Jad Mouawad: Good afternoon, ladies and gentlemen. Welcome to the Council on Foreign Relations. My name is Jad Mouawad. I'm with The New York Times. Before we begin, I was asked to remind everyone to please turn off your cell phones, and also this meeting will be an on-the-record meeting. With us today is Dr. Fatih Birol, who's the chief economist at the International Energy Agency and the author of IEA's yearly World Energy Outlook. This year the publication makes a few sobering points. Basically, it shows that without a radical change in policy, energy consumption is set to soar in the next three decades. Paradoxically, the IEA warns that there's no assurance that the massive investments needed to meet this soaring demand will be made in time. The report also says that the growth in consumption is going to lead. might lead to the development of so-called dirtier energy sources. coal, heavy oil, more tar sand and perhaps shale oil. sorry. oil shales. So just as the debate on climate change heats up, we're going to be getting more dirty fuels. All this points to a contradiction. Energy security and environmental security seem to be pulling us in different directions. In its report, the IEA says the world is facing twin energy-related threats: that of not having adequate and secure supplies of energy at affordable prices and that of environmental harm caused by consuming too much of it. Dr. Birol, the floor is yours.
Dr. Fatih Birol: Thank you very much for the kind introduction. Good afternoon, ladies and gentlemen. It's a great pleasure again that I have the opportunity to share the views of the International Energy Agency with you. We have last week published the World Energy Outlook 2006, in London, and we look at the global energy trends and the resulting challenges for all of us for the next two and a half decades. In doing so, we outline two different visions of our energy system, global energy system. The first one: if we stick to our current policies, we see an energy system which is vulnerable in terms of security of oil and gas supply, dirty in terms of environment, and expensive in terms of investments. And we think this is a trend which is unsustainable, and we need to change these trends. And therefore we build another vision, which we call the alternative policy scenario, and I am going to discuss this. both of these scenarios in a nutshell, with yourselves, and afterwards we will be very happy to have your questions and remarks. So first of all, with the current policies, where are we heading at? With the current policies in place, oil demand is coming strongly, mainly driven by China and India, which are responsible. more than 50 percent of the growth in the global oil demand between now and 2030, and the main driving sector will be the transportation sector. cars, trucks and jets. Coal is coming strongly. I will elaborate in a minute, but coal's growth is very impressive. Gas also grows in a substantial manner, but our expectation for gas this year are a bit lower than what we had last years, mainly as a result of high gas prices. Biomass, mainly coming from developing countries; nuclear power, with the current policies in place I again underline this. with the current policies in place, as of 2006, is going to lose market share, as there. lots of retirements in the OECD countries. Renewables are growing but still making a small share in the global energy mix. So this very picture will have major implications for our energy system. the very first picture. The first one and the most critical one for the International Energy Agency is on the oil security front. The growth in oil demand will need to be met from a very few number number of countries in the future. Number of suppliers will be less and less, mainly as a result of declining oil production levels outside of the OPEC countries. We expect that the non-OPEC production will reach a peak before 2015, within the next 10 years of time, and therefore the demand will be met more and more by few number of countries, mainly coming from OPEC. Three countries are key here, mainly Saudi Arabia, Iran and Iraq. In terms of Saudi Arabia, as you know, the Saudi investment climate is very different than what we used to see in Gulf of Mexico and North Sea. The decisions, in terms of the investments and production capacity growth will be made by their national oil company and, of course, looking at the market conditions. But market conditions may not be the only factor that they look into. In terms of Iraq, we know there are question marks and big potential. But there a lot of question marks in terms of the political stability of Iraq and when they will be increasing their oil production. Iran. lots of oil and lots of gas, but again, as much as those, there are question marks about the investment climate, and moreover, the political situation Iran is in. So we also expect some non-conventional oil, mainly from Canada, to come to the market. But this will not change the main picture, that the bulk of the growth in the oil demand in the future will need to be met from very few number of countries, mainly focusing in the Middle East region. And this is a concern that the number of suppliers is decreasing, from our perspective. The picture in terms of gas is not very different. Gas demand is growing, gas trade is growing, and the bulk of the growth in the gas demand will need to come (from) Russia, Iran, a very