Energy in Transition: Brazil and the United States Emerging as Major Energy Powers

Event Description

As the North American shale gas boom continues to transform the global energy economy, Fatih Birol, chief economist at the International Energy Agency and director of its World Energy Outlook project, discusses his latest findings from the 2013 report. With the United States inching ever-closer to becoming a net energy exporter, and Brazil increasing production from its offshore deepwater oilfields, Birol outlines a shifting competitive landscape. Despite these new resources, low-cost Middle East oil will continue to play a central role in the world energy economy for the foreseeable future.

Event Highlights

Birol on the geopolitical effects of the shale gas boom in the United States:

"I believe the secretary of state of United States sits in his chair in the international negotiations now much more comfortably than he or his predecessor did a couple of years ago before the shale gas revolution."

Birol on the Middle East's transition away from oil-usage for electricity generation:

"About one-third of the electricity generation in the Middle East comes from oil. It's incredible. It is the most expensive way of producing electricity. It is even more expensive than producing electricity from solar power in -- more than wind, more than anything you can. It is something like using Chanel perfume to fill your car. So this is in the same type of -- from economic point of view, it is economically a criminal thing."

Birol on the world's continued dependency on non-renewable energy sources:

"Twenty-five years ago, when this move [toward renewable energy resources] started, the share of fossil fuels in the global energy mix was 82 percent. And after 25 years, of all these efforts, all the governments, the share of fossil fuels in the global energy mix today is still 82 percent."

ROOSEVELT: Let me start, if I may, by welcoming all of you here, as well as the members who are around the—on the telephone and will be listening in. And we are really privileged to have with us today Dr. Birol, who's responsible, amongst other things, for the World Energy Outlook. Here it is. You all ought to get one. Every commodity trader on Wall Street reads it. Every CEO and their staff who works for oil companies, they read it. And it's a great product, even though it does weigh a little bit. And Dr. Birol is also the chief economist for the International Energy Agency. And he's the director of the global energy economics there.

George Monbiot, who doesn't always agree with you, once said of Dr. Birol that he's the most—one of the most powerful men on Earth, because when he speaks, his words are regarded as petroleum gospel and all the governments of the worlds scurry to listen to what he said.

And then, finally, on an administrative point, our next meeting is on the topic of what to do about Egypt with Mr. Telhami, Thomas Carothers, and Dan Kurtzer, and that will be from 5:30 to 7:30. And obviously, you're all welcome there.

So with that as an introduction, let me turn it over to you, Dr. Birol.

BIROL: So thank you very much once again to CFR for inviting me. I was just counting. This is the ninth year in a row I was invited here—the privilege to be invited here. This is a great honor for me and for my colleagues, who work on this very book. So if you wish, I can tell you two, three things about some of the findings of our work, and then we can have a chat.

The first one perhaps I can start so. There is an energy game worldwide, and there are different players (inaudible) and what we see in our book is that the job descriptions of those energy players are being rewritten, redefined recently, and it's going to go like that. What do I mean with that?

Some countries who have been years and years energy importers are turning to be an energy exporter, such as U.S., in terms of natural gas. But also, Brazil 2015 comes as a significant oil exporter in the markets.

Another change in the job description is in terms of the exporters. Middle East exporters whom we know produce a lot of oil and influence the global oil markets as a producer, now they are having effect on the oil markets electricity markets as a consumer. In few years of time, according to World Energy Outlook, oil consumption in Middle East companies will be equal to the oil consumption of China of today. They will consume oil as much as China tomorrow. And it has lot of implications, from geopolitics to the oil markets and the oil prices.

A third change in the job description or the change, I should say, is under energy trade patterns. The destinations are changing. When you have this—you know, you always have this global map and the arrows going to trade, it is changing. For example, I don't know if we have anybody here from Canada. For Canadians, life was very simple until recently. They produced energy and send it to south. But south does not need much more energy from Canada, and we need less and less, and there's a huge Canadian oil and gas resources. Therefore, Canada will have to—will have to—there are some challenges, but will have to turn to Asia for the new trade pattern.

Or Russia, Russia had one single loyal, longstanding client, which is Europe. But when you look at the Europe dynamics today, A, Europe energy demand is not growing, very, very, very slowly, and we think European gas demand, for example, will come to the pre-crisis level only in 2020. And Russia, whose economy is two-thirds relying on the energy export revenues, have to find new export destinations. It will be China. It will be Japan, other countries. So the trade patterns are also changing.

So job descriptions are changing, and it is very important for the governments, for the companies to be able to read the game in this fast-changing energy world and position themselves. If they're not able to do so, they will be losers. And there are some countries, major countries who were not able to understand what is going on, and they lost—they lost a lot of volumes and prices in terms of exports and some companies, as well.

Let me finish by saying that there are also things which do not change which I would like to see changing, at least two things. One, carbon dioxide emissions are continuing to increase, and energy sector is at the heart of it. Two-thirds of the emissions which lead to climate change come from the energy sector. Without finding a solution in the energy sector, we have no chance whatsoever to find a solution to climate change.

And our trends in the World Energy Outlook shows that in the normal trajectory what we are following now, the world will see a temperature increase around 7 degrees Fahrenheit, and this is substantially higher than the allowed or permitted temperature increase of 3.5 degrees Fahrenheit, and there is a 3.5 degrees Fahrenheit difference, but this difference is not that we just take our jackets off and we continue living. It is not like that. It will have devastating impacts for all of us, the climate change. This is one challenge which is not changing, unfortunately.

The second one is something that we follow in the World Energy Outlook since long time. Today, 1.3 billion people, every fifth person in the world, they have no electricity, in sub-Saharan Africa, India, Pakistan, Bangladesh. And when we look at our trends, without major interventions, without breaking the vicious circle, we will see in 20 years of time still 2030s, at least 1 billion people who will have no access to electricity, especially in Africa and in the rural communities.

So these are some changes and not changes in the global energy scene in what I see today.

ROOSEVELT: Well, Dr. Birol, thank you so much for that introduction and explaining to us how rapidly the world of energy is changing. One of the changes that I think everybody in this room is familiar with is that a few people I suspect a few years ago were able to anticipate the impact of the development of shale gas. What are the implications of that development for the U.S., the Middle East, and Russia?

BIROL: I think there are two types of implications. One is the geopolitical implication. The other one is the economic, the competitiveness issue. In terms of geopolitical implications, there are colleagues who know these things much better than me here, but I can tell you one thing, that I believe the secretary of state of United States sits in his chair in the international negotiations now much more comfortably than he or his predecessor did a couple of years ago before the shale gas revolution. So this is, I would like to say, in terms of geopolitics.

And perhaps one more note. The ability of the major gas exporters of dominating and shaping the gas policies and their extensions are being questioned significantly. This is as much as I can say, as an international civil servant under geopolitics, when we have an open meeting like this.

(LAUGHTER)

Second, under case of competitiveness, this is a—you don't know it here perhaps in the United States, but this is a major issue in Europe and in Japan. Today, European gas prices are three times higher than the U.S. gas prices, and the Japanese Asian gas prices are five times higher than the U.S. gas prices. I don't know any other commodity such as strategic commodity where you have such price differentials. This is a serious issue.

But more serious than this is that I believe this price gap, which is amazing, may narrow down a bit, but it will be with us at least 20 years. There will be a structural price difference between U.S., Europe, and Asia. And this will have major implications for the competitiveness of the energy-intensive industries in Europe and Asia, and what we see is that share of – we analyze this in the outlook, share of petrochemicals, iron, steel, cement, and others in the international trade of these goods in the United States will increase and it will see a major decline in Europe and in Japan if there are no policy changes. So this is the second implication, geopolitical implication and also under competitiveness.

ROOSEVELT: Now, sort of as a continuation of that, the technology, the fracking technology that led to the development of shale gas has led to a rapid development of shale liquids. And in the medium and sort of longer term, what do you see is the potential impact on WTI or Brent?

BIROL: Now, this is an area that I am very happy that you asked me this question, because I think in the United States and some other places, some of us are interpreting the shale oil surge—I won't call it revolution, but shale oil or the unconventional oil or whatever you call it, surge—in a bit of a way which may be a bit misleading and which may not be very helpful. So what do I mean with that?

