Energy Security and Vulnerability: Options of Risk Minimisation and the Broader European Context

Energy Security and Vulnerability: Options of Risk Minimisation and the Broader European Context

Posted in Other | 08-Oct-06 | Author: Nikolaus Supersberger

"Addressing causes of disruption of supply the first to mention in the current global context is terrorism"

In recent years, questions regarding energy security have risen on the public and political agenda, driven by events like ongoing terrorist attacks on facilities of the fossil fuel industry, like the electricity blackouts in a number of industrialised countries and, last but not least, by events like the sharp increase in energy demand of countries like China and India. All these events show the large vulnerability of our modern energy systems – on all levels, from the global to the local. Supply disruptions directly affect economic development, and growing import dependence is becoming more and more a factor in political calculus.

Different answers to this challenge exist, one of them is a far-reaching transformation of our energy systems to reduce intrinsic vulnerabilities – in the long run, this might be the only option available to guarantee reliable access to energy for the members of the global community.

Characteristics of Modern Energy Systems

Vulnerability of modern energy systems is a function of their complex characteristics. First, heavy use of carbon-rich fossil fuels is one defining feature of today’s global energy complex. Oil, coal and natural gas dominate. Low-carbon nuclear fuels and renewable energies play a secondary role. The primary energy carrier coal is mainly converted to the secondary energy carriers electricity and heat. The same holds true to a lesser degree for natural gas. Oil is dominating in the transportation sector; in heating it is in some countries also important. Renewable energy sources are used for electricity, transportation and heating.

Second, for decades the energy industry, especially in electricity generation, has used economies of scale, building infrastructures comprised of large generation units and large-scale transmission lines and distribution networks. Centralization was the result.

Third, modern energy systems and modern economies need a constant energy supply—no interruptions, “24/7”—hence the need for constant security of supply. Unlike oil, which can easily be stored in tanks, storing electricity is extremely difficult. Technologies for efficient large-scale storage are not on the markets.

Fourth, extrapolating historical trends, world energy demand will steadily increase in the future. (In this context it has to be mentioned that ever increasing energy consumption is not at all a prerequisite of economic development, because of available energy efficiency potentials even in industrialized countries.) In sum, today’s global energy system is characterised by:

• Heavy use of fossil fuels;
  
  
• Centralized and large scale structures throughout the supply chains;
  
  
• Reliable 24/7 supply;
  
  
• Rapidly growing demand.

Disruption of Supply and Causes of Vulnerability

The requirement of constant supply is the major cause of vulnerability. In other words, disruption of supply is the major threat to fossil-fuel-dependent economies. It is the “background noise” that sets the context. Here, there is a difference between the concrete disruption of supply (notably terrorism, strikes and political risks) and general causes of vulnerability (import dependence, rapidly rising demand and centralization). The former involves direct interventions in the functioning of the energy systems, the latter address the overall structural conditions of these systems.

Addressing causes of disruption of supply the first to mention in the current global context is terrorism. Iraq shows that infrastructures of oil and gas production make easy targets for terrorist attacks. Since the end of war in Iraq hundreds of attacks on oil production sites, on pipelines, on hubs, and on port facilities have occurred. This has lead to a significant reduction of oil exports, resulting in an estimated financial loss of about $11 billion for Iraq between June 2003 and May 2005. The largest oil producer Saudi-Arabia spends $1.2—1.5 billion annually for security measures for oil and gas production, transportation and refining facilities (www.gasandoil.com).

In October 2002, terrorists targeted a French tanker off the coast of Yemen. If attacks like this one succeed, environmental damage due to the oil spill will be large. The situation could worsen by an attack at a strategically relevant so called choke point of tanker transport like the Strait of Hormuz or the Suez Canal. Sinking a tanker would then create a major disruption of supply. This is an extreme scenario, but not an unthinkable one. The number of tanker transports is large (and growing) and security measures have logistical limits.

Talking about disruption of supply, different patterns have to be discerned. The general pattern among terrorist attacks and strikes (which will not be discussed in this article) is that disruptions are often small or negligible on a global scale (with certain exceptions), that they are not centrally coordinated by an organizational body, and that they don’t follow an international strategy.

Political Risk arising from Unexpected Sources

Nikolaus Supersberger: "In this context the role of a national energy security advisor should be thoroughly analysed"

The opposite is the case with political risks. The term is often applied to describe the situation in the Persian Gulf region. The region is usually seen as politically labile, constantly threatened by subversion and religious fundamentalism. Some experts do, however, disagree, believing that countries in the region are more or less politically stable: they may not be democratically legitimized, but the ruling elites would not be threatened directly by upheaval and revolution (H. Fürtig, in: Krisenfaktor Öl, 2006).

