Strategy Shift: Russian Energy Insecurity Fuels the Green Transition
(Article originally published in Mar/Apr 2022 edition.)
The last few months have made it abundantly clear that overdependence on foreign energy is a national vulnerability – especially in Europe, where “energy policy is now security policy,” as WindEurope CEO Giles Dickson recently put it, and the rush to offload Russian energy has given offshore wind stakeholders a powerful new argument.
In the months leading up to the invasion, Russia reduced its gas exports to Northern Europe to the contractual minimum, quietly demonstrating that it could throttle the supply at will. In March, Russian Deputy Prime Minister Alexander Novak threatened to shut the giant Nord Stream 1 pipeline – Germany’s main artery for natural gas – in retaliation for Ukraine-related sanctions.
Any lingering hopes that Russian gas could be supplied on a “purely commercial” basis came to an abrupt end. As IEA Executive Director Fatih Birol put it, “Nobody is under any illusions anymore.”
Europe’s Green Transition
Europe's leaders are under tremendous pressure to find replacement energy sources, and a new national security imperative has accelerated "green transition" planning overnight. "We are indeed too dependent on Russian fossil fuels," said E.C. President Ursula von der Leyen on the day of the invasion. "The motto is to get rid of the Russian gas and go deep into the renewables, and this will be our new strategy.”
Some Russian energy will inevitably find its way into the European supply for the next few years, but the E.U. hopes to excise two-thirds of all Russian gas imports from the market by the end of 2022 and remove all Russian fossil fuels by 2027. The European Commission has quickly drafted and rolled out a new energy plan that’s even greener than before: It calls for tripling renewable power generation by 2030 including a boost in wind energy capacity from 190 GW to 480 GW.
Under the new plan, fully half of all the extra renewable power generated (500 TWh annually) will support green hydrogen production, and offshore wind is essential to this objective. In periods of low demand or high wind speed, excess power from a wind farm can be diverted to an H2 electrolysis plant, turning “wasted” capacity into usable fuel.
Hydrogen is also an alternative way to store and transport wind energy, enabling more offshore wind capacity in areas where electrical grids are too congested or underdeveloped to carry all the power to market.
Hydrogen is the new plan in Denmark where the transition away from Russian "black energy" – as Denmark’s Energy Minister calls it – is both an imperative and an opportunity. In March, the Danish parliament voted to spend $185 million to accelerate hydrogen-based fuel production. The objective is to build out six gigawatts of hydrogen electrolysis capacity by 2030, fed with electricity from offshore wind farms.
According to Minister of Trade and Industry Simon Kollerup, “The agreement is the starting shot for a new green business and export adventure, which is now also about becoming independent of Russian energy sources as soon as possible.”
Neighboring Germany will be one of the biggest customers. Over half of Germany’s natural gas supply comes from Russia, and the German government is working frantically to unwind decades of energy policy based on abundant Russian gas. Zeroing out this supply will be a seismic shift in Germany’s climate strategy: Russian methane was supposed to play a role in the country’s green energy transition, first as a substitute for coal and nuclear power, then as a feedstock for blue hydrogen.
That era has come to a close. In search of suppliers who don’t start land wars in Europe, Germany’s government is holding talks with Norway on building a new pipeline specifically for hydrogen. The trade will start with so-called “blue” hydrogen, manufactured from Norway’s abundant offshore gas resources, followed by “green” hydrogen from renewables like offshore wind and hydro. The pipeline will facilitate the "extremely important" task of developing "substitutes for Russian gas and oil," German and Norwegian officials said in a joint statement in March.
Domestic offshore wind resources will play a major role in mid- to long-term energy plans, but only if the regulatory conditions are right. According to the IEA and industry group WindEurope, permitting is one of the biggest hurdles holding up offshore wind and other renewables in Europe.
