Is the Green Transition at a Crossroads?

0:00People are going to lose their minds. This is a moment in history unlike anything humanity he's gone through. It's a very different world for humans to come. Take a step back and see the broad picture, which is the way all these technologies are interlinked. Because this is all about exponentiality and humans can't think in exponential terms. How consequential do you want to say machine intelligence is? It's almost certainly as consequential as writing. How long did writing take to disseminate through the human population? You know, hundreds, thousands of years and we're dealing with it now on a scale of months.

0:33But in this kind of world, you're compounding 100 % growth every year and the numbers become astronomical. AI is going to spot patterns in the world that were just completely invisible to us. Even if you think that the AI and the robots are your demise, you might as well bloody invest in them and make some money out of it. If not, you're just going to be angry man shaking your fists at the clouds.

1:09is the green transition at crossroads welcome to this real vision deep dive interview i'm your host for the next 45 to 60 minutes and i'm pleased to be joined by saria giante of eney lsc and energy transition company saria earlier served as the energy unit chief at the U.S. Embassy in Ukraine. So a strong subject matter expert on the developments in Ukraine and the ties to the current turmoil in energy markets and the green transitions. Ria, it's a big pleasure to have you back here at Real Vision. Thank you very much for being with us. It's an absolute privilege. Thank you for inviting me back.

1:48First of all, given your experience from Ukraine, I'd like to start with the status on the war and the ramifications for the energy markets. So if we look at the current status in Ukraine, how important is the warfare for energy markets at the current stage of the war? Unfortunately, Ukraine has found itself mired in what is becoming not quite a frozen conflict because it's quite an active conflict, in fact, but it's become an inch by inch or centimeter by centimeter, almost World War I trench warfare effort to reclaim territory. Now that unto itself doesn't affect energy markets. Traditionally, Ukraine was an extremely important country for energy, mostly as a transit country.

2:38Much of what Russia was transiting natural gas-wise into Europe went through Ukraine, which has by far the largest transit capacity. But then starting in August and ultimately ending in October of last year, so six to eight months after Russia began its full-scale offensive in Ukraine, Russia began to cut off gas transit through Ukraine to Europe. You saw Russia sabotage the Nord Stream 1 and Nord Stream 2, natural gas pipelines. There have been, as we know, the recent sabotage of the Baltic interconnector, but also Russia just cut off natural gas. And that was not a sanctions response. Oil has been sanctioned.

3:22Some of the financial mechanisms in the markets have been sanctioned, but natural gas for the most part wasn't. And so it really was Russia trying to leverage Europe's reliance on Russian natural gas in an effort to keep the continent from supporting Ukraine and reacting punitively to Russia's invasion of Ukraine. At present, the amount of gas that is now going into Europe through pipelines is down to approximately 40 million cubic meters per day through Ukraine, which is an incredibly small amount of gas. Just to put it in perspective, in a cold winter, Ukraine uses about 21 billion cubic meters of gas.

4:04And the amount transiting is now only about half as much as that. And so Ukraine itself has stopped being an important energy country. However, what Russia is doing or is not doing in Ukraine at any given moment does have the ability to influence international energy markets and also has the ability just to scare international energy investors. And so, although Ukraine itself is not at present an important energy country, it is nonetheless less capable of roiling energy markets and making investors, both investors in energy production, but also, for example, spot traders, very, very, very worried about what could happen at any given minute.

4:49And a lot of that has to do with the fact that the Russian manufactured energy crisis that started in 2020 and 2021, especially as Russia began to build up towards the invasion of Ukraine, what in retrospect we can see was very intentional moves by Russia to restrict energy supplies, especially to Europe, that has left the entire world with incredibly thin margins for error, so to speak. So energy markets remain very tight. And that means that any shock to the system has the potential of making prices fluctuate tremendously, but also causing additional chapters of the energy crisis. So although much of the world has come to see the energy crisis as having passed, we energy experts are aware that it is still very much unfolding and that anything unexpected, any large natural disaster, any war breaking out in the Middle East, any decision by Russia to change how much it's producing, how much LNG, how much oil it's shipping, any political change, for example, in an important energy country could send a big enough shock into the system that even non-energy experts will notice that the energy crisis has not ended.

