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Cheap Oil Muddles Energy Transition

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Oil prices are expected to rise again.
  • Why it matters

    Why it matters

    Germany shouldn’t be sidetracked by oil-price developments in its push to renewable energies.

  • Facts

    Facts

    • GE operates 2,000 thermal power plants in Germany.
    • Electricity generation accounts for one-fourth of overall energy consumption in the country.
    • The global demand for energy will double by 2050.
  • Audio

    Audio

  • Pdf

General Electric, which builds energy plants, and Shell, the energy and petrochemicals group, want to earn money from Germany’s transition to renewable energies and intelligent distribution. Stephan Reimelt, the chief executive of GE Europe, and Peter Blauwhoff, the head of Shell Deutschland Oil, explain why that is easier said than done.

Handelsblatt: Mr. Blauwhoff, the price of oil was still $110 (€104) a barrel a year ago, then it fell to under $50 per barrel, rising up to $60 at the beginning of the year, only to collapse again. What should consumers expect next?

Mr. Blauwhoff: That’s the million-dollar question. If you look at the fundamental data, the price of oil must go up again.

Why?

Blauwhoff: In recent years, demand rose by about one million barrels per day each year – even during difficult economic times – to a 91 million recently. At the same time, the capacity of developed reserves decreased by four or five million barrels per day. The gap that had to be closed with the exploration of new fields amounts to five to six million barrels per day.

But with the current low oil prices, won’t corresponding investments stop?

Mr. Blauwhoff: As our CEO recently said, we are taking a cautious approach, but will be careful not to overreact.

But will we soon see prices above $100 again?

Mr. Blauwhoff: I can only repeat myself here. We expect that the price of oil will increase again in the long term. How quickly that will happen is difficult to say.

And how do you, Mr. Reimelt, see the situation in the oil market?

Mr. Reimelt: No one disputes that at the end of the day, the price of oil will rise again due to the shortage of resources. What worries us, however, is the increase in price volatility. We’re bracing ourselves for the price of oil fluctuating strongly in short intervals in the future.

And that poses real problems for business, right?

Mr. Reimelt: Yes. Volatility has become one of the greatest challenges, affecting not just commodity prices, but also the pace of innovation, which has dramatically increased, as well as geopolitical changes and global growth.

But is the back and forth with the oil prices worse than having a high level consistently?

Mr. Reimelt: With volatility come high costs. That makes the long-term ability to plan investments more difficult, and with energy projects, we’re talking about very high sums and timeframes that our customers have to decide on.

For GE as a manufacturer of gas turbines, gas prices may be more important. How has the crash in the price of oil played a role?

Mr. Blauwhoff: Not that much at all. Gas prices are lower, but that has been the case for a while. The price of gas has been uncoupled from the price of oil for sometime.

Mr. Reimelt: Also, gas also doesn’t have the global market that oil does because the costs of transportation are higher. There are three major markets with very different price structures – the Asian, the American, and the European.

The low price of oil puts the potential of fracking, or the extraction of gas from shale rock, into perspective. Is the boom over?

Mr. Blauwhoff: Naturally, the profitability of such projects depends on the price of oil. And if the price of oil bounces back, then projects profit, too.

But in Germany, the technology still has no chance.

Mr. Blauwhoff: It’s known that Europe, including Germany, has considerable supplies of shale gas. What’s not  known is whether these supplies can be extracted profitably. Without appropriate legal parameters and acceptance from society, we won’t find that out.

blauwhoff-Julia Steinbrecht
Peter Blauwhoff, with a PhD in chemical engineering, is the chief executive of German Shell Holding GmbH, in which the British-Dutch oil giant bundled its German business. Source. Handelsblatt/Julia Steinbrecht

 

And in Germany, you probably won’t find that out because of the huge public opposition.

Mr. Reimelt: It’s certainly difficult. But an innovative country like Germany can’t afford to rule out such a technology from the outset. We need transparency and openness in weighing the risks and opportunities.