Last year, when we published the outlook, one of our major findings was—and I mentioned again here—I had the privilege to mention also here—the United States will be the largest oil producer of the world in 2017, overtaking Saudi Arabia. This is what we said. And this year's finding does confirm that trend, and it may be even around 2015. This is the good news.

But—but—some colleagues did started to say that since it is growing so strongly, we may not need such a significant growth from Middle East oil. I think this is, A, politically, B, analytically, C, from the numbers point of view, completely wrong.

First of all, U.S. oil will—definitely shale oil will increase. It's a very good news for U.S., for the rest of the world. But all of this oil, almost all of this oil will be used in the United States for its own consumption. And there is a world beyond the United States in terms of global oil demand which is Asia. Asia will need to import additional 15 million barrels per day of oil. Where will this oil come from?

There is—there are a couple of addresses, but there's one big address, which is the Middle East. So, therefore, if we tell the Middle East producers we may not need the growth from your oilfields, we may push them or lead them—their appetite for investment may fade away. And if the investment is not there, if you need—according to our numbers, we expect a significant growth around 2020 for Middle East countries, in addition to Iraq, Saudi Arabia, other countries in the gulf and around. But if we tell them we may not need your oil, why should they invest? And if we want oil around 2020 growth there, investment should be today. You know better than me in your daily work, investment takes decisions to oil come to the market.

So, therefore, I think it is very important for all of us to understand, very good news in the United States what is happening, chapeau (ph), no problem, good for U.S., good for the rest of the world, but let's don't be carried away with that. We do need Middle East, Middle East oil. It is important now, and it will be important as long as we use a lot of oil.

ROOSEVELT: You've pointed out I think very clearly the need for more oil, and parts of the world, poor people need energy. So that raises the question, what are the prospects for shale resources getting developed outside the United States, let's say China, Argentina, Russia?

BIROL: Yeah, again, especially in China and (inaudible) Argentina, some countries in Europe, there are some shale resources, but challenges are also tremendous in terms of the know-how, in terms of the data. I mean, they are starting the geological data is not yet there the regulation and the—how the population is located in those countries are a bit different than the United States.

So we do not expect—first of all, let me give the bad news. We do not expect until 2020 any significant shale gas production growth from anywhere else, except for U.S., Canada and Australia. Except for these three, no major significant growth. But after that, we may see—especially from China, because China's government is very keen putting even some subsidies for shale gas production and others—we may see some growth from China to come.

But once again, when we think about the global gas market's point of view, if China was able to produce some shale gas, this would be only helping them to import less gas than being a gas exporter.

ROOSEVELT: Right. Now, you mentioned a little bit the need for Middle Eastern oil even in the face of more liquids getting developed in the United States and why that was. But let's assume for a second that the investment in Middle Eastern oil decreases. How fast do you think that they could respond to increased demand, if that were? And what do you think the implications would be for—in the medium term for the global oil prices?

BIROL: It is exactly what I'm afraid of, because the—when we look at the where outside of Middle East the oil production got come from, most of them are high-cost regions. In the United States, I say in the chapeau (ph), very good. But in order to produce that oil, you need the oil price around $80. And there are colleagues here who work on this every day, $80, because there are very complex fields.

In Middle East, cost of production is about $5 in Iraq. So $5 in Iraq versus $80 here. So if we are not able to make sure that the investment is made in Middle East countries for this or that reason, we may—it may well be a major challenge in terms of seeing higher prices than we have now.

So, therefore, I am not a big subscriber of the abundance of oil, everything is now fine, don't worry about it, the oil prices will go down. I don't think so. It is not so simple. The new oilfields coming in the future from Brazil, from United States, they are complex fields, and they need certain amount of price to be profitable. And, second, in Middle East countries, many of those countries need, according to analysis, about $90, $95 of price in order to balance out their budgets.

So, therefore, if those investments in the low-cost areas are not made and around 2020, I believe, the growth of the U.S. production will come to a plateau, it will not go—it's not as big as the shale gas, we may see some challenges.

ROOSEVELT: Now, one of the things you alluded to were subsidies in some of the large oil producers in the Middle East, certainly in Saudi Arabia, Iran, Iraq, or even Indonesia, if these were decreased or possibly phased out—and as we know, Saudi Arabia has made a decision, they're going to no longer burn oil to produce electricity, they're going to replace that with either nuclear energy or solar forms, what are the implications of those changes or potential changes on supply and on prices?

BIROL: So, first of all, subsidies, what does it mean? In many countries in the world, they artificially governments put the—get the money from their own pocket and bring the price of oil, gas, coal electricity down artificially. And this has a couple of implications. One, this is a major reason for increasing fossil fuel consumption, bad news for the climate change. Second, inefficiency. People—if something's extremely cheap, whatever it is—it can be water, it can be a shirt—we human beings tend to use in a wasteful manner. This is—given inefficiency there.

And, third, as you mentioned, most of those countries—some of the countries you mentioned, their major income is oil exports. But if they consume more and more oil at home as a result of subsidies, wasteful consumption increase, they use the oil at home, they will have less to export and it's bad for their economies.

And it is for me a—fossil fuel subsidies worldwide are the number-one public enemy of sustainable development. When it comes to Middle East countries, it is incredible at this number I will give you now, at least for me, somebody who makes their hands dirty with data every day. About one-third of the electricity generation in the Middle East comes from oil. It's incredible. It is the most expensive way of producing electricity. It is even more expensive than producing electricity from solar power in—more than wind, more than anything you can. It is something like using Chanel perfume to fill your car. So this is in the same type of—from economic point of view, it is economically a criminal thing.

And many governments, as you said, now want to improve this situation and go from oil to other energy sources and make oil more available for export purposes.

ROOSEVELT: Well, you've given me a great line my wife. Let's put some of your Chanel perfume in the car.

BIROL: Yes. Yes.

ROOSEVELT: Now...

BIROL: I never use the perfume on the car, so I should mention that, as well, so this is...

ROOSEVELT: Now, I have a few environmental questions, and you've touched on that. If the Conference of Parties concludes that 450 parts per million is the right target for green gases in, let's say, 50 years, what are the measures that would have to be taken by the U.S., the E.U., China, and the rest of the developing world? So that's question one. And, question two, is 450 parts per million the right target?

BIROL: Now, 450 means about 3.5 degrees Fahrenheit temperature increase. But what does this mean? This mean, scientists tell us, if we can keep it, we can have a lifestyle in the future more or less similar to what we have now. It will not make big changes. The higher the increase is, the more extreme weather events we are going to face, the heat waves, sea level rise, and everything will be in a difficult situation. So it is the right target, but if it's a target that we can still meet, it's a different question.

Now, 2015 in Paris, there's a great rendezvous. What is this rendezvous? Don't misunderstand it. It's a rendezvous of the climate change. A similar meeting we had in Copenhagen in 2009. There will be world leaders going to meet, and hopefully we hope—all of us of hope—to have an agreement on the climate change.

And I am—as some of the colleagues who know me—I am normally by definition a very pessimistic man. But here, I am a bit optimistic. And I have three reasons to be optimistic.

One, United States. United States emissions today are down to the levels of 1990s. U.S. position is much more comfortable now. Second, in U.S., there is an administration now who says—or who indicates that it may be an excellent thing to leave a legacy behind them. These are one thing.

Second reason, China. You know, what is the main problem today in China? I'm not talking about energy or anything, social issue. It is the local pollution in the cities in China, and the Chinese economic stability, we talk about the China social stability, it is seen as one of the major challenges to those.

So China is now thinking very, very seriously to put a cap on coal and pushing a lot of efficiency policies in order to reduce the local pollution, which in turn happens to have to decrease the carbon dioxide emissions, as well. So China has very much of a vested interest to reduce the CO2 emissions, and I can tell you that, looking at our numbers, the amount of renewable energies which will come from China in the next 20 years will be equal to the amount of renewable energy which will come from U.S. plus Japan plus all European countries together. China will get more than all of them put together. China is pushing forward.

And, again, last year—again, one number—sorry to give too many numbers—but one last year, China's carbon dioxide emission increase was one of the lowest in the last 10 years. So this gives me a second hope, and plus, between those things, U.S. and China at the president level work on this issue.

Third one, Europe. Europe is already a champion of pushing the climate change. And I think there are still questions about the—whether or not Europe should be still the one who pushes alone. But the good news coming from U.S. and China makes me feel hopeful in that respect.

