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Council on Foreign Relations
New York, NY
JAD MOUAWAD: Good afternoon, ladies and gentlemen. Thank you. Good afternoon, ladies and gentlemen. Welcome to the Council on Foreign Relations. My name is Jad Mouawad with the New York Times.
With us today is Fatih Birol, the chief economist and the International Energy Agency.
Before we begin, I was asked to remind the audience of a couple of things. Please turnoff your cell phones, pagers, et cetera And secondly, a reminder that this meeting is going to be on the record.
Dr. Birol is the author of the IEA's yearly world energy outlook, which this year focuses on the Middle East and North Africa, a topic that is of extreme importance. As you all know, the bulk of the world's oil resource and reserves are in the Middle East, an area of the world that is both disputed and that sees a lot of change.
2005 has also been a year of exceptional movement on the oil market. We've had a supply shock on top of a demand shock. We've seen record prices, massive disruptions and calls for conservation from even the most improbably of conservationists -- the president himself. (Laughter.)
Demand remains strong. Supplies are still catching -- struggling to catch up with demand. Some of those issues Fatih will address in his presentation and his outlook for 2030 and try to answer the question of whether this is a new era in the oil market or whether just another cycle.
Fatih, the floor is yours.
FATIH BIROL: Good afternoon, ladies and gentleman. Thank you very much, Jad, for the introduction. It's a great pleasure to be with you here today.
I will try to discuss with you, with the help of my slides, left and right, how do we see -- what are the major challenges in the next 25 years in the world energy scene, with particular emphasis on oil and the role of Middle East and North African countries. And what are the uncertainties around the supplies we expect to come from Middle East and North African countries?
When I do this -- my presentation, I would like to discuss three distinct scenarios. The first one is, if there are no major policy changes from the (consuming ?) governments -- major governments -- OECD governments such as the United States, Japan, European countries -- especially (considering ?) the concerns on the energy security environment, there are a lot of discussion in those countries. But we assume that what happens if there are no major changes in their policies. And plus, if the Middle East and North African countries, such as Saudi Arabia, Iran, Iraq, Kuwait, UAE, would invest in oil production capacity as much as the world demands from that. It means a very good, very nice, everything is in order scenario, which we call our reference scenario -- no policy change.
The second scenario I am going to discuss with you today, which we call the deferred investment scenario, in which the key Middle East producers -- for different reasons I am going to share with you in a minute -- do not increase their production capacity as much as the world demands from them. What happens in this case? This is the second scenario -- mainly a policy initiative coming from the producing countries.
A third one is we call the world alternative policy scenario, which this time considers the impact of policies -- likely policies -- which could be introduced in the key consuming nations -- U.S., Japan, Europe, China and India -- policies that are under consideration, but not yet legally enacted. What happens if they push such policies?
So three distinct scenarios, and I will go through them one by one and try to discuss with you what are the implications of those on the global economic international energy process and other important elements.
Let me start with the global energy -- (inaudible) -- the reference scenario. It means no policy change, everything is in order. The countries in the Middle East invest as much as the world demands from them in a timely and sufficient manner. No major -- (inaudible) -- policies coming from the consuming countries.
To do this scenario or to do the general study on world energy after 2005, we made some assumptions. And one of them is on the international energy prices. Some of you may know that the International Energy Agency's price assumptions are a key input for the oil industry, as a benchmark. And this year we have increased our price assumptions substantially upwards. The reason -- very reason -- for that is that we have -- for this work we have analyzed 200 major fields in Middle East and North African and elsewhere and looked at the concrete projects. How much oil and gas can come to the markets in a realistic manner in the next four or five years to come? And how does it compare with the expected demand?
We have seen the supply, which we expect to come, will ease the market, can the ease the prices, but still not as much as at least the consumers would like to see. In that context, the IEA import price, which is a proxy for the -- a basket for the (consuming ?) nations. In order to go to WTI, you have to put $5.00 on top of that. So it will come about $40.00 in nominal term in 2010. In WTI terms it is $45.00-$46.00 in 2010 from the 50-something (dollars) nowadays. So we expect a decline, but this decline is not as steep as we thought in the past and as the -- perhaps the consumers would like to see.
We expect, again, new capacity (additions?) to come from Middle East and elsewhere. New refinery projects are coming downstream and the market will be more comfortable. But again, this will be mainly how much the oil will come, how much the refinery capacity (additions ?) will depend on the investment trends in -- mainly in the Middle East countries.
So in our reference scenario, this the picture -- the global energy picture -- we expect. Oil and gas grow about 60 percent between now and 2030. The oil is the most important fuel -- the single most important fuel -- mainly driven by the transportation sector. Gas is the (rising star ?) of all fossil fuels, and we do not expect a major breakthrough coming from renewables or from nuclear in our reference scenario -- in our no-policy- action scenario.
And a key issue I would just mention, by passing the CO2 emissions -- carbon-dioxide emissions -- they will also grow stronger, more than 50 percent between now and 2030, aggravating the -- our concerns in terms of global warming and climate change. And the bulk of this growth will come from key developing countries such as China.
