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Living Without Russian Gas

Energy at War

Written by Jason Williams
Posted March 26, 2014

So Russia wants to play hardball, eh? Well, Europe is up for that.

Russia has long enjoyed its influential position as chief supplier of gas and oil to Europe. Approximately half of the European Union’s oil and gas imports, worth $275 billion, comes from Russia — and most of it flows through Ukraine — hence Russia’s keen interest in the region.

It’s enough to make Russia want to annex Ukraine’s province of Crimea, completely ignoring threats of embargos and sanctions by Western governments. Russia’s thinking seems to have been, “What are they going to do about it?”

Well, this is what they are going to do about it...

“Efforts to reduce Europe’s high gas energy dependency rates should be intensified, especially for the most dependent member states,” reads a statement submitted for adoption at an EU summit last week. “The European Council calls on the Commission to conduct an in-depth study of EU energy security and to present by June 2014 a comprehensive plan for the reduction of EU energy dependence.”

The EU’s 28 member states have mandated that the European Commission come up with a plan within three months to outline ways in which Europe can satisfy its energy needs without continued reliance on Russia.

On both sides of the Atlantic, we now have two enormous pushes toward energy self-sufficiency for both economic and political reasons. In America, the desire to reduce dependence on Middle Eastern oil has encouraged the development of vast new sources of energy — from Canadian oil sands to American shale. Now Europe, too, will be embarking on its own quest for energy independence.

The main difference, of course, is that Europe isn’t as well endowed with oil sands and shale deposits as North America. So it will have to turn to Mother Nature: the sun, the wind, and the atom.

Europe’s Energy Needs

The scope of Europe’s push to achieve energy self-sufficiency will be truly enormous. According to the CIA World Factbook, the 28-nation EU block has some 5.568 billion barrels of proved crude oil reserves.

At the current rate of production of 1.866 million barrels per day, the block would run out of oil in eight years and two months. It has thus become the world’s top importer of petroleum products at some 8.613 million barrels per day.

The EU block also has some 1.955 trillion cubic meters of proved natural gas reserves. At the current annual rate of production of 164.6 billion m3, the block would run out of gas in 11 years and 11 months. It has thus become the world’s top importer of natural gas at some 420.6 billion m3 per year.

Not only is developing an alternative energy sector necessary to avoid being pinned against the wall by Russia and other energy exporters, but Europe also needs to speed up the sector’s development before it runs out of its own supplies. And at current production rates, it has just 10 years in which to do it.

Structural and Regulatory Changes Required

The 25-year plan the EU is calling for would therefore require increasing imports from non-Russian sources over the immediate term in several possible ways.

For one, the EU is considering increasing oil and gas imports from the United States. Although the U.S. has recently begun granting licenses for exporting liquefied natural gas, any supplies destined for Europe will be limited given the higher prices paid for natural gas in Asia. The EU would have to incentivize American exporters with generous subsidies to draw their supplies over to Europe.

New pipelines are also being considered. The EU has already committed itself to the development of a new pipeline in the Adriatic Sea for importing gas originating in Azerbaijan, while Britain has called for an examination into ways of shipping Iraqi gas into Europe.

Britain has also been attempting to partner with France in the building of a new nuclear power plant but has run into opposition from the European Commission on anti-competition laws.

Before any real progress can be made in securing the EU’s energy self-sufficiency, antiquated laws and regulations will need to be reformed. Britain is urging the EU to scale back regulations that impede the development of shale deposits and to form a unified energy market with the aim of helping member states explore and develop their own energy supplies.

Germany Takes the Lead

Germany, for its part, is also looking into ways of reducing its reliance on Russian gas.

While only 11% of Germany’s energy needs are met by natural gas, some 35% of that gas is supplied by Russia. That Germany has almost no natural gas production of its own makes it highly susceptible to gas shortages imposed by Russia in retaliation for sanctions.

Of course, Germany does have shale deposits that, if fully developed, could supply almost the entire 35% of its natural gas needs that it currently imports from Russia. But the government last year rejected a bill that would have opened the door to the shale fracking process.

