The global economic crisis has developed with such rapidity and intensity that some of its likely consequences have virtually escaped comment.
It’s not surprising. When events of the kind of high drama we have become accustomed to dominate the headlines, lower-profile trends tend to be ignored.
A year ago, energy dominated these same headlines because oil had almost reached $150 a barrel and utility companies were rushing to exploit the perception that we had entered a new and permanent era of high-cost fuels. Then the banks took over the front pages.
Now oil is bumping along at $50 a barrel, though this fall, just as dramatic as the earlier rise, has certainly not been passed on to consumers. An equally predictable corollary of the oil-price drop is that, once again, the security of supply imperative, as an issue, has slipped into the background.
It really is amazing how quickly this cycle repeats itself. Oil prices rise and everyone is pledging allegiance to balanced energy policies, investment in nuclear and renewables, and avoiding over-dependency on fossil fuels. Oil prices tumble and normal service is resumed – oil companies pulling out of renewables; gas-fired power stations all the rage.
But beneath the surface of such events and responses, significant changes are taking place, and the associated implications are large. They reflect the fact that no part of the world is immune from what is going on in the global economy. However, aside from India, which has ridden the downturn surprisingly well, there is another country that seems better placed than almost any other.
That rather big place is called China. While Europe, the US and Russia all hold back on investment, China appears to suffer no such inhibitions. And the impact of its current activities will create significant changes to patterns of world energy supply and demand, with particular implications for Europe.
Over the past few months, China has been doing massive deals with Russia, tying up Caspian oil&gas assets; oh, and entering into strategic partnerships with Venezuela and Iran.
All follow the same logic. At a time when most other economies are staggering, this is turning out to be an ideal opportunity for Beijing to cut favourable deals that guarantee China’s energy supplies long-term.
The interplay with Russia is particularly interesting from a Western perspective. Until now, concerns about security of gas supplies from Russia have been based mainly on political considerations. Neither the orientation of Moscow towards the European market nor the availability of gas in vast quantities was in doubt.
I well recall being told repeatedly when I was UK energy minister that Russia never had, and therefore never would, renege on a gas contract with the west. This slightly starry-eyed view was rudely disturbed by events in Ukraine, and that, in turn, triggered a great deal of angst about over-reliance on Russia’s gas.
But look at what has happened in recent months. Russia is starting to experience a gas shortfall. The financial crisis is hitting investment commitments by Western countries.
At the same time, the old Soviet Union fields are starting to come to the end of their productive lives. With oil&gas prices a third of what they were a year ago, Russia’s own mega-energy companies do not have the money to invest. So in steps China. A massive deal was signed in February that involves a $25billion loan from the China Development Bank to Rosneft and Transneft (the pipeline company) in return for oil shipments, equating to 8% of current Chinese demand, for the next 20 years.
Pipelines are being built and a full-scale energy co-operation programme between Russia and China is now spoken of.
It is the same story in Central Asia. Kazakhstan, which accounts for 8% of the world’s known oil reserves, has just been the grateful recipient of a $10billion loan from China – to be paid for over several decades through oil&gas shipments.
Moreover, wherever exploration opportunities arise in the Caspian area, the Chinese are paying top dollar.
Over the past decade, Russia and the West have played out intensive diplomatic games around the Caspian in order to secure access to the oil&gas wealth of that region. But that phase has now passed. It is China that is building a gas pipeline from Turkmenistan via Uzbekistan. Gazprom at present gets 14% of its gas from Central Asia, but China is now a major competitor. The knock-on effects are impossible to measure, but the trend is clear.
When the world settles down to something that passes for normality, we will find that a great deal has changed and some of it might come as an unwelcome surprise.
The extent to which China has taken the opportunity to secure its position over the energy wealth of Asia – or, indeed, Africa and the rest of the world where substantial hydrocarbon resources exist – will be one of consequences that has to be lived with.
From our UK domestic standpoint, the lesson is timely. It never made sense to become over-dependent on imports that, 20 or 30 years from now, will need to come overwhelmingly from Russia and the Caspian. It makes even less sense now.
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