Europe


European Union has been working on the economy to become carbon-neutral until 2050. Russia is seeking to reduce emissions and diversify the energy exports. For bilateral cooperation, the “Green Deal” may be a challenge on the first glance, but these could turn into opportunities, said Florian Willershausen, BD Director of Creon Capital at the 9th seminar on the future of Russia-EU relations at November 2, organized by the Russian International Affairs Council, Delegation of the European Union to Russia and the Embassy of Germany.

Florian Willershausen, Director BD Creon Capital

Florian Willershausen
Florian Willershausen

In the EU some tend to think quietly that Russia lacks behind in terms of climate change mitigation, recent accidents such as the Norilsk oil spill may give even some evidence. But this perception is incorrect: Together with WWF Russia Creon Capital and Creon Group have been conducting a rating of oil and gas companies in terms of environmental transparency for seven years. This project shows a more and more open discussion of challenges, and the instruction of elaborated ecological policies to reduce the carbon-footprint.

At the same time, in Russia many experts sometimes tend to talk down the “Green Deal”, stating that there will always maintain a market for Russian oil and especially gas, since both resources are cheaper than elsewhere and available on the long run. But this argument is at least risky. EU countries are willing to subsidize the energy transition, so that higher energy costs are sufferable for private and corporate customers.

There are many challenges both sides must face.

Challenges for Russia

For Russia, of course, gas will remain an important export good to Europe in the next decades. But Europe already started significant investments in a hydrogen infrastructure to reduce fossils. Big oil and gas companies are now turning from fossil fuel merchants to green energy suppliers of tomorrow. For example, Shell has been replacing a gas-based steam reformer by a renewables-based electrolysis to produce carbon-free hydrogen for their Rhineland refinery in Germany – with the result of a drop in gas demand.

Some may say, that power generation on gas causes less emissions, than coal-based power generation, that is still durable in Germany. And that since coal remains strong for domestic and social political purposes, gas will stay forever. But there is no guarantee that electricity still will be produced from the fossils, once the coal power plants are shut down in near future of 2030s. This is a trend concerning not only Europe, but the whole world. The Israeli regulators are about to block the construction of a modern and a highly-efficient gas power plant by Siemens Energy. The Israel government switched to support only energy projects from renewables.

The energy landscape is changing dramatically and very fast.

Russia cannot foresee the regulatory sticks to come, for example taxes on pollution or custom duties for carbon-intense products. But Russian enterprises should be prepared that the future of the fossils is in jeopardy.

Challenges for the European Union

And there are also tough challenges from the “Green Deal”the European Union has to face.

It is naïve to think that all energy demands can be covered from renewables at the current stage. Or that all hydrogen to being imported to Europe must be “green”. With all respect to the “Green Deal” and the growing share of renewables in the energy mix, there will not be enough renewable-based hydrogen available in Europe. It is unfeasible, when the entire passenger car sectors will shift to electricity, while coal and nuclear power plants in Germany are being shut down. But instead of hoping to increase their gas supplies to the EU, Russia might promote carbon-neutral hydrogen through a jointly developed infrastructure.

This situation offers a perfect framework for synergy effects.

Framework for synergies between Russia and the European Union

Apart from the challenges, there is motivation by the financial sector to bring incentives in terms of cheap financing for green projects. The investors demand money to be spent in green projects, which gain cheap funding. EU green bond market is open for Russian projects despite sanctions.

European companies provide plenty of high-end solutions in the fields of energy efficiency, waste treatment and ecological monitoring, which are highly demanded in Russia right now. These solutions must be adapted and localized to the Russian context.

Russia can keep its role as major energy supplier. The country exported in 2019 more than 150 billion qm³ of gas to the EU, yet a very important an irreplaceable market for Russian gas producers. The “greener” the economy becomes, the more will the gas demand decline. So Russia must prepare itself to produce carbon-neutral hydrogen based on natural gas and LNG.

At the same time, Russian business should be ready to shape supply chains for clean energy proactively. This approach works very well, as can already be witnessed in Germany. The Russian LNG producer Novatek invests in a small-scale LNG terminal in Rostock, from which in short run the fuel will be provided to ships and trucks further downstream. For the next 20 years, LNG is the better alternative to diesel and heavy oil, not yet hydrogen.