And my—also, a bit of a hope is that since the recent 10 years ago, the developments in the Middle East, the Atlantic Ocean became a bit too wide, and I believe, looking at the current administration's interests and the European interests, climate change can well be an instrument, bring the Atlantic Ocean to its normal level now. And putting these things together, U.S., China and Europe, and the able French diplomacy, I have some reasons to believe that in Paris we may have some hope for that very meeting.

ROOSEVELT: Well, that's good news, and we certainly hope that you're right.

BIROL: Me, too.

ROOSEVELT: It's too bad that there are not a few more members of our very distinguished U.S. Congress that could learn a little bit from you. Now, in this year's report, you focus a little bit on the use of enhanced oil recovery. Is—and knowing it can be attractive for long-term investors—but does long-term enhanced oil recovery—the injection of CO2 in the wells et cetera – does that really result in a net environmental benefit? It takes a lot of energy to get it in, and you put in—for every unit of CO2 you put in, you get a larger amount of carbon that you get out that's going to be in the form of oil that you're going to burn.

BIROL: I mean, just the first—perhaps the enhanced oil recovery is something—a technology that makes use of the oil which we think we don't get anymore using some technology, as you mentioned, using heat, using steam, and other things. This will be definitely helpful if we are successful to get additional oil in the markets, but it will not be a major game-changer in terms of the environmental issues, unfortunately.

ROOSEVELT: Good. Well, let me turn it over to the audience, with one caveat. Please ask a question. No speeches. No soliloquies. Questions will being with "what" or "why." Good. Kassia?

QUESTION: Hello. My name is Kassia Yanosek from McKinsey. Thank you for coming. My question is about Brazil. You devote a lot of your—this year's outlook to Brazil. And there's a huge expectation on the amount of growth that's going to be coming from Brazil. And I was wondering if you could speak to some of the risks to that investment thesis or that expectation for Brazil, particularly in light of the Libra auction, some of the supply chain constraints that we're seeing. Thank you.

BIROL: Now, every year in the outlook, we look at all the countries, but one country in depth. Last year, we made a report on Iraq, a very important country, and this year, we work on Brazil. As you mentioned, we look at everything, not only oil and gas, electricity, climate, economy, and so on, and we work very closely with the Brazilian government and companies.

But our views, expectations of oil production growth in Brazil is a bit lower than those of the government. First of all, let me give you the good news and then, secondly, challenges. Good news is, we think Brazil will be—in 2015 will be an oil exporter. It's a big thing. We have to acknowledge it, a country who has been an oil importer years and years, you transform this country being an exporter. And this is—just, again, to highlight this—this is not only as a result of growth in production, which is one major issue, production of oil, deepwater, but also Brazilian government was very keen—and we have to learn from this—pushing the biofuels policies in order to replace the oil products. So they push the consumption down and increase the production, and 2015 they are becoming an oil exporter, and very soon, one of the six largest oil producer of the world.

But why our numbers are lower than those of the governments? Because of the very issue you mentioned. There is a very strict investment framework—so-called, the local content issue—that the investors have to be in line with those regulations that the government put into. And I am afraid they put a lot of burden on the shoulders of Petrobras there.

Therefore, in addition to our main expectations, we have another scenario or case which we say a law of Brazil case, which means that if those projects are not being pursued as a result of the investment not being mobilized in a timely manner. To this production growth to see, Brazil has to invest about $1.6 trillion in the next 20 years, which compares $1.1 trillion in Middle East. So Brazil has to find money more than the Middle East. And this may be a big challenge for the Brazilian government, given the framework they put on the table.

But they made very good things, Brazilian government, with the biofuels policy, opening up the deepwater off-shore. I hope they will be successful, but these challenges are definitely there, that we may see lower numbers than we have indicated in our book.

ROOSEVELT: Good. I'm going to go in the back next time.

QUESTION: Gerald Pollack (ph). Fracking is very controversial here and abroad.

BIROL: Yes.

QUESTION: How much of this anxiety about fracking is well-founded? And how much of it is a somewhat irrational fear of what might happen?

BIROL: I mean, you say fracking is a problem in the United States, and I live in France, so this is—in France, it is our daily life, breakfast, lunch and evening, we deal with these issues in the newspapers. First of all, the concerns are legitimate. I have to say that the concerns are legitimate that the fracking is not a very easy, completely harmful—completely harmless technology. There are some legitimate concerns in terms of the contamination of water, in terms of the methane issue, and other things, one.

Second, however, we—we, meaning the regulators, industry, citizens—we can minimize, if not nullify these problems if the right policies, right regulations in a strict way put into action. This can be done by—we recently made a report which we said golden rules for a golden age of gas. What are the rules? What the companies, governments need to do in order to minimize the methane emissions, in order to nullify the water contamination? These are not major rocket science you need. You need the right regulation, and the industry, the operators have to make a bit more investment what they are doing now.

According to our analysis, the investment costs will increase about 10 percent if the right regulation is put in place and if the operators push those policies. So concerns are legitimate, but there is a solution there, if the right regulation is put in place and if they are monitored by the agencies, by the regulatory bodies.

ROOSEVELT: Jason?

QUESTION: Jason Bordoff from Columbia University's Center on Global Energy Policy. Thanks for being here, Fatih. I just wanted to ask you to say a little bit more in response to one of the questions Ted asked about shale development outside the U.S.

So I understand there are challenges—water, geology, pipeline, storage, regulation—all the things you described, but if that looks different, that changes the outlook a lot, a lot more supply, difference in price, why—I was wondering if you could say more about why you think, given how great the world's energy needs are, given how important it is to China for pollution and other reasons to find alternatives to coal, why these countries, with the help of Exxon and Chevron and Schlumberger and all the rest, why is the U.S. so special? Why do you think these other countries are not going to figure this out?

It'll take some time. It'll be a little more costly. But why, looking out 5, 10, even 15 years, I'm wondering why the IEA doesn't think they're going to somehow figure it out?

BIROL: Now, first of all, I don't say that U.S. is special, first of all. I did not say that. What I want to say is that, in the United States, you have an oil and gas industry which has a history of 100 years and you have the—all the industry know-how, geology, data, everything, capital, everything is here.

In those countries, they're just starting, and if I have to distinguish Europe and China, we have more hopes to see in China a growth in shale gas, but this is a matter of technology, capital, government policies, geology, and economics of it all coming together. We don't see this happening before 2020. After 2020, this will come, this will contribute. And in terms of China, for example, we expect China will more than 150 BCM they are going to produce shale gas, which is very good news.

But what I'm saying is, this will not be a game-changer for the global gas markets. Today's share of gas in the Chinese energy mix is 4 percent compared to many countries which is about 25 percent, 30 percent. So if China has gas, China will use this gas at home to replace coal, China will never be like the United States or Russia and the others, will be a major gas exporter. Definitely it will help, but I do not expect that China gas exports will be as important as the United States', as they have to use at home most of them. China is today a gas importer, and will be more of a gas importer next years to come. It will perhaps help to reduce the imports.

U.S. is not special. U.S. has a history, capital, technology and data already in place, and in these countries, there is a time lag coming on. In Australia, very good news. Australia will come with the shale gas, will export, but the amounts will not be as big as the United States.

QUESTION: Thank you. Allen Hyman, Columbia Presbyterian Medical Center. Some might be surprised that you never mentioned OPEC in your presentation today. And years ago, people were focused on what was happening in Vienna every year.

BIROL: Yes.

QUESTION: Has OPEC lost its ability to control the price of petroleum these days?

BIROL: So, first of all, let me tell you that before working for the IEA, I worked six years at OPEC secretariat. Thank you very much for asking this question.

(LAUGHTER)

And I learn a lot when I work in OPEC. Now, of course, when we look at the next 10 years, the amount of oil which will come from the Middle East countries, OPEC countries will be less than what we have seen in the previous years. There are a couple of reasons for that.

One, I mentioned the U.S. oil is—shale oil is growing very strongly. And, second, Brazil oil is coming very strongly. And the—because of the financial crisis, the oil demand is a bit slow compared to previous years. And, plus, there is one country which in OPEC, which will—where we see a significant increase and not from the others, which is this country—this is Iraq. Iraq will make a major contribution the next 10 years, and afterwards we will see hopefully other countries to contribute to that.