Going back to oil -- even though my presentation will be mainly based on supply side, I want to underline a very key issue that I think is of crucial importance that every (consuming ?) nation needs to understand. This is, where does the oil demand come from? This is a new phenomena. (Inaudible) -- are we in a new era? Yes, we are in an new era for two reasons -- one on the demand side, one on the supply side.
On the demand side we are in a new era because almost all the growth in the last five, six years came from the transportation sector. This is different than the past. In the past, households, industry, power sector did provide the input to the increase in the oil demand growth, but now it is only and mainly transportation sector. And this important because in the transportation sector, you do not have easy fixes -- is alternatives to oil.
There are no -- in the power sector we were using oil in the past, in the power sector, but we can switch to nuclear, coal, renewables, gas. In the industrial, we were using oil as an input. We could go to gas, again, and some other fuels. But in the transportation sector, there are not easy economic (revival ?) alterative source.
This is a new era from the consuming countries' point of view because of the rigidity that we have in the demand sector.
Now, coming back to the supply -- where will the supplies come from? Again, bad news for the consuming nations or OECD countries. The production prospects in the OECD countries are rather sluggish -- in the North Sea, in the Gulf of Mexico and even outside of the MENA within the North Africa countries, even in Russia, we do not expect major additions to come to the market. And therefore, the share of MENA -- Middle East, North African countries -- will increase substantially.
So this is perhaps the second issue that we are in a new era. On the supply side, the bulk of the growth needs to come from very few number of countries in the future, namely, Saudi Arabia, Iran Iraq, Kuwait, UAE. These are the major countries which would add to the growth in the oil supply growth, countries concentrated on -- in the Middle East region. And this is the reason why we have done -- carried out this study.
The picture is not very different in the gas. Let me tell you a couple of lines about the MENA countries, specifically. We think with the growing oil demand growth, on one hand, and a rather sluggish prospect outside of the MENA region, in our reference scenario, in our no-policy scenario, in our scenario in which the MENA countries invest in a timely and sufficient manner, the share of MENA countries are increasing significantly from about 35 percent today to 44 percent in 2030. And the bulk of the growth here comes from Saudi Arabia.
Saudi Arabia today produces -- include the NGS -- close to 11 million barrels per day. And we think, in our reference scenario, Saudi Arabia can reach 18 million barrels per day in 2030 with the reserves the kingdom owns today. And this would, of course, be a factor in the international oil trade. The share of the MENA countries in the international oil trade will increase substantially, again, driven by Saudi Arabia, Iran -- and after 2010, Iraq -- will be the major exporters to the rest of the world. Both in Western countries, as well as in Asia.
The picture is not different in terms of gas. We expect, in addition to the traditional gas countries, such as Qatar, Iran, Algeria and Libya in North Africa would add to that -- from North Africa mainly to Europe, and from Middle East to the countries of the U.S. and others will get a lot of gas from these countries, mainly in terms of LNG.
A key concern that we at the International Energy Agency have is a (security ?) of supply. And one of the key issues is the -- is we call the dire straits. Today, there are three major choke points in the region. Namely, Hormuz, Suez, Bap El Mandab. And today about one-third of the global oil supply goes through these very narrow three straits. And in 2030 with the increasing share of the MENA countries in the world oil production, it will reach to one third will through from this region.
What is important to note is that in terms of accidents or piracy or a terrorist attack, the disruption in the global markets will be much higher in the future. The vulnerability will increase in the future compared to today.
Now, let me tell you a couple of points on the specific countries. Saudi Arabia, a country which reserves discussed substantially last couple of months, we think that Saudi Arabia has enough reserves to increase production capacity. And it has also enough domestic capital to do so. The question mark is, what is the decision of the pace of production growth in the very country? And this will be, perhaps, not only taken on the basis of the prices, but perhaps other considerations which the country may have, which is a legitimate one.
The other country, which is very important to note, both in terms of oil and gas, is Iran, a huge potential in both terms. And we expect that the Iran production may grow substantially if the investments would come in a timely manner. However, in the case of Iran, unlike Saudi Arabia, domestic capital is not sufficient enough to invest in a timely manner. Therefore, Iran needs to get foreign investment, as they (say ?).So -- but the current investment climate in the country as well as the international political context they are in do not make us very hopeful in terms of the flow of investment in this country.
Perhaps the last country I wanted to look here -- we have covered almost all of the key countries, but I just have to share Saudi Arabia, Iran, Iraq as a third one, a country with a lot of oil -- cheap oil and good geology -- easy geology. But we are -- compared to many colleagues, we are perhaps on the conservative side, especially after 2010. The current production capacity of 2 million barrels per day, we think can reach only around 3 million barrels per day in 2010. And there's a lot of potential, but we believe the security in the country and the political stability is key in order to get the investments done and to make the markets work there.
So these are some of the brief thoughts on the (investment ?) scenario if everything goes well, if the investments are done in a timely and a sufficient manner. However, we think that there are important signs we have seen in the past. And there are important question marks for each country, that the investments may not be forthcoming in a timely and in a sufficient manner, which serious implications for the international oil markets. The bulk of the growth would need to come from this region in the future.
