Question and Answer Session
Professor François Heisbourg, Chairman, IISS
Thank you very much. My question is really to all three of you, but particularly to James Smith, who mentioned the issue. That is the impact of shale gas. My understanding is that shale gas, at least in the US, has already very substantially modified forecasts for American energy consumption over the next 10‑20 years. Of course, the United States is the world’s largest energy consumer; energy markets, as was pointed out, are interdependent, so what are the knock‑on effects of shale gas on the relative position of other players on the energy market, even if one does not go along with forecasts about vast amounts of shale gas in China or Poland or wherever? In particular – maybe this is one for Oksana – what does this mean for players who have been heavily reliant on gas exports, like Russia?
Fabio Basagni, Chairman and Chief Executive Officer, Actinvest Group Ltd
I have three questions. The first two are for Oksana and the other is for the whole panel. Could you please elaborate a little bit about the energy links between Russia and China as a source of both possible conflict and cooperation? Secondly, would you say something about the diversification of the Russian economy out of energy by the present leadership? What practical measures are being taken and what is the timeframe there? That is one of the key issues for European business; to find internal markets in Russia which are not only dependent on energy. Finally, for the whole panel, it seems to me that energy saving is not given enough attention both in terms of our own consumption in the West and especially in making developing countries understand the importance of relying more on saving and efficiency than importing more and more and using energy very inefficiently. Thank you.
Dr Rosemarie Forsythe, Manager, International Political Strategy, Exxon Mobil Corporation
I would like to ask the panellists to address the issue of the rise of China and how it affects the global energy picture. I was surprised that no one mentioned that this is probably one of the key changes in the period up to 2020, where as an international oil company we certainly notice – and I am sure Shell has noticed as well – that China and Chinese companies have made themselves felt to a much greater degree than we have seen in the past. It would be interesting to hear about that. Oksana did a very good job of covering Russia, but it seems that on a global level, certainly China has played a big role in terms of the kinds of agreements we have. Security issues, government involvement all around the world and the nature of Chinese policy has actually evolved in the last few years, but it led to all sorts of security issues in the South China Sea and other places, so it would be interesting to hear about.
Braz Baracuhy, Diplomat, Ministry of External Relations, Brazil
Thank you very much; this is a question for Mr Smith. I would be interested to hear your views in relation to the evolving energy security environment in South America, in particular its links to the global energy system. Thank you.
Dr Andrew Parasiliti
We have a good series of questions here. One on the role of shale gas; some questions on Russia‑China and Russia‑Europe relationships; the issue of energy savings; the role and rise of China; and energy issues in South America. I will turn these over to the panel. The panellists should not feel obligated to answer each one, but let us try to address those that you feel you are interested in answering and were addressed to you.
James Smith
I think the advent of shale gas, particularly in the United States, has actually transformed the situation as regards security of supply for gas globally. I would not have predicted – and our scenarios did not predict, so I cannot claim perfection for scenarios – that Pennsylvania would have been a major global gas province, which it has turned out to be, for example. It looks like the US may have gas reserves for 100 more years’ worth of consumption, so that has changed a lot for the US for the good, and it has taken a decent amount of pressure off the international gas market. LNG that might have been destined for the United States will not go there; places like Trinidad might find themselves sending LNG to Europe as well. As you hinted, even if the volumetrics and geology in Europe might be comparable, the population densities are not; I cannot see Shell drilling in downtown Rotterdam to produce shale gas, for example. So it is a very different thing. China might have substantial shale gas and I think that is worth pursuing; it certainly, I think, has changed the mood in the market. When we do the sums, there will still be very significant international trade in gas; that needs to be recognised. But I think to some degree it has improved the balance between consumers and producers by taking some of the pressure out of the marketplace.
The point about South America: I do not know all the angles that you had in mind when you raised it, but there is certainly substantial oil offshore. Brazil, for example, may be very significant; Venezuela, of course, has very substantial volumes of oil; it looks like Colombia may have more as well. We did not get into rare earth metals; I do not know if anyone was going to raise the matter of rare earth metals and energy security, but some of those are produced in South America as well, and that is also relevant. There are some changes afoot in the commercial arrangements for the production of oil in Mexico, for example. The reason I am elaborating that a little bit is if you look around the world – and it is not dissimilar to gas – it looks like oil supplies in the Atlantic basin, if I can put it that way, may be a little bit better, particularly given what is being found and produced in South America, and that, as with oil sands in Canada, may also take some of the pressure off North America.