Now, I believe Vienna is still a very important city. The decisions which will be made in Vienna will definitely have implications for the global oil markets. But it is also very good to see that there are more and more producers bringing oil to the markets, providing more diversity in the global oil markets. But once again, the low cost energy is in Middle East, and we shouldn't forget that in the future we will need Middle East oil, perhaps not in the next few years, but after that. And in order to not to close (ph) for after that, we have to give the right signals to the Middle East producers.

ROOSEVELT: Yeah.

QUESTION: Thank you. Lucio Vinhas de Souza. I am the chief economist of Moody's, the rating agency. Question about Europe. You can make the case that in some European markets, because of the policies of the union, you have a glut of renewable energy, specifically on electricity. Is this sustainable? Is there something that we would change prices in the European Union, namely on electricity?

BIROL: I think this is also another very good question. Now, when you look at the European electricity prices, again, there is an incredible increase—in the last 10 years, European electricity prices increased 2.5 times in real terms. It's amazing, an increase 250 percent in the last 10 years. And there are three reasons for that.

One is the increase in the gas prices, as gas going as input to electricity generation. Second is the strong support from governments in terms of renewable subsidies, about $60 billion renewable subsidies are going to the renewable electricity generation, and it ends up higher electricity prices. And, third, in some countries, they said goodbye to nuclear power, which is replaced by the other forms of energy, which are in some cases more expensive.

So as a result of that, we see today in Europe I wouldn't say panic, but almost a panic in terms of high-cost energy and its impact on their competitiveness of their economies. And among which discussion now, as our colleague just implied, one of the major discussions in European energy circles is, shall we go ahead with these renewable subsidies? Or shall we reduce them?

And I personally wouldn't be surprised if some governments who are at the same time trying to recover from the financial crisis were to reduce significant amount of subsidies for renewables. I wouldn't be surprised.

ROOSEVELT: Paula?

QUESTION: Thank you. Paula DiPerna, NTR Foundation. Back to Paris. Speaking of subsidies and the fluctuation, regionality, and energy prices, I just wonder if you could speculate a little bit about, if there's an agreement that would imply potentially a global price on carbon, potentially regional prices, and so that's the third leg of the stool. So how does a carbon price potentially integrate with the changes in subsidy policies? And who would it do that integration? Otherwise, you have three different trains.

BIROL: I mean, from—first, I'm going to talk as an economist and then as a realist, so there are two different things. As an economist, the best way of reducing CO2 emissions is to put a carbon price. It is the most efficient way. It gives way to using energy more efficiently, cleaner fuels, and get higher market share vis-a-vis the dirtier fuels.

But personally, starting as of 2015, a carbon price I see a bit difficult, but what we can hope—at least I hope—is a transition between 2015 and 2020. Around 2020, we may see a carbon price coming from many countries.

We talk about China, I mean, China and energy and climate. China today is introducing in seven provinces carbon price. In Europe, we have a carbon price. In the United States, in some states, we have a—you have carbon. So this is definitely something very important, because in Europe, many people say, why Europe has to be so at the forefront while others are not doing anything? So it is very difficult to justify the European carbon price to the European people in the cities, in the streets.

So, therefore, the best way is to have a unified—especially for U.S. and China and other places—a carbon price. And I hope in 2015 decisions will pave the way for introduction of a carbon price around 2020. So this will be the perfect way to address the climate change. And I have hopes for that, I should say.

ROOSEVELT: You had a question. Go ahead.

QUESTION: Kimball Chen, Energy Transportation Group. Dr. Birol, in your—what I want to know is, what policy coordination among leading nations in the world could lead to a substantial deviation from your present projections of the world's energy picture? Your models and your most likely cases obviously depend on certain assumptions about economic structures, market structures, and political policies amongst countries. What kind of coordination could be possible that would be a game-changer in terms of the trajectory of both supply and demand?

BIROL: I mean, I mentioned one of them already, and I will tell you another one. The CO2 emissions, carbon price could be a game-changer. It's a policy intervention there. But there is another one coming which we don't talk much, but it goes under the sea, coming to the surface, namely efficiency, efficiency policies.

Now, we—everybody here, there are many much senior than me—we, all the—everybody push that efficiency is important for climate change, we reduce the CO2 emissions, and so on. Everybody push this agenda button, but nothing much happened.

But in the last two years, we see a major push for efficiency policies for the—of the governments. And this is happening in China, in United States, India, even in Middle East countries. But the driver here is not climate change. The driver here is the bringing the costs down. It's a cost concern. Reducing the cost of using energy.

And I believe this is a very important driver, and I believe this can be a way that our numbers, which already incorporate certain amount of efficiency improvements, may well be on the high side, if those efficiency policies are put in place. And I see—especially from China, we may see some surprises, especially efficiency policies, which are based on regulatory measures, then the economic instruments—we may see some efficiency improvements coming from China and maybe later on India, but also in United States. This is very important.

In the United States, just to put a bit of balance, the success story in the United States of the oil import dependency (inaudible) is not only because of the shale oil surge, but at the same time new efficiency standards for cars. We will see the effects of that, pushing the demand down. It's a combination of these two things, and I think this is one of the very important decisions that this administration, the previous one put in place to use cars in a more efficient manner.

So efficiency is the one I would put—or nominate as a game-changer. But no technologies I see will change the game in the next 20 years.

ROOSEVELT: Right there.

QUESTION: If I had a—if I had some champagne, I'd raise a toast to your optimism.

BIROL: Thank you very much.

QUESTION: Bevis Longstreth. I'm from Debevoise and Plimpton. I wonder if you could say a few words about the stranded asset issue. As Carbon Tracker has in their reports, talking about—and coupling it now with your optimism, what—what do you have to say about the stranded assets and the fact that they reported in 2011, I think it was, or 2012 some $674 billion of capital exploration expenses were planned to be spent by the top 200 private companies?

BIROL: Thank you. So, first of all, thank you very much for thinking I'm optimistic man. I really—thank you very much for that. I'm very positively surprised, but this is very good.

First of all, stranded assets is an issue, if we have a chance to read our book, we are the first one who raises issue, assets, especially for oil, gas and coal. What we say is—leave aside the NGOs and anything. What we say is the following. Even—leave aside the climate policy-driven world, just where we are today, with these trends, around 2050, about 50 percent of the fossil reserves will remain undeveloped, even with the current trajectory. Leave aside the 450, I mean, climate policy. If it's a climate policy-driven world, more than two-thirds of the reserves will be undeveloped or stranded.

But here, I think it is easy to say this, but one has to dive a bit into this. Not every fossil fuel is a fossil fuel. They are not the same. Now, about this—about this fossil fuels, almost 80 percent in coal that's—we have to look at it, there are different things.

The share of oil and gas is much, much less, and this is a very small portion of the game. The fuel, which would be negatively affected from those trends, will be mainly coal. And when we say fossil fuels, our colleague said that I am optimist, just to balance out my optimism with a rather pessimistic remark.

I was in—before here, I came here from Norway. In Norway, there was a big meeting, and one of the colleagues—one of the presenters, there was Mrs. Brundtland, the former prime minister of Norway...

ROOSEVELT: Right, right (inaudible) yeah.

BIROL: ... and she made a major report, Brundtland report, 1987, to put the sustainable development first—the first time in the agenda on behalf of the U.N. secretary general at that time.

So in that report, when the sustainable development came, one of the major recommendations was lowering the share of fossil fuels. And since 25 years, everybody tries to decrease the share of fossil fuels for climate change and everything, more renewables, more nuclear efficiency, and so on.

Twenty-five years ago, when this move started, the share of fossil fuels in the global energy mix was 82 percent. And after 25 years, of all these efforts, all the governments, the share of fossil fuels in the global energy mix today is still 82 percent. So I hope I can balance out my optimism with this one, so this is—I don't need to comment more.

ROOSEVELT: Go ahead. I see you.

QUESTION: Thank you. Richard Strother (ph). In the Kurdish area of Iraq, how large are those reserves? Whose capital and technology might be brought in? And what is the geopolitical implication of it being exported either through Turkey or through Iraq?

BIROL: I don't get easy questions here, by the way.

ROOSEVELT: No.