So we have developed a scenario which we called the deferred investment scenario, and we will look at the implication of that if the investments in the MENA countries would grow slower -- would still grow, but slower than it is in the reference scenario -- what would happen?
So we have seen that, as a result of global investments in the country -- in the region -- the production will still grow, but grow slower than in the reference scenario with implications on the prices. And the prices on average are more than one-third higher than what we have discussed, what we have presented in the reference scenario. For example, in the case of 2010 -- again, coming to 2010, I mentioned that in the WTI terms -- in nominal terms -- it will be $46.00 in the reference scenario. And in deferred investment scenario, if the investments do not come in a timely manner, it will reach about $53.00, which is very high.
And this would have implications on the gas prices, gas demands and other things. So this is the -- again, the blue curve shows you the reference scenario. It increases nicely without any problem. But this is the deferred investment scenario. Again, it increases, but much more (slowly ?).
Countries may have different reasons why they do not increase their production capacity as much of the world demands from them. Some of them may think that they may want to leave the oil is their natural endowment. They may want to leave it for the next generations. Some of them may want to see higher prices in the market. It is out of -- (inaudible) -- in the markets. And some of them may want to increase the production capacity, but perhaps do not have the means to do so in terms of availability of capital.
In our deferred investment scenario, just to remind you that today Saudi Arabia, again, produced about 11 million barrels per day. And in the reference scenario it would go to 18 million barrels per day. In our deferred investment scenario, however, it goes to 14 million barrels per day.
Now finally, let's turn to the (consuming ?) nations. And I would stop (there ?). The consuming nations would also react -- would also need to react. And we know that there are already some signs of that. In many countries -- especially for two reasons, the consuming nations want to react. One is the energy security people started to see that. The other one is environmental concerns. And I am sure that the higher prices that we are experiencing now are an additional trigger -- policy trigger -- for the countries to look at the alternative policies more carefully.
What are those policies? Those policies are, first of all, the efficiency policies -- to use oil and gas much more efficiently than we are using now -- especially the transportation sector. Fuel efficiency standards is an important key word here, such as the bio-fuels using in the transportation sector.
Also looking at the renewables, but especially in the context of gas, looking at the nuclear very carefully is a topic which is heavily discussed in many countries throughout the world. We have said, if those policies which are under consideration in the pipeline, but not yet implemented were to be introduced as of 2005 -- end of 2005 -- what would happen to the trends I have just shown you?
Just for your information, this scenario was presented a preliminary version at Gleneagles summit to the G8 leaders and it was endorsed, and they have asked the IAE to work further on this scenario in their very communique. So if those policies, which we have listed in our book in a transparent manner, would be introduced it has significant implications.
Today, world oil demand is about 82 million barrels per day. And in our reference scenario, it comes 150 million barrels per day in 2030. If these policies, which are not revolutionary at all -- they are all in the pipeline -- were to be introduced, we could save a lot of oil and gas throughout the world. And the amount of oil, with these policies under consideration, we could save would be equal to the current production of Saudi Arabia and United Arab Emirates put together.
Now, one final point on the alternative scenario is that in addition to this positive impact on the saving of oil, therefore comforting the markets, therefore bringing the international oil prices down, it also decreases the growth in the carbon-dioxide emissions worldwide, another major concern globally.
Let me finish my presentation by putting some of the ideas together. If the governments stick with their current policies, the global energy needs to grow more than 50 percent between now and 2030. In any plausible scenario -- I have presented to you three scenarios -- no policy, policy initiative from the producing countries, policy initiatives from the consuming countries. In any scenario, the oil and gas supplies from MENA countries will be critical to meet the growth in the global energy demand.
And countries like Saudi Arabia, Iran, Iraq, Algeria will play a crucial role in meeting that growth. If the under investment continues in oil and gas, we think the prices due to be very high in the future. And this would have significant implications to the global economic growth. And in major importing countries -- all OECD plus China and India -- are considering to react to those high prices and the global concerns, such as energy security and environment. And they can, by introducing these policies, curb the growth in the global oil energy demand and perhaps also on the CO2 emissions.
And we believe as the International Energy Agency, that the dialogue -- continuing dialogue -- between the consumer and producer could help to understand each other's problems, anxieties and the questions and perhaps lead us to the beneficial outcomes for everybody. Thank you very much. (Applause.)
MOUAWAD: Thank you, Fatih, for your presentation, within the deadline.
You've presented a broad outlook for the next 30 years. But one of the things that perhaps is a first in the outlook, certainly coming from consumer nations, is a recognition that producers might not have an interest to invest as much as you would them to or we would like them to, especially after the realization that high prices -- $50.00-$60.00 perhaps -- did not have the impact that even the IEA was warning them it would have -- slowdown the economy, derail world growth and the catastrophic scenario, alternative energies, et cetera.
So why would a Saudi Arabia bring up its investments to 18 million barrels a day? They've announced an investment plan to reach 12.5 million by the end of the decade. Isn't that a more realistic scenario?
BIROL: In fact, do not say who should do what. We only say, if they do this what happens?