Germany has a different plan, one that would steer the nation away from fossil fuels altogether.

“The energy transformation in Germany will be carried out by two main sources — those are wind and solar,” deputy energy minister Rainer Baake announced last week.

By 2025, the nation hopes to supply some 40 to 45% of its energy needs through renewable sources, including wind farms and solar arrays.

Since Germany’s Renewable Energies Act was adopted in 2000, the country has “learned... to produce electricity with wind power and large solar facilities at the same price as if we were to build new coal or gas power stations,” Baake proudly informed.

Unfortunately for the German populace, much of the cost savings to the federal government has passed higher energy prices on to consumers, who are currently paying among the highest electricity prices in the world.

What is more, international energy analysts have criticized Germany’s Energy Transition — known as Energiewende — as unworkable, stressing that Germany simply cannot satisfy its energy needs on renewable sources alone.

Germany Defends its Energiewende Program

In response, The Heinrich Böll Foundation has devoted its energytransition.de web portal “to explain what the German Energy Transition is, how it works, and what challenges lay ahead,” as the site informs.

“A lot of the international reporting about the German Energy Transition, or Energiewende, has been misleading. [This website] is intended to provide facts and explain the politics and policies to an international audience.” Such as:

  • Germany currently supplies 25% of its total energy needs through renewable sources. On optimum days, solar arrays and wind farms generate up to 50% of the nation’s electricity consumption.

  • 69% of Germans support Energiewende and consider it advantageous, while only 22% consider it disadvantageous.

  • The German renewable energy industry employs 380,000 workers, more than twice the 155,000 workers in the conventional energy sector.

  • Wind and solar stations have driven down energy prices by 10% of 2012 levels and by 32% of 2010 prices. Industries are also granted regulatory exemptions to offset the higher costs of German electricity.

  • Germany has reduced its overall greenhouse gas emissions, beating its Kyoto target to reduce emissions by 21% of 1990 levels by the end of 2012 and achieving a reduction of 25.5% instead.

  • Add-on benefits of Germany’s Energiewende include the development of a lucrative renewable energy technology and equipment industry offering the most efficient wind and solar energy system components in the world. Germany has the world’s largest domestic solar PV market and, with the help of Chinese mass-scale production, has driven down systems costs by 66% from 2006 to 2012.

First Solar Inc.

If all this talk of renewable energy gives you an itch to add a renewable energy holding to your portfolio, look no further than Tempe Arizona’s First Solar Inc. (NASDAQ: FSLR). In business since 1999, the $7.01 billion mid-cap has been publicly traded since 2006.

While its stock had fallen considerably in 2011, it has been enjoying a bull revival since mid-2012, with a well-defined upward channel as noted in the graph below.

The stock soared 30% over the past two days as the company raised its revenue and profit projections as far out as 2016 — mostly due to the increasing efficiency of its cadmium telluride solar technology.

“The takeaway,” summarized Citigroup's Shahriar Pourreza, “is that FSLR is well positioned strategically with rapid technological improvements, a strong balance sheet, an important GE [General Electric] relationship, and strong management to capitalize on the large global solar opportunity set.”

Having grown its revenues from $2 billion to $3.31 billion over the past three years, the new forecasts anticipate revenues of $3.85 billion for 2014, $4.05 billion in 2015, and $4.15 billion in 2016, with earnings expected to grow 15% by then.

Where most solar companies trade at high multiples from 15 to 25 times book value, First Solar’s stock is a leaner 1.53 times book. Yet investors need to be prepared for the stock’s notorious volatility. Since it bottomed at $12 in mid-2012, the stock has risen to $37, fallen to $25, climbed to $58, plunged to $36, jumped to $65, reeled to $47, and is currently over $70.

First Solar Chart (small)Click Here to Enlarge
Source: BigCharts.com

Not for the faint of heart, but just perfect for an active trader.

Until next time,

Joseph Cafariello for Energy and Capital

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