6:12So given the sanctions on Russian oil and the sort of transfer of flows from Europe and elsewhere to other regions, now China and India being the buyers of Russian oil mostly. How are we dealing without these direct flows of fossil fuels from Russia in the West so far? Well, the overall answer to that is we're doing quite well, considering prices are still quite a bit above where they were before Russia invaded and before the 2021 energy crisis. But they're not astronomical. And we did really see astronomical prices in 2021 and 2022. And right Right now, things are survivable, but they're definitely not as low as they were before.

7:00But it's important to separate oil and gas for this discussion because natural gas is not particularly fungible as a commodity, by which I mean there's not that many ways it can be transported. You can send it through pipelines or you can send it as liquefied natural gas, LNG, on tankers, essentially. And I guess theoretically you could then move it in cisterns by rail, except that's just really not done very often. So with all of the pipelines either not used or destroyed going to Europe, and there are still pipelines. There's, for example, Turk Stream that is still transiting Russian natural gas.

7:43The natural gas itself has become a much more scarce commodity because the physics of natural gas are such that you can't simply turn the switch off on a natural gas well. It actually destroys the well and then you have to drill a new hole. So what Russia is doing is actually crippling its natural gas fields. But it does have some options. There is the power of Siberia pipeline that goes from Russia to China, and that's approximately 3032 BCM, billion cubic meter pipeline. So about the same amount of gas is transiting Ukraine still, not very much. But Russia has been trying to negotiate with China the bringing online and construction and then bringing online of a second power of Siberia pipeline, which would have a capacity of about 50 BCM.

8:33That becomes quite a lot more gas. We're still not anywhere near the approximately 150 to 170 per annum billion cubic meters that Russia was transiting to Europe through the existing pipeline structure before it shut off gas transit. But it does provide an ability for Russia to continue exporting a considerable amount of natural gas, except now it's going to Asia. That said, global energy markets even for natural gas are quite interconnected. And so if China is getting more pipeline gas, which is much cheaper than LNG, considerably cheaper just because of the logistics that are involved, then China will need less LNG.

9:20And so what we've been seeing is that China, as a consequence of demand reduction because of its own economic and COVID situation, has been selling its long-term LNG contracts at a very advantageous price for China because the margin between what it originally entered those contracts at price-wise and what it can now sell LNG on the market for is huge. So China's been making quite a lot of money by selling the LNG to which it has a right instead to other countries. So there is a little bit of a just sort of musical chairs going on, but that's much less true of natural gas than it is of oil. And oil is an extremely fungible commodity.

10:02And so although oil has been sanctioned, or rather, well, yes, it has been sanctioned, but it's also had this$60 per barrel price cap put on it, which has implications for the reinsurance market. So the goal of that was to make it impossible to get insurance for an oil tanker that was selling above the price cap of$60 per barrel, But it's actually much more difficult to enforce because what happens is you take a country like India, which didn't buy any Russian crude until the invasion of Ukraine, but then saw an opportunity to buy Ural's crude at a$30 discount per barrel and said, well, now we should.

10:49And so, excuse me, India began importing a million barrels per day of Russian urals. And that means it's not buying oil from other countries. And so, again, it's going to remove shares. Oil simply moves through international markets in such a way that prices generally end up lower. And it's very difficult to tell where the oil comes from. So Russia has been making a killing this year on crude oil exports, and it's primarily what's keeping the Russian economy and Russian government floating. And it's very, very difficult to cut those off. Because what will happen is we'll see a massive price spike, which will then trigger another inflation cycle, which Western governments don't want for political reasons and, of course, for the well-being of their populations.

