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Russia Switches
To Gas
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Natural gas has a CO2 content per unit of energy approximately 30 percent lower than oil and 50 percent lower than coal.
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As the European Union works toward meeting its obligations to reduce greenhouse gas emissions, switching from dirty, carbon-intensive coal to cleaner-burning natural gas has become a popular measure.
At first glance, this makes perfect sense: Coal, particularly the kind still left in places like Germany, is highly polluting. Although widespread adoption of renewable energy is the ideal solution, wind, solar, and geothermal still have a ways to go before meeting European needs, ENN said
Natural gas has a CO2 content per unit of energy approximately 30 percent lower than oil and 50 percent lower than coal, making it a reasonable short-term solution. It is still relatively plentiful, with Norway at least 15 years from reaching peak production, and Russia already plugged into the European energy grid with high-capacity pipelines. Europe is counting on Russian production to fill the energy gap left by moving away from coal, but recent concerns about Russia’s ability to satisfy demand have put this plan in doubt.
Russian consumers are using ever greater amounts of energy to power their newly acquired appliances and to heat their bigger homes. With Russian gas feeding expanded domestic electricity generation, less will be available for export to Europe. The Energy Information Administration sees Russian energy consumption growing at 2 percent, in parallel with the 7 percent or so at which the economy has been growing.
Early warnings of this trend have been sounded by the likes of Vladimir Milov, Russia’s former deputy minister of energy and head of the Institute of Energy Policy in Moscow. In a recent International Energy Agency report, Daniel Simmons also expresses concern about the long-term viability of Russian gas supply, finding that Gazprom’s “capital expenditures fall far short of what seems necessary to ensure sufficient new production.“
European leaders are beginning to take notice. Yulia Tymoshenko, Ukraine’s new prime minister, writes in Foreign Affairs of her own concern for Russia’s inability to “increase gas supplies to Europe.“ Not surprisingly, Gazprom and the Russian government have embarked on a strategy of supplementing Russian gas production with additional inflows from Central Asia, and promoting gas conservation in the domestic market by accelerating the rise of gas prices to market levels. The two measures combined should indeed free up additional gas for export.
Satisfying European hunger for natural gas is not the only challenge facing the government-controlled energy establishment. Russians, and the Russian economy, have become accustomed to cheap energy. So much so, in fact, that without below-market gas prices many Russian industries would struggle against the giants of Europe and America. Russia may be known for its vast industrial output--it is not known for efficiency.
An end to cheap gas was a precondition for Russia’s entry into the WTO, as was an arrangement between Brussels and Moscow for Russia to ratify the Kyoto Protocol. The two goals may be impossible to reconcile. A study by Hermitage Capital Management found that some Russian industries, such as metals processing and chemicals, enjoy higher margins than their Western competitors thanks to the below-market price they pay for gas. Should that cheap gas become a thing of the past, the study goes on to say, other sources of energy would have to be found.
For Russia, this is where coal comes in. Shunned by the EU due to its high carbon content and acid rain--causing sulfur, coal is nevertheless the most abundant fossil fuel on earth. Russia holds among the world’s largest reserves of this resource, untapped and accessible. To date, it was simply easier to use gas--it flows by pipeline, is cleaner, and had been easy to extract until recently. Russia may be the only country in the world where coal costs more than gas per thermal unit of energy.
Now that the cost of developing new gas fields is rising, and the geography and geology is becoming more difficult, coal is making a comeback in Russia. It is no coincidence that just as gas prices are on the rise, the government is on the verge of introducing a more favorable tax regime for coal extraction.
The implications of this policy shift are clear. Gas is Russia’s number one earning export. The more it exports, the more government coffers swell. In order to maximize revenues, alternatives to gas must be found for the domestic market, lest the lights go out. Looking forward to 2020, the Kremlin’s strategic plan calls for the construction of four new nuclear power plants, 30 biofuel plants, and lots and lots of coal.
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Tough Times Await UAE
The UAE is likely to face major energy crisis as its consumption is set to treble by 2020.
The country has one of the highest per capita gas consumption rates in the world, according to an expert, Tradearabia reported.
Until recently, the assumption was that demand growth would be met by creating additional generation capacity, fed by limitless gas resources. Governments in the region acted in line, seeking to locate energy intensive industries such as aluminum smelting and sponsoring the building boom, said Gundi Royle, managing director of The National Investor, one of the leading investment and merchant banking groups in the Persian Gulf Arab region.
Based on future development plans, the current installed capacity of energy will need to be doubled by 2015, he said.
Abu Dhabi’s gas is increasingly used in the oil recovery process. Using this gas for electricity generation instead could cost millions of barrels of oil left unrecovered. Abu Dhabi’s untapped Shah Field gas resource can produce the equivalent of 50 percent of current UAE consumption.
However, this resource is earmarked for supporting the oil recovery process. Furthermore, the gas has a high content of sulfur which has to be removed at a cost nearly equivalent to the current wholesale price.
