Host and principal at Cornerstone Government Affairs Jack Belcher is joined by Geir Vollsaeter, an energy expert and consultant based in Oslo, Norway, for the latest installment of Energy Policy Watch.
Vollsaeter is involved with all matters concerning carbon and energy in Europe. He’s an expert on energy, carbon management and decarbonization, and provides consultancy services for industrial and energy companies, as well as the Norwegian government and the EU. He has more than two decades of experience in energy climate and environmental matters, including carbon management strategy and ESG.
In the latest installment of Energy Policy Watch, Vollsaeter discusses the severity of the energy crisis facing Europe, the decarbonization movement and how a transatlantic partnership between the U.S. oil and gas industry and Europe could help.
Jack Belcher: Geir, tell us a little bit about yourself and how you got into energy and decarbonization and this role that you play in advising companies and governments.
Geir Vollsaeter (01:48): Yeah, it’s been a long road. It started very early. Electricity’s always been in my veins and I got electrocuted at age two. Decade and a half later, I got to become a journeyman electrician, but luck be have it, met a California wife, went out to California, got educated, electrical engineering, government and government national affairs. And long story short, I come back to Europe and I start in waste-to-energy. Got my big experience through Shell, selling gas, doing upstream projects, doing government affairs, and also, at the tail end of that career, doing everything regarding benchmarking new assets.
From cradle to grave, we needed to know the carbon intensity and the mitigation strategies. And so, this was in the 2000s and since then, worked for Alcoa and been part of a whole bunch of different commissions for the IA, IOGP, and also the European Union. Helped set policy, helped advise, provide expert opinion, testifying. And so, it’s been just a long run on the same topic and I love it.
“I think it’s very important that we also set aside time not to solve just domestic issues, but solve bigger issues that help solve Europe’s problems and can create a long stable partnership on energy and minerals with the United States.”—Geir Vollsaeter
JB: That’s great. Well, I know you’ve had a busy week this week. Can you talk a little bit about what has been going on in Norway this week with the conference that you have attended? And I know it’s been very focused on energy and the energy crisis that’s happening in Europe right now.
GV (03:31): So once a year, on the Southern tip of Norway, in a town called Arendal, the people that are in this space, that includes the prime minister, all the ministers, all the party leaders from all the political parties, the CEOs of all the big companies in oil and gas and in land-based industries like Alcoa, fertilizers, aluminum, ferrosilicon, and so on, including civil society. And we meet for one week where we try to iron out and mitigate the issues that Norway faces. And this year, of course, the energy crisis was top on all issues regarding industry.
We’re suffering hard from gas prices, electricity prices, looming rolling brownouts or blackouts in Europe and in Norway. And this has had a dire, dire impact on European industries. We’ve suffered 50% reduction in aluminum production because electricity prices are too high. Fertilizer producers are cutting down because they can’t afford the gas. That’s it here. And our gas reservoirs are short. We can’t fill them up. And while we produce everything we can out of Norway, the U.K. does the same. LNG is imported. We still have these looming large issues with the war, Russia and Ukraine, and geopolitics.
JB: So how did we get here to this situation, which is, I know, having a devastating effect on the economy and the supply chain and the situation, in general, there? How did this happen? What are the factors involved?
GV (05:18): Well, we have to go 20 years back with how we regulated our markets. We deregulated everything, and Europe has always been short, or for decades been short of its own energy. So 20 years ago, 25 years ago, Europe realized it needed to have more energy. And Russia’s been a stable supplier for all the years, even through the communist era, Soviet era, but Europe sought more supplies from Africa, and in the last decade and a half LNG imports, LNG receiving terminals. Now that isn’t enough, but the marginal supplies into Europe are LNG. As Russia dials down on its production, we need more gas. Without that gas, we are looking at devastating winter, I fear.
JB: Talk a little bit about the geopolitics, because I know that’s very important in this whole dynamic and the work that you do. How is geopolitics impacting all this? And what are some of the things that need to be maneuvered in terms of geopolitics, especially with Russia and China and the U.S.?
GV (06:38): Yes. So we can go back to 2004, that’s when we suffered our first gas crisis, it wasn’t big, but the gas that is transmitted through Ukraine, the troubles between Ukraine at the time, and Russia led to the Ukrainians diverting gas that was supposed to go to Europe to themselves because of the difficulties they had with Russia, because Russia tapered down on their production so the Ukrainians wouldn’t get the gas, but the Ukrainians took the gas from us. That was in 2004 and that caused huge problems. I was working for Shell at the time. Every oil and gas company in Europe tried to do their most to mitigate that problem. But that was the start and it's just continued. And the 2004 crisis gave us Nord Stream 1 and Nord Stream 2, the two pipelines that bypass Ukraine and that was supported.
