Globex Energy Advisory
Global Enterprise Services Corporation (Globex) would like to bring to the attention of its readers the substance of a very important discussion that was recently held concerning the global energy outlook.
The Council on Foreign Relations hosted this forum in which Dr. Faith Birol, Chief Economist of the International Energy Agency (IEA), provided the audience with the agency’s insights, trends, and short/medium term projections for the international energy markets. The IEA is a Paris-based organization founded by the industrialized nations on November 8, 1974 in response to the 1973-74 Middle East oil crisis. The IEA was originally created to allow for the coordination of western governmental petroleum policies providing much needed guidance to western companies engaged in the unpredictable international oil market. At its inception, the IEA ostensibly served as a counterbalance to the increasingly powerful Organization of Petroleum Exporting Countries (OPEC) − an entity composed of oil producing nations in the Middle East North Africa (MENA) region such as Saudi Arabia, Libya, Iran, and Iraq. IEA membership consists primarily of industrialized nations from the Organization for Economic Cooperation and Development (OECD) such as the United States (US), Canada, United Kingdom (UK), The Netherlands, Germany and Japan.
The IEA continues to serve an extremely important function in the international energy markets by developing and maintaining systems that mitigate and respond to potential disruptions in the oil supply market implicating UPSTREAM (exploration, identification, and extraction) and DOWNSTREAM (refinement, sale, and distribution) operations. In addition to responding to international energy emergencies the IEA offers dynamic capabilities that are utilized by global energy market participants: it prognosticates on short and medium term developments; publishes energy statistics (10 annual and 2 quarterly statistic publications including the much lauded World Energy Outlook (WEO); and counsels on the linkages between energy and the environment through the promotion of renewable energy, enhancing energy efficiency, expanding global access to electricity, and advocating for deployment of the most advanced energy technologies.
Dr. Birol provided the audience with a cogent analysis of the positions currently occupied by the principal commodities in the global energy mix (oil, natural gas, coal, and nuclear) and forecast some important developments expected to occur in the international energy markets. Importantly, Dr. Birol offered a stark assessment of the international community’s efforts to retard climate change and made a forceful argument for the expansion of electricity access to the approximately 1.3 billion people in this world who are without it. Globex believes effective coordination, based on a realistic understanding of the current state of the energy markets, will be critical to confronting the challenges and exploiting the tremendous opportunities represented in this dynamic but often volatile market. Policymakers, multilateral organizations, business leaders, non-governmental organizations (NGO) and consumers will have to be active participants in this dialogue and must demonstrate sufficient willingness to compromise in order to achieve mutually beneficial global energy outcomes.
Dr. Birol anticipates a major shift in the international oil security calculus owing to the shifting energy posture of many nations. The US has historically been the principal guarantor of stability in the international oil market playing a variety of roles since the 1901 discovery of the Spindletop gusher in Beaumont, Texas that signaled the promise and drove the expansion of the American petroleum industry. The US has at times been the primary global supplier of petroleum providing 50% of the world’s petroleum in 1950 (note: 6 of the 7 billion barrels of oil used during World War II emanated from the US), primary consumer of petroleum, and implicit/explicit protector of the immense Middle Eastern oil reserves. (Think President Franklin Delano Roosevelt’s security assurances to King Ibn Saud of Saudi Arabia in 1944). The US, long the largest importer of oil, has traditionally assumed the responsibility for maintaining stability in the international oil markets as a means of keeping energy hungry domestic industries satiated. Further, given American experiences in the World War I & II, in which the Allies access to petroleum proved outcome determinative, policymakers understandably determined petroleum to be a strategic commodity critical to American national security interests.
Dr. Birol expects a modification in this American viewpoint as a result of a reorientation on the US demand side of the equation: Increased efficiency standards and increased domestic production will translate into a significant reduction in American oil imports. In fact, the IEA expects the scale of European Union (EU) oil imports to overtake the US by 2015 and 2035 China’s oil imports to be 12 million barrels per day representing 200% of projected US imports. This dramatic shift in petroleum allocation, Dr. Birol predicted, will lead to a major shift in the international oil security equation with the US moving to a more peripheral stance requiring EU nations and China to assume a more direct role in securing and maintaining a stable global petroleum market. Dr. Birol’s assessment is that, to date, the EU has failed to seriously consider this predicted shift in the global petroleum order and are, at best, ambivalent as to the ramifications that this shift in the international oil security paradigm will mean for their respective polities. Dr. Birol noted that the upcoming Munich security conference represents a great opportunity for the European nations to commence in earnest this critically important discussion.