MR. MAOWOD: Well ?
BIROL: Yes, if Saudi Arabia does not produce 18 million barrels per day, which is their choice and they can, of course, as legitimate countries, as the United States, United Kingdom or, I don't know, other countries, they have the right to decide how much they are going to increase their production capacity -- what do they do with their energy policies.
But if they do not increase the production capacity, I believe in the medium and longer term, it is also bad for the producers for two reasons. First, in terms of -- if they do not increase enough -- and Saudi Arabia is a key country here, the most important oil producer today -- the prices will go up. And the higher prices would induce a slowdown in the demand, which is one issue.
Second, perhaps more importantly, it can also induce, after a certain period of time, growth in areas -- growth of oil in areas -- which are not normally profitable, such as non-commercial oil in Canada -- (inaudible) -- or (GTL ?) -- all of this process. And this may very well impact on the -- those countries' revenues in the medium and longer term.
But more importantly -- more importantly -- higher prices do (vary the public ?) in the consuming countries, and this would end up with major policy changes in the consuming nations.
I work with the public policy issues since 15 years -- six years with the OPEC secretary in Vienna and nine years with the IEA. And I follow the IEA country policies very closely since 15 years -- that side and this side -- and I can tell you that for the first time, I see a strong momentum in the IEA countries that they do want to change their energy policies.
And this is not necessarily because of the environmental concerns or the general energy security concerns, but mainly because of the fact that the oil prices are very high and people do believe that they will be high for years to come. I think this is what Saudi Arabia may risk or the others if they do not increase their production capacity to certain levels.
MOUAWAD: One of the issues that you hinted at during your presentation that's had a lot of press this year is the issue of the world running out of oil. And next week is an historic date. On Thanksgiving 2005, the world is running -- we will reach peak production. This is the date that was given by the Peak Theory. What is your take on that? And is this why Saudi Arabia can't boost it's production? Are they also running out of oil?
BIROL: No, this is -- in our book, we made a very strong statement on that. First of all, Saudi Arabia and then in general -- Saudi Arabia has today official reserves about 256 billion barrels of oil. And Al-Naimi, His Excellency, mentioned in Johannesburg that they want to increase it by 200 billion in addition to that. With -- only look at the 256 (billion barrels) and we look at the claims -- they say two things, very broadly.
One, the reserve numbers are inflated. They are wrong. Second, there is a water problem in Saudi Arabia. We said, okay -- this counted the reserves -- current reserves number -- which I just mentioned -- by 35 percent. And the water problem we have discussed it -- lots of oil field service companies, people work on this issue since several years, they told us that it could increase the cost of production a maximum of 60 to 70 percent in worst case. And this is not (to?) Saudi Arabia, in fact.
And we have said, okay, let's assume that it will increase by 300 percent -- two very (heroic ?) assumptions -- one-third -- the 35 percent lower reserves and the water -- (inaudible) -- problem is a problem, and it would increase the cost by 300 percent. They can still easily come to 18 million barrels per day -- very, very clear.
But we do not say that they will come to 18 million of barrels per day, because it is not a question of (rocks ?). It is a question of production policies. And we are not sure that Saudi Arabia will want to come to 18 million barrels per day. If they wish, they can, we believe. But we do not think that the reserve availability is a limiting factor.
For the general peak issue, I think this is an issue which comes every 10 years or so and which collapses after the date that -- (inaudible). I think I had myself is a public debate with Mr. Campbell (sp) in May in Dublin. And after long, long discussions in front of hundred people, we bet. He said that in 2005 we are reaching peak. And I said, if 2006, if the global oil production increases by one barrel per day, then I will win the bet.
And this comes on top of the Thanksgiving issue that some of our colleagues in the U.S. mentioned here. And I think in 2006 we will not talk a lot about peak oil at this intensive level, because, again, what they have predicted is a third time proves to be long.
However, there's an important aspect, I should say, to be honest with you, is that what they had to argue is that there is more need -- the need for more transparency in the reserve later that they would like to see as everybody, not only in the Middle East and North African countries, but also for the international oil companies. And this would have to make that argument, but not far from that.
MOUAWAD: Okay, we'll hold our judgment on the peak until the end of the year.
I'd like to take some questions from the audience. Remind you to wait for the microphone. State you name and affiliation, please. Anyone for the first question?
Here in the middle and in the very back of the room over there.
QUESTIONER: Thank you very much. It was a very interesting presentation.
Let -- I'm Maurice Tempelsman from Leon Tempelsman and Son.
Let me take it to the next stage. Let's assume your scenario does take place and that there are -- that the political will or the pain threshold in the consuming countries has now reached a point where this becomes politically achievable. What sort of changes do you see as being germane or applicable to this?
And secondly, demand comes from different sources with different systems. How do you see a coordination between the consumer nations -- some operating under different systems -- focusing on achieving what you -- what would be the next step under your scenario?
BIROL: We see that there would be three different types of policies that one may need to consider if the process gave a trigger to the consuming nations if it comes to that threshhold, as you mentioned.
