions must be to strengthen energy markets overall, so that we have also greater energy security. But either on the supply or the demand side to try to move prices in particular directions beyond the promotion of price stability which is necessary for long-term planning and investment – I don’t think it’s in the interest of anyone, and certainly not useful for the promotion of economic growth.

SS: Now Russia and America have had ideological differences over Ukraine, and the differences are quite acute at this moment – but then you see oil giants like BP and Exxon Mobil (and they actually instead of [following the] White House’s line have signed agreements with Russia’s Rosneft) – now, we’re thinking over here, don’t you find it a little silly, that they are making deals with a company whose CEO can’t even visit them or even pay for their lunch, because, he is banned from everywhere – I know it’s an absurd situation, what do you make of it?

AFQ: I think that this is part of a conduct of business, and we have to look at it from a pure framework – there is what companies are doing and what states are also involved in, and we are also going to see a process of adjustment in this regard. But to qualify this as absurd – that’s your opinion, it’s not mine.

SS: What’s not absurd is not the fact that companies are making deals despite of politics, the absurd [thing] is that the man who is in charge of the biggest company in Russia cannot even visit the companies who is he signing the deals with. That’s what I meant, I just wanted to be precise. Alright, thank you so much for this wonderful insight in the world of energy. We were talking to Aldo Flores-Quiroga, chief of the International Energy Forum. We were talking about how Europe and Ukraine and also Russia can diversify their energy fields. It was great talking to you. That’s it for this edition of Sophie&Co. I will see you next time.