Dr. Birol smartly identified some important ramifications that the Arab Spring has had on the petroleum energy market outlook. 2010 witnessed approximately $400 billion in global petroleum market subsidization with 50% of the subsidies originating from governments in the MENA region and the remainder divided amongst the rest of the world. Popular unrest in the MENA region has resulted in governments diverting significant sums, originally allocated for upstream investment, to social spending programs as a means of lessening the probability of the civil chaos perceived to pose existential threats to the survival of various regimes. The IEA has estimated that 90% of global growth in oil production needs to come from the MENA region in order to satisfy increasing global energy demand and supplant exhausted petroleum reserves. The IEA estimates that approximately $100 Billion dollars worth of investment in MENA capital infrastructure is necessary to identify new reserves and bring the petroleum to market. Paradoxically, it appears that this diversion of MENA upstream investment, and consequent failure to identify new reserves resulting in supply limitations/increase in oil price, will stimulate investment in alternative energy solutions leading to a decline in revenue to the MENA treasuries thereby reducing funds available for social spending. Unraveling this causality dilemma is sure to pose significant headaches for the policymakers charged with its resolution.
On a more optimistic note, the IEA has posited that we may be entering an era of unprecedented growth in the utilization of natural gas with the possibility of paying tremendous dividends for international consumers. Abundant natural gas supplies are coming to market from countries such as the US, China, and Australia. Dr. Birol highlighted the significant growth in natural gas consumption over the past three years stating that this growth has led to a situation in which there is minimal surplus capacity. Further, the US supply of natural gas to EU markets has been a tremendous “gift” to the European consumer providing EU policymakers with a desperately needed source of energy supply diversity. Dr. Birol asserted that market adjustments, particularly with respect to gas contracts, are necessary in order to instigate the commercial incentives necessary to significantly increase the volume of natural gas brought to market and as a result benefit consumers worldwide. Primary among these adjustments is a need for market developments to be reflected in long-term gas contracts and a general move away from gas price indexation based upon petroleum.
The arguments against oil-based indexation are many and quite complicated. There are those who contend that oil-based indexation of gas contracts is overly rigid and represents a fundamental disincentive to the development of infrastructure necessary to take advantage of natural gas potential. This line of reasoning advances the notion that oil-based price indexation of natural gas distorts international energy market realities leading to illogicality in pricing.
Dr. Birol affirmed that the world has only witnessed the tip of the iceberg in terms of natural gas potential to revolutionize the global energy calculus however; market axioms must be properly structured in order to realize this potential. Appropriate market and regulatory principles need to be adopted by all stakeholders and greater efforts need to be made to mitigate potentiality for the environmental damage that so rightly concerns those living in proximity to natural gas exploration sites and environmentalists. Dr. Birol conceded that environmental damage resulting from the deployment of hydraulic fracturing (fracking), a primary method for the extraction of natural gas – the utilization of pressurized fluid to cause fractures expediting the release of natural gas from rock formations – has become a controversial issue in countries such as the US, Germany, Australia, and France (the procedure is currently banned by the French government). However, Dr. Birol stated that the technological capacities for preventing much of the environmental damages induced by fracking are already in existence and their deployment would result in increased production costs of approximately 15% allowing still for significant margins of profit. Importantly, Dr. Birol surmised that increased regulation compelling natural gas explorers to utilize the appropriate technology and procedures is necessary to achieve the potential of natural gas.