11:45but it also means that money continues to flow into Russian coffers. So we're doing a decent job of weaning ourselves, we, the West, off of Russian natural gas, but we are not doing a very good job of weaning ourselves off of Russian LNG. And in fact, European imports of Russian LNG spiked and have remained double what they were before the invasion. and there's no sign that they're going to go down at any time, at least in the immediate short-term future. And meanwhile, demand for Russian oil really hasn't fallen off. It's just been a bit redirected. And with the OPEC decision to cut production by a million barrels a day to keep prices high, those prices are then also high for Russia despite the price cap.

12:37It sounds like we're walking a tightrope from a supply side perspective, both when it comes to natural gas and also to a certain extent in oil space. But if we look at the demand side of this equation, how big of a deal is this lack of supply in natural gas space for the Europeans, first of all? Do we have a demand side that actually fits the bill in terms of bringing the demand side down relative to the supply that seems like it's still walking a tightrope here? Demand for oil and indeed for hydrocarbons generally, for fossil fuels, is still going up. And we saw a massive rebound in demand following the end of COVID lockdown.

13:18So the short answer to your question is no, we are not doing very well of weaning ourselves off of fossil fuels as a general matter. There are some projections that have fossil fuel demand peaking in approximately 2030. Oil experts will tell you they think that we're not even close to the high watermark of oil in particular and that we're looking more at 2050. But it is true that Europe deserves some credit. following the invasion of Ukraine, Europe, by necessity, did everything it could to reduce consumption. And that included, for example, beginning to turn off lights in public buildings and reduce thermostats by a degree or two.

14:02And so to take Germany, for example, Germany boasted a 25 % reduction in its consumption. However, it's worth noting that a fair portion of that, especially in Germany, came from what is being widely described as deindustrialization, that what Germany did was turn off its factories. Now, that's partly because the factories decided to go offline. Energy prices were so high that it became unprofitable to continue operating at full capacity or every day of the week, and in some cases to operate at all. We saw a bunch of energy companies in the UK go out of business, for example, a bunch of supply companies because they are providing a regulated product that is subject to regulated prices at which they can sell it to the consumer.

14:55But meanwhile, because they hadn't actually hedged with long-term supply contracts for what they were purchasing, they couldn't get the energy inputs for anything less than four or five times what they had originally calculated, but they also couldn't turn around and provide that at cost to consumers because that would have bankrupted regular people. And so enough of them went bankrupt to cause a severe energy crisis in the UK and one of the resulting worst inflation crises as a consequence. But we really saw that in lots of places. The UK and Germany are just two of the examples. it would behoove the world to get off of fossil fuels as quickly as possible, not just for climate change and emissions purposes, but also if we were going to get serious about crippling the Russian economy, for example, then we would need to stop burning Russian oil and gas.

15:50And we still very much are. If we were going to get serious about having some leverage with the Iranian government, for example, and I think reasonable people can differ about how evil an actor Iran actually is, although obviously the United States has a severe Iran problem, then we would need to get serious, sir, about enforcing some of those sanctions. similarly with Venezuela, similarly with a number of other countries around the world. It would provide us a great deal of leverage to have a sufficiently diversified energy mix everywhere that we are not reliant on any one source. And that, I hope, is the lesson of the energy crisis, at least for Europe.

16:37It is a standard eggs in basket situation. If you put all of them in one, you're in a lot of trouble when things go wrong. And that's exactly what happened. We're going to take a quick break and be right back with more of today's top analysis on the Real Vision Daily Briefing.

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17:57Given what we've just discussed, Saria, you wrote a while ago in Times Magazine that Russia is also vital for the energy transition away from natural gas and oil. So how is that and why is Russia also important for the green transition? The importance of Russia as an energy economy and superpower really can't be overstated. It's in decline now, partly because of actions Russia has taken, for example, cutting off gas transit, which has a negative, very negative impact on its own natural gas wells and fields. but also because of sanctions. But nonetheless, Russia remains incredibly important on a number of energy fronts.

