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14 March 2022

Fares Kilzie: “The conflict between environmentalists and the energy community will intensify”


«O&C», March, 2022

Chairman of the Board of Directors, Creon Capital
Fares Kilzie

O&C: In your opinion, is the discussion closed with respect to gas and nuclear projects to be included in the EU green taxonomy? Can we expect that the struggle between the two groups of countries, led by France and by Germany respectively, will continue, and the EU criteria for the sustainability of energy projects will continue to change?

– Inclusion of nuclear energy in the taxonomy clearly provides a good basis for the “nuclear renaissance” in Europe. But it must be taken into account that environmental organizations still treat the nuclear energy as unsustainable solution for the development of energy. A number of organizations, such as Greenpeace, are very critical of the “nuclear renaissance” and will do everything possible to prevent the final recognition of nuclear energy in the green taxonomy. Therefore, on the one hand, the nuclear industry of the European Union will receive additional support anyhow, and it will be impossible to refuse it. On the other hand, the conflict between environmentalists and the energy community will intensify. We know this from our partners at WWF, with whom we co-operate in running the Environmental Transparency Rating of Oil and Gas Companies. Meanwhile, gas is perceived by the European Union as a transitional energy carrier in the process of moving towards sustainable energy, and this position is defended not only by Germany, but also by Italy. All European countries with a less developed nuclear power industry than France are interested in gas. And in order to protect their gas interests vis-a-vis France, these countries, of course, are referring to Germany. Such configuration of the EU green taxonomy means that Russia is in any case holding an advantageous position as the only country in Eurasia with colossal nuclear potential and significant gas resources.

O&C: What role did institutional investors play in the discussion of the green taxonomy, as the number of cases is growing when they declare their position regarding financing energy projects, and defiantly reject, for example, investment in oil and gas companies? On the other hand, it is known that the largest banks continue to invest tens of billions of dollars in fossil fuels. To what extent was the position of the financial community taken into account when adopting the European decision in favor of gas and nuclear energy?

– After the European Green Deal was launched, two distinct groups of financial institutions have emerged. Banks and funds in the first group would finance projects exclusively in line with the ESG agenda and the green economy, while the second group would continue to work with conventional energy that in turn makes the achievement of green goals possible. But these two groups do not compete and are not in a conflict; rather they complement each other, following a parallel course. One does not exclude the other, which is why our Creon Energy Fund in Luxembourg works with both green and conventional (gas) projects.

O&C: Does the inclusion of nuclear energy into the green taxonomy add political points to French President Emmanuel Macron, who is about to face difficult elections?

– Unfortunately, there has already been a significant backlog of investments in nuclear energy in France, although, of course, Macron is not to blame for this: the problems have been accumulating for decades, and pressure from the “greens” has contributed to that. Macron is certainly trying to win the support of the nuclear lobby in France, which is why he has been so active in promoting the inclusion of nuclear energy in the taxonomy. But whether a victory on this front will help Macron in the elections is not known: France has a lot of other problems besides nuclear energy. Macron, of course, is playing the nuclear card on the eve of the elections, but the outcome is not clear so far.

O&C: What impact will the green taxonomy have on investment decisions? Judging by the financial results of the largest European oil and gas companies over the past year, investments in new oil and gas projects offer them excellent returns, regardless of green content.

– Obviously, profitability is the first thing an investor is interested in. But non-financial reporting factors are becoming important now; they were not taken into account before, for example company’s focus on sustainable development or adoption of carbon neutrality strategy, as the climate change affects everyone today. For very large financial institutions, profitability is no longer an absolute priority. Therefore, the whole world is trying to find ways to compensate for the decline in profitability in order to prevent uncontrolled climate change. The only way to offset this decline is to trade CO2 certificates through cross-border carbon regulation mechanisms like CBAM in the EU. That is why we have been trying to convey to our partners and clients since 2005 that only the launch of a CO2 trading mechanism in Russia and its full harmonization with the EU ETS (Emission Trading System) will be able to provide additional profitability.

O&C: For which European projects in the energy sector will green taxonomy be the primary incentive? Will it speed up any investment decisions?

– Hydrogen will benefit the most compared to other products, being a more environmentally friendly and cross-industry product that can complement the arsenal of traditional energy carriers. This is precisely the task for hydrogen, rather than to replace certain types of fuel. In addition, green hydrogen is a semi-end product of wind and solar energy, which should monetize the overproduction of renewables. Therefore, a significant part of the efforts and financial flows will go toward the development of hydrogen projects, thanks to the green taxonomy. And again, Russia will benefit from this. Hydrogen in our country is anything but a new product; it has long been present in the production chains of petrochemical industry. Therefore, Russia will be able to produce and supply hydrogen of any international classification: yellow, blue, turquoise, gray, or green. However, until a major anchor partner for Russian hydrogen appears in the international energy market, the topic will remain “extremely promising”, though unprofitable due to the lack of sustainable demand. This will be the case until we have a comprehensive understanding of which regions of the world will develop local hydrogen production, how they will transport it, and what additional volumes of Russian hydrogen they will need.