South Africa, Russia and the new energy equation

Jun 08, 2006 02:00 AM

by Viktor Vekselberg

Geographically, South Africa and Russia are far apart, but there are more similarities between the countries than meet the eye. Both are major holders of natural resources, with important extractive industries and commodity-driven economies. Both are major exporters of raw materials to the world market.
Both underwent major political and social transformations about 15 years ago, freeing themselves from single-party rule and breaking their isolation from the global economy. And both nations are working to integrate themselves into the global economy, attract investment, and succeed in an increasingly global marketplace.

Both South Africa and Russia also face the task of building dynamic, broadly based and globally competitive economies. Although rich in natural resources, neither country can afford to be isolated from the global marketplace. Therefore, an issue of vital importance internationally takes on even more significance for South Africa and Russia: that of global energy security.
Energy security stands at the top of the international agenda due to the acute need for reliable energy supplies to fuel the growth of the global economy. Over the past few years, global demand for hydrocarbons in particular has consistently outstripped supply. This has created an extremely tight market, with little spare capacity, and propelled oil and gas prices to historical highs.

Most would acknowledge that today’s record oil prices have come about as a result of a shortage of production capacity and a shortage of refining capacity resulting from insufficient investment and planning during the previous decade. Adding to that are the above-ground risk factors such as political and regulatory uncertainty, as well as the tight market conditions which amplify volatility and can be worsened by speculation.
In this environment, a system that helps to deliver a more stable energy supply to the world economy has emerged as a priority for energy consumers and producers alike.

The international community has traditionally viewed energy security as security of supply. However, as a result of Russia’s Group of Eight (G8) leadership, the concept of security of demand is gaining recognition as part of the energy-security dialogue. Security of demand for producing countries means adequate demand for their production at reasonable prices. This would enable them to recoup investment in the energy sector, and make new investments.
A balance between these two sides of the energy equation would facilitate greater energy security for the global economy and help fuel further growth.

Realistically, in the medium term, oil and gas will continue to constitute the core of the global energy balance. Therefore, parties on both sides of the energy equation should focus on the following steps to create greater energy security.
-- Investment in new production is crucial for the global industry. Because of the long lead times typical for the industry, these investments need to begin now.
-- New market access is required to ensure security of demand.
-- Investment in infrastructure is needed to ensure access to new growth markets.
-- Investment is needed in reserve capacity -- across the value chain. This would build system resilience to shocks. This is a task that needs to be shared by governments and industry.
-- Technology is needed to enhance productivity across the value chain.
-- Energy efficiency and conservation can help better manage and plan the demand side of the equation.
-- Alternative sources of energy and nuclear energy will continue to account for a small part of the overall balance. They will not replace hydrocarbons in the foreseeable future, but research to commercialise and increase the use of these alternatives to oil and gas should be encouraged.

In addition, creating regulatory regimes that encourage investment is now being increasingly viewed as a matter of energy security. Without favourable investment conditions, investments needed to generate energy supplies to the energy-hungry economy will not materialise.
The need to create regulatory regimes that promote investment applies to energy-producing and energy-consuming nations. A stable and transparent investment climate is a top priority, not only for the G8 nations, but also for all economies eager to attract investment and be competitive in the global economy.

The three key aspects here are: first, to build effective private-public partnerships which can contribute international best practices, project management skills, technology, innovation, knowledge of the markets and international reach.
However, for this model to be effective, a single set of fair and transparent rules that applies to all players -- regardless of form of ownership -- is required. This would stimulate growth, efficiency gains and competition. Without this “level playing field”, the necessary investment will not materialise.

Second, markets are a key instrument of energy security. The rigorous discipline of the market imposed on all producers -- regardless of form of ownership -- is the best guarantee of supply.
And, finally, data transparency and openness to investment facilitate greater interdependence between consumer and producer nations, and as such help to build a more stable energy security system.

Vekselberg is executive director, gas development, at private-sector Russian oil producer TNK-BP, and is a member of the South African President’s International Investment Council.

Source: Moscow Times
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