18:49And obviously, we've just spoken about natural gas. We've spoken a little bit about oil. But Russia is also critical for the mineral supply chain. So although it doesn't have the great deposits of lithium that are necessary to make the batteries for electric vehicles that will help reduce emissions tremendously, It does have a lot of other minerals that are very, very important. It has a lot of copper, it has a lot of nickel, for example. One of the ones that's been discussed recently, and this is the one that I was talking about in that time piece particular, is uranium. Russia has about 10 % of the world's global uranium reserves.

19:27And so it has a huge role to play in the nuclear industry supply chains. A lot of hope for the energy transition is placed on a nuclear renaissance, and rightfully so. But unfortunately, uranium isn't everywhere, and a lot of it is in Russia. But moreover, what Russia has is 42 % of the world's uranium enrichment capacity. Now, enrichment is a carefully regulated industry in some sect of an industry, And that's because of nonproliferation concerns, because of course, uranium is also what goes into making atomic bombs. And so if you enrich it to a high enough level, it becomes what's called weapons grade uranium.

20:12But up until about 20%, 20 % enrichment is for civilian nuclear use. It's for making nuclear reactors. And Russia has not quite a monopoly, but 42 % is a considerable percentage of the enrichment capacity in the world. And what that means is that the West can't, as a practical and pragmatic question, sanction Russia's nuclear industry. And we simply need it. Now, in the US, we just don't have that many nuclear reactors online because for the last 40 to 50 years, we've taken an abstinence-only approach to nuclear. But there are a lot of other countries in the world that are reliant. And because the Soviet Union and then subsequently Russia exported a lot of Russian nuclear technology, there are a lot of countries in the world that have Russian VVR nuclear power plants.

21:12And those run Russian fuel. And that fuel was made by Russian nuclear company TiVo. Now, that's not sanctioned, but it's also not a great time to be reliant on Russian fuel inputs of any kind, right? So especially including uranium. So when the invasion started, the world had about a year and a half of enriched uranium backstock to keep things running. And there's been a mad scramble since then to try to find alternative sources and get some enrichment capacity up and running. This is also true, both sadly and ironically, for Ukraine. So Ukraine has 15 reactors, nuclear reactors, spread out over four power plants.

21:57The famous one is the Zaporizhzhia nuclear power plant, which we have all heard of because Russia has hijacked it and is using it for nuclear brinkmanship. As a practical matter, it's not actually that dangerous, by which I mean it's incredibly resilient. So unless you're going to bomb it with bigger bombs than Russia is using, you're not going to crack it and turn it into a Chernobyl situation. Second, where it's located, it's not a particularly dangerous spot. But you are looking at the possibility of spent fuel radiation spillage out of some of the spent fuel cooling ponds. And you are looking at the possibility of a contained meltdown if the cooling systems lose electricity.

22:41So that particular model of nuclear power plant relies on external power sources to continue operating. And because it takes nuclear reactions so long to end and the uranium so long to cool down, you have to keep the cooling systems in place for decades, honestly. And so without the cooling systems operating, you do run the risk of the reactor core overheating and a meltdown happening. But it wouldn't be a Chernobyl meltdown because the reactor core can't burn. It has water in it. And it would be more like a Fukushima issue where the cooling system failed, except that where Zaporizhia is, we're not looking at a massive discharge over hundreds of thousands of people that will then ultimately get into the ocean, etc., etc.

23:33Nonetheless, it does show the vulnerability of being reliant on anything to do with Russia for anything to do with nuclear power industry. Now, as of this week, Ukraine is no longer reliant on Russian T-Val fuel for those power plants. The Canadian slash, to some extent, US company Westinghouse has now begun fabricating the same fuel that is necessary to run a VVER reactor. reactor. And so there was big fanfare. Ukraine is finally not reliant on Russian nuclear fuel, but the rest of the world still has a problem. And so we've been looking around for countries that could provide the uranium. Kazakhstan is a leading possibility.

