Regional disruption of energy security in uncertain times

This is based on my presentation at Atlantic Council’s ‘Regional Conference on Clean and Secure Energy’ that took place earlier this week.

Every international meeting, be it the COPs, G7, G20, BRICS, produces more pledges on climate and global warming and yet the world is as far from meeting Paris Agreement goals as ever.

There is a good reason for this. Despite the tremendous progress made by renewables, they are not growing fast-enough to keep-up with the growth in global energy demand resulting from improving living standards, increasing cooling needs and AI data centers.

Just to put that in context, an Asian consumes about 50% of the energy a European does, an Indian 20% and an African just 10%. And they all aspire to a better way of life, inevitably requiring more energy.

As a result, all other fuels need to carry-on growing at the same time as renewables to provide the energy the world needs. Natural gas and oil are still indispensable and will be for a long-time to come.

Although natural gas consumption in Europe is projected to continue to fall partly due to falling industrial activity, the opposite is true in the rest of the world, driven by Asia, where energy and gas consumption are projected to carry-on rising.

The contrast between developed and developing countries is stark. In 2023, primary energy demand actually declined by about 1,5% in OECD countries, but increased by a staggering 4,3% in non-OECD countries, with fossil fuels providing close to 80% of this growth.

In fact, fossil fuels still provide about 84,5% of primary energy demand in non-OECD countries despite the rapid growth in renewables, with solar and wind providing less than 6,6%, even after growing by 18% in 2023.

Evidently, during energy transition oil and gas will continue to be important to the global energy mix, especially as, despite massive investments, the penetration of renewables in sectors other than electricity is very low.

Globally, electricity demand grew by 2,5% in 2023, much the same as in 2022, and comprised 17,4% of global primary energy demand, only marginally up on the 17,3% in 2022. At this rate, energy transition will be a long-drawn process.

The bottom line is that natural gas is hard to replace and will have a key role to play in global energy consumption all the way to 2050 and likely beyond.

Maintaining oil and gas reserves and production to support this demand is critical to global energy security. The oil and gas majors have been making this point for a while, but, importantly, major international banks and lenders are coming to a similar conclusion.

Global energy demand carries-on growing, driven by non-OECD countries, and while this happening, as Energy Institute’s ‘Statistical Review of World Energy’ has shown, the world will need all the energy it can get. On that basis, the notion that oil and gas demand would peak in 2030, as the International Energy Agency (IEA) claims, looks unlikely.

Reducing investment in and production of natural gas and oil, under the assumption that renewables can quickly replace them in all energy sectors is a fallacy, prone to substantial economic and geopolitical risks. Such factors are often glossed over in climate change debates, but they will not go away – it’s reality.

Instead, during energy transition, more effort should be made to reduce emissions and make fossil fuel use as efficient as possible. Replacing coal with natural gas and eliminating methane emissions must be a priority.

Our region is not immune to these developments. We depend on the same oil and gas majors to explore, produce and market our hydrocarbon resources. But we must put this into perspective. East Med gas comprises only about 2% of global gas resources. Even for Chevron, the biggest gas player in Israel, the share of East Med gas in its global portfolio is only about 6%.As a result, its strategic value is limited in global terms.

It is much more important to develop this resource and utilise it regionally to cover the region’s growing energy needs during transition. Today, gas and LNG can act as agents of decarbonisation by displacing oil and coal in the power sector.

To that extent, regional cooperation to facilitate exploitation of East Med’s gas resources can make a difference. But war is putting that at risk.

Regional conflicts

The Israel-Hamas war, and now Israel’s attacks in Lebanon and Iran’s response have brought the question of East Med energy security and the geopolitics of energy back to the fore. With no solution in sight, there is always a risk that the conflict could develop into a regional confrontation with potentially global consequences. Energy security concerns resurface frequently in this volatile region.

For the East Med, these concerns cast a shadow over the future development of its abundant gas resources. A long-running conflict could delay projects -happening already- and final investment decisions and cause doubts and concerns in the minds of international investors that the geopolitical risk is too high.

In global energy terms the concern is whether it will lead to oil and gas supply disruptions. Oil prices have risen to $79/barrel. This is a restrained response implying that the oil markets do not see any immediate escalation dangers. The industry’s current base-case appears to be that the conflict will likely be confined.

However, Israel’s Netanyahu is not known for his sensitivity to international views or pressure – even from the US. Within the country, the expectation is that Israel will attack Iran’s oil installations and refineries. An attack on its refineries, could paralyze Iran and have a devastating economic impact on the country.

This would almost certainly lead to a retaliatory response, with Iran targeting Israel’s gas-fields, oil refineries and power plants if attacked.

Iran could also decide to internationalise the crisis by blocking the Strait of Hormuz and by the Houthis intensifying their attacks on shipping in the Red Sea.

This would severely disrupt global energy flows and could push the conflict into a more direct confrontation between Iran and the US, raising the stakes for both global oil markets and regional security.

Iran exports 1,5-2million b/d, with most of it going to China. About 20 million barrels/d, accounting for 20% of world petroleum liquids consumption, transits the Strait of Hormuz with 70% destined for Asia. In addition, about 80 million metric tons, or 20%, of global LNG flows go through the Strait every year.

If the Strait is blocked, global oil and LNG prices will sky-rocket, with major ramifications worldwide. A prolonged period of high oil and LNG prices could impact the fragile world economic recovery.