COLUMN | Wind, gas and coal: Gazprom, DNV and the European renewables boom [Offshore Accounts]

Image: Samuel Bailey/Wikipedia
Image: Samuel Bailey/Wikipedia

Well, that didn't take long. In May (here) we were predicting that the purchase of some large anchor handlers by Sevnor could prove an amazing coincidence if such vessels were needed to complete the Nord Stream 2 gas pipeline from Narvik in Russia down the Baltic to Greifwald in Germany, which Allseas had been forced to abandon because of American sanctions with only 160 kilometres of pipe left to lay.

What do you know? On July 6, Denmark's Energy Agency approved a request from the developer of Nord Stream 2 for permission to lay the pipeline in Danish waters using moored pipelay barges. As we pointed out, in May, the Russian owners had already mobilised the only two Russian flag pipelay vessels able to perform the work on Nord Stream 2 to the Baltic: the DP pipe-layer Akademik Cherskiy and the moored pipelay barge, Fortuna, which both arrived in Mukran that month.

Why Nord Stream matters

The Nord Stream 2 pipeline was budgeted at EUR10 billion (US $11 billion) and the pipeline will double Russia's direct export capacity to Germany to 110 billion cubic metres per year. After the Danish authorities gave the green light to the completion of the project, the Americans tried another last-ditch effort to expand their sanctions regime against Russia to prevent it from coming on-line, with Texas Senator Ted Cruz mustering an effort in Congress to extend the sanctions on the project.

This includes attempting to target insurance companies, bunker companies, and even classification societies which are involved in the completing the pipeline, and those banks which handle their funds. The German media was reporting that the sanctions would even be expanded to include DNV, the classification society certifying Nord Stream 2's actual pipe (here).

Last week, American Secretary of State Mike Pompeo thundered: "Let me be clear, these aren't commercial projects…they are the Kremlin's key tools to exploit this bad European dependence on Russian energy supplies…a tool that ultimately undermines trans-Atlantic security."

But should we really be concerned that Nord Stream is a plot by Putin to enthral Western Europe in a web of dependency? Or should we be more anxious that Germany is importing more gas when "decarbonisation" is at the top of the environmental agenda?

Wind, coal and gas

Driven by government subsidies, popular pressure for more environmentally friendly energy, and by technical breakthroughs in batteries for cars, wind farm turbines, and solar panels, renewables are on the rise across most of Europe, whilst coal use is in sharp decline. In 2019 wind and solar power together accounted for 18 per cent of the EU's power generation, while coal produced 15 per cent, according to a recent analysis of energy production on the continent (here). 2019 was the first year that renewables exceeded coal's share in Europe's energy generation mix, as the following chart shows.


Coal is dying in Europe

A number of European countries have already phased out coal. In 2016, Belgium closed its last coal-fired power station. This year both Austria and Sweden followed suit, with Sweden two years ahead of schedule. The Baltic states of Lithuania, Latvia and Estonia are already coal-free and rely on imported LNG through the Independence floating regasification facility in Klaipeda, which started operation in 2014 to break the monopoly of Russia's Gazprom over gas supplies (the name is no accident).

Independence mainly imports Norwegian LNG. Malta has also built a large LNG regasification plant, leased from Malaysia's Bumi Armada (here). The UK and Ireland both plan to stop using coal for power production in 2025 at the latest. In total, fifteen European countries have already committed to phasing out coal-based electricity generation, and fourteen of them want to exit coal by 2030.

German coal-fired hypocrisy

Unfortunately, after an ill-judged decision to phase out nuclear power and close all its nuclear power plants by the end of 2022 (here), Germany has struggled to reach its environmental and climate change related targets, and to meet its domestic energy requirements without increasing pollution.

Germany is one of the EU's biggest coal consumers, burning huge amounts of the dirtiest lignite brown coal and importing electricity from neighbouring countries which do the same. In 2013 coal fuelled 45 per cent of Germany's power generation, in 2019 that figure fell to 30 per cent, still a significant absolute volume in a rich country of over eighty million people.

