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Vladimir Litvinenko: reducing investment in oil and gas will only lead to a further increase in their cost

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The world public and the media continue to discuss the scandalous statement of experts of the International Energy Agency (IEA), which proposed to stop financing new projects related to the exploration and development of hydrocarbon deposits. Most analysts believe that this will not lead to an acceleration of the energy transition and reduction of human impact on nature, but only to a shortage of resources, an increase in their cost, and, as a consequence, a decline in the quality of life in developing countries. The result of this state of affairs will be an increased role of “dirty”, but cheaper technologies for power generation.

So, what happened? In May, the International Energy Agency (IEA) published a report which contains very controversial and contentious judgments. This document states, in particular, that there should be no investment in the oil and gas industry if the world is to achieve carbon neutrality by 2050. The idea is that existing fields will suffice to cover falling demand.

The conclusion from this is simply paradoxical: Humanity for the realization of the optimistic scenario should, hand in hand, begin to invest exclusively in renewable energy sources. In this case, we will completely rebuild the global fuel and energy complex in 30 years, the planet will be cleaned of the heavy legacy of the fossil fuel era and Greta Thunberg will proudly proclaim that her children and grandchildren, unlike herself, will not have their future stolen by anyone.

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It would be great to believe in this beautiful fairy tale if it were not for one “but”. This spring, the International Renewable Energy Agency (IRENA) calculated its price. So, according to the most conservative estimates, it amounts to $131 trillion, although previously it was thought that a third lesser sum would be enough to implement the idea of the energy transition.

Do you think the world economy, weakened by the impact of the pandemic, will be able to handle a project costing about $4.5 trillion a year? However, this is not the final amount, because the flywheel of global inflation is spinning ever stronger, and copper, polysilicon, and other raw materials needed for the construction of wind turbines and solar panels, are rapidly becoming more expensive.

Now imagine the situation: by the year 2050, the energy transition has failed. We have almost no oil and gas by then, because the old fields have been exhausted or are in the final stages of exploitation, and no one is exploring and developing new ones. This means that thanks to the wise advice of IEA experts, we will have to spend our evenings in the company of dimly flickering candles, a melting refrigerator, and a cooling battery with varying regularity.

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The recommendations of the structure, which is supposed to take care of increasing the level of energy security, and not the other way around, caused a flurry of comments. For example, Total Energies CEO Patrick Pouyanne said th”chronic underfunding of the industry during the period of maturity of existing fields will lead to a reduction in supplies and a sharp spike in oil prices in the future.”

“The world risks facing an acute shortage of energy resources,” warned Igor Sechin, head of Rosneft. He called it a paradox that “the world consumes oil, but is not ready to invest in it,” and called on the global community to take into account the economic efficiency of green energy and “avoid focusing only on alternative generation.”

According to Deputy Prime Minister Alexander Novak, if the world follows the controversial International Energy Agency roadmap and immediately stops investing in hydrocarbons, their asset prices will increase several times.

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“The price of oil will be, what, $200? Gas prices will skyrocket,” Novak believes.

Qatar Energy Minister Saad Sherid Al-Kaabi fully agrees with him:

“Speculation around the transition to clean energy is very dangerous. When you deprive business of investment, you condemn yourself to higher prices. In the case of highly sought-after commodities such as oil or gas, the spike can be very large.”

Saudi Energy Minister Prince Abdulaziz bin Salman called the IEA report “a continuation of the La La Land movie, that is, idle chatter.”

“Why should I take it seriously?” he asked rhetorically in response to an invitation from journalists to comment.

Forpost decided to seek clarification from Vladimir Litvinenko, a leading expert in the field of FEC and rector of St. Petersburg Mining University. What is the reason for such a strange statement of the IEA? When will mankind be able to give up hydrocarbons? And are eco-activists right in calling them “cave fuels” that hinder the development of clean energy?

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Vladimir Litvinenko: Reducing the technogenic impact on nature is not a tribute to fashion, but one of the most serious challenges of our time. Mankind must, without any doubt, find a way to minimize the pollution of ecosystems, including during energy production and power generation. Another thing is, how?

I do not want to comment on the IEA report, because it is simply inadequate. I can hardly imagine incompetent people working for such a serious organization. Therefore, the only reason for the appearance of such a “study” can only be their bias, an attempt to lobby the interests of certain business structures.

In essence, we have witnessed yet another example of non-market competition, not a struggle for the environment. All the more so because companies that produce lithium batteries for electric cars and other products associated with “green” technologies also pollute the environment. Just watch on the Internet the video of the June 9 explosion at the plant where polysilicon (used to manufacture photovoltaic cells for solar panels - ed.) is made to be convinced of that. And this is far from an isolated incident.

Nonetheless, the trend is clear. The West is advocating taking investments from the oil and gas industry and directing them at the development of renewable energy sources. In other words, they propose that we take a revolutionary path and fundamentally transform the global energy industry in the next thirty years.