This brings us back to Europe. It is Europe that I think is going to be a significant importer of oil and gas, even though there may be other factors that are mitigating things elsewhere.
Richard Jones
First of all, I want to say that the IEA view on shale gas is very similar to what you have just heard. The only caveat I would add is that there is a certain amount of environmental backlash, or potential, in the United States and we do not know whether or not shale gas is here to stay, because they could be ruled out of bounds environmentally. This is also a concern in Europe, of course, but there is another concern in Europe that should be mentioned that will probably limit the penetration of shale gas in Europe. That is that there is a completely different legal system in the United States and in Europe when it comes to resource law. In the United States, many landowners own the mineral rights to their land, so when a company comes and says, ‘I want to drill on your land’, you have a chance of making a profit out of that. In other words, the leaseholder is the person who is going to live next to the drilling rig. That does not exist in Europe. So there is no incentive for people to have oil wells or gas wells on their property and therefore they resist it. It is a ‘not in my backyard’ syndrome. So that is a problem when it comes to Europe.
China, of course, probably will not have that kind of a restraint. China does have attractive geology and we believe that China is a real potential. That is quite important for the topic that James Smith raised initially, which is the climate change. One of the things that are driving climate change is the growth of China as a consumer of energy; in particular, China’s use of coal‑fired power plants. To be fair to China, the coal‑fired power plants China is building now are probably the most advanced in the world; the least emitting. But they are building a lot of them. There was a period in the not-too-distant past when China was commissioning a new coal‑fired power plant every week. They have slowed down now; they only do it every other week. But that is how many power plants China is building. Of course, this is a tremendous advance for the welfare of the Chinese people and is one of the reasons that China is growing so rapidly in economic strength. But it is still a concern for the world. You are seeing rising levels of lead, for example, in the blood of children in California because of coal being burned in China, because the pollution travels all the way across the Pacific.
But in any event, China is a sovereign nation and is going to pursue its energy agenda on its own, unconstrained by any international agreements on that. The IEA, of course, is watching China very closely. We have watched it for many years already; we have had a relationship with China probably for 20 years or more, and in fact the one statement that was made that the United States is the world’s largest consumer of energy is no longer true. IEA figures show that China has passed the United States as a consumer of energy in the last year and that will only continue. That is really what drives the tremendous explosion in energy demand in the world that we see coming; it is the rise of China and the rise of India. Together, they account for almost a third of the world’s population. So they have a right to develop and they are going to pursue that right. Our concern is that they pursue that development in a way that avoids repeating the mistakes that our own countries have made. It is hard to always sell that, but the IEA engages with both countries; we do work with them and we do promote energy efficiency in those countries. Energy efficiency is improving in those countries; it has improved dramatically in China. China is still about half as efficient as Europe and the United States, but it is much more efficient than it was, and their undertaking in the Copenhagen Accord related to improving the efficiency of their economy. ‘Reducing the energy intensity’ is how it was phrased, but that is what it means.
India has made great progress on energy efficiency. They have a very well advanced programme, and you have seen a big drop in the consumption of energy per GDP in India’s results. We continue to work with both countries.
Dr Andrew Parasiliti
Could you just say a word on energy savings as policy? There was a question on that.
Richard Jones
That is the energy efficiency issue. We very strongly believe in energy efficiency. All our models show that energy efficiency is the least costly way to achieve our objectives, whether they are security objectives or environmental objectives. We have a number of initiatives in that area; we were very closely involved with the creation of IPEEC, the International Partnership for Energy Efficiency Cooperation. This was a G8, G5 initiative of a few years ago. We spent over a year negotiating what this partnership was going to be about, what it was going to do and how it was going to be structured. The IEA was the secretariat for those negotiations. Now IPEEC exists; in fact, tomorrow there is a meeting of its executive committee in Paris. They have a number of tasks that have been developed and China and India are founding members of IPEEC, so I think that is a good demonstration of how serious they are and how serious we are about working with them.
Oksana Antonenko
Firstly, I do not believe that shale gas will be a game changer in Russia‑Western relations, at least in the foreseeable future. I think Europe – particularly Eastern and Central Europe – will remain dependent for a large share of its energy needs on imports from Russia. Of course, in the long run, the development of shale gas, notwithstanding the precise legal, environmental and other limitations, could provide a sense of diversification, but the cost perhaps is not acceptable to the populations of those countries.