Russia was a stable supplier. They always delivered as they promised. So, they’ve been one of our most stable suppliers of large volume gas. And they’re the largest gas supplier to Europe. As relationship between Russia and Europe declined over time following then the annexation of Crimea and now eventually the war, gas supplies from Russia has been dwindling. They supplied up to 60% at some time. 155 billion cubic meters in 2021.
Now that was much less than the year before. They claim it was contractual, that they didn’t short us. But now they are saying that they can’t maintain their gas turbines, so they can’t supply enough gas to us. As a consequence, the European commission engaged in a policy process. They realized this was a huge problem, so strategic partnerships became key. We started that partnership process and that was part of this, initially on minerals. But as the war came, strategic partnerships on gas became even more important. Gas is a short-term issue. A long-term issue for us are the minerals. And we are more than 90% reliant on Russia and China for batteries, for rare minerals, and so on. And that looms a much larger danger for geopolitics and for Europe security.
JB: What’s the policy solution? And I ask that question of short-term and long-term policy solution. And I’m going to get to the decarbonization movement here, but starting with just supply of energy and minerals—assuming that we’re going to have the situation in Russia last a long time and similar geopolitical situations.
GV (09:49): It’s a complex matter. The European Union has launched an array of energy environment and climate packages over the last few years. It's been the green deal, it has been CBAM (Carbon Border Adjustment Mechanism). It’s been recently REPower, as a function of the crisis with Russia. But before then climate packages were already present and Europe has had a climate regime since 2005 with the emission trading system.
So, while they drove down that climate trail, which was needed, we ended up in this situation where we cannot deal with the climate if we don’t have enough energy. It’s that simple.
The initial deals were made on minerals, but earlier this year, Europe signed a deal with the United States for 15, up to 50 Bcm (billion cubic meters) of gas by 2030. If you look at 50 billion cubic meters of gas by 2030, compare that to the 155 to 170 Bcm of gas that Russia supplied—it’s not enough. Even if we do energy efficiency, we save, I think we’re still going to be short and a deal that has an intention of 15 to 50, but no roadmap, no concrete deliveries, is going to be a huge problem.
My worry is that, well, it was a nice, nice deal, but we still run the risk of that gas not showing up if you leave it just to the market.
JB: And there are other countries in the world or other parts of the world that are competing for those gas resources as well, so that further complicates the situation. How do you guarantee that supply, and then moving forward, how do you make up for that delta of lost energy demand? Any electrons, whether it comes from gas or nuclear or renewables—whatever the source.
GV (12:11): Well, essentially, Europe competes for those gas LNG cargoes with China, Asia. And the LNG is produced in Nigeria, Trinidad, Australia, United States, Russia. So essentially the marginal cost of production or gas to Europe is now going to be LNG for the foreseeable future. If we’re going to have a chance to reach the climate goals, we need to double the electricity production in Europe and we can build a lot of renewables, but if we don’t have spinning gas reserves to modulate that we are going to destroy our grid system and we're going to have rolling brownouts and so on.
JB: And you already have those challenges. As I recall winter before last, Western Europe had to shut down electricity and wheel power in from Eastern Europe. There’re already issues that have to do with balancing the grid and areas of high demand?
GV (13:13): Yes, that was a huge scare. In Albania, I think there was, Romania, a transformer, not particularly large compared to the European grid, fell out. That caused frequency instability in the grid. It transferred all the way into France. Grid operators were really scared the whole grid was going to come down. Europe has chosen to integrate all the countries with interconnectors and cables and high-level grid. So, if one suffers, we all suffer.
JB: You mentioned earlier some of the initiatives that the EU has undertaken, the European Green Deal, the CBAM, which is the carbon border adjustment mechanism, and then the recent power initiative. Can you talk about what those are and what Europe is embarking on in this area of, A, decarbonization and, B, with the new initiatives on power, what that involves?
GV (14:23): Yeah, so, the Green Deal was an all encompassing package to reach 55% production by 2030 and go net-zero by 2050. It encompasses the whole ag sector—so farming, food. It deals with all industries, all power production. So, it’s the most comprehensive package that I've ever seen come in the European Union. It was huge in terms of number of pages you had to read, but what you can remember from that is the Fit for 55 and then the net-zero 2050. That wasn’t enough. So, they’ve added to it with something called taxonomy, where they want capital to flow towards measures that actually reduce emissions, that you don't waste your capital on things that maybe cause carbon leakage, and so on. Carbon leakage has been a huge problem in Europe. We’ve lost quite a lot of industries due to high taxation of CO₂ emissions in Europe since 2005.