few other MENA, Middle East\North Africa, countries. There's a concentration of reserves also here. Just to put in a context, perhaps, Russia plus Iran make about 50 percent of the proven gas reserves. two countries which are in the headlines of the newspapers for energy and non-energy related reasons. The third field I would like to discuss with you is coal. One of the messages coming from the World Energy Outlook 2006 is that coal is coming back. Coal is coming back with all its consequences, positive and negative; positive consequences in terms of the enhancing the security of supply, having resources throughout the world dispersed in an equal manner in Australia, China, U.S., Canada, South Africa and elsewhere; but in terms of the CO2 emissions, carbon dioxide emissions, this is a major problem. The growth. what we have seen in the last three years in coal globally. 2003 plus 2004 plus 2005. is equal to the growth what we had seen in the previous 23 years. So such a huge growth coming from coal, mainly driven by China, as well as driven by the high natural gas prices, switch from gas to coal in many examples. As I said, it is important to note that the increasing coal demand has implications for the CO2 emissions. And in general, carbon dioxide emissions increase 55 percent between now and 2030. And a bulk of this increase is coming from China plus India, which make more than 50 percent of the emissions. And perhaps a good news. "good" in quotes. for the U.S. colleagues here. China has taken over the United States as the biggest emitting country of the world in 2009, if not earlier. And other developing countries are also increasing their emissions a lot. More than two-thirds of the emissions, growth of emissions coming from the developing countries. However, one shouldn't blame China here. One should see that in the population that China has, in terms of per capita emissions, China still emits less CO2 emissions than the OECD person in the OECD in 2030. However, this brings to the picture that if we want to have effective solutions to the climate change problem, we shouldn't afford not to have China, India on board for the future environmental architectures that we may propose. The very first picture I show you in the global energy mix, how the different energy perhaps are growing, ends up with substantial requirements in energy investments. We expect that there is a need to build new power plants, transmission lines, distribution lines, oil fields, gas fields. About $20 trillion needed between now and 2030; a bulk of it for the electricity sector. building power plants, transmission lines and distribution lines. In terms of countries, China alone would need $4 trillion for its energy sector. Just to put it in a context, if China grows every year, China electricity sector, equal to the one U.K. electricity sector, the growth in China equal to U.K. each year, and it grows in that level. For the OECD countries put together, we need about $8 trillion. It may sound a bit contradictory that even though the bulk of the growth in energy demand is coming from China, you need more money for the OECD countries. The reason here is the demographics, demographics of the energy infrastructure; namely, in the OECD countries we need to make investments not onlynd not mainly in order to meet the growth in the energy demand, but in order to replace the existing structure which is going to retire within the next two decades. So we need more money to replace the retiring infrastructure, retiring power plants, declining oil and gas fields, and so on, more than meeting the demand. One of the major problems that the global economy is facing today, as we believe at the IEA, is the high oil and gas prices. In terms of oil prices, when we look at the current investments discussed by the international and the national oil companies, we look at it on a project-by-project basis, how much oil and gas we can realistically expect to come to the markets within the next five years so that the prices will affect it accordingly. First we look at the past five years to see whether or not in the last couple of years the high prices end up with higher investments in the upstream sector in the oil production. And when we first looked at these trends, we were very happy to see that the investments in the oil sector increased substantially between 2000 and 2005. However, looking at the cost inflation, which is the increasing cost of rich material, skilled labor, if we adjust this, if we look at it in real terms, in terms of real spending, the investments were more or less flat between 2000 and 2005, a major cost inflation aspect. And looking at the future, we look at all the projects, sanctioned projects, on a field-by-field basis. And what we have seen is that if all the sanctioned projects see the light of the day by 2010, the current spare production capacity, which is about 2 million barrels per day, may increase slightly higher than 1 million barrels per day, and the currentnd the spare production capacity in 2010 may be a bit higher than 3 million barrels per day, which means that we are far from having a comfortable oil market. In other terms, if some of these projects for some reasons, if there are some slippages, some delays, as a result of the factors that we had not foreseen. it may be climatic reasons, it may be as a result of geopolitics or other reasons. the spare production capacity