Analysts at Rystad Energy state that peak oil demand can be passed already this decade. They believe that for this to happen and for the market to remain balanced, it will be enough to produce 10 million barrels a day at new fields. This would require funding of less than $300 billion a year.

- What is the global investment in oil production right now, and do you think the funds that Rystad analysts are talking about will be enough?

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- Investments in the industry have already seriously diminished. Whereas in 2014 it was $900 billion, in 2016, it dropped to $500 billion, and in 2020, it is down to $400 billion. But has this led to a reduction in demand for oil or natural gas? No, it has continued to grow, and the pandemic has only temporarily slowed it down. Because developing countries have to think not only about the environment, but also about the progressive development of their economies and the fight against poverty, and about the fact that about one billion people around the world, especially in Asia and Africa, have no access to electricity.

The West is now trying to distort the objective picture of the world by presenting the situation in such a way that states with a rich resource base, including Russia, are provoking increased consumption of hydrocarbons. But is this truly possible? We all know from our school years that it is demand that generates supply, not the other way around. Therefore, reduction of investment in oil and gas will only lead to further growth of their value, and not to a decrease in demand.

The Role of Hydrocarbons in the Global Energy Agenda: The Focus on Liquefied Natural Gas

Look at how much the same coal is priced today at the Rotterdam exchange: it’s over USD 100 per ton, which is a ten-year maximum. Natural gas on the TTF, the most popular trading platform in the EU, is traded at USD 350 per thousand cubic meters. And that’s in summer! And what will happen in winter? Such high gas quotes are a direct result of the resource shortage caused by underfunding of the production sector and attempts to hinder the construction of Nord Stream-2. Given this state of affairs, statements of politicians and “experts” that hydrocarbons are yesterday’s reality, that there is no need to invest in them, that they will be replaced by renewable energy sources are the height of absurdity.

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Yes, of course, if the world takes a revolutionary path and an artificial shortage of the same natural gas is created in the market, then developing countries will have to switch to other sources of energy. But most likely, the choice will be made not in favor of environmentally friendly technologies, but rather in favor of cheaper and, accordingly, more harmful to nature.

- But some Western countries have quite succeeded in increasing the share of solar and wind energy in their energy balances, haven't they?

- Yes, over the last decade, the share of electricity generated by renewable energy sources in Germany and Denmark in particular, has increased significantly. Perhaps these and some other post-industrial powers will be able to make the energy transition by mid-century due to huge investments. However, it will not be easy to do this, because the currently available technology does not allow for the accumulation of electricity produced by wind turbines and solar panels on an industrial scale. That is, they cannot guarantee the stability of the power grid at peak loads, and even more so if there is no wind or cloudy weather outside. As much as they have generated, so much has been fed into the grid, there is no reserve. This is not their only disadvantage, but perhaps their most serious one. The saddest thing is that there are no scientific breakthroughs in this direction.

Besides, let’s not forget that the dollar and euro are currencies used in international settlements. That is, the EU or the U.S. can afford to turn on the printing press or borrow and invest these funds in the development of renewable energy. If a developing country does this, it will lead to a devaluation of the local currency and a significant drop in living standards.

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The EU and the United States live by different rules. They shift inflation to those countries that use their currency in foreign trade, that is, they “smear” it around the world. And yet, they continue to urge us to follow their path and angrily condemn us for not wanting to do so. What can this be compared to? For example, to a situation where an experienced climber, equipped with special equipment, invites a novice in sneakers, shorts, and a T-shirt to follow him up the mountain on a cliff.

- So the energy transition on a global scale is impossible?

- In my opinion, and this opinion is supported by many respected experts from Russia and other countries, humanity should not make a revolution in energy. In all likelihood, this will lead to the fact that we will have to live in conditions of regular blackouts and parallel pay astronomical electricity bills. We would hate to find ourselves in such a situation, even if we pursue such a good goal as reducing the technogenic impact on nature.

At the same time, it is certainly necessary to solve the problem. But we should follow the evolutionary path. Yes, it is necessary to build wind farms and solar power plants, and we are building them. For example, this year Buryatia launched its sixth wind farm. It makes sense because this is one of the sunniest regions in Russia. Rostov region recently built the country’s most powerful wind power plant.

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And yet the development of renewable energy is not the only and perhaps not the most important task. It is equally important to increase the volume of waste recycling; continue working on improving the quality of fuel; introduce affordable technologies to minimize the environmental impact of traditional energy facilities; create more efficient ways of capturing pollutants, including CO2.

If we don’t do this, counting on the rapid energy transition promised by the West, in 30 years we will still live in a world with a very high level of oil and gas consumption, and their extraction, processing, and use, due to lack of proper funding, will still cause significant harm to the environment.