And we as an industry have argued extensively that you don’t do climate good by shutting down cleaner industries in Europe, then importing Chinese and Russian or Middle Eastern products. There’s a five, six times difference in CO₂ emissions. So if you produce a ton of aluminum in Norway, it could be 67 times higher by the time you get it from China. So hence came the carbon border adjustment mechanism.
So, that was introduced in late 2018. That was part of this process where you ensure that if a country didn't have any restrictions or any CO₂ taxes or so on that you would have some form of ensuring that import did not compete our products. So you could say it’s protectionism, but the benefit of it is that those that export to us then also would be incentivized to do something. It didn’t go well with China, Russia, or initially the United States. And there’s been a lot of wrangling on that carbon border adjustment. It was passed earlier this year. There’s a pilot phase now up until 2026, when they go live. Furthermore, does not include indirect emissions. So the original proposal was that if you had coal electricity to fire up your kilns or your aluminum factory, you would've to include that. Does not include that at present. So it’s only the Scope 1, the factory emissions per ton that’s present. Makes it a lot simpler, but that's now, it’s happening. And it’s coming in 2026.
JB: And then the electricity initiative?
GV (17:29): So REPower came as a function of the war in Ukraine. With the potential threat of Russia, actually shutting all gas into Europe, we needed to prepare for that. And so the commission then went aggressive on new renewables, particularly energy savings. So to reduce the gas demand and being smart about it. If they succeed with that, it’s still not enough to make up for it. So Europe is now, or European Commission, is working on securing as much gas as they possibly can. And in my world, I think the most reliable supplier we could have is the United States, North America. Getting long-haul gas out of Australia may be a challenge when we compete with the Chinese.
JB: And the commission relabeled, I guess you’d say, natural gas and nuclear as being sources of clean energy or green energy. Can you talk a little bit about that? I mean, it seems to me that the issue is how do you ensure that you have baseload power, right? And those seem to be the two solutions in a decarbonized world.
GV (19:00): The whole taxonomy—that’s where the issue came up, taxonomy, where you would classify what's green or not. The taxonomy was passed in European Commission as regulations. So, it’s law. Initially, they had screened out natural gas and nuclear from being qualified as green. Well, that was set to go in motion up until the crisis when Europe, the commission, realized that we are running into a huge problem here, it didn’t take that long to bring nuclear and natural gas in minimum as a bridge fuel, possibly as something we’re going to need forever. So I think we’re on the right footing now. Shutting down nuclear in Germany was a disaster decision that was made after Fukushima, they are reconsidering that. We got some troubles with nuclear power generation in France, but they’re working hard at that. So, I think nuclear’s going to have a Renaissance in light of this situation and gas is going to be with us for a long time.
JB: You mentioned the carbon border adjustment tax, and we’re seeing reverberations. We’re seeing the impacts of that. I mean, the U.S., for instance. There have been some policy discussions about the U.S. implementing something kind of like that. Not only just as a response, but also as just a path forward to decarbonization and a result of this. We’ve seen manufacturing countries like Mexico, for instance, start taking a big look at their own carbon footprint in manufacturing and looking at ways to decarbonize there. Is that something that you can talk a little bit about and is that part of the intended consequences of the CBAM?
GV (20:50): Yeah, I think it is, but there are two factors here. Back in the mid-2000s, they established what’s called the carbon disclosure project. That’s a nonprofit organization that has now more than $110 trillion of institutional capital behind them. And essentially $110 trillion of capital wants to know if there’s any climate risk to where the money is spent. So, this has been going on in the financial world for some time and the CBAM is actually sort of an extension of that to where you want to know the carbon footprint.
And even if you didn’t have a tax associated with the carbon border adjustment mechanism, it would still require everybody to analyze the footprint. So, the ESG life cycle analysis of a product. Furthermore, most large companies in the world now require this from their suppliers. So environmental product declaration (EPD), no company wants to buy steel or aluminum if you can’t supply EPD, product declaration. So, that’s going to be... CBAM may not end up to be a tariff or a tax in the short term due to the crisis, but it certainly will require everybody to declare the footprint for the products they have included into the CBAM.
JB: You keep mentioning the cost of all this, and obviously that’s a big factor. This transition is expensive, and it’s very expensive when you look at what you’re talking about happening in Europe, how the economy’s being impacted right now, and the whole world is really suffering from inflation right now. And what we’re starting to see as a global slowdown in the economy. How do you finance this? How does this get paid for when you’ve got such big costs and you’ve got economic damage that’s occurred?