The power of OPEC should not be overestimated. OPEC is an aggregate of quite different (developing) countries, each dealing with special challenges like environmental stress and accompanied health risks for their populations, poverty, unemployment, and more. Like the consuming countries depending on oil supply, OPEC countries depend on revenues from oil exports. Extremely high oil prices bear major risks for OPEC countries themselves, among these are promotion of alternatives to fossil fuels and reducing dependence on OPEC. These alternatives have the potential to reduce OPEC power. Indeed, OPEC is very much interested in stable market environments.

Political risk may rise from other sources. One setting is a scenario of political overthrow, comparable to the Taliban regime in Afghanistan. If such a regime came into power in Saudi Arabia, which provides about 15 percent of global oil, the oil weapon could of course be used, and it would probably be in the logic of Islamic fundamentalism to use it to harm the economies of the Western societies. However, this is speculation, and more realistic situations are at hand.

The Russian-Ukrainian gas crisis of January 2006 shows another facet of political risk, and here it becomes obvious that political risk is the link between the disruption of supply and causes of vulnerability. This conflict was symptomatic—a clear example of the kind of challenges the future will bring. All eastern European countries are dependent on Russian natural gas. The same holds true for Western Europe. Russia claimed Ukraine to pay a “world market rate” for Russian natural gas (J. Stern, Oxford Institute for Energyg Studies, 2006). This position is reasonable, as Ukraine received gas from Russia at a “friendship rate” in the past. But other countries like Belarus still get gas with these conditions and the question rose why Ukraine now has to pay twice as much than before, but Belarus doesn’t.

Import dependence bears—apart from forgone domestic value creation—the risk that independence of decision making on international level is reduced. Globally import dependence, as a challenge for national energy systems and cause of vulnerability, is a growing problem. The consumers on the one side increase in number (as developing countries enter the global market and compete for oil and gas) and the consumers increase absolute demand. On the other side production capacities continue to decrease in the major consumer regions; the remaining producers thereby increase their (market) power. For probable increase of oil import dependence see Figure 1.

Figure 1. Oil import demand of different world regions in percent of total oil demand. Source: World Energy Outlook 2004, International Energy Agency, 2004.

Oil demand in the EU25 region is projected to increase in the coming decades from 648 million tons in 2002 to 743 million tonnes in 2030 according to the IEA. But domestic production of oil and gas in the European Union is declining (Directorate General Energy and Transport, Brussels, 2004). These declines have to be compensated for by diversification of suppliers or stronger dependence on only some few suppliers like Russia. Independently from the chosen solution, dependence on imported fossil fuels will increase significantly. Import dependence can directly influence security of energy supply, as political and other aspects in supplier and transit countries play major roles in the stability of supply chains.

With this background in mind the latest Green Paper of the European Commission has to be analysed (Title: A European Strategy for Sustainable, Competitive and Secure Energy, 2006). It points out several priority areas of future energy supply, emphasising the need for common action. One key area is the development of a coherent external energy supply policy. This seems in view of increasing global energy demand and growing challenges in energy production one of the foremost topics to be put on the political agenda.

Especially natural gas shows high dynamics in terms of supply security. Europe is searching for new gas suppliers to reduce extreme dependence on some few exporters. E. g. Russia contributes a quarter of total natural gas supplies of the EU25 region.

It is of relevance that the Russian export strategy did not plan on supplying natural gas to the EU in the amounts as were projected by the EU itself (cf. analyses of R. Götz, e.g. the study Russia’s natural gas and EU’s energy security, 2004). The resulting gap has to be filled by other imports. Liquefied natural gas (LNG) is a promising option for future European gas supply as it allows high flexibility of suppliers (ship transport). The LNG option is discussed in different regional contexts: imports from Algeria could be increased as well as trade with Trinidad and Tobago. Nigeria is seen as a possible supplier of LNG as well. However, the most promising gas supplying region – covering LNG as well as pipeline natural gas – is the Persian Gulf region, holding large natural gas reserves. Especially Iran as second largest gas reserve owner is an interesting future supplier. Initiatives like the Nabucco pipeline project are manifestations of Europe’s will to co-operate with countries of the Persian Gulf.

Production Peak Considerations

Fossil fuels are finite, non-renewable resources. The statement that oil will last for “another 40 years” at current consumption rate is misleading, because consumption is increasing (so that current consumption as reference is worthless) and, more importantly, it is impossible to produce from an oil field at constant rate until the last recoverable unit is extracted. A realistic production profile generally follows a bell shaped curve with a production maximum when about fifty percent of the recoverable oil is produced (the so called depletion mid point), possibly followed by a short plateau. After this peak production rate, productivity decreases; the field is then “in decline.”