(LAUGHTER)

BIROL: So—now, Iraq has huge resources. First of all, let me talk about Iraq, and I will come to Kurdish part, the northern part of Iraq. And these resources are huge. And I believe—I believe we are still in the beginning, because you have resources and you find resources when you look for it.

During the Saddam period, there was no exploration work. You find something if you look for it; otherwise you don't find it, in normal cases. So, therefore, I believe the resources in Iraq will be even higher than what we have now, which are already very high. And not only that, it is very low cost, the geology is very simple, very easy.

Now, about 10 percent, 15 percent of these resources are in the northern part of Iraq in the Kurdish Regional Government territory. And they have a different way of developing those resources compared to the central government. They provide other conditions, other investment framework, and, therefore, today, the KRG, the Kurdish Regional Government, region is one of the most dynamic basins in the oil industry in the world. Everybody is almost there.

And they can quickly increase their oil production, and there are different ways to export this oil, including through Turkey, but there are some other—they have some other options, but from an economic point of view, the cost point of view, the Turkey option seems to be one of the important ones.

But to be honest with you, if Iraq was to flourish as a result of oil—and all the, in fact, conditions are there—there is a need Baghdad and Irbil, the capital of KRG, needs to work together. Otherwise, it may not end up to the results that we all would like to see.

There is a huge potential in north, but there's a huge potential in Basra, huge potential in Basra. Therefore, the political tensions in the country I see as the single barrier for Iraq to be a prosperous country in the Middle East. According to our numbers, I can tell you that if Iraq could produce our rather modest projections, come to about 6 million barrels per day, about 2.5 today in 2020, 6 million barrels per day, and that increase, the Iraq GDP in 15 years of time will be equal to the Saudi GDP of today. So there may be another Saudi Arabia-equivalent rich country in the Middle East if those political tensions are resolved, and definitely it will be good news for north of Iraq, south of Iraq, and center of Iraq. I think this is the main challenge in front of the Iraq and its neighbors today.

ROOSEVELT: Interesting. Time for one more question, and the lady in the back.

QUESTION: I know we've been talking a lot about oil development and shale gas development in the industrialized world, but you're seeing more and more exploration and development of oil in more environmentally fragile areas, like Virunga National Park in the Congo and in the forests of Ecuador and in the Arctic. I know you're—you always say you're not an optimist and you're a pessimist, but what can be done to try to alleviate or mitigate any kind of environmental impact in these places that have so little protection?

BIROL: I think—to be very frank, I work with many oil companies since several years work, meaning exchange views, discussions, debates, et cetera. I see more of a growing understanding of the oil companies paying attention to environmental sensitivities. They are perhaps not necessarily doing it—maybe some of them—for the sake of environment, but for the sake of their image, they have to do it, because we, the consumers, now reach that level that the companies who are not paying attention to the environmental sensitivities will be—in one way or another may see some challenges.

But today, if I can leave you with one thing, between the climate change and the issue you mentioned, there is one—we have many colleagues from oil companies here. There is one issue that they can help the entire world, namely, today we talk about the carbon dioxide emissions, but there is another very important, very dangerous greenhouse gas, which is methane.

And many of the today, the big companies during the production of oil and gas, they let methane to escape in the atmosphere. And to be honest with you, this can be very easily—with very simple technical arrangements, this can be fixed, this problem. So, therefore, this is appeal to all of them. This year in Davos, in January, we will make this appeal to all the oil executives to be—to be a part of the solution and address their methane emissions to capture them, first to report them and then to capture them, and this would be a very easy solution and very important saving in terms of the economics, because they can use this gas, but more importantly, to reduce the greenhouse gas emissions. It can be a very good service, and, therefore, it can improve their image globally.

ROOSEVELT: Great. Well, please join me in thanking Dr. Birol.

(APPLAUSE)

ROOSEVELT: Let me start, if I may, by welcoming all of you here, as well as the members who are around the—on the telephone and will be listening in. And we are really privileged to have with us today Dr. Birol, who's responsible, amongst other things, for the World Energy Outlook. Here it is. You all ought to get one. Every commodity trader on Wall Street reads it. Every CEO and their staff who works for oil companies, they read it. And it's a great product, even though it does weigh a little bit. And Dr. Birol is also the chief economist for the International Energy Agency. And he's the director of the global energy economics there.

George Monbiot, who doesn't always agree with you, once said of Dr. Birol that he's the most—one of the most powerful men on Earth, because when he speaks, his words are regarded as petroleum gospel and all the governments of the worlds scurry to listen to what he said.

And then, finally, on an administrative point, our next meeting is on the topic of what to do about Egypt with Mr. Telhami, Thomas Carothers, and Dan Kurtzer, and that will be from 5:30 to 7:30. And obviously, you're all welcome there.

So with that as an introduction, let me turn it over to you, Dr. Birol.

BIROL: So thank you very much once again to CFR for inviting me. I was just counting. This is the ninth year in a row I was invited here—the privilege to be invited here. This is a great honor for me and for my colleagues, who work on this very book. So if you wish, I can tell you two, three things about some of the findings of our work, and then we can have a chat.

The first one perhaps I can start so. There is an energy game worldwide, and there are different players (inaudible) and what we see in our book is that the job descriptions of those energy players are being rewritten, redefined recently, and it's going to go like that. What do I mean with that?

Some countries who have been years and years energy importers are turning to be an energy exporter, such as U.S., in terms of natural gas. But also, Brazil 2015 comes as a significant oil exporter in the markets.

Another change in the job description is in terms of the exporters. Middle East exporters whom we know produce a lot of oil and influence the global oil markets as a producer, now they are having effect on the oil markets electricity markets as a consumer. In few years of time, according to World Energy Outlook, oil consumption in Middle East companies will be equal to the oil consumption of China of today. They will consume oil as much as China tomorrow. And it has lot of implications, from geopolitics to the oil markets and the oil prices.

A third change in the job description or the change, I should say, is under energy trade patterns. The destinations are changing. When you have this—you know, you always have this global map and the arrows going to trade, it is changing. For example, I don't know if we have anybody here from Canada. For Canadians, life was very simple until recently. They produced energy and send it to south. But south does not need much more energy from Canada, and we need less and less, and there's a huge Canadian oil and gas resources. Therefore, Canada will have to—will have to—there are some challenges, but will have to turn to Asia for the new trade pattern.

Or Russia, Russia had one single loyal, longstanding client, which is Europe. But when you look at the Europe dynamics today, A, Europe energy demand is not growing, very, very, very slowly, and we think European gas demand, for example, will come to the pre-crisis level only in 2020. And Russia, whose economy is two-thirds relying on the energy export revenues, have to find new export destinations. It will be China. It will be Japan, other countries. So the trade patterns are also changing.

So job descriptions are changing, and it is very important for the governments, for the companies to be able to read the game in this fast-changing energy world and position themselves. If they're not able to do so, they will be losers. And there are some countries, major countries who were not able to understand what is going on, and they lost—they lost a lot of volumes and prices in terms of exports and some companies, as well.

Let me finish by saying that there are also things which do not change which I would like to see changing, at least two things. One, carbon dioxide emissions are continuing to increase, and energy sector is at the heart of it. Two-thirds of the emissions which lead to climate change come from the energy sector. Without finding a solution in the energy sector, we have no chance whatsoever to find a solution to climate change.

And our trends in the World Energy Outlook shows that in the normal trajectory what we are following now, the world will see a temperature increase around 7 degrees Fahrenheit, and this is substantially higher than the allowed or permitted temperature increase of 3.5 degrees Fahrenheit, and there is a 3.5 degrees Fahrenheit difference, but this difference is not that we just take our jackets off and we continue living. It is not like that. It will have devastating impacts for all of us, the climate change. This is one challenge which is not changing, unfortunately.

The second one is something that we follow in the World Energy Outlook since long time. Today, 1.3 billion people, every fifth person in the world, they have no electricity, in sub-Saharan Africa, India, Pakistan, Bangladesh. And when we look at our trends, without major interventions, without breaking the vicious circle, we will see in 20 years of time still 2030s, at least 1 billion people who will have no access to electricity, especially in Africa and in the rural communities.

So these are some changes and not changes in the global energy scene in what I see today.