The first one is the efficiency policies. We are using energy or oil or electricity, whatever, very, very inefficiently in some countries. And I am sorry to say, but the U.S. is one of them. And we believe that some standards -- new standards -- in efficiency in the energy can help to increase the energy savings and can help us to have less dependence on the very few number of countries in the Middle East.
So efficiency policies are a big portion of this new, if I may say so, policies. There are some -- (inaudible) -- some discussions, for example, between the EU to be less politically sensitive. Within the EU there is a long discussion on setting some new standards on the car efficiencies. There's a discussion with the car manufacturers and to put some standards there. Or this may be one -- in Japan -- in China -- China introduced new efficiency standards, which are very, very strong. And by 2008, the average Chinese car efficiency will catch that of the United States, to be very clear.
MOUAWAD: (Inaudible) -- more efficient than -- (inaudible) -- because they're not very efficient here.
BIROL: Yeah. They would catch that level of the United States on average.
The second type of things which I believe -- I talked about only oil today, but there is a very important (multiplier ?) to oil, which is gas, especially in the context of the U.S., the major issue because the U.S. imported (on the ?) natural gas -- (inaudible) -- also increased substantially as a result of very strong gas demand governments and very sluggish domestic gas production prospects and through LNG the U.S. will increase its gasoline imports and it will aggrevate the oil imports.
So the second type of policies which could help gas reliance and gas from Middle East to solve that is the, I believe, the nuclear will be an important point to discuss or to consider.
And the third one is the renewable energy, such as wind, biomass and others.
But in addition to that, almost all the major consuming countries are putting money on this technological breakthrough, such as the carbon sequestration, one point -- using coal in a more clean manner -- clean coal technologies. These technologies are not yet commercially at the level of technology, at the level that they would immediately get the marketplace -- market share, but with a lot of R&D -- budget and U.S. government is doing that very strongly -- they can improve their position with other fuels in the future.
To sum up, efficiency, renewables, nuclear and new technologies may trigger this policies.
In terms of the coordination, again at the Gleneagles meeting at the G8 summit -- G8 club -- big five -- China, India and others -- decided try to address this issue together and provide a general framework in which there are some synergies between the countries. And at the next summit in Russia, we look at it how this framework could be implemented in a coordinated and coherent manner and the International Energy Agency -- (inaudible) -- provide this framework for that very summit.
MOUAWAD: Before we get to the next question, the last time the world considered alternatives to oil and prices collapsed, all those alternatives were rendered moot. Isn't that one of the main risks of hanging on this -- these scenarios, (these policies ?)
BIROL: In terms of prices, I think the risk is not that it is going to collapse, but it's going to explode. I mean, this is what I see.
MOUAWAD: And we had a question in the back and then in the middle table, please.
QUESTIONER: Byron Wien (ph), Morgan Stanley.
I wonder if you're underestimating the escalation of the demand in India and China. I mean, you paint a pretty optimistic outlook where that's based on a continuum of present supply-demand factors.
But demands in India and China is escalating considerably, and I'm concerned that it's going to outstrip the expansion of available supplies.
And then as a side -- an aside -- maybe you could comment on the supply additions in Kazakhstan and other -- Russia, Azerbaijan and other former Soviet republics?
BIROL: Thank you. We have, in fact, put a lot of emphasis on China and India. In terms of China, I think what we say is that China is today importing about three million barrels per day of oil. And in twenty years of time, they are going to import 10 million barrels per day of oil, which is what the U.S. is importing today.
Tomorrow, China will be the U.S. of today. It's a major fact, and this will be major driver of the oil demand.
Why it is so? Again, the transportation system. In China today, 13 person out of 1,000 persons own a car, which is 800 out of 1,000 in the United States and 650 in Europe. With rising income levels, one of the first things what they do is, for convenience and for prestige reason, to buy a car, which in turn fuels the demand growth in China. And in fact, in our very strong growth in oil demand, this is not driven by the OECD rich nations, but mainly from China and India. Therefore, we believe that this is the major determinant of the global oil demand growth. And I agree with you there.
In terms of Russia, Kazakhstan and these other countries, they would also -- there are many questions around those countries. In Russia, from the geology to the investment framework -- the fiscal regime and so on -- issue in Kazakhstan and others the transportation issue. They -- there are reserves there, and the -- I think from a consumer's perspective, it is very important that those reserves are developed and provide a diversification on very few number of countries, which would provide the bulk of the growth.
But we do not think that the growth -- growth -- in Russia and Kazakhstan would change the very fact that the MENA countries -- Saudi Arabia, Iran, Iraq -- are the main ones in which we need to get the oil and gas from in the future.
Of course, the higher the oil and gas comes from former Soviet Union countries, the better it is in order -- in terms of the diversification of oil and gas in the future, and that (for its ?) political implications.
MOUAWAD: We had a question here and then in the back.
QUESTIONER: Elizabeth Bramwell, Bramwell Capital.
I think if I did the math right, you have 50 percent increase in 30 ˙2D˙2D 25 years -- is basically about about 1.75 percent annually.
So I guess one question is, is that very different from what it has been?
