Hochstein outlines how world energy changed during Obama’s presidency

President-elect Donald J. Trump’s incoming administration almost certainly will get a dramatically different world energy assessment than President-elect Barack Obama’s did 8 years earlier, the US Department of State’s special envoy for energy resources expects.

In the time since, US crude oil production climbed from 5.5 million b/d to a 9.6 million b/d peak in late 2014-early 2015 before falling back to an 8.3-8.4 million b/d in 2015-16, Amos J. Hochstein said. The US began to export natural gas to South America, which experts had not predicted, as well as to Kuwait and Dubai, which also was not expected, he noted in a Nov. 28 address to the German Marshall Fund in Brussels.

US renewable energy investments rose to $45 billion in 2014-15 when crude prices were in the $100/bbl range, with another $58 billion spent toward the end of 2015 when crude prices dropped, he said. “So at the low price of oil, we still saw a far more significant increase in investment in renewable energy than we have with high oil prices because we have seen more and more of a disconnect between renewable energy investment and the price of oil,” Hochstein said.

“So that’s the reality in which we have lived through from 2009 to where we are today: A better mix, inside the US, an increase in renewables, an increase in gas, and yes, an increase in oil production as well” and growing energy efficiency and reduced carbon and greenhouse gas emissions, he said.

“If you take everything I’ve said as a whole, it is what has translated the US into the world’s energy superpower,” Hochstein said. “It’s not that we are the superpower because we are producing more oil, or more gas, or more renewables alone. It’s because in every aspect of the word ‘energy,’ the [nation] is leading that path.”

Hochstein considers this substantial because it has foreign policy and national security implications that the US public and government have not actually internalized, he said. Noting that reports about the possible outcome of the Organization of Petroleum Exporting Countries meeting a few days later speculated an agreement to reduce production would be reached, the US envoy said that more than 4,000 US producers—both conventional and unconventional—also could benefit as the only ones in the world controlled not by governments, but by markets.

From client to competitor

“So if the price actually rises, the US will increase production, which will translate into the US gaining the market share. OPEC states will be at lower production levels and less money,” he said. “Now that’s important because as the US, we have to think about how the rest of the world views us. Oil-producing countries, in the history of our relationship, provided us with natural resources in return for a certain degree of security. What does that mean when your former big client is now your competitor?”

He noted that he recalled concerns at the end of 2008 as a cautionary tale for making too many predictions about the world energy market “because you’re more likely to be wrong than right, and therefore I’m not going to say that I know when peaking oil is going to be.” But, he said, “I think we’re underestimating that the forces that brought more oil to the market [from tight shale formations] are actually going to accelerate its demise. By keeping the prices there, it creates a different market dynamic that we don’t yet understand.”

Hochstein said his main concern now is not in Europe, but in Asia, where Vietnam has moved away from investing in nuclear power and LNG to 40 GW of coal-fired power plants. Malaysia, Thailand, and the Philippines also have announced similar moves. “So while we talk about China all the time, we’re creating a subculture in Southeast Asia where coal comes back,” he warned. “How do we combat that? I don’t believe it’s simply by implementing only renewable energy. If we don’t have a functioning and stable trading of natural gas in Southeast Asia, we will not see a decline in coal.”

He said the worldwide energy revolution has affected Europe too, particularly in impressive work the European Commission is doing on developing an energy package to address European Union member countries’ goals.

“But there’s an element that is hanging over our heads that is of vital importance for Europe’s very future and sovereignty and territorial integrity. And that is the energy security piece, because energy security is not about energy. It’s about everything around energy. What we have seen the last several years is a vulnerability that exists in Europe that has not been addressed fully,” Hochstein said.

From dominance to diversity

A significant number of European nations still live with the threat of an energy supply cutoff from a dominant supplier, he pointed out. But the ability to diversify also exists, Hochstein added. “First it was a gas pipeline from Azerbaijan through Turkey into Europe. Second was the ability to build LNG terminals on the borders of different key points in Europe in order to be able to bring diversity,” he said.

“This does not mean that Russia should not be a supplier in Europe. It should and it will,” he emphasized. “It is a significant resource-holder that is sitting right on your borders. It should be one of your main trading partners. But if it is allowed to be the only supplier into certain countries with zero alternatives—that they can have a take-or-pay contract whether you need it or not, which means that you don’t only depend on them for the energy supply but it puts you into debt financially—that’s not sustainable, because that translates into leverage.”

Some European nations have addressed this with relatively low levels of investment that have provided alternatives, such as Lithuania, which built an LNG import terminal and then renegotiated a lower price with Russia’s Gazprom before the first LNG shipments arrived, Hochstein said. “Gazprom still sells them most of their gas, but now it’s at a competitive price. And now if Gazprom ever shuts it off, there’s an alternative. That’s all that needs to happen,” he said.

There are gas pipeline projects pending in Europe now that could determine the next 30 years of energy dependency and energy security vulnerability, he said. “If you build Nordstream II and Turkstream, in combination, there is no room for a supply line through Ukraine. You will extend the dependency and eliminate all options of diversification for 25 years.”

He said, “New contracts will be signed, new dependencies created or extended. And if Europe does that, then the economic burden on Ukraine—losing nearly $2 billion/year of transit revenue—is not recoverable, which could lead to economic collapse. And we all know what happens [then]: political instability and ultimately a change in direction potentially.”

He said, “That’s what’s at stake in the next 6-9 months. And that’s not hyperbole. Decisions will be made. If Europe wants to work to avoid these threats, it will have to come together. It will need to be the success of an energy union. Otherwise, it will not work.”

Contact Nick Snow at nicks@pennwell.com.

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