ROOSEVELT: Well, Dr. Birol, thank you so much for that introduction and explaining to us how rapidly the world of energy is changing. One of the changes that I think everybody in this room is familiar with is that a few people I suspect a few years ago were able to anticipate the impact of the development of shale gas. What are the implications of that development for the U.S., the Middle East, and Russia?

BIROL: I think there are two types of implications. One is the geopolitical implication. The other one is the economic, the competitiveness issue. In terms of geopolitical implications, there are colleagues who know these things much better than me here, but I can tell you one thing, that I believe the secretary of state of United States sits in his chair in the international negotiations now much more comfortably than he or his predecessor did a couple of years ago before the shale gas revolution. So this is, I would like to say, in terms of geopolitics.

And perhaps one more note. The ability of the major gas exporters of dominating and shaping the gas policies and their extensions are being questioned significantly. This is as much as I can say, as an international civil servant under geopolitics, when we have an open meeting like this.

(LAUGHTER)

Second, under case of competitiveness, this is a—you don't know it here perhaps in the United States, but this is a major issue in Europe and in Japan. Today, European gas prices are three times higher than the U.S. gas prices, and the Japanese Asian gas prices are five times higher than the U.S. gas prices. I don't know any other commodity such as strategic commodity where you have such price differentials. This is a serious issue.

But more serious than this is that I believe this price gap, which is amazing, may narrow down a bit, but it will be with us at least 20 years. There will be a structural price difference between U.S., Europe, and Asia. And this will have major implications for the competitiveness of the energy-intensive industries in Europe and Asia, and what we see is that share of – we analyze this in the outlook, share of petrochemicals, iron, steel, cement, and others in the international trade of these goods in the United States will increase and it will see a major decline in Europe and in Japan if there are no policy changes. So this is the second implication, geopolitical implication and also under competitiveness.

ROOSEVELT: Now, sort of as a continuation of that, the technology, the fracking technology that led to the development of shale gas has led to a rapid development of shale liquids. And in the medium and sort of longer term, what do you see is the potential impact on WTI or Brent?

BIROL: Now, this is an area that I am very happy that you asked me this question, because I think in the United States and some other places, some of us are interpreting the shale oil surge—I won't call it revolution, but shale oil or the unconventional oil or whatever you call it, surge—in a bit of a way which may be a bit misleading and which may not be very helpful. So what do I mean with that?

Last year, when we published the outlook, one of our major findings was—and I mentioned again here—I had the privilege to mention also here—the United States will be the largest oil producer of the world in 2017, overtaking Saudi Arabia. This is what we said. And this year's finding does confirm that trend, and it may be even around 2015. This is the good news.

But—but—some colleagues did started to say that since it is growing so strongly, we may not need such a significant growth from Middle East oil. I think this is, A, politically, B, analytically, C, from the numbers point of view, completely wrong.

First of all, U.S. oil will—definitely shale oil will increase. It's a very good news for U.S., for the rest of the world. But all of this oil, almost all of this oil will be used in the United States for its own consumption. And there is a world beyond the United States in terms of global oil demand which is Asia. Asia will need to import additional 15 million barrels per day of oil. Where will this oil come from?

There is—there are a couple of addresses, but there's one big address, which is the Middle East. So, therefore, if we tell the Middle East producers we may not need the growth from your oilfields, we may push them or lead them—their appetite for investment may fade away. And if the investment is not there, if you need—according to our numbers, we expect a significant growth around 2020 for Middle East countries, in addition to Iraq, Saudi Arabia, other countries in the gulf and around. But if we tell them we may not need your oil, why should they invest? And if we want oil around 2020 growth there, investment should be today. You know better than me in your daily work, investment takes decisions to oil come to the market.

So, therefore, I think it is very important for all of us to understand, very good news in the United States what is happening, chapeau (ph), no problem, good for U.S., good for the rest of the world, but let's don't be carried away with that. We do need Middle East, Middle East oil. It is important now, and it will be important as long as we use a lot of oil.

ROOSEVELT: You've pointed out I think very clearly the need for more oil, and parts of the world, poor people need energy. So that raises the question, what are the prospects for shale resources getting developed outside the United States, let's say China, Argentina, Russia?

BIROL: Yeah, again, especially in China and (inaudible) Argentina, some countries in Europe, there are some shale resources, but challenges are also tremendous in terms of the know-how, in terms of the data. I mean, they are starting the geological data is not yet there the regulation and the—how the population is located in those countries are a bit different than the United States.

So we do not expect—first of all, let me give the bad news. We do not expect until 2020 any significant shale gas production growth from anywhere else, except for U.S., Canada and Australia. Except for these three, no major significant growth. But after that, we may see—especially from China, because China's government is very keen putting even some subsidies for shale gas production and others—we may see some growth from China to come.

But once again, when we think about the global gas market's point of view, if China was able to produce some shale gas, this would be only helping them to import less gas than being a gas exporter.

ROOSEVELT: Right. Now, you mentioned a little bit the need for Middle Eastern oil even in the face of more liquids getting developed in the United States and why that was. But let's assume for a second that the investment in Middle Eastern oil decreases. How fast do you think that they could respond to increased demand, if that were? And what do you think the implications would be for—in the medium term for the global oil prices?

BIROL: It is exactly what I'm afraid of, because the—when we look at the where outside of Middle East the oil production got come from, most of them are high-cost regions. In the United States, I say in the chapeau (ph), very good. But in order to produce that oil, you need the oil price around $80. And there are colleagues here who work on this every day, $80, because there are very complex fields.

In Middle East, cost of production is about $5 in Iraq. So $5 in Iraq versus $80 here. So if we are not able to make sure that the investment is made in Middle East countries for this or that reason, we may—it may well be a major challenge in terms of seeing higher prices than we have now.

So, therefore, I am not a big subscriber of the abundance of oil, everything is now fine, don't worry about it, the oil prices will go down. I don't think so. It is not so simple. The new oilfields coming in the future from Brazil, from United States, they are complex fields, and they need certain amount of price to be profitable. And, second, in Middle East countries, many of those countries need, according to analysis, about $90, $95 of price in order to balance out their budgets.

So, therefore, if those investments in the low-cost areas are not made and around 2020, I believe, the growth of the U.S. production will come to a plateau, it will not go—it's not as big as the shale gas, we may see some challenges.

ROOSEVELT: Now, one of the things you alluded to were subsidies in some of the large oil producers in the Middle East, certainly in Saudi Arabia, Iran, Iraq, or even Indonesia, if these were decreased or possibly phased out—and as we know, Saudi Arabia has made a decision, they're going to no longer burn oil to produce electricity, they're going to replace that with either nuclear energy or solar forms, what are the implications of those changes or potential changes on supply and on prices?

BIROL: So, first of all, subsidies, what does it mean? In many countries in the world, they artificially governments put the—get the money from their own pocket and bring the price of oil, gas, coal electricity down artificially. And this has a couple of implications. One, this is a major reason for increasing fossil fuel consumption, bad news for the climate change. Second, inefficiency. People—if something's extremely cheap, whatever it is—it can be water, it can be a shirt—we human beings tend to use in a wasteful manner. This is—given inefficiency there.

And, third, as you mentioned, most of those countries—some of the countries you mentioned, their major income is oil exports. But if they consume more and more oil at home as a result of subsidies, wasteful consumption increase, they use the oil at home, they will have less to export and it's bad for their economies.

And it is for me a—fossil fuel subsidies worldwide are the number-one public enemy of sustainable development. When it comes to Middle East countries, it is incredible at this number I will give you now, at least for me, somebody who makes their hands dirty with data every day. About one-third of the electricity generation in the Middle East comes from oil. It's incredible. It is the most expensive way of producing electricity. It is even more expensive than producing electricity from solar power in—more than wind, more than anything you can. It is something like using Chanel perfume to fill your car. So this is in the same type of—from economic point of view, it is economically a criminal thing.

And many governments, as you said, now want to improve this situation and go from oil to other energy sources and make oil more available for export purposes.

ROOSEVELT: Well, you've given me a great line my wife. Let's put some of your Chanel perfume in the car.

BIROL: Yes. Yes.

ROOSEVELT: Now...

BIROL: I never use the perfume on the car, so I should mention that, as well, so this is...