And, you know, I look at some of the things going on the world. I understand that China's been using diesel instead of coal because you couldn't get the coal supplies to their power plants. And as a result, that has, at least temporarily, pushed up the price of diesel. There are a lot of emerging markets out there that subsidize the use of oil, such as in India, Indonesia, and I think it's gotten Indonesia into a lot of financial difficulties.
And basically, I have to think that the price is really going to draw out a great deal more of supply. And, for example, you can convert coal to -- you can convert coal to diesel, I guess, economically at about $35.
And I guess -- I wish -- could you comment on the fact that the really large, integrated oil companies, such as Exxon -- (speaking last week ?) -- are talking about oil being backed down to 35 (dollars) or less in about 10 years and just how all this kind of fits together?
Thank you.
(Laughter.)
MOUAWAD: (A meaty ?) question. (Inaudible).
BIROL: And we have 20 minutes, so --
Let me pick up one or two points (about ?) the issues you mentioned.
The -- I tried to say -- the point you mentioned is it is difficult to go from coal to diesel or the (other?) products. This is very important -- a key issue.
And when Jad asked the question about the, are we in a new era? Yes, but not because of the lack of reserves. We are in a new era because there is a concentration rigidity in terms of demand. We cannot change the game in the transportation just like that. There are not easy fixes in the transportation sector. What are you going to do?
Develop alternatives now, such as the fuel-cell cars. They talked about this. This is as expensive as formula one car -- to buy a fuel-cell car. Nobody would go and buy it. Or there are some technologies -- (inaudible) -- liquids. It is very, very expensive. They are not easy fixes there.
So from the consumer's point of view, we don't have a lot of maneuver room now.
In '73, '74 and '79, '80 when the prices went up, we were able to substitute oil in different places, as I tried to mention. Nobody builds anymore oil-fired power plants, except for one or two countries, because it is really vulnerable -- lots of uncertainties around it.
So from this perspective, it is very important to note that the consumers are in a new era, and whatever the prices are, there are not very easy fixes to find alternatives to oil in the transportation sector. This is one point.
The international oil companies and their policies -- (I'm a ?) international civil servant. I will make my points -- try to make my point carefully. But there are a couple of disappointments in that respect.
One of them is that we have not seen the windfall profits profits from major oil companies to go to investments in a timely manner, especially in the refinery sector. We do not want to put the projector only on the (unstream ?) sector and some key producing countries. But there is certain issues in the -- certain reason why we have high prices. One of them is the lack of refinery capacity, and we would like to see some of the investment (would ?) go there. And -- (inaudible) -- seeing a lack of investment going into the refinery sector, (which ?) a lot of money goes to newspapers -- advertisement -- about the clean energy and so on from the -- (inaudible) -- oil companies.
So it goes there to improve the image of those companies. It is a point that we feel very sorry about.
MOUAWAD: Very diplomatically put. I think we had a question in the back and right on the -- my right.
QUESTIONER: Andrew Shapiro from Green Order.
What assumptions are you making in your model about regulation of greenhouse gas emissions outside of the Kyoto framework going forward, past 2012 in Europe and in the U.S., Australia, China and India? That's one question.
And the second is you mentioned nuclear earlier. Especially since you're talking about transportation, can you give us your insights into how your modeling has taken into account the potential for hydrogen to be -- I assume that's where the connection is nuclear for the transportation industry, so what your projections are about hydrogen as a viable source for transportation?
BIROL: In terms of environmental question, we know that not all the countries did sign the Kyoto agreement agreement. And there are two major countries. Some of them signed, but they don't have obligations. Two of them are very important -- United States and China.
Let me again go to -- skip United States and go to China. If you just let me give you a number, just put in context. The growth of the carbon dioxide emissions in China between now and 2030 -- in the next 25 years of time -- is 30 percent higher than the CO2 emissions of United States, plus Canada, plus all European countries, plus Japan, Australia, New Zealand and Korea all put together between now and 2030, and compared to China, China is 30 percent higher.
So just to put everything in a context that if you do not have China and India -- as the gentleman over there raised the question and India in the framework -- perhaps the efforts made in the countries who signed the Kyoto may not prove to be very effective.
So I think there is the need to have a definite international architecture, which would provide incentives for both countries -- China, India -- and all other major countries, in order to -- for them to reduce the CO2 emission growth.
What we have done in our calculations is that, in many countries, there are policies which are geared, for example, in the EU or Japan and elsewhere, which are geared at meeting the Kyoto targets. And we have only taken those policies into consideration when making our projections -- our focus.
But we, when we look at the numbers, neither our reference scenario, nor our alternative scenario, which is environmentally friendly is close to the Kyoto target in 2012. We are far from that.
So the (the ball ?) is with the OCD and other key countries, whether or not they want to rewrite, if I may say so, spirit of Kyoto and find it more effective internal architecture to address the concerns, which we take very seriously.
MOUAWAD: We had a question here and then back in the middle.
QUESTIONER: My name is John Mengave (ph). I'm an engineer.
There are two effects that you have mentioned, but I'd like to discuss them anyway.
