Lima Accord

As you probably heard by now, Peru was the host to nearly 200 nations, who had traveled to Lima to discuss what to do about global climate change – Lima Accord.  The Twentieth Conference of the Parties (COP-20) of the United Nations Framework Convention on Climate Change recently concluded.  The 195 nations, rich and poor, agreed to the first such agreement after 20 years of conferences and public debate, to reducing the fossil fuel emissions – oil, gas and coal.

The deal is interesting in that there are no legally binding requirements.  It is based on pledges made by every country to reduce emissions in their country.   Each country will introduce domestic laws to reduce carbon emissions via a plan to be public by March 31, 2015 with a deadline by June.  The plan is to lay out how each country will cut their carbon emissions after 2020.  While there are those that think that the time frame should be now, it is not pragmatic when you analyze the energy systems in each country. 

Think about it.  You are asked to devise an energy plan for the next 20 plus years by March 31, 2015.  Now, there are those countries, which have long-term plans in place and this deadline won’t be an issue.  Denmark is such a country.  But the vast majority of the other countries will need time to analyze their needs and then to implement their plans.  The US would be one of those.  We have so many interested parties that want to put in their two cents worth, that it takes too long for a consensus to materialize that quickly.  The energy plan needs to phase in new renewable technologies before phasing out the old hydrocarbon-based technologies.  Otherwise, we will have a highly unstable energy system.  Think and be smart about this. 

Never Poke a Russian Energy Bear

I published several blogs on Russia and natural gas this year, discussing the use of its natural gas resources as a lever on Europe.  Winter is here and Russia has employed this leverage on Ukraine in 2006 and 2009.  This time is different.  According to the 2013 BP Statistical Review:

• Russia is the number 2 producer of oil at 12.9% of global production (behind Saudi Arabia at 13.1%); and
• Russia is the number 2 producer of natural gas at 17.9% of global production (behind the US at 20.6%).

Oil prices have dropped from a high in July 2014 of approximately $112/bbl Brent to approximately $70/bbl Brent (today), a drop of 37.5% in 5 months. With energy being Russia's largest export, this is devastating to its budget and trade deficit.  Add to this woe, the collapse of the Russian ruble and accelerating this week.  This has stoked the flames of inflation to a point of nervousness among its politicians.  On top of that, there is some $35 billion in corporate debt repayments due in December, causing angst among the executives who are putting pressure on the politicians.  And sanctions continue to be applied.

This bear is cornered and being poked from all sides.  If there is a year for extracting more revenues from its natural gas exports, then this is it.  It is the perfect storm: an early winter in Europe, a large natural gas dependency on Russia, a falling ruble, a falling oil price, mounting trade deficit, and irritating sanctions.  Putin may act swiftly and harshly by imposing price hikes on all exported natural gas and there is no easy replacement of it for  Europe.  If Europe does not comply, then Putin could throttle back the quantity or shut the pipelines down.  While this is a poor strategic move in the long-run, you never want to poke a bear in the corner in a short-run.