I remember Daniel Yergin famously said that China and Russia would shift their relations from Marx and Lenin to oil and gas. I do not think we have witnessed that transformation. I think oil and gas and the energy relationship in China‑Russian relations, although it is increasing in terms of its significance, will remain much more limited than the importance of energy cooperation in the Russian‑European relationship. Indeed, I think there is a greater realisation in Russia today that while it is desirable and in fact economically sensible to start exporting oil and gas to China, it will be neither desirable nor beneficial to Russia to become more dependent on its exports to China than it has been as a supplier in its relationship with Europe. So I think Russia sees the energy relationship with China as to some degree leverage in its relationship with Europe, but I do not foresee that, in spite of all the infrastructure which is now being constructed, China will become the main consumer of Russian oil and gas in the next decade or two.
Going to Rosemarie’s question about China‑Russian relations as a security factor, we have seen over the past several years a very remarkable development of growing geopolitical tensions between Russia and China over energy resources in Central Asia. It is very interesting to observe, from a comparative perspective, a contrast with the geopolitical tensions we have seen between Russia and the West in Eurasia over energy resources and how those tensions have exacerbated insecurity in the region, but actually delivered very few outcomes. With the exception, I think, of the Baku–Tbilisi–Ceyhan pipeline, we really do not see very many other success stories. The agreements concluded just a few days ago between Russia and Azerbaijan really put more question marks over the future of the Nabucco pipeline, which was supposed to be another flagship project.
In the relations between Russia and China, we have seen a very remarkable situation where with a minimum of tensions, we actually have seen China gaining more and more access to resources in Central Asia, despite the fact that Russia has been very apprehensive and remains very apprehensive about it, particularly in the relations with Turkmenistan, which was a very important provider of gas to Russia to complement its own declining or stagnating volumes of gas production. China has concluded a number of agreements with Turkmenistan and has built, together with Kazakhstan, long pipelines to get resources from Central Asia.
I think this kind of dynamic of Sino‑Russian geopolitical competition in Central Asia has already affected the regional institutions. For example, within the Shanghai Cooperation Organisation, we see a much greater uneasiness in relations between Russia and China. Clearly, China has resources that Russia does not have, but Russia is also trying very much to project its new economic and energy power beyond Eurasia; it is trying to invest in various projects in Africa, in the Middle East and in Latin America. But clearly again, in whatever competition might emerge, China is going to prevail as it has prevailed in a similar competition with many of the Western energy producers. So I think there is an uneasiness in Russia in that sense over the future of the relationship.
Ambassador Michael Lemmon, Distinguished Professor and Director, Regional Network of Strategic Studies Centers, Near East South Asia Center for Strategic Studies
I wanted to follow up on Oksana’s remarks and ask her and the rest of the panel to elaborate a bit more on the challenges posed to a collaborative win‑win energy security regime, given the temptation to use energy as a political instrument. Is it really possible to transcend the temptation to use energy investments, supply cut-offs, pipeline routes and sanctions regimes to achieve political ends? Related to this, how does the panel view the increased interest in nuclear power in the Gulf and elsewhere, and the implications for the previous panel’s discussion of the current non-proliferation regime?
Dr Andrew Parasiliti
Those are two important questions. I would like to give each of the panellists a chance to answer them and any brief concluding remarks: one on cooperation and collaboration on many of the issues you raised and the role of nuclear power, which has not come up until now, except briefly.
James Smith
I think the substance of the first question you raised was valid; that where the energy is is not where it is consumed. But I think we need to recognise that fundamental point: that major consuming nations achieving energy security through energy independence is not realistic, and in fact a dangerously false trail and therefore a collaborative international environment, trying to enhance the nature of international relationships with all the things that have been talked about. But equally, diversification to mitigate risk; whether it is financial investment or energy investment, this notion of diversification, robust infrastructure and fallback supplies is very important.
Equally, I think we need to recognise too that these assets are extremely valuable to their holders, and anything the holders might do to undermine the long‑term value of those assets undermines their own long‑term economic prospects. I am sure that is strongly in their minds and though it would be difficult, the consumers have it to some degree within their power to put leverage behind their own energy system to reduce further those risks which would have the impact of undermining the value of that economic asset in the hands of the holder. But I think there are many things that have to be brought to bear; there is no simple solution to energy security, and all of the components I think we have heard about and that you imply are going to have to operate.
Can I just say one thing about gas? Forgive me; I know we are out of time, but it was mentioned that the other benefit of shale gas is that the impact it has on reducing concerns about energy security offer a big benefit on climate change, it was implied, because the biggest, surest, fastest thing that we can do to mitigate climate change is actually gas replacing coal in power generation. I think shale gas enables that in a way that had not been expected.