The discussion focusing on a static range of fuels is distracting attention from the basic problem: the world will experience supply shortages long before the world “runs out of oil”. The crucial point is when demand further increases but supply cannot follow. The resulting gap will lead to soaring oil prices.

There is discussion as to when this production peak for conventional oil, as well as for all hydrocarbons, will occur. The Association for the Study of Peak Oil and Gas (ASPO) and the German Geological Survey (BGR) are discussing a global oil production peak in the range between 2010 (see Figure 2) and 2015 to 2025.

Figure 2. Possible production peak for all fossil hydrocarbons (oil and natural gas), as projected by ASPO. Source: Newsletter No. 64, Association for the Study of Peak Oil and Gas, Uppsala, www.peakoil.net.

Many other sources do not assume a production peak. This is due to the reason that either the production projections are not progressing far enough into the future or that such a peak is actively denied. ExxonMobil (see Figure 3) is calculating possible future oil demand, and production, hence supply, is assumed to follow: Non-OPEC oil production will peak, and the gap between demand and Non-OPEC production will have to be filled by OPEC; the assumption is made that OPEC can and will increase production to the required level. The basic criticism using the “supply follows demand” approach is that using demand projections as starting point for future supply requirements is not fully accepting physical production restrictions as they will happen, but rather views economic parameters as dominant variables.

Figure 3. Exxon’s projection of permanent demand increase; supply is assumed to follow. Non-OPEC production peak (in fact more a plateau) is calculated to occur between 2010 and 2020. The resulting gap between demand and non-OPEC supply has to be filled mainly by OPEC. Source: Report on Energy Trends, ExxonMobil, 2004, www.exxonmobil.com.

Dynamics of Substitution of Energy Sources

Quick responses to supply restrictions (be it structural on supply side or due to problems in getting access to sources because of strong international competition) require high flexibility of energy systems. However, energy systems are all but flexible. Indeed, inflexibility is the major weakness of current energy systems. They are too inert to be able to respond to abrupt changes. Adequate reactions on structural supply restrictions take decades. Inertia derives from different sources, among them consumer behaviour, but also powerful lobby groups trying to prevent system change. On the structural side, inertia results from the long life-time of power plants (up to 50 years), pipelines and other infrastructures.

Substitutes to conventional oil offer numerous opportunities. One branch of substitutes is utilizing other sources of fossil fuels, such as tar sands, heavy and extra heavy oil production, and synthetic fuels from coal and natural gas. The second branch of options is comprised of renewable energy sources like wind, solar energy, biomass, hydrodynamic energy (waves, tides, rivers and storage lakes) and geothermal energy; and last but not least, enhanced energy efficiency and energy saving.

Substitution of fossil fuels by other fossil fuels bears numerous counterproductive effects: the production processes of all substitutes need more energy and consume more non-energy resources. So one of the unsolved problems of using tar sands is their severe environmental impact on two sides: local damages, partly caused by open-pit mining, like water and soil consumption and significant energy demand for processing and upgrading to synthetic oil, hence increased greenhouse gas emissions (plus emissions of other pollutants). At present, Canadian discussion revolves around whether to use gas to fuel tar sands production (as hitherto) or to sell gas to the United States directly. Substitution of conventional oil by natural gas through gas-to-liquid processes (GTL) is an energy-consuming process with currently low efficiency as well. The same holds true for liquefaction of coal (coal-to-liquid CTL).

Finding substitutes for fossil fuels has never been regarded as an inert process. Replacing conventional oil by non-conventional fuels (see above) has always been judged as a smooth process mainly driven by economic factors. The rationale was that rising oil prices would make fossil alternatives, one after the other, economically feasible. After reaching cost effectiveness, they would contribute to the overall energy supply. The error in reasoning is that economical criteria are not the only influencing factors; the described automatism only works in more or less narrow confines. Other determinants are social acceptance and environmental sustainability, as well as the possible long-term contribution on global or at least national scale and the velocity of market introduction of alternatives.

Transformation of the Energy System as Prerequisite for Future Risk Minimization

The energy infrastructures today are because of the mentioned reasons in critical condition. Built without considering resource limitations and complex relationships between diverse players, they are now less able to meet the needs of modern societies. For the long-run, security of supply without harming social and environmental contexts can no longer be guaranteed. The current non-sustainable trends of these energy systems need far-reaching transformation.