We were most fascinated by the portion of the dialogue concerning the role of coal in the global energy mix. The current sustainable energy discussion with its focus on renewable energies and natural gas would lead one to incorrectly judge utilization of antiquated coal as on its final descent toward extinction. Dr. Birol accurately pointed out the tremendous disconnect between the current state of the international energy debate and the practical realities of the international energy markets. The statistics advanced during the discussion are a revelation and irrefutably establish that King Coal is indeed alive and doing quite well. Over the past 10 years (2000-2010) coal comprised approximately 50% of the growth in global energy demand with the remaining 50% divided among oil, gas, renewables, and nuclear (read, everything that is not King Coal). This situation has important public health, environmental, and water security implications. Policymakers and citizens around the world will need to take a realistic assessment of King Coal and his function in the global energy equation in order to effectively address the ramifications of its predominance. The divergent commercial interests and strategic optics by which industrialized (U.S., Germany, France etc.) versus developing/BRIC nations approach His Majesty will no doubt complicate efforts to implement a coherent international strategy. The success of such an effort will be conditioned upon stakeholder capacity to empathize and willingness to compromise.
Dr. Birol also spoke of the uncertain status of nuclear energy particularly in light of the devastation witnessed last year at the Fukushima nuclear power plant in Japan. Countries such as Russia, China, India will continue to rely on nuclear power; however, nations such as France (estimated 76% of electricity from nuclear power generation) and Japan are reevaluating their reliance on nuclear power. As a testament to the uncertain status of nuclear power in France, this topic has become an important subject of public debate and will undoubtedly be a focus point in the upcoming French presidential elections in April of 2012. Furthermore, Germany has renounced nuclear power and plans to phase out nuclear technology by 2022.Conversely, the US, which obtains approximately 20% of its electricity from nuclear power, has witnessed a recent increase in the number of permit applications to the Nuclear Regulatory Commission.
In November of 2011 Globex traveled to the Republic of Niger and met with competent officials in Société du Patrimoine des Mines du Niger (SOPAMIN) a government agency that is, among other things, responsible for the commercialization of strategic resources and specializes in the supply of uranium concentrates in the form of U3O8. Globex found the officials to be incredibly informed about the current state and projected outlook of the complicated Uranium international market and learned much from the discussion. We will be releasing a Globex Market Advisory that focuses on the challenges and potential of the nuclear market.
CLIMATE CHANGE-ELECTRICITY ACCESSIBILITY
Climate Change was another important aspect of Dr. Birol’s talk. The IEA’s 2011 World Energy Outlook offers a surprisingly gloomy outlook for the probability of maintaining global warming below the 3.6°F (2°C) levels agreed to by world leaders at the 2009 Copenhagen Summit and later ratified at the 2010 conference of the UN Framework Convention on Climate Change (UNFCCC). Dr. Birol called attention to the fact that the international energy market’s existing capital infrastructure – power plants, factories, and supporting structures – consumes approximately 80% of the emissions allowance necessary to stay below the 3.6°F (2°C) per UNFCCC. Further, by 2015 IEA projects that this capital infrastructure – predicated upon the burning of fossil fuels resulting in massive emissions of the greenhouse gas Carbon Dioxide (CO2) – will consume 95% of allowable emissions.
Dr. Birol stated that the worsening efficiency despite the high price of energy is primarily the result of tremendous growth in energy demand from developing countries such as China, India, and the Middle East. Carefully calibrated incentives must be developed to induce these countries to deploy energy efficient technologies. These incentives need to be designed in a manner that does not significantly injure the domestic industrial growth that has accelerated socioeconomic development in these countries. Successfully navigating toward the solution to this complex problem will be extremely difficult; however, the most effective response mandates international collaboration and a willingness to negotiate in good faith.
As with King Coal, the current rhetoric of the climate change debate and public statements of action do not necessarily reflect the reality of the situation. Dr. Birol reminded the audience that 2010 saw the highest CO2 emissions ever recorded. Additionally, in a stark reversal of the historically positive trajectory of global energy efficiency (approximately +1% per annum), 2009 and 2010 represented an actual worsening of the international community’s efficiency performance. Policymakers, business leaders, thought leaders, multilateral institutions, and the public at large will have to reconcile the rhetoric of preventing global warming and the fact that the situation is not improving. The facts are simply the facts.
Finally, Dr. Birol spoke at length of the need to expand electricity to the 1.3 Billion people in this world – primarily residing in Sub-Saharan Africa and Asia – who are without it. The United Nations (UN) has designated 2012 as the International Year of Sustainable Energy for All. ∎