Angela Merkel's government has pledged to eliminate coal from the nation's power mix by 2038, but this will not be possible by renewables alone. To phase out coal in the short term requires gas supplies to be increased, because even with the massive investment in renewables in Europe, solar and wind simply cannot provide the power generation requirements of the next two decades. Germany alone has 46 GW of coal capacity.

<em>Coal phase-out dates and remaining coal capacities. Source:</em>
Coal phase-out dates and remaining coal capacities. Source:

Gas is Greener than coal

Hence the importance of Nord Stream 2 to the German energy mix. Natural gas produces half as much carbon dioxide (CO₂) for each unit of energy generated, compared to coal, and none of the particulates, heavy metals and other carcinogens which coal fired power stations produce. Readers may be shocked to discover that coal-fired power plants still serve an estimated five billion people globally and contribute over 40 per cent of annual CO₂ emissions (here). Mike Pompeo and Ted Cruz may not like the idea of Germany burning Russian gas supplied by the Nord Stream 2 pipeline, but from an environmental point of view it is a complete no-brainer.

Germany is not alone. In Poland, Bulgaria and the Czech Republic over 49 per cent or more of electricity generated in 2019 came from coal, so there is still significant room for gas to take more market share even as wind and solar power gain volume as well. China is even helping Serbia to expand its coal-fired power generation capacity. Kosovo, which has some of the biggest reserves of lignite coal in the world, is also planning on building more coal-fired power plants, although lenders are increasingly leery of funding such pollution-heavy projects.

Europe is now in the midst of a renewables boom, which has benefited construction companies like DEME, Boskalis and Van Oord, turbine manufacturers like Vestas and green power companies like Orsted. Northern Europe has become a test case for replacing coal with wind, especially offshore wind, and in warmer Southern Europe replacing it with solar power. But natural gas will still play a critical part in reducing carbon emissions by supporting the phase out of coal, so pessimists predicting the end of the offshore industry may be overreacting. It is highly likely that the last gas well will be drilled offshore long after the last coal mine has shut down.

Worldwide, the prize is even greater

If Europe has been weaning itself off coal, the rest of the world still has a huge way to go. Most of those people dependent on coal are in Asia. Since 2010, China and India have been on a construction binge of coal-fired plants, with India more than doubling its coal-fired generation capacity.

China's coal fired power stations have over forty times the capacity of all the offshore wind farms in Europe (22 GW, here). This has been great for Australia and Indonesia as major exporters of coal. However, given that coal produces only half the energy as gas when burnt, per tonne of CO₂ produced, it has massively increased the CO₂ released into the atmosphere and contributed to the massive urban air pollution problems blighting many Indian and Chinese cities.

<em>Source: <a href=";text=As%20of%202019%2C%20there%20are,billion%20tonnes%20of%20CO%E2%82%82%20emissions">here</a></em>
Source: here

The Visual Capitalist website, which has an epic video of ten decades of coal-fired power stations rolling out around the world here, concluded that, "as of 2019, there are an estimated 2,425 coal-fired power plants in the world, combining for an operating capacity of about 2,000 GW and roughly 15 billion tonnes of CO₂ emissions."

These 15 billion tonnes of CO₂ emissions and 2,425 power stations provide an enormous opportunity for companies that specialise in offshore wind farm installation and support, and to companies that are involved in the production and transportation of gas, whether by pipeline or by LNG.

If you think offshore is dead, think again. Phasing out that much coal capacity, which will be required in the coming decades, will require a massive investment in offshore energy, both in cleaner gas and in wind turbines. Whether you believe in climate change or not, the scientific consensus is going to force such a change, and the people of Beijing, Mumbai, Shanghai, Hanoi and Karachi are not going to put up with choking air and the toxic effects of carcinogenic by-products of coal fired power stations on their health.

Taiwan opening the first of Asia's commercial scale offshore windfarm as one of 69 proposed offshore wind projects there (here) is just the beginning, but so too is the decision to progress Mozambique's offshore LNG development (here). Wind power and offshore gas have a common enemy: coal. Nord Stream 2 is just one battle of many to come in the struggle for the future of the global energy supply.

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