Ukraine Crisis: Time for Europe to give (clean) coal a bigger share

Did anyone of us ever think that switching from coal to imported gas could pose a major risk to the security of energy supplies in Europe?

At least six European countries rely exclusively on one country for natural gas supply – Russia. During a recent press conference Donald Tusk, the Polish prime minister called for changes in the EU energy policy and added that “Germany’s dependence on Russian gas may effectively decrease Europe’s sovereignty”.

EU relies on Russia for 30% of its natural gas imports, with 80% of that delivered through Ukrainian pipelines. Ukraine is a major gas transit nation for supplies from Russia to EU. Earlier this month Russia warned it could stop distributing gas to Ukraine over unpaid bills and any such move can have dramatic consequences for the EU.  With Europe’s main natural gas supply route at risk this provides the policy makers in the EU re-think and direct more attention to Europe’s indigenous coal resources as well as secured and reliable coal imports.

Source: BBC News

Coal accounts for 90% of the EU’s fossil fuel energy and natural gas accounts for only 7%. Hence, it is not surprising at all that Europe imports almost 70% of its natural gas and as per a report from European Commission it will have to import close to 80% by 2030.

Coal continues to remain integral to EU, as it creates jobs, keeps the domestic producers in business and more importantly reinforces the continent’s energy security. Imported coal has been a reliable source of energy for Europe. Unlike natural gas coal imports are not dependent upon transport infrastructure such as LNG terminals or pipelines so any drop in supply from one country can be easily filled by another supplier. Currently, 60% of EU’s coal imports come from the USA, South Africa, Australia & Colombia & 25% is sourced from Russia.

There is a strong security argument against over-reliance on natural gas imports from Russia and this should be given more attention in the EU’s 2030 framework for climate and energy policies. None of the targets, measures & policies proposed as part of this package should force Europe into a position where it is slowly abandoning the most abundant, affordable and secure energy fuel it is endowed with to the benefit of imported natural gas.

An evening with Paul Donovan, Global Economist

I recently had the privilege to meet Mr. Paul Donovan, Global Economist, Managing Director UBS Investment Bank on September 23, 2013 in Dubai. Paul co-authors the Global Economic Perspectives publication with other members of the Global Economic team. Paul regularly appears on CNN, Bloomberg TV, and CNBC.
Paul, very comprehensively, covered various developments in the global economy ranging from the selection of US FED chair to the Japanese issuing bonds, devaluation of currencies and region-wise economic outlook.
There was a Q/A session which allowed me to put forward questions/opinions to Paul and I am glad he answered those questions to my satisfaction. The following were the communications exchanged

1 - Creation of Fake Capital

“I own apples and Paul owns oranges and we both agree to exchange each fruit worth millions. Paul sells me the oranges and I sell Paul apples. Next morning, we are no more fruit vendors but banks with assets worth millions. How this creation of fake capital is preventing organizations and economies to bounce back?" I related this to what happened in Iceland (shift from fish to investment banking) and other European economies.

Paul’s response: As this was the very first question to Paul that evening, he smiled to me and said that this is quite unfortunate and many bankers in the hall will not like us for discussing this. He added that banks have realized this and regulations are being brainstormed and developed to overcome these issues. Banks are becoming more systematic than before. He added that a bad situation in Euro will result in good outcomes. Many banks have recently either ceased or limited their operations in the Middle East and other regions. Banks like BNP Paribas have ceased operations in most of the gulf countries and Barclays has limited its operations too. These banks have been influenced by their respective countries’ governments to return and invest in their local economies. The increase in lending within the Euro bloc will improve the economic conditions over the medium term.

2 - Volatile Commodity Prices

“Theoretically prices decline when demand falls. Prices of coal, gold and several other commodities have either declined or remained volatile amid increasing demand trends year over year. What is to be blamed for low commodity prices? Am I right in saying that high capex is to be blamed for low commodity prices ?”

Paul’s response: “Yes, it is true that excessive capex in certain regions has resulted in volatile commodity prices. Expanding upon your statement mis-allocation of capex and resources is to be blamed for volatile commodity prices.”

3 - Asset Nationalization

“Asset rationalization, by Jan 2014, in countries like Indonesia can create serious issues in the global economy as China imports more than 80% of its bauxite requirements from Indonesia. What implications will this carry for the Global economy ?”

Paul’s response: “As a global economist I am more concerned whether the world’s global resource requirements will be fulfilled. China has invested in countries in Africa and has acquired mines, which it cannot fully rely upon because in the past sudden shifts in the governments in Africa has also caused disruptions in the mining activities and complicated ownership structure. As a global economist Indonesia must continue to supply raw material to China as China processes resources primarily for its local economy. Indonesia’s move is politically correct but not on economic terms because it has energy crisis and processing industries need adequate and cheap energy supplies. This move will worry the Chinese and will have a global impact.” 