Richard Jones
Thank you; I will try to be brief. First of all, I want to remind people that threats to energy security do not only arise from geopolitical or military incidents. They can arise from natural disasters. The IEA has only actually had to use our emergency response capability twice in our existence, and one of those times was a natural disaster: Hurricanes Rita and Katrina. When I first arrived at the IEA in 2008, it was hurricane season and we were very closely watching, and we considered triggering our emergency response network because of Hurricanes Gustav and Ike. No geopolitical incidents that have occurred during this time have come anywhere close to triggering. So I just want to remind people that what we are doing at the IEA is not all about geopolitics. I have not had a single conversation with anybody in NATO. We have never considered a NATO role in energy security from our perspective; we are strictly looking at it as an economic, natural disaster-type thing, not as a geopolitical-type thing.
We do, of course, believe in the diversity of supplies for consumers, but we also recognise that producers should have diversity of markets. One of the things that I sometimes tell people is, ‘Yes, it is true that Europe is dependent on Russia for 25% of its imports, but Russia is dependent on Europe for 60% or more of exports’. So dependency runs both ways in that equation; that is one of the reasons we look at it the way we do.
I am glad you raised nuclear power. The IEA is a firm proponent of nuclear power. We are encouraged by what we are seeing, particularly in Europe, with changing attitudes towards nuclear power, with Germany deciding to extend the life of nuclear power plants; we think that was a prudent decision. The United States has already, of course, done that in many cases. In fact, they are already talking in the United States that rather than just 60 years, some of these plants may last 80 years. Nobody knows if that is really possible from a technical point of view, but we are well over 40 years now and most of the plants have been relicensed or are in the process of being relicensed to work for an additional 20 years. Already, people are talking about 20 years as a possibility beyond that.
But we do see also developments of nuclear power. One of the things we do is publish technology roadmaps; we look very closely at new energy technologies. We did not catch shale gas either until it was already upon us, but we were one of the first people to notice it, at least. But in any event, energy technologies can also be game changers. There are possible new nuclear technologies which promise to be more reliable and, more importantly, safer than existing technologies. Our 450 Scenario does posit a significant increase in nuclear power. One of the scenarios that we did for another publication is a high nuclear scenario, where we see nuclear power producing as much as 38% of world electricity by 2050. I am not saying that is going to happen, but it could happen if people get serious about climate change. Thank you.
Oksana Antonenko
On the temptation to use energy as a weapon, I think for any country which tries to do that it becomes immediately apparent that the cost of doing that for their own long‑term interests outweighs the potential short‑term benefits. I think the Russian‑Ukranian crisis is very much a case in point, although clearly many Russian policymakers disagree, and challenge and dispute the perception that Russia stopped supplies to Ukraine in 2006 in an attempt to use its energy as a political tool. This is clearly the perception which exists in the West. I think Russia has paid a very high price for that, of being seen as an unreliable supplier and generating this entire backlash against cooperation with Russia. We have seen efforts which followed that crisis to develop a much more predictable relationship, including this new early warning mechanism of the European Union, which provided much more information, much more openness and transparency on other crises which followed, including the most recent crisis in Belarus, which has not, despite the fact it has caused certain small interruptions, actually caused a major political crisis. So I think there are very major limitations on the ambition of any country to be an energy superpower, because exactly as was said before, interdependence is fundamental. For Russia, whose economy still depends profoundly on energy exports, this energy interdependence is even more significant.
I have remembered that I have not responded to the question which was asked about Russia’s efforts to diversify its economy. Clearly we have seen a very clear correlation between the oil crisis and the appetite for reforms in Russia. Many proponents of reforms domestically have been unhappy with the speed with which the oil prices have recovered following the global financial crisis to the comfort level zone for Russia, which still provides it with resources which can allow it to rely on energy exports and not undertake painful reforms. But I think the financial crisis has made a huge impact on the mentality of policymakers, making it very bluntly obvious to everyone how vulnerable the economy is if it is overwhelmingly dependent on commodities exports in general.
I think we see now much more concerted efforts in Russia to try to develop a new system in which the technology industries and other sectors of the economy should be developed to complement, for the time being, the energy sector and commodities sector overall. Of course the challenge is immense, because to develop a non‑energy sector the importance of the rule of law, the fight against corruption, better governance and all of that requires very fundamental reforms. But I think there is a political will at the moment to do that, and hopefully we will see some reforms being implemented in the foreseeable future.