There are two pathways to deal with the challenge of rising energy insecurity, increasing vulnerabilities and secondary effects of fossil energy use (e.g. climate change refugees) (Weltmacht Energie, P. Hennicke / M. Müller, 2005). The first is coping with the effects and choosing ever more drastic measures to keep control. As a last resort, military force would be used, be it for securing supply lines, be it as an instrument of political pressure, or be it for gaining access to fossil fuel by force. The risks will not vanish with military involvement. They could only be reduced to a limited degree. The question arises how fossil-based centralized energy structures can fit into a setting of increasing global security risks.

The second pathway and a possible way out of the dynamics of ever increasing risks is a far-reaching transformation of supply and demand structures. This should be the major task of the coming decades, aiming for security of energy supply and overall energy security. However, depending on the different players and their mindsets, the answers to these exigent challenges are often nothing more than small pieces of a strategy without broader context, with many players driven by all possible motivations but long-sighted security. A concise and coherent long-term energy strategy is missing in almost all countries. A first framework for such a strategy should include the following elements:

• Reduction of relative (and absolute) import dependence to an “acceptable” level through development of domestic energy sources. The aim would be to regain control over national energy supply and to minimize susceptibility to political pressure from supplier countries;
  
  
• Decentralization of the energy system, especially the generation of electricity;
  
  
• Reduction of absolute energy demand by introduction of strong energy efficiency measures;
  
  
• Development of a new understanding of international cooperation in the field of energy supply.

Whatever the nature of the specific substitutes, the process of far-reaching transformation will take 20 to 30 years. Assuming a rather early oil production peak, say in 2015, natural gas following about twenty years later, would mean that this peak with subsequent decline will aggravate the described situation: Competition for cheap oil will give way to competition for oil at all. Economies, hence countries, will become much more vulnerable to (political) pressure from producer countries. The need for oil could lead nations to deploy military forces to open access to oil sources. Nations not using such extreme measures will be left empty-handed.

Options for System Transformation

Decentralization, reduction of vulnerability to external and intrinsic risks, reduction of import dependence and environmental protection are the four sides of the energy tetrahedron.

In the following a possible system transformation will be analysed for the case of Germany as one of the largest OECD members and as a European country being strongly dependent on energy importsGermany is characterized by high energy demand and high energy-import dependence, and is in these respects comparable to many other industrialized countries. Reduction of import dependence needs to stress use of domestic energy sources. In Germany, oil is not available in significant amounts, domestic natural gas playing a minor role as well. Coal provides about 25 percent of total energy demand, oil products and natural gas, 36 and 22 percent, nuclear and renewable energies, 13 and 4 percent, respectively. More than 95 percent of consumed oil is imported, more than 80 percent of natural gas (mainly from Russia), 100 percent of nuclear fuels. Only hard coal and lignite are produced domestically (but more than half of hard coal demand is provided by imports). Renewable energies are also produced domestically.

Although energy intensity (energy used per unit GDP) in Germany is low compared to world average, many options for further reduction of energy consumption remain: be it in household appliances, insulation of buildings, efficient vehicles; be it in energy saving by changing individual behaviour, material efficiency and much more (Energy Efficiency, A Worldwide Review, World Energy Council, London, 2004). Therefore energy efficiency can contribute significantly to the reduction of total energy consumption and reduction of absolute import dependence: not using energy means not having to import it. Widely achieved energy efficiency gains will facilitate the transformation of the centralized energy systems to systems with large shares of decentralized generation, because less energy demand will naturally reduce the demand for power generating units, hence making system transformation cheaper than often assumed. The benefits of small systems are obvious: blackouts will of course still happen, but they will not have severe effects on the economy because they will be limited in dimension. Resilience will increase. Smaller systems are in most cases more efficient (e.g. because no long-distance power lines are necessary). They are cheaper and faster to build.

Regrettably, the strategic value of renewable energies has gone largely unnoticed. Two reasons explain this:

• An underestimation of their potential to contribute to national energy supply;
  
  
• The belief that renewable energies are much more expensive than fossil fuels.

Numerous studies, projects, and governmental expert commissions (e.g., the Study Commission on Sustainable Energy Supplies in the context of Globalisation and Liberalisation, initiated by the German Parliament in 2000) have presented evidence that the potential for renewable energies in combination with energy efficiency measures in Germany is large enough to reduce carbon dioxide emissions by 80 percent until 2050. In other words, there are credible substitutes for fossil fuel. System transformation could be accomplished at acceptable prices and would even be beneficial for the national economy if external costs were included (Final Report of the Study Commission on Sustainable Energy Supplies, German Bundestag, 2002).