Individual E.U. member nations hold the keys to project approval, and industry stakeholders say that regulators can do a lot to promote development by simply clearing the way for projects that are ready to build. E.C. commissioner for energy Kadri Simson has provided encouragement from the top, asking E.U. member nations to treat permitting for renewables as a “matter of overriding public interest.”
U.S. Doubles Down
In the U.S., direct exposure to a Russian supply shock is minimal, but the conflict has still increased prices. The extra inflationary pressure of $100-plus oil has not escaped the notice of the White House, and at least one Administration official has suggested it’s time to get away from this vulnerability.
“This conflict has made it clear to us that we should double down and triple down on the transition and make it broader, bigger and faster,” said Amos Hochstein, the State Department's Special Envoy for Energy, at a conference in March. A coalition of 200 environmental groups has called on President Joe Biden to go a step further and "utilize the Defense Production Act to ramp up the deployment of renewable energy,” fighting both Russian aggression and climate change at the same time.
To be sure, offshore wind won’t deliver relief on its own, nor will it arrive overnight. Permitting, construction and commissioning will take years from start to finish, even with favorable political winds.
In the immediate term, sanctions on Russia are a brake as well as a boon for offshore wind and other renewables. Russian suppliers play a major role in the market for several critical metal commodities including cobalt, aluminum and nickel. These are all needed to build key pieces of the green energy transition like wind turbines, lithium-ion batteries and electric cars.
"There's a cost issue and there's a timing issue [for renewables]," Holland & Hart Partner Ashley Wald told Law360 in March. "A lot of people on the developer side, they just can't say with certainty when they'll get products and how much it will cost to get them."
Offshore Drilling Revival?
Oil and gas are traded on global commodity markets, and a disruption in one locality can have an effect on prices everywhere. The IEA expects that 2.5 million bpd of Russian oil production could be cut out of the global market by April, given the wave of sanctions on Russian banking and the growing Western reluctance to do business with Moscow. With this global supply risk in mind, the invasion of Ukraine is prompting a careful oil-policy rethink, even in nations that are not heavily dependent on Rosneft and Lukoil.
The Western world has learned this lesson before. In November 1973 when Egypt and Syria launched a surprise attack on Israel, the American government provided support for the Israeli side, angering Middle Eastern members of OPEC. The oil cartel sharply cut output and the price of crude quadrupled – with severe consequences for the import-dependent American economy.
But there was a silver lining: The technology for drilling in the deep federal waters of the Gulf of Mexico had just come of age. New deepwater wells began supplying five percent of domestic demand when America needed it most – five percent that did not have to be imported from an unreliable supplier.
Offshore oil and gas may be part of the long-term solution this time, too. In the U.K., the government is now considering a new national security exception to its climate-review process for offshore oil and gas licensing. If the idea is approved, a climate "checkpoint" for new leases could be waived for E&P projects that make a significant contribution to national energy security.
The energy industry believes that offshore oil and gas could play more of a role in America’s long-term security as well – if policymakers would allow it. But E&P activity does not align neatly with the White House’s climate goals, and the Biden Administration’s recent actions have not favored offshore oil and gas.
When a record-setting 1.7-million-acre offshore lease sale was annulled by a federal court in January, the White House said it would let it go without appealing the ruling. It’s also running behind schedule on the next five-year plan for federal offshore leasing. When the current plan runs out in July, it will be impossible to carry out new offshore lease auctions, according to the American Petroleum Institute. The timing is unfortunate: Under current projections, the U.S. is on track to become a net importer of oil this year.
Policy Support Needed
“It’s clear right now, we don’t want to be relying on other parts of the world. We have a strategic asset in the Gulf of Mexico that could be producing 700,000, maybe 800,000 more barrels per day or more if we had good policies in place,” National Offshore Industries Association President Erik Milito recently told The Daily Caller. “But we don’t have the policy support in place right now, which leaves us [having] to rely on outside sources."
Paul Benecki is the magazine’s News Editor.
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.