And, the intellectual evening came to an end.

Denying developing countries access to coal is like restricting food aid to the poor

Coal mining plays a significant role in many national economies. Developing countries rank highly among the world's major coal producing countries. In cases of China, India and South Africa coal is utilized for domestic electricity generation. Moreover, these countries have export markets generating export revenue. Colombia and Indonesia earn considerable export revenues from the coal production industry which is highly export-oriented. Coal currently provides 30% of the global energy needs, 41% of its electricity and 68% of its steel.

Coal in Electricity Generation

Pakistan is the sixth most populous country in the world with an estimated population of 184.35 million in 2012 - 2013. With a growth rate of 2.0 percent in 2012/2013, it is estimated that Pakistan will move to the fifth position by 2050. With rapid urbanization and population boom in major cities of Pakistan, the demand for electricity continues to exceed the supply. As per the Power and Water Ministry the supply of electricity stands at only 12,150 MW while demand is 16,400 MW creating a shortfall of 4,250 MW. Opportunity lies in the crisis, they say.

Increased investment in the technological development and higher labor productivity through improvement in education, health and training facilities are the main modes of increasing productivity of human resources. But how is this all possible without an investment in the energy sector, primarily coal.

Apart from being the sixth most populous state, the country is the sixth richest nation in respect of coal reserves, amounting to more than 200 billion tons. For further clarity, these coal reserves account for 2% of the reserves in the Asia-Pacific region and 0.2% of the world. Of this 200 billion tons, 185.5 billion tons (93%) of the coal reserves are in Thar in the province of Sindh which is 8 hours drive from the coastal city of Karachi. All coal is sub-bituminous and lignite in grade and is optimum for the energy sector. With the Chinese assistance Pakistan has 3 X 50 MW power plants in Lakhra, Balochistan and only 15 MW is being produced which is only 0.1% of the actual energy mix as displayed above. Majority of the electrification is via Oil which has traded above the $ 100 mark for quite some time in the international market and Pakistan nearly imports all its oil requirements. The other primary source is Gas. Gas is currently being increasingly consumed by the industries, households and the transportation sector in Pakistan. This has caused bottlenecks in timely supply of gas resulting in shortages and power cuts. The other source is hydroelectric where Pakistan faces an issue of water shortages in rivers and banks which have sources in Indian controlled Kashmir. There have been several rounds of dialogues between the two neighbors India and Pakistan to abide by the Indus Water Treaty and Pakistan has voiced its concern on international conventions and forums regarding India building dams in Kashmir. 

The current energy mix is quite expensive which is causing unrest in public and pushing businesses out of the country. The Pakistani economy can save around $26 billion in fuel costs over the next 15 years if thermal plants of only 420MW are shifted to coal.

Many of the countries with significant coal reserves also have significant coal production. However, Pakistan is counted amongst those nations whose coal reserves are yet to be utilized at a large scale. This provides economic opportunity to further develop the coal extraction industry and poses a great potential for a secure and affordable domestic energy supply using the indigenous coal reserves.

Pakistan currently imports more than 6 million tons of coal annually to meet the requirement of its thriving cement and ailing steel industry resulting in loss of foreign reserves and lost employment opportunities at home.

The current prime minister of Pakistan, Mr. Nawaz Sharif and his government, have several times shown interest in setting up greenfield power projects in Gadani and converting diesel and furnace oil based thermal power plants to coal. There has been no constructive talks on how could Pakistan mobilize its internal resource to attract capital inflow.

Earlier governments had policies directing towards exploiting the local Thar coal reserves to produce energy, but due to Asian Development Bank’s withdrawal of USD 1.4 billion in finance, Pakistan will resort to coal imports, atleast in the short run, to provide cheap electricity to the consumers and breathe life into industries, textile in particular. It appears that multilateral banks listen only to their donors, not their customers. And donor governments, like the US and the EU, are more interested in being politically correct on climate control than actually addressing poverty. It is interesting to note that US is the largest producer of coal, accounting for 13.4% of the global coal production and consumes 88% of the coal produced domestically and half of the electricity produced in the country is generated through coal.

For critics: Coal has a bad reputation due to the widely held view that it causes global warming and is responsible for death of many miners. What people don't tend to realize that coal has changed the living conditions of many in the developing countries such as India and China. For example, China, a model country for the developing world, has witnessed 536% growth in GDP since 1990 and more than 660 million people have been lifted out of poverty. Today more than 99% of the Chinese population has access to electricity. Coal has proven to be a "critical enabler" for successful economies. This has helped countries to further invest in cleaner technology and renewable energy resources. Coal is potentially the "fuel" towards any successful economy.