The first one is biomass to ethanol. It's a small -- very small -- business now, but in the long term, cornstalks, grass, will turn out to be used to make ethanol, and that will require a great deal of capital, and it is technically feasible now. In Canada, especially, it is being put forward. I do not know the magnitude of the possible effect -- the cost per-capital investment would be quite high -- point one.
Point two, the -- I'm an engineer and geochemist -- geological chemist. The advent of more CO2 in the atmosphere is negative. There are many bad characteristics of ethanol. However, there is one good one, and it is almost never mentioned. And the good one is that the temperature of the atmosphere has increased one and a half degrees Fahrenheit over the last 50 years. That reduces the amount of heating oil that has to be used. And while you may laugh about it, it's a very large number. And the one and a half degrees is going to do -- going to (move ?) two or three degrees. And you will be wearing lighter clothes right around here.
Those are my two points.
MOUAWAD: Thank you.
So the --
BIROL: Okay. Thank you.
MOUAWAD: -- economics of the biofuel.
BIROL: Well, yeah.
I think there's a lot of potential of biofuels, but, as you have also mentioned rightly, it's required a lot of capital -- the first investments are very high.
But what is happening is that -- I can give you -- you gave the example of Canada. I can give you the example of European Union. They are -- European Union is -- European Commission -- is drafting a new law in order to provide tax incentives for the companies which would use -- which would produce biofuels in order to provide an alternative to oil. We do not think that it will completely change the picture, but it can provide an important, let's say, alternative with limited significance but some diversification at this from oil. And some of the countries, (although ?) there (is ?) some good examples throughout the world, such as some of the examples which -- (inaudible) -- Brazil -- they had some positive, let's say, outcomes there. And some of the European countries, especially in the north of Europe, are keen, as well as Japan is very keen to push the biofuels.
But again, this can change the picture slightly but not substantially. But the current economics of biofuels do require at this stage some government support, otherwise it's not a (very ?) significant market share vis-a-vis the (better ?) cheaper and convenient oil products. This is one.
Second -- your second question -- so 1.5 degrees of warming may have some positive impacts here and there, but I think the catastrophic impacts in climates outweigh the -- some of the (anecdotal ?) positive impacts substantially, and therefore we should be very careful, I believe, to see what we can do in order to reduce the growth in the CO2 emissions, therefore lowering the risk of climate change, which would have tremendous effects on many parts of our daily life and the life of our children.
QUESTIONER: (Inaudible) -- good.
BIROL: But most of them are bad. (Laughter.) (This is the thing?).
MOUAWAD: We had a question over there and then one here and then we'll go back.
QUESTIONER: My name's Gary Sick (sp), Columbia University.
The -- as my understanding is that the political impact has actually -- that the oil market has been largely impervious to recent major political developments, much to our surprise. I may be wrong about that, but it seems to me we tended to overestimate the effect of politics.
Do you hold constant in your assumptions and all the political situation, that basically you're not looking at changes there? And I wonder if you believe, if I'm correct, that that is going to remain true for the future, that is, that the markets are going to remain impervious to the political implications, and is there any way we can think about what those might be in the longer term?
MOUAWAD: Thank you. And if I can also interject, after you answer this question or while you answer this question, how Iran and Iraq fit into that question because I don't see how you can substract the politics out of those two countries.
BIROL: So I will answer this question again very carefully -- (laughter) -- because I like my job very much -- (laughter).
MOUAWAD: But, Fatih, it's just the two of us.
BIROL: Exactly.
Now, we have tried to simulate three type of policy responses -- one, no policy change; second, producing countries do take the initiative, and the consuming nations just watch what's going on; and the third one is the alternative scenario -- consuming nations take the initiative, and the producing countries don't do anything.
In the real life, it would not be like that. There would be some mixture of those. But if you look at the past four or five years, I believe it was the producing countries which dictated the markets with their policies, while the consuming countries -- (inaudbile) -- in the passive role here for different reasons.
In order to move the consuming nations, when I look at the past data -- past events -- you not only need high-price signals, but those signals should stay there for some years to come in order to give a strong policy move or push for the consuming nations.
And I think at this moment I've tried to make it a little bit personal business that there's a strong momentum, and I believe the consuming nations will move, perhaps not as the gentleman would have mentioned. And I wish it was so in a coherent manner, and perhaps there are some options that can be in a coherent and consistent manner, but perhaps a more sporadic context.
I know that European countries are very keen. Japanese governments -- I was last week in Japan before coming here before coming here -- they are very keen. And I hope we see certain moves in the -- in this very country, as well.
And if those policies turn out to be realized, we can see some implications in the market, as we have seen by introduction of the -- (inaudible) -- (gas ?) in the past. There were some significant impacts. Yes, consuming countries can have an impact on global markets to demand measures -- on the demand side. I really believe that.
But two things we have to bear in mind -- one, our -- the consuming countries, maneuver room is narrower compared to past. We don't have the power plants -- using oil for power plants or for home heating. And so in general terms, we have maneuver room.
And second, (I hope ?) we have stronger governments and stronger leadership in the consuming nations to push such policies at the cost of perhaps losing some of popularity in the Western countries general.
Coming to Iran --
MOUAWAD: You're being a little bit too diplomatic here.