24:20And in fact, Kazakhstan has what's called a one to three agreement with the United States, meaning it is pre-authorized for the transfer of American civilian nuclear technology. And so we could really make Kazakhstan a key nuclear power player. It's not that it doesn't do anything, but it could be ramped up considerably. And the United States has also been developing its own additional enrichment capacity. And this is especially important for the new generation of nuclear designs, what are called Gen 4 or advanced nuclear. And these are nuclear reactors that are cooled with not water. They're cooled, for example, with molten chloride or other salts.

25:07And those have the potential to revolutionize the nuclear industry because they are safer. Indeed, in some cases, they're almost entirely safe. Some of them have internal fuel recycling mechanisms. They have passive safety systems and nuclear fuel recycling has had such technological advances that fears of, well, where do we put the waste, which is the usual complaint, especially in the United States, are now completely unfounded because you can get the waste down to under 10%. And that's because so much of it can be repurposed. And so it's only waste if you waste it, is what these companies like to say.

25:50And And they're quite right. So there is hope for the nuclear industry. But right now, it is certainly true that because it takes a long time to get new nuclear facilities, whether fuel enrichment facilities or whether actual nuclear power plants online, and it takes such a huge amount of initial capital expenditure to do that, that we are lagging a bit. And so for the time being, Russia is still a very key player in the nuclear industry. And that includes new developments in certain countries. So for example, Serbia and Hungary are both looking at Russian nuclear power plants, building them. Saudi Arabia also, and there's a bit of a political standoff because the United States is trying to get Saudi Arabia to adopt the U.S.'s, what is called by Americans and only by Americans, the gold standard of nuclear regulation as part of you can have our nuclear technology, but you have to then regulate it our way.

26:49to which Saudi Arabia says, well, why would I do that? Why would I take your ridiculously overburdened some abstinence only nuclear regulatory system when I could just go get a Chinese or a Russian design and have none of these, none of this extra baggage to which the United States says, oh, but it's the gold standard as if that's going to somehow settle the issue. So this remains a very hot international question. It remains a key part of Russia's ongoing role in global energy markets. It is, however, an area for optimism because it is helping in the same way that the Russian invasion and ensuing energy crisis really got the energy transition finally properly started.

27:35That's also true for the nuclear renaissance. And so there is a silver lining on all of it, but it's going to take a few years for the rest of the world to dig itself out. If we look at the most recent trends in financial markets, it's relatively clear that nuclear is back in fashion, at least as an investment vehicle. And especially the trends seen in nuclear relative to the trend seen in wind turbines and solar are quite striking over the past couple of quarters. So what's your take on this change of trend in financial markets towards nuclear now being back in fashion relative to solar and wind?

28:17Is it what we should expect to continue over the coming years here? I cannot say this clearly enough. Nuclear is the only viable possibility for a proper energy transition. And that's because wind and solar are fantastic. However, they are not scalable to anything like the necessary level to satisfy still growing energy demands in countries around the world. You also have with wind and solar a dispatchability problem. Wind and solar are, newsflash, reliant on wind and sun. And as the world noticed in 2020 and 2021, when the wind stopped blowing in the North Sea and the sun stopped shining in the Mediterranean, that these things can happen.

29:07And with climate change, weather patterns are shifting, it becomes very difficult to predict with the same certainty we could 100 years ago where the winds will blow and where the sun will shine. So the only way to make grids that are reliant heavily on wind and solar really safe is to do it with battery storage systems. Battery storage systems basically take the electricity that wind and solar plants have generated. And when it is not being used, store it so that when there is a dearth of generation down the line, you can pull it out of the storage. Battery storage systems are fantastic technologies and they're pretty simple technologies.

29:52It's the same as any battery. However, they add cost. It's about half a million dollars per megawatt. The cost goes down a little bit marginally as you make bigger and bigger battery storage facilities, but it doesn't go down much because a lot of it is the battery itself. And so there's not that much marginal cost that can be spread out. So that adds to the cost of wind and solar. Now add the fact that China has decided to start playing hardball on a lot of renewables commodity trade in order to get political leverage on the international stage. And it has recently banned the export of a number of minerals that are really important for building the batteries that will fuel the energy transition.