ROOSEVELT: Now, I have a few environmental questions, and you've touched on that. If the Conference of Parties concludes that 450 parts per million is the right target for green gases in, let's say, 50 years, what are the measures that would have to be taken by the U.S., the E.U., China, and the rest of the developing world? So that's question one. And, question two, is 450 parts per million the right target?

BIROL: Now, 450 means about 3.5 degrees Fahrenheit temperature increase. But what does this mean? This mean, scientists tell us, if we can keep it, we can have a lifestyle in the future more or less similar to what we have now. It will not make big changes. The higher the increase is, the more extreme weather events we are going to face, the heat waves, sea level rise, and everything will be in a difficult situation. So it is the right target, but if it's a target that we can still meet, it's a different question.

Now, 2015 in Paris, there's a great rendezvous. What is this rendezvous? Don't misunderstand it. It's a rendezvous of the climate change. A similar meeting we had in Copenhagen in 2009. There will be world leaders going to meet, and hopefully we hope—all of us of hope—to have an agreement on the climate change.

And I am—as some of the colleagues who know me—I am normally by definition a very pessimistic man. But here, I am a bit optimistic. And I have three reasons to be optimistic.

One, United States. United States emissions today are down to the levels of 1990s. U.S. position is much more comfortable now. Second, in U.S., there is an administration now who says—or who indicates that it may be an excellent thing to leave a legacy behind them. These are one thing.

Second reason, China. You know, what is the main problem today in China? I'm not talking about energy or anything, social issue. It is the local pollution in the cities in China, and the Chinese economic stability, we talk about the China social stability, it is seen as one of the major challenges to those.

So China is now thinking very, very seriously to put a cap on coal and pushing a lot of efficiency policies in order to reduce the local pollution, which in turn happens to have to decrease the carbon dioxide emissions, as well. So China has very much of a vested interest to reduce the CO2 emissions, and I can tell you that, looking at our numbers, the amount of renewable energies which will come from China in the next 20 years will be equal to the amount of renewable energy which will come from U.S. plus Japan plus all European countries together. China will get more than all of them put together. China is pushing forward.

And, again, last year—again, one number—sorry to give too many numbers—but one last year, China's carbon dioxide emission increase was one of the lowest in the last 10 years. So this gives me a second hope, and plus, between those things, U.S. and China at the president level work on this issue.

Third one, Europe. Europe is already a champion of pushing the climate change. And I think there are still questions about the—whether or not Europe should be still the one who pushes alone. But the good news coming from U.S. and China makes me feel hopeful in that respect.

And my—also, a bit of a hope is that since the recent 10 years ago, the developments in the Middle East, the Atlantic Ocean became a bit too wide, and I believe, looking at the current administration's interests and the European interests, climate change can well be an instrument, bring the Atlantic Ocean to its normal level now. And putting these things together, U.S., China and Europe, and the able French diplomacy, I have some reasons to believe that in Paris we may have some hope for that very meeting.

ROOSEVELT: Well, that's good news, and we certainly hope that you're right.

BIROL: Me, too.

ROOSEVELT: It's too bad that there are not a few more members of our very distinguished U.S. Congress that could learn a little bit from you. Now, in this year's report, you focus a little bit on the use of enhanced oil recovery. Is—and knowing it can be attractive for long-term investors—but does long-term enhanced oil recovery—the injection of CO2 in the wells et cetera – does that really result in a net environmental benefit? It takes a lot of energy to get it in, and you put in—for every unit of CO2 you put in, you get a larger amount of carbon that you get out that's going to be in the form of oil that you're going to burn.

BIROL: I mean, just the first—perhaps the enhanced oil recovery is something—a technology that makes use of the oil which we think we don't get anymore using some technology, as you mentioned, using heat, using steam, and other things. This will be definitely helpful if we are successful to get additional oil in the markets, but it will not be a major game-changer in terms of the environmental issues, unfortunately.

ROOSEVELT: Good. Well, let me turn it over to the audience, with one caveat. Please ask a question. No speeches. No soliloquies. Questions will being with "what" or "why." Good. Kassia?

QUESTION: Hello. My name is Kassia Yanosek from McKinsey. Thank you for coming. My question is about Brazil. You devote a lot of your—this year's outlook to Brazil. And there's a huge expectation on the amount of growth that's going to be coming from Brazil. And I was wondering if you could speak to some of the risks to that investment thesis or that expectation for Brazil, particularly in light of the Libra auction, some of the supply chain constraints that we're seeing. Thank you.

BIROL: Now, every year in the outlook, we look at all the countries, but one country in depth. Last year, we made a report on Iraq, a very important country, and this year, we work on Brazil. As you mentioned, we look at everything, not only oil and gas, electricity, climate, economy, and so on, and we work very closely with the Brazilian government and companies.

But our views, expectations of oil production growth in Brazil is a bit lower than those of the government. First of all, let me give you the good news and then, secondly, challenges. Good news is, we think Brazil will be—in 2015 will be an oil exporter. It's a big thing. We have to acknowledge it, a country who has been an oil importer years and years, you transform this country being an exporter. And this is—just, again, to highlight this—this is not only as a result of growth in production, which is one major issue, production of oil, deepwater, but also Brazilian government was very keen—and we have to learn from this—pushing the biofuels policies in order to replace the oil products. So they push the consumption down and increase the production, and 2015 they are becoming an oil exporter, and very soon, one of the six largest oil producer of the world.

But why our numbers are lower than those of the governments? Because of the very issue you mentioned. There is a very strict investment framework—so-called, the local content issue—that the investors have to be in line with those regulations that the government put into. And I am afraid they put a lot of burden on the shoulders of Petrobras there.

Therefore, in addition to our main expectations, we have another scenario or case which we say a law of Brazil case, which means that if those projects are not being pursued as a result of the investment not being mobilized in a timely manner. To this production growth to see, Brazil has to invest about $1.6 trillion in the next 20 years, which compares $1.1 trillion in Middle East. So Brazil has to find money more than the Middle East. And this may be a big challenge for the Brazilian government, given the framework they put on the table.

But they made very good things, Brazilian government, with the biofuels policy, opening up the deepwater off-shore. I hope they will be successful, but these challenges are definitely there, that we may see lower numbers than we have indicated in our book.

ROOSEVELT: Good. I'm going to go in the back next time.

QUESTION: Gerald Pollack (ph). Fracking is very controversial here and abroad.

BIROL: Yes.

QUESTION: How much of this anxiety about fracking is well-founded? And how much of it is a somewhat irrational fear of what might happen?

BIROL: I mean, you say fracking is a problem in the United States, and I live in France, so this is—in France, it is our daily life, breakfast, lunch and evening, we deal with these issues in the newspapers. First of all, the concerns are legitimate. I have to say that the concerns are legitimate that the fracking is not a very easy, completely harmful—completely harmless technology. There are some legitimate concerns in terms of the contamination of water, in terms of the methane issue, and other things, one.

Second, however, we—we, meaning the regulators, industry, citizens—we can minimize, if not nullify these problems if the right policies, right regulations in a strict way put into action. This can be done by—we recently made a report which we said golden rules for a golden age of gas. What are the rules? What the companies, governments need to do in order to minimize the methane emissions, in order to nullify the water contamination? These are not major rocket science you need. You need the right regulation, and the industry, the operators have to make a bit more investment what they are doing now.

According to our analysis, the investment costs will increase about 10 percent if the right regulation is put in place and if the operators push those policies. So concerns are legitimate, but there is a solution there, if the right regulation is put in place and if they are monitored by the agencies, by the regulatory bodies.

ROOSEVELT: Jason?

QUESTION: Jason Bordoff from Columbia University's Center on Global Energy Policy. Thanks for being here, Fatih. I just wanted to ask you to say a little bit more in response to one of the questions Ted asked about shale development outside the U.S.

So I understand there are challenges—water, geology, pipeline, storage, regulation—all the things you described, but if that looks different, that changes the outlook a lot, a lot more supply, difference in price, why—I was wondering if you could say more about why you think, given how great the world's energy needs are, given how important it is to China for pollution and other reasons to find alternatives to coal, why these countries, with the help of Exxon and Chevron and Schlumberger and all the rest, why is the U.S. so special? Why do you think these other countries are not going to figure this out?

It'll take some time. It'll be a little more costly. But why, looking out 5, 10, even 15 years, I'm wondering why the IEA doesn't think they're going to somehow figure it out?

