Europe trapped between energy crunch and climate action

Sopuruchi Onwuka

The aggressive movement by governments of industrialized western nations to transition energy demand from fossil fuels is running into quagmire as acute oil and gas deficits confront economic targets.

And loosening stringent measures already installed to constrict funding flow to petroleum projects and drain demand for oil and gas would now entail dismantling of financial barriers to enable the industry players and investors restore verve to exploration and production.

Leading European economy, Germany, is pushing the Group of Seven world’s most industrialized nations (G7) to reverse the commitment by the western economic bloc to arrest the growth and prosperity of the fossil fuel industry in order channel support for renewable options.

German government declared in a note to the G7 heads of state that the world’s most powerful economies must confront the reality of openly supporting new investments in petroleum development projects in order to address supply concerns that currently sustain hikes in oil and gas prices.

The proposal canvassed for a funding model that is consistent with the bloc’s climate objectives without creating lock-in effects.

The Oracle Today reports that the proposal has continued to engage the seven heads of state at the meeting, including the US President, Joe Biden, who is grappling with high energy prices and associated triggers in prices of goods and services in the United States.

The American government has provided fiscal and policy support for increased crude oil production but the result has not drilled down the market due to midstream processing weakness which started with low investments associated climate action.

Whereas government’s support has helped the upstream petroleum industry in United States drive production to record highs, it has only translated to increased export volumes and income because the refineries in the country are not primed up to accept increased volume of crude oil.

The new move by Germany runs against the prevailing sentiments that propel climate action commitment among governments in Europe and North America against the financial health of fossil fuel industry that produces mostly coal, oil and gas.

Coordinated western climate action against the coal and petroleum industries followed heightened global concerns about extreme weather conditions manifesting in and that would halt the financing of overseas fossil fuel projects by the end of the year, according to people familiar with the matter. That would be a major reversal on tackling climate change as Russia’s war in Ukraine upends access to energy supplies.

From the United States to Europe and Asia, it has become clear that the race for energy transition comes at great cost to economies, and government’s are beginning to draw lines between climate sentiments and pressing economic realities.

The Oracle Today reports that the Secretary General of the Organization of Petroleum Exporting Countries (OPEC), HE Dr Mohammed Barkindo, had warned that the race for energy transition by the industrialized Europe was laying dangerous groundwork for crisis.

He had pointed out that global energy accessibility, affordability and climate action must be achieved under common, fair and inclusive solutions model in order to achieve two important priorities that address energy poverty and climate change.

The Oracle Today reports that the pump price in the United States is at global pinnacle, while Germany has made it clear that its economy which has been badly hit with Russian supply squeeze is on the brinks of crisis.

Other European countries including Italy, Netherlands, France, Spain and United Kingdom have cushion from equity crude oil and gas supplies by their multinational energy firms including Shell, TotalEnergies, Repsol, Equinor and others respectively.

These European multinational majors have traditional partnerships with poor oil producing states in Africa where they provide funding and expertise in exploration, development and production of hydrocarbon resources from conventional and deepwater terrains.

In Nigeria, the four biggest European oil majors including Shell, TotalEnergies, Eni and Equinor form part of the traditional partners with the Nigerian National Petroleum Company (NNPC) Limited in the deepwater terrain which holds the future of the Nigerian hydrocarbon industry.

Diplomats from the European Commission had visited the Group Managing Director of NNPC, Mallam Mele Kyari, with proposal for deeper business ties in the industry after the EU fell apart with Russia over invasion and subsequent war in Ukraine. Shell, TotalEnergies and Eni are also holders of joint 49 percent operating equity in the Nigerian Liquefied Natural Gas (NLNG) Limited whose significant supplies are dedicated to Europe.

Germany has no major ties with petroleum industry players in Nigeria and Africa. It relies mainly on cheaper Russian pipelines oil and gas supplies.

The German government has warned that Russia’s moves to limit supply risk a collapse in the energy markets, with Europe’s largest economy facing the unprecedented prospect of businesses and consumers running out of power.

Germany responded to the cuts by reviving coal plants and providing financing to secure gas supplies, while continuing with plans to phase out nuclear energy against the advocacy by an industry lobby group that the G-7 should boost access to nuclear technologies.

In Italy, the Prime Minister, Mario Draghi, said the country has managed to reduce Russian gas imports from 40% last year to 25% at the moment by signing new gas deals in African countries including Congo, Algeria and Angola.

Italy has said it will monitor the potential need to trigger emergency energy plans. Any such move could also see it boost coal production.

It is not surprising therefore that Italy did not support Germany’s idea of retracing from climate agenda.

Neighboring Spain is a major destination of supplies from the NLNG.

A G-7 shift from a commitment initiated last year and firmed up in May would be a u-turn in global efforts to fight climate change. It would make it harder to rally the rest of the world around more stringent targets and direct investments toward cleaner sources of energy.

It would also go against International Energy Agency’s advice that no new oil and gas projects should be developed if the world is to limit global warming to 1.5 degrees Celsius.

G-7 ministers, in making their commitment to end direct international financing of fossil fuels by the end of 2022, acknowledged for the first time that fossil fuel subsidies were incompatible with the Paris Agreement. The group also reaffirmed a commitment to end “inefficient” fossil fuel subsidies by 2025.

The ministers acknowledged, however, that investment in the LNG sector was a necessary response to the current crisis “in a manner consistent with our climate objectives and without creating lock-in effects.”

“This would be a huge setback from the progress we made last month at the G-7 energy and environment ministers when we finally brought Japan, the last G-7 holdout, into the commitment to end such financial support for fossil fuels,” said Alden Meyer, a senior associate at climate change think E3G.

“Where we saw Chancellor Merkel being the climate chancellor at the last G-7 summit Germany hosted, Scholz could go down in history as the climate backtracking Chancellor, which I think would be a real mark on his record, and we don’t need to do this,” he added.