Let's -- (laughter) -- let's get to Iran and Iraq and how you can make long-term out of -- or assumptions in a very volatile, to say the least, area.
MR. BIROL : Yeah.
Let me start from the easier one, Iran. So this is the easier case, if I'm going to Iraq.
In the case of Iran, in our reference scenario, which means they would invest as much as it is needed, we do not see in the oil business major problems -- major -- (inaudible) -- in terms of gas. They are experiencing -- I'm going to give it to the detailed now, but the important fact -- decline rates. Their gas fields are declining substantially, and they need huge investments in order to maintain this decline and, on top of that, increase production capacity. Plus, they have some problems in terms of the transport bringing oil, bringing gas to the markets.
And here, in terms of difficulties, of course, I should put the current international policy context here, the recent statements made by the Iran president would not -- definitely did not help Iran -- (laughter) -- to get such options to bring their oil and gas outside and money for oil and gas they will want to the country. This is certain effect.
In terms of Iraq, Iraq has huge potential -- very easy geology. There's an Iraq expert -- (inaudible) -- Adam Sieminski, he would know better than me -- but the problem is -- unlike some of our colleagues think in this country, we do not expect the production capacity can increase substantially in the next four or five years because of the political station -- the security station.
I come from a country which is a neighbor country to Iraq, from Turkey, and I know that there are major difficulties, people make heroic work in order to maintain the current system in Iraq to get the oil run to the consumers. This is a heroic work what they are doing. And this is despite the political context they are in.
If you want to see -- or if we would -- if we were to see higher production growth in Iraq in the next four or five years, we have to see first a stability in the Iraq political context.
MOUAWAD: Okay. I think we have time for one or two last questions.
One here -- we'll just put them all together -- and one over there. If you just ask your question quickly, and we'll -- (inaudible) -- answer.
QUESTIONER: Thank you, Fatih. Adam Zemiski (sp) from Deutsche Bank.
The -- so my easy political answer to your question is 25 years is a long time, and we could have pretty bad geopolitics for five years in Iran and Iraq, but it's certainly possible that things would change very dramatically. Twenty-five years ago it was 1980, and the world looked a lot different in 1980 that it does today. That leads me to the question -- the focus on your deferred investment scenario was in the Middle East and North African countries. I know you mentioned this, but I was hoping you could elaborate on it.
What if we have deferred investment in Russia? Russian production has climbed depreciably in the last four years from six million barrels a day to, you know, almost 10 million barrels a day -- nine and a half to 10. My question is, what were you assuming in your scenarios out the 20, 30 for Russia, and what might change there?
MOUAWAD: Thank you. And there was a question over there? And then you have two minutes to answer that.
QUESTIONER: Steve Helman (sp) quickly.
You mentioned refining capacity, obviously a big bottleneck. Where do you see increases in refining capacity taking place over the next 25 years, and specifically in the United States, do you feel there'll be increased refining capacity?
MOUAWAD: That's it. There you go -- Russia and refining capacity.
BIROL: Okay.
Now, you are right. It is very difficult to forecast the political events in the next 25 years, so it is the reason why we got aggregate the political response. And I am sure -- (inaudible) -- political events that we have not foreseen, and this may change the picture significantly.
Having said that, 10 years ago, we have -- where we make the China oil demand growth for today we were (on spot ?). So this is very surprising -- we were on spot on the China. If you get the GDP right in these things it is not bad; you get good answers.
Russia is a very big question mark. What we have -- expect for Russia is, we do not expect major growth in Russia. (Inaudible) -- compared to today, only two million barrels per day of increase, and then later -- (inaudible) -- out, and then after 2030, declining of Russian production.
We do not think, unlike, again, some of colleagues, which we respect a lot, a major production growth in Russia which would change the balances.
And if, even the situation is reversed and a different investment scenario in Russia happens, as it (out of ?) for example, current government policies, which is not necessarily an invitation for investment to come to the country, the current tax and fiscal regime it can even -- (inaudible). It would even increase the reliance on a very few number of countries in Middle East, which is perhaps bad news, again, from the consumers' perspective.
And in the last 30 seconds, in terms of the refinery, let me give you one last bad news in terms of refinery here in general global terms. I said, if you look 200 fields on field-by-field basis, and one of the things what we have found out is that when we look at the API gravity -- let's say the quality of crude comes to the market, it (should be ?) -- (inaudible) -- looking at this field, it should be -- (inaudible). It should be heavier and heavier and more and more sulfur it will contain. And (when I ?) look at the demand side, it is coming -- demand (for ?) transportation fuels, market will ask for cleaner and lighter fuels and -- (inaudible) -- complete opposite sides, the trends are going.
So that will be lots of (need ?). We think about $480 billion between now and 2030. One thirty (billion dollars) is for the upgrading capacity, the rest for expansion. Expansion will mainly come from Middle East countries, China and India and some from -- very few -- from the OECD countries. We do not expect major expansion in the United States in the current context of energy.
MOUAWAD: Thank you, Fatih.
We've run out of time. Thank you very much for joining. (Applause).
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