The governments in both countries should encourage and support such projects also for synthetic polymers, as well as for the hydrogen infrastructure. Both Russia and European countries need to start joint research and development programs to produce blue or turquoise hydrogen, and not only green hydrogen, where the entire European discussion on hydrogen turns around.

Both Russia and Europe share the vision of a long-term climate neutrality, aiming to reduce harming climate emissions and to develop new value chains in green energy. This requires financial support also from governments and development banks. In this context it would be helpful to lift financial sanctions on Russia at least by a degree development banks are allowed to cooperate with Russia and finance joint “green” projects.

Last but not least, the energy cooperation can enhance the political ties between EU and Russia.

Recently, Germany declared an energy partnership with Ukraine with focus on hydrogen. Further partnerships between EU members and other countries are being set up. An EU-Russia Dialogue on green economy and clean energy is urgently needed. And the business demands a bilateral hydrogen partnership driven from the top official level. This kind of cooperation would be very fruitful and beneficial for both sides to fulfill decarbonization goals until 2050.

 



Several German cities plan to ban diesel-powered vehicles from city districts – further bans will follow throughout Europe. Stricter sulfur and carbon dioxide limit values on the North and Baltic Seas, as well as later in the Mediterranean, are forcing the ship-owners to make extensive retrofits. And so, the diesel gradually fades from roads and sea routes.

LNG could benefit from it. The burning of liquefied natural gas produces only a fraction of the pollutants compared to diesel, gasoline or heavy fuel oil – and the range is greater. But it lacks the value chain – from liquefaction to transport fueling the entire supply-chain is missing, preventing the fuel’s final breakthrough in the gas station business. How this can be achieved was a subject of the recent LNG conference organized by Wisdom Events in Hamburg.

Wisdom gathered the who-is-who of the industry: representatives of ENI, Elengy, Gas Natural Fenosa, Uniper, Fluxys, Linde subsidiary Nautricor, Baker Hughes and NASA were present to discuss the chicken egg problem: If the decrease of LNG in large quantities is not secured, nobody will run a gas station. As long as LNG prices fluctuate, a freight forwarder will shy away from switching its fleet to LNG. Without the critical mass of demand, an LNG supplier will not offer the gas on long-term contracts with reasonable pricing.

Creon Capital is ready to invest in projects along the value chain for small and mid-scale LNG through the Creon Energy Fund. “We believe in strong medium term growth in this segment,” said Florian Willershausen, BD Director of the Luxembourg Private Equity Fund. “Banks are hesitating to finance because of the high volatility in the market. As a consequence, an equity partner like us is more than ever needed to realize the projects.” Creon Capital is currently evaluating several potential LNG projects and technology providers in Europe.



The US is likely to replace Russia as the world’s largest gas producer by the end of 2018. Within ten years, US companies have been able to keep developing their fracking technology. As a result, the country is not only able to meet domestic demand through domestic gas production, but also to gain a foothold in exports.

America’s LNG market was the subject of a conference organized by CREON’s partner Wisdom Events partners on 27 and 28 February in Houston, Texas. Creon Capital was on board as silver sponsor. Florian Willershausen, Director of Business Development, Marketing & Communications, discussed the LNG market and current challenges in a panel discussion with representatives from GE, Red Box, SNC Lavalin and Monkey Island LNG.

There are many challenges for the US gas market, though. It is not a coincidence, that in the past two and a half years no final investment decision has been made for the construction of new large-scale export terminals: The US manufacturers have difficulties to find customers for their hydrocarbons, given the current oversupply of gas. Since the good utilization of the terminals is crucial for banks and equity partners in the context of project financing, many projects are on hold.

Over the next few years, Australia will bring more gigantic quantities of liquefied natural gas onto the world market. At the same time, Russia is increasing its export of gas in the form of LNG and pipeline supplies. Nonetheless, analysts expect China’s rapidly growing demand to rapidly absorb additional available volumes.

In general, the Creon Energy Fund is also holding back on the financing of the large-scale LNG infrastructure. Instead, Creon Capital, as a fund manager, is examining entry into technology companies that make the handling and transportation of LNG more efficient. An entry into small scale LNG projects, especially in Europe, can also be an attractive topic for the Fund. The latter are aimed primarily at the supply of decentralized power plants, as well as the refueling of ships and truck fleets. These are growth markets that CREON keeps a clear eye on.

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