Mr. Blauwhoff, Exxon-Mobil is lobbying intensively for fracking in Germany, but Shell isn’t. Why not?

Mr. Blauwhoff: It’s very simple: Exxon-Mobil operates our joint venture in Germany, which has been extracting natural gas in Lower Saxony since the 1950s. It’s common for the operating company to represent the venture externally. But back to the point: Shell is actively involved in the public discussion on the future of energy. We think that natural gas, as an energy source low in CO2, can and should, for reasons of climate protection, have an important role in Germany’s energy transition and in meeting growing global energy demands.

So how much does the slide in oil prices influence the German energy transition?

Mr. Blauwhoff: I don’t see a large effect on Germany’s transition to renewable energies. The price of oil hardly has an impact on the electricity market. The price of gas has a greater one, but it is almost uncoupled from the price of oil. Gas-fired power plants, which would actually fit perfectly into the energy transition, have other problems. They will be pushed out of the market by renewable energies and by coal.

But the low price of gas must make electricity generation with gas plants cheaper.

Mr. Blauwhoff: It’s true that through the shale gas boom in the United States, coal will replaced through gas-fired power plants. Coal that was actually intended for the United States will now be transported to Europe and used here at low prices. In recent years, Germany has produced more and more electricity from coal, while the share of low-carbon natural gases has declined. That is a paradox.

GE is working on a feasibility study for a gas-fired power plant in Grafenrheinfeld in Bavaria, at the site where a nuclear power plant is about to be taken offline. How realistic is that project?

Mr. Reimelt: Even if the gas-fired power plants in Germany currently are having difficulties, we believe the cost-effective peak-load power plants, which are gas plants, are essential to the energy transition – and we are prepared.

Will gas-fired power plants be built in Germany?

Mr. Reimelt: One must say clearly that in Germany there are currently very few projects for major gas-fired power plants. But things look differently for thermal power stations, or small plants. We have installed more than 2,000 plants in Germany by now.

Reimelt-Handelsblatt-Julia Steinbrecht
Mr. Reimelt, with a PhD in industrial engineering, has been president and chief executive of GE Europe since January 2015. Source: Handelsblatt/Julia Steinbrecht

 

How are things doing otherwise with the energy transition?

Mr. Blauwhoff: In the public debate, the energy transition is a pure electricity transition. The fact is electricity generation accounts for only one-fourth of overall energy consumption. And with that, we haven’t even covered other consumption sectors such as thermal energy and mobility.

But that is exactly where we have an effect from the price of oil: The costs for heating have dropped and the costs for mobility, too. Who is supposed to save energy?

Mr. Blauwhoff: Yes, there’s a price effect, but even those consumers who remain with oil can save with heating; a majority of the heating systems are so outdated that consumers could achieve energy savings of 30 to 40 percent with replacement units. There’s a real lack of investment in private households. The issue of energy efficiency, especially when it comes to heating, is neglected far too often.

But can a company that sells oil and gas have an interest in efficient heating?

Mr. Blauwhoff: The global demand for energy will double by 2050. We will not be able to manage without more energy efficiency. It’s not an either-or situation. We will need both more energy and more energy efficiency.

And electric mobility? It is also supposed to contribute to the energy transition. That must be a nightmare for Shell.

Mr. Blauwhoff: We are seeing a further diversification of motors and fuels. Electric mobility will develop further in Germany, but it will be more evolutionary than revolutionary. We expect between 2 and 4.5 million cars powered purely by battery electricity or fuel-cells by 2040, of a total number of 44 million cars. By the way, Shell is actively involved in implementing hydrogen infrastructure in Germany.

Mr. Reimelt: When I look at the success Tesla has had and at Apple and Google, which are developing cars, it’s clear to me that something has started here. The car will be newly defined and Germans must pay very careful attention to who who is leading the pack.

 

Dana Heide is responsible for Handelsblatt’s Online coverage of companies. Jürgen Flauger covers the energy sector. To contact the editors: heide@handelsblatt.com, flauger@handelsblatt.com

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