GV (23:06): Well, so CBAM itself is not a cost for the European Union or any government. It’s a revenue source. We had hard discussions with the commission, the international countries for how to allocate that money. If that just ends up as an indirect tax, it's a bad deal. And it can cause inflation, but oftentimes primary role materials, which is primarily covered here, usually have a higher price in Europe than China. So right now there are great price differences on steel between Europe and China and the United States. So, there could be some inflationary pressures, but if it’s perceived to be driving inflation, I'm sure that's also going to cause possible delays on implementation, and so on. It's difficult to say now, but I think everything is up in the air, the crisis is so dire that you could possibly delay everything in these large packages, because the consequences for people, energy parity, are possible. I mean, we had a heat wave and thousands of people died here. If this happens in the wintertime, people matter most.
JB: You mentioned earlier that the United States is, you called it, the best source of energy for Europe, primarily through natural gas, LNG exports from the United States to Europe. And so, when we look at the situation here in the U.S., there’s a lot of concern about the gas price pressures here. There have been some who've called for the U.S. to pull back on its exports. We've also got an administration that’s been less than friendly to the oil and gas producers and the infrastructure in the U.S., the pipelines, all of that.
We recently had the budget reconciliation process pushed through, the package that has been called in the Inflation Reduction Act. That’s kind of a mixed bag for oil and gas. There are a lot of incentives for decarbonization for 45Q tax credit, which is EOR. A little bit on oil and gas production but a lot of that trends not in a good place. What can Europe do, or what should Europe do to put pressure on the U.S. for us to produce the amount of natural gas, for instance, and oil, really, because the global oil market needs additional supplies? What can it do to pressure the U.S. to do the things it needs to do to be able to deliver those volumes that have been promised to Europe?
GV (26:08): Well, at the government level, between the commission and the United States, the administration, you need a fairly detailed roadmap for how to get there, but this is business. So European industry, it’s in their interest to engage in this process. Upstream of Europe is shale gas, gas supplies, pipelines, LNG facilities. And if this is to be delivered upon, the initial deal, there will have to be built more LNG facilities. At the same time, we can fully appreciate that the United States now has extremely competitive gas prices. And I don’t think anyone here in Europe wants to see the United States suffer what we do. But you can only solve this by dialogue, by interaction with governments, interaction with industry, and making sure that is an orderly process where you iron out the difficulties before you go into them. So, that the unintended consequences are avoided early.
JB: This is huge, right? It’s about energy security. It’s a transatlantic energy security issue that’s geopolitical, that’s economic, that involves also the ongoing decarbonization efforts on both sides of the Atlantic. So, it really does sort of call for a sort of transit comprehensive discussion on all of this. And you’re right, individual companies that are suffering in Europe, they need to be putting pressure on the U.S. to ensure that the LNG suppliers in the United States can deliver the volumes they need. You have any thoughts on that?
GV (28:06): Yeah, I remember when the first LNG facilities came up in the U.S., one of our petrochemical facilities here in Ineos was the first to get a gas deal, long term gas deal with one of the LNG producers in the Gulf. And that was a long-term agreement, fairly preferential, essentially a destination clause. So it was a bilateral agreement. That to me was a very positive sign, but that was one company. What needs to happen here, I liken it to the Marshall help that brought Norway out of the misery of the Second World War. That was a loan. We paid it off as one of the few, but that type of deal, the mentality that goes in that, I think is what we need. So, it’s not about asking the U.S. for money. Europe has the money to pay for it. So, that’s not the problem. But we need the mentality of a transatlantic partnership that’s a lot more than laissez-faire business. This needs to be a serious effort to create that bond and United States and Europe have done this before and we can do it again.
JB: Do you have any predictions for the future in terms of that, in the way this all plays out, what do you think is going to happen?
GV (29:44): Well, my gut feeling tells me that having been one week with Norwegian industries down in Arendal in the south, conversations with the commission two weeks ago, I've never seen such desperation my whole career. Fear, you can feel it, for what consequences could come one month from now, two months from now. It could be Christmas. It could be New Year’s. The total pressures with inflation, high prices, loss of jobs, rising interest rates. It’s putting huge stress on the politicians. I think it’s very important that we also set aside time not to solve just domestic issues, but solve bigger issues that help solve Europe’s problems and can create a long stable partnership on energy and minerals with the United States.
Energy Policy Watch is a partnership between Hart Energy and Cornerstone to bring regular video updates on legislative and regulatory actions affecting the energy industry. Guests range from key representatives or congressional staff to relevant cabinet-level officials and executive branch personnel. View More Energy Policy Watch Episodes Here.
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