Wednesday, June 7

Nemesio Fernndez-Cuesta: “Finding oil in the Canary Islands would be a problem due to the political brawl”

Nemesio Fernández-Cuesta was Secretary of State for Energy with Jose Maria Aznar in La Moncloa and General Manager of the Crude Oil Exploration and Production business at Repsol. He is currently a professor at IE Business School and the Charles III University.

What consequences will the oil embargo on Russia by the European Union have?
The world market for oil and derivatives consumes approximately 100 million barrels per day. On that round figure, Russia puts seven on the market, which are divided into five in the form of crude oil and two in other products. The country does not have the capacity in the short term to put on the market the quantity that it will not be able to sell to Europe, not only due to a lack of infrastructure but also because of the insurance that the ships require and that is in the hands of Western companies. The problem for Europe is where does it get the oil that is not bought from Russia? The countries that have the capacity to increase their production are Saudi Arabiawhich is going through a bad relationship with the US and has not the slightest interest in lifting a finger; Iranwhich due to the sanctions imposed by donald trump has a million barrels a day off the market, and the great unknown is Venezuelawhose production has passed 3.5 million with Hugo Chavez to the current half million. Conclusion: an oil above 100 dollars. The embargo is not going to pose a problem of shortages, but of prices that will end up producing reductions in demand.
However, measures such as subsidizing fuels lead to increased consumption and not to reducing it…
In the short term and from the point of view of the energy transition, everything that subsidizes the consumption of fossil fuels is negative. That said, I think they are necessary policies at this time. Another thing is the lack of discrimination. We all like to pay less, but there are people who can afford more and others who can afford less. We must be much more selective in this type of aid.
How is the embargo going to affect Spain?
It affects us because we imported some crude oil and heavy gas oil that we used as a mixture to produce high-quality products. Now it is a matter of looking for other sources of supply. At the moment in which the offer is reduced, what we will notice is an increase in prices.
Could this embargo be extended to gas?
This is a much more complicated market. The world market for Liquefied Natural Gas (LNG) was 490 bcm in 2020. Russia supplies Europe in the order of 150-170 bcm… If you try to replace that in a market of 490, it is impossible. There is not. That is why the only solution is rationing, which Germany refuses to do because it would force them to close their industry and burn much more coal. This will be accompanied by sharp price increases.
So you rule out that embargo?
We are spending an enormous amount of resources to help Ukraine while we finance 25,000 million euros every month to Russia. That inconsistency somewhere will have to be resolved if the war continues.
Do you see the Spanish government’s plan to intervene in the price of gas used in electricity generation?
We have a gas problem, and that should lead us to attack that problem. Italy, for example, has just approved a 14 billion euro plan to subsidize gas for industry, homes and electricity production. That package finances it with taxes, including windfall profits on power generation technologies that are making a lot of money. Spain should leave the electricity market alone. Why does Europe prefer the marginalist system? Are they masochists? No, because it works. Another thing is that we have mechanisms here that aggravate certain characteristics of the market, such as the fact that the Voluntary Price for Small Consumers is linked to this wholesale market. It is as if the price of a ton of bread were announced every day. Furthermore, the most vulnerable retailer is also linked to this market. It doesn’t make any kind of sense.
What would you do?
It would make sense to liberalize all rates, forcing electricity companies to transparently announce their offer at different terms: one month, one quarter, one semester, one year… With the mechanism of the Government, the Spanish consumers are going to subsidize the French and It is also not clear who is going to pay the difference between the political price of gas and the real price. If this finally falls on all the marketers, we would be talking about cross-subsidies between companies.
What consequences do you predict its approval will have?
Market distortions. From the point of view of energy transition there is another problem. Now everyone wants to invest in renewables, but if in Spain the market price is limited by this mechanism… Why not invest in Italy or Greece, which have similar wind and sun conditions? I insist that the problem is the price of gas and that is where it must be tackled with measures financed by increased tax collection such as VAT and that derived from CO2.
Would it be worth changing pace and investigating whether we have hydrocarbons in Spain like other European countries are doing?
We have resources here, although research is prohibited. In any case, these are limited resources that are not going to get us out of poverty, but there is some gas and it would make some sense to allow it. What is most relevant, for example, is not closing nuclear power plants, which account for 20% of our electricity production. It is a fundamental base energy that does not emit emissions, and if it is closed it will have to be replaced by gas. They cannot be closed until we have triple the power installed in renewables than now. And that could be in 2050.
You were General Manager at Repsol when the explorations were carried out in the Canary Islands… Was it worth it?
We did a survey for responsibility, but of course with the political brawl that they caused us and the unleashed animosity, the best thing would have been not to drill. We found traces of oil, but they were not an accumulation that would allow their exploitation. In any case, the problem would have been to find it. We would have had a good time.
Morocco is now boosting its drilling in the area. Do they have a margin of success?
The ability to find large quantities, without being a geologist, I see reduced. Besides, it’s not just about finding oil. Then come the delineation drilling to find out the extent, see the type of oil, the amount of resources and carry out a development plan that requires an investment of billions. If it’s discovered today, it won’t start producing for at least five or six years. And if you start producing in 2027, and they tell you that in 2040 its consumption will be prohibited in Europe, nobody invests.
How do you think the war in Ukraine will affect the pace of this ecological transition?
In the short term it is bad because Europe is burning more coal and subsidizing fossil fuels. That said, what is opening up is a period of relatively high oil and gas prices because investing in hydrocarbons worldwide is a complicated decision. Firms will invest if they are offered 20-year stability. If investments are reduced, there will be less supply and more expensive prices from now on. To the extent that oil and gas are expensive and the goal of energy security becomes more relevant, it becomes clearer that the goal is to grow in renewables.
Oil companies have soared their profits this quarter in the heat of more expensive crude. Is it an opportunity to boost your transition by buying electricity companies?
They are making more money because oil prices are higher and because they are reducing their investment in production and exploration for the reasons we have discussed. What they are doing is filling the box, which they use to reward shareholders more and attract investors, and boost their transition by investing in renewables, carbon capture, biofuels…
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