may be even lower, therefore significant impacts on the prices. Looking at the long term, I think this is the picture that I would choose as the most strategically important picture for the oil industry to come, which says that looking at the proven reserves both by distribution and investment climate, in many countries where we have a lot of oil, the foreign investment cannot flow freely and go and invest there, such as Saudi Arabia. So this is a completely new structure that we used to see in the oil industry. In the past when the prices went up, we have seen volumes coming from North Sea, Gulf of Mexico, as a response to high prices. However, in the future the decisions, again, will be made by the national oil companies, and again, the main reason for the investments may not be the international oil prices. Those companies may well have other considerations than the international oil prices. So this is a new picture that there is a big problem for the international oil companies to have access to reserves and to invest. So they have to see what they are going to do in that situation, looking at their perhaps medium- and long-term strategies. Up to now I have discussed with you the issues related to the rich people, about the OECD countries and the others. There is an issue which is not very typical, perhaps, for the energy meetings, but I still want to share with you. According to our analysis, today 2.5 billion people in the world, which is about 40 percent of the global population, is using. for the cooking at home is using so-called dirty biomass; namely, agriculture waste, animal waste, dung, and similar things in order to cook in the stoves they have, which are very primitive. And this has several implications. One of the implications is, as a result of the indoor emissions coming from these cookstoves, and the respiratory diseases it results, in every year, according to World Health Organization, 1.3 million women and children die prematurely. And this compares with the 1.2 million people dying from malaria. There are some other implications of this, in terms of deforestration, in terms of implications on the women and others. And we have seen that if we do not do anything, despite the economic growth worldwide, despite the technological innovation worldwide in the next 25 years, despite the so-called globalization, there will be still 2.7 billion people in 2030 using this type of fuel and having the consequences of it. So we think this is unacceptable. And we have seen. we just made a work, and we have seen that if half of these people, in line with the Millennium Development Goals, were to go to clean energy services, the money we would need for that would be (literally ?) peanuts. Now, let me just put together my thoughts in terms of the reference scenario if we do not change our policies. Our security of oil supply will be more and more at risk. Gas security will be along the same lines, with the growing demand and the diminishing number of supplies both in the oil and gas side. One important issue coming from our work is the fact that next 10 years are very crucial for the global energy and environmental system. Let me explain very briefly why. China and India, we talk about them a lot, and we try to give the order of magnitude how important they are. They are going through an economic boom, both of these countries, and during this economic boom, they are making major energy infrastructure investments. They are building power plants, refineries, transmission lines and so on. And if they build a power plant today in China and elsewhere, it has a lifetime of 60 years. And it will be very difficult. it will be very difficult. to shut down their power plant after 10 years and so before its economic lifetime is over. So there are going to be lots of decisions taken in China and India which will determine the next 50, 60 years of their energy patterns, and at the same time will have major implications for the global energy and environmental picture. The second reason why it is important for the OECD countries next 10 years is that in the OECD countries, bulk of such investments, major investments, were made just after the Second World War, when the economy was booming. We built a lot of power plants, transmission and distribution lines, and most of them are in the phase of retiring within the next 10 years. So we are going to replace them within the next 10 years, and we have to again think what kind of technologies, what kind of fuels, what kind of design we want to put together. So next 10 years is key to have sustainable solutions to our energy problem, which is discussed in the reference scenario, which ends up with the two interests, security of supply and increasing environmental risks. The second vision I wanted to share with you is the alternative policy scenario. G-8 leaders in Gleneagles in 2005, and again in 2006 in St. Petersburg, asked the IEA to provide an alternative scenario to look at the implication of policies which are not yet legally enacted but under consideration. There are many discussions about the new policies in terms of increasing energy efficiency, more renewables, more this and that. They are not yet legally enacted, but they are under consideration in all the governments of the world, mainly driven by security of supply, and sometimes climate change concerns, but at the same time, high energy prices give a momentum to