Qatar has instituted a gas development moratorium until 2011 to preserve its valuable resources for future projects. It has invested in special plants that allow its gas to be marketed anywhere in the world, attracting world market prices. Put simply, the gas rich nations of the region have the options to sell their gas in an attractive world market which has raised the benchmark for gas prices at home, particularly in the demanding UAE.
“At the right price--which we estimate to be in the order 100 percent higher than current wholesale price--gas will be available. Unless governments continue to subsidize energy prices, consumers must get used to the idea of higher energy prices. It is quite possible that some energy intensive industries will suffer, said Royle.
A possible solution to the UAE’s fuel problem is a combination of demand management, efficiency and diversification,“ he added.
The UAE’s real estate development needs to be regulated by building codes which make cooling more efficient, and make solar generated electricity and water heating mandatory. Domestic waste water should be recycled to get more use out of costly desalination which consumes vast amounts of electricity.
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Petrochem Plan
Saudi Basic Industries Corp., Sabic, the world’s largest
petrochemicals maker by market value, is looking to set up a
petrochemical project in India.
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Battling Ethanol-Propelled Food Prices
Food prices worldwide have risen dramatically in the past few years, due in part to a similarly dramatic rise in the amount of corn used for ethanol production in the United States. Now, in an effort to make food less expensive, experts are calling for limits on ethanol production, subsidies for corn, and more incentives for biofuels made from nonfood sources.
According to statistics released Wednesday by the US Department of Labor, food prices for the first three months of the year rose at a rate that translates to an annual increase of 5.3 percent (adjusted for seasonal variations). That’s slightly higher than last year’s increase, and much higher than the increases in previous years, Technologyreview wrote.
From 2001 to 2006, the price of food increased each year by an average of only 2.5 percent. According to the World Bank, the situation worldwide is more dire: food prices have nearly doubled over the past three years. That has erased a decade of economic gains for the poor in some countries.
Part of this increase is due to corn being diverted from use as animal feed and food to use as a feedstock for ethanol production. Many other factors are also important--such as growing demand for food imports in India and China and a drought in Australia that hurt grain harvests.
But the use of corn for biofuels has been singled out because it is one factor over which governments have some control. Some analysts, such as C. Ford Runge, a professor of applied economics and law at the University of Minnesota, say that the use of corn for fuel rather than food could account for about one-third of the rise in prices worldwide. The other two-thirds is split between the effects of weather and increases in demand, he says.
Ethanol Demand
A look at the grain markets gives a good idea of the role that ethanol demand plays in food prices, says Patrick Westhoff, codirector of the Food and Agricultural Policy Research Institute at the University of Missouri. In the past two years, global consumption of grains has risen by about 80 million tons, he says. About half of that increase, or 40 million tons, comes from corn used to make ethanol.
To reverse the effects of corn going to fuel rather than to food, some experts are calling for an end to the biofuel mandates signed into law late last year. The mandates require an increase in biofuel production in the United States, including 15 billion gallons of corn ethanol production by 2015--considerably more than the 6.5 billion gallons produced last year.
Repealing the mandates would certainly have some effect on food prices, Westhoff says. According to an analysis done by his organization, the mandates will decrease US corn exports by more than 13 percent from 2011 to 2016. That decrease will tighten corn supplies worldwide, driving up not only corn prices, but also the prices of other staples, such as wheat, that could serve as a replacement for corn.
Removing the mandates could improve export numbers, Westhoff says. (Notably, higher demand for corn for use in ethanol production has actually increased corn exports in the short term. High corn prices have led farmers to plant more corn, and last year, not all of the increased supply went to ethanol. Much of the excess went overseas.)
Repealing Mandates
But the effect of repealing the mandates on food prices depends strongly on the cost of energy. If oil prices stay around $100 a barrel, ethanol will remain an attractive alternative even without the mandates, Westhoff says. As a result, ethanol production could reach levels as high as those set by the mandates anyway, putting just as much strain on the corn supply.
High energy costs increase food prices in other ways, too, says Simla Tokgoz, an economic analyst at the Center for Agricultural and Rural Development at Iowa State University. Growing crops takes energy, and countries that have to import food are now paying a high price for shipping because of fuel costs. Bringing down food prices requires addressing these problems as well.
One thing that could help is reducing or eliminating subsidies that give corn ethanol an economic advantage over ethanol from other sources, such as sugar cane, Runge says. Ethanol can be made from sugar more efficiently than it can from corn, so diversion of sugar to fuel production would not have as much of an effect on food markets.
Scaling up technology for making ethanol from nonfood sources, such as grass and wood chips, could also help. Federal grants are already starting to make that happen, and certain provisions in the US biofuels mandates call for the use of cellulosic ethanol.
But so far, technologies for producing cellulosic ethanol have not been commercially deployed. The jump in food prices “increases the urgency to get them developed,“ says Bruce Babcock, director of the Center for Agricultural and Rural Development at Iowa State University.
Here again, reducing subsidies could help. Runge says that corn ethanol is squeezing out cellulosic ethanol. With corn prices at record highs, farmers have no incentive to plant the best cellulosic crops. Reducing or eliminating corn subsidies could help level the playing field.
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