The benefits of energy efficiency for energy exporting countries cannot be discussed in this article. Summarizing according positive effects, these are:

• Saving fossil fuels domestically to increase exports
  
  
• Lifting pressure from energy markets, hence reducing the risk of volatility
  
  
• Lowering competition for fossil fuels in producer countries’ own interests

Under the premise of increasing vulnerability, the cost regime of different energy types has to be revised: external costs have to be factored into energy prices. This means that costs arising from energy use—which are not part of nominal energy prices—are included in energy cost calculations. External costs arising from energy use include expenses for repairing environmental damages (local and global), for curing negative health effects, but also for increased security efforts throughout the whole supply chain. Internalizing these costs would lead to a price increase—reflecting “real” energy costs. Under these changing conditions, the market will need to re-examine the available energy options. It will have to recalculate cost effectiveness.

Real energy costs would shift the cost balance in favor of renewables. High oil and gas prices have already made biomass for heat generation in buildings competitive. Wind power, and especially geothermal energy, is still more expensive than electricity produced from coal or natural gas. The limited time span of technology development—compared with fossil (and nuclear)–explains the current high cost. Nevertheless, costs are converging. Learning in the renewable sector and increasing fossil fuel prices are reducing the economic spread between renewables and non-renewables. So renewable energies become more and more attractive not only for small scale generation, but also for large scale solutions, even with the option of long distance transportation.

One large scale option for renewable energy utilization are concentrating solar power plants (CSP). Experiences with this type of plant exist since the early 1980s. In Spain some of these plants will be built in the coming years. The approach of TREC (Trans-Mediterranean Renewable Energy Cooperation, www.trecers.net) is to produce electricity via CSP and satisfy domestic needs as well as to export “solar electricity” via long distance transmission lines to Europe in a longer perspective.

Apart from technological specifics such an energy grid extending from the Persian Gulf and North African region to Europe could give valuable starting points for close inter-regional co-operation. Electricity transmission lines would increase mutual dependence, which could – if planned long-sighted – improve relationships. This type of interregional co-operation should be considered in terms of long-term energy security targets.

Conclusions and recommendations

The traditional energy systems show structural weaknesses—today more than ever.

Unfamiliar to traditional thinking, renewable energies can on large scale play an important role even in interregional energy co-operation and trade. Fossil fuel systems can benefit from introduction of renewable energy sources: pressure in form of price volatilities is taken out of the energy markets as prices for renewable energies are more predictable; the availabilities of oil and natural gas are extended, and last but not least, the stabilization of the global climate system requires a significant reduction of carbon dioxide emissions.

The once valid maxim of reliable and cheap energy supply has to be broadened to cover more non-energy aspects, as outlined above. Consequently, apart from current cost differences amongst energy carriers, the relevant issue is: can we afford to pay a low price for energy from fossil sources now when facing increasing security challenges and climate change risks in the future? Put in other words: can we postpone investment necessities and structural changes into the future while at the same time facing substantial economic risk (possible adaptation cost to climate changes)?

Enabling the transformation to energy systems intrinsically less vulnerable needs to address all relevant players on all levels. Apart from energy economical details like internalisation of external costs to reflect real energy prices, in the European context we have to put energy security more pronounced on the agenda of EU’s political bodies and of national governments as well as developing basic understanding of energy and security within civil societies. Subsequently coherent energy supply and energy security strategies have to be formulated. These have to cover both regional and interregional aspects. In this context the role of a national energy security advisor (where not established yet) should be thoroughly analysed. However, national solo attempts are – especially in the European Union – of only limited value and should be embedded in the pan-European context. It is therefore of utmost importance for the EU to set energy security targets as guidance for national security strategies. Such strategies need to introduce appropriate incentive systems to push the development into the mentioned direction. Four basic approaches have to be followed and combined in the process:

a) Introduction of ambitious energy efficiency policies along the whole chain, from supply to consumption, to reduce absolute demand and to reduce pressures on energy markets,

b) Promotion of domestic energy carriers (in correspondence with climate protection goals) to reduce high levels of import dependence (e. g. via renewable energies);

c) Introduction of decentralised generation for risk minimisation on various levels (resilience on technical level, reduced vulnerability regarding terrorist attacks etc.);

d) Promotion of new types of transnational and transregional energy co-operations to extend the stability range of the European Union (which will include elements of mutual dependence of e. g. Persian Gulf region / North Africa and the EU, and other approaches).

As the European Union has shown in its current green paper on security of energy supply, it is willing to make first steps into the direction of an energy security strategy to tackle the problem. This is overdue – and it remains to be seen if we once get a consistent strategy or just another piece of patchwork. The time to start is now.

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