the governments to consider such new policies. We have chosen 1,400 policies on a country-by-country basis, sector-by-sector basis. If you just look at the IEA website, you will see them one by one. And we said if those policies which are under consideration. which are by no means revolutionary policies, these are policies discussed in the corridors in Washington or in Brussels or in MITI in Japan or in China and India. if they were to be introduced, how would they change the unsustainable trends I just showed in the reference scenario. And in terms of oil imports, for example. this is the reference scenario. we see the oil imports growing significantly. In the alternative scenario, oil imports are coming down significantly within the OECD. The trend is changing substantially. This is mainly as a result of increasing fuel efficiency in the OECD countries and making more use of biofuels in some cases. Another implication is on the gas and the security of gas supply questions. This is the gas imports in the U.S., EU and Japan. And in the reference scenario with the current policies in place, there's a huge increase; but in the case of the alternative scenario, there is a decline in the gas imports in all regions, again driven by using electricity more efficiently at home and in the industry. Therefore, less electricity demand; therefore, less power plants; therefore, less gas-fired power plants. The second one is using more renewables, replacing gas, and the third one is using more nuclear, replacing gas. With the CO2 emissions, the second challenge that the reference in our report has asked. that we can bring CO2 emissions in a much (sic) reasonable levels. They can stabilize around 2030. And this stabilization takes place as a result of three major policy pillars. The first one is on the increasing energy efficiency, mainly fossil fuel increased efficiency. This is the transportation sector, mainly coming from the cars, trucks and jets, using them more efficiently. This second one is using electricity at home. the refrigerators, washing machines, TV sets and others. more efficiently. And the third one is in the power sector, to increase the efficiency of the power plants worldwide. This is the first pillar, and the main one. The second one is increased use of renewables, mainly wind, biofuels, hydro, geothermal and others, and third one, increased use of nuclear in the countries where it is accepted. To give you more of a flavor of the policies we have chosen, just to tell you that there are twelve policies out of 1,400 we have put together. We call them "the clean dozen." And here, just to give you some examples what do they mean. for example, in the case of U.S., the tighter CAFE standards would help a lot. And what does it mean? It means that the current. or it means that U.S. average vehicle fuel efficiency in the year 2030 will reach the current level of EU today. so this sort of very adventurous assumption. And I know that in Washington there's a lot of discussion among the colleagues to draft. to look at the CAFE standards and to revise them in terms of the fuel economy. Or in China, increased efficiency of coal-fired power plants. this is an important thing. And what we assume therend it's in line with the government's considerations, in fact. to bring the Chinese coal-fired efficiency in power plants to the level of EU. current level of EU in the year 2020. so again, a major improvement we can get from. on this. So in that respect, these policies can have a major impact on the CO2 emissions and therefore on the global picture. So just to tell you that since yet is working around, which leads. this is the third message that I wanted to give today. is that alternative policies not only bring the costs. not only bring the oil import dependency down, which is a good message for the energy security; not only brings the CO2 emissions down; but they are cost-effective. Let me give you one example to you here in the electricity sector. If there are two television sets. one is $10; the other one is $11nd if the $11, with the same quality, is a bit more efficient than the $10 one; if I as a consumer go and buy that $11, it ends up. this efficiency savings. of avoiding building new power plants worth of $2.2. So demand side investments in the first instance ends up with a bigger savings on the supply side. And the best use of the best power plant, the cheapest power plant, the cleanest power plant is the power plant you don't need to build. So it is the reason that there's a big room there for improvement. And we have calculated that we need less money for the alternative scenario than we need in the reference scenario. So let me finish my presentation telling you that we made a major analysis to my. (inaudible). on the nuclear power and on biofuels. perhaps we can cover them during our Q&A sessionnd to say that with the current policies in place, if we do not change the reference scenario, the situation is rather serious. We are going to end up with an energy system which is vulnerable, dirty and expensive. As we try to make out here, we have all the means that we can build an energy system which is cleaner, cleverer and more competitive. And we have. we can do all of these things if the governments would take it seriously and provide clear incentives to change the existing investment patterns. So with this, I'll stop here. Thank you very much for your attention.
