Why banning fossil fuel investment is a huge mistake
By Dr. Cyril Widdershoven – Berry Commodities – Global Head of Strategy & Risk
Activist global warming strategies have now caused the European Investment Bank to ban its fossil fuel project funding. After more than a year of internal and external lobbying by several EU member states and an ever-growing list of activist NGO and pressure groups, the EIB has decided to cut its financial support for all new fossil fuel projects by 2021. It will also support ?1 trillion of investments in climate action and environmental sustainability. This is meant to force European countries to put an end to new gas-fueled power projects and keep in line with the Paris Agreements and EU CO2 emission targets. EIB VP Andrew McDowell stated to the press that the EIB?s new energy lending policy, seen as a landmark decision, has been approved with ?overwhelming? support. He reiterated that it will bar investments or financing for most fossil fuel projects, including those that employ the traditional use of natural gas.
There is still a small loophole for fossil fuel projects, as the EIB funding will still be available for projects that can show they can produce one kilowatt-hour of energy while emitting less than 250g of carbon dioxide. New technologies could therefore be the savior in the end for traditional gas-burning power plants.
Non-EU projects will be hit hardest, as they will have a much more difficult time trying to find enough lending support for new projects. EIB support has always been an important piece of the energy puzzle, with third parties using it as leverage to arrange finance consortia to start up new gas-related projects.
The decision by the EIB and the EU finance ministers is very much a political one, not based on real assessments of the overall energy market situation inside of the EU, or taking into account economic and geopolitical risks for the regions bordering the EU. Brussels has, for decades, been targeting a higher level of security of energy supply (mainly gas) in order to wean Europe off its Russian gas addiction. This strategy has been far from a success story, with European countries today seemingly more addicted than ever to Russian gas.
Official figures from EuroStat show that natural gas dependency in EU reached an all-time high of 77.9 % in 2018, up from 74.4 % in 2017. While core EU gas consumption is slightly down, imports will have to increase as European gas production is decreasing (Groningen, North Sea). To decrease dependency on Russia, other sources will be needed. Those new sources would normally be supported by the EIB, a support that is now coming to an end in 2021.
At the same time, experts seem to agree that the best way to target lower CO2 emissions in the EU is to substitute oil and coal power generation in Eastern Europe with natural gas. At present these traditional power plants are struggling to find gas supplies. For a functional Paris Agreement strategy to be enacted, natural gas demand must increase. Additional transport infrastructure is also needed, but this decision by the EIB will also impact that.
Even in the most optimistic projections, renewable energy options, such as wind or solar, are not going to be able to counter the need for power generation capacity. If the EIB blocks a soft energy transition via natural gas, the Paris Agreement will almost certainly fail.
Another concern that the EIB seems not to have considered is that the removal of financial support for natural gas related projects in the Mediterranean or Central Asia/Caucasus will challenge the security of supply in the region. The EIB?s economic support has been crucial for key energy projects outside of Europe, not only supplying additional volumes to the EU but also increasing economic growth in politically fragile countries. Energy infrastructure connections also link regions, such as Algeria-EU, Azerbaijan-EU or East Med. Without these viable economic and strategic options available, Western Europe?s renewable energy sector will get maybe a boost, but the security, stability and security of energy supply to Eastern Europe and others will be threatened. The current European focus of energy producers in the Mediterranean and Central Asia can easily shift from West to East if incentives disappear. The EIB?s latest decision may appear sensible on the surface, but the geopolitical and economic fallout of this new policy will likely be disastrous.
By Cyril Widdershoven for Oilprice.com