BIROL: Now, first of all, I don't say that U.S. is special, first of all. I did not say that. What I want to say is that, in the United States, you have an oil and gas industry which has a history of 100 years and you have the—all the industry know-how, geology, data, everything, capital, everything is here.

In those countries, they're just starting, and if I have to distinguish Europe and China, we have more hopes to see in China a growth in shale gas, but this is a matter of technology, capital, government policies, geology, and economics of it all coming together. We don't see this happening before 2020. After 2020, this will come, this will contribute. And in terms of China, for example, we expect China will more than 150 BCM they are going to produce shale gas, which is very good news.

But what I'm saying is, this will not be a game-changer for the global gas markets. Today's share of gas in the Chinese energy mix is 4 percent compared to many countries which is about 25 percent, 30 percent. So if China has gas, China will use this gas at home to replace coal, China will never be like the United States or Russia and the others, will be a major gas exporter. Definitely it will help, but I do not expect that China gas exports will be as important as the United States', as they have to use at home most of them. China is today a gas importer, and will be more of a gas importer next years to come. It will perhaps help to reduce the imports.

U.S. is not special. U.S. has a history, capital, technology and data already in place, and in these countries, there is a time lag coming on. In Australia, very good news. Australia will come with the shale gas, will export, but the amounts will not be as big as the United States.

QUESTION: Thank you. Allen Hyman, Columbia Presbyterian Medical Center. Some might be surprised that you never mentioned OPEC in your presentation today. And years ago, people were focused on what was happening in Vienna every year.

BIROL: Yes.

QUESTION: Has OPEC lost its ability to control the price of petroleum these days?

BIROL: So, first of all, let me tell you that before working for the IEA, I worked six years at OPEC secretariat. Thank you very much for asking this question.

(LAUGHTER)

And I learn a lot when I work in OPEC. Now, of course, when we look at the next 10 years, the amount of oil which will come from the Middle East countries, OPEC countries will be less than what we have seen in the previous years. There are a couple of reasons for that.

One, I mentioned the U.S. oil is—shale oil is growing very strongly. And, second, Brazil oil is coming very strongly. And the—because of the financial crisis, the oil demand is a bit slow compared to previous years. And, plus, there is one country which in OPEC, which will—where we see a significant increase and not from the others, which is this country—this is Iraq. Iraq will make a major contribution the next 10 years, and afterwards we will see hopefully other countries to contribute to that.

Now, I believe Vienna is still a very important city. The decisions which will be made in Vienna will definitely have implications for the global oil markets. But it is also very good to see that there are more and more producers bringing oil to the markets, providing more diversity in the global oil markets. But once again, the low cost energy is in Middle East, and we shouldn't forget that in the future we will need Middle East oil, perhaps not in the next few years, but after that. And in order to not to close (ph) for after that, we have to give the right signals to the Middle East producers.

ROOSEVELT: Yeah.

QUESTION: Thank you. Lucio Vinhas de Souza. I am the chief economist of Moody's, the rating agency. Question about Europe. You can make the case that in some European markets, because of the policies of the union, you have a glut of renewable energy, specifically on electricity. Is this sustainable? Is there something that we would change prices in the European Union, namely on electricity?

BIROL: I think this is also another very good question. Now, when you look at the European electricity prices, again, there is an incredible increase—in the last 10 years, European electricity prices increased 2.5 times in real terms. It's amazing, an increase 250 percent in the last 10 years. And there are three reasons for that.

One is the increase in the gas prices, as gas going as input to electricity generation. Second is the strong support from governments in terms of renewable subsidies, about $60 billion renewable subsidies are going to the renewable electricity generation, and it ends up higher electricity prices. And, third, in some countries, they said goodbye to nuclear power, which is replaced by the other forms of energy, which are in some cases more expensive.

So as a result of that, we see today in Europe I wouldn't say panic, but almost a panic in terms of high-cost energy and its impact on their competitiveness of their economies. And among which discussion now, as our colleague just implied, one of the major discussions in European energy circles is, shall we go ahead with these renewable subsidies? Or shall we reduce them?

And I personally wouldn't be surprised if some governments who are at the same time trying to recover from the financial crisis were to reduce significant amount of subsidies for renewables. I wouldn't be surprised.

ROOSEVELT: Paula?

QUESTION: Thank you. Paula DiPerna, NTR Foundation. Back to Paris. Speaking of subsidies and the fluctuation, regionality, and energy prices, I just wonder if you could speculate a little bit about, if there's an agreement that would imply potentially a global price on carbon, potentially regional prices, and so that's the third leg of the stool. So how does a carbon price potentially integrate with the changes in subsidy policies? And who would it do that integration? Otherwise, you have three different trains.

BIROL: I mean, from—first, I'm going to talk as an economist and then as a realist, so there are two different things. As an economist, the best way of reducing CO2 emissions is to put a carbon price. It is the most efficient way. It gives way to using energy more efficiently, cleaner fuels, and get higher market share vis-a-vis the dirtier fuels.

But personally, starting as of 2015, a carbon price I see a bit difficult, but what we can hope—at least I hope—is a transition between 2015 and 2020. Around 2020, we may see a carbon price coming from many countries.

We talk about China, I mean, China and energy and climate. China today is introducing in seven provinces carbon price. In Europe, we have a carbon price. In the United States, in some states, we have a—you have carbon. So this is definitely something very important, because in Europe, many people say, why Europe has to be so at the forefront while others are not doing anything? So it is very difficult to justify the European carbon price to the European people in the cities, in the streets.

So, therefore, the best way is to have a unified—especially for U.S. and China and other places—a carbon price. And I hope in 2015 decisions will pave the way for introduction of a carbon price around 2020. So this will be the perfect way to address the climate change. And I have hopes for that, I should say.

ROOSEVELT: You had a question. Go ahead.

QUESTION: Kimball Chen, Energy Transportation Group. Dr. Birol, in your—what I want to know is, what policy coordination among leading nations in the world could lead to a substantial deviation from your present projections of the world's energy picture? Your models and your most likely cases obviously depend on certain assumptions about economic structures, market structures, and political policies amongst countries. What kind of coordination could be possible that would be a game-changer in terms of the trajectory of both supply and demand?

BIROL: I mean, I mentioned one of them already, and I will tell you another one. The CO2 emissions, carbon price could be a game-changer. It's a policy intervention there. But there is another one coming which we don't talk much, but it goes under the sea, coming to the surface, namely efficiency, efficiency policies.

Now, we—everybody here, there are many much senior than me—we, all the—everybody push that efficiency is important for climate change, we reduce the CO2 emissions, and so on. Everybody push this agenda button, but nothing much happened.

But in the last two years, we see a major push for efficiency policies for the—of the governments. And this is happening in China, in United States, India, even in Middle East countries. But the driver here is not climate change. The driver here is the bringing the costs down. It's a cost concern. Reducing the cost of using energy.

And I believe this is a very important driver, and I believe this can be a way that our numbers, which already incorporate certain amount of efficiency improvements, may well be on the high side, if those efficiency policies are put in place. And I see—especially from China, we may see some surprises, especially efficiency policies, which are based on regulatory measures, then the economic instruments—we may see some efficiency improvements coming from China and maybe later on India, but also in United States. This is very important.

In the United States, just to put a bit of balance, the success story in the United States of the oil import dependency (inaudible) is not only because of the shale oil surge, but at the same time new efficiency standards for cars. We will see the effects of that, pushing the demand down. It's a combination of these two things, and I think this is one of the very important decisions that this administration, the previous one put in place to use cars in a more efficient manner.

So efficiency is the one I would put—or nominate as a game-changer. But no technologies I see will change the game in the next 20 years.

ROOSEVELT: Right there.

QUESTION: If I had a—if I had some champagne, I'd raise a toast to your optimism.

BIROL: Thank you very much.

QUESTION: Bevis Longstreth. I'm from Debevoise and Plimpton. I wonder if you could say a few words about the stranded asset issue. As Carbon Tracker has in their reports, talking about—and coupling it now with your optimism, what—what do you have to say about the stranded assets and the fact that they reported in 2011, I think it was, or 2012 some $674 billion of capital exploration expenses were planned to be spent by the top 200 private companies?

BIROL: Thank you. So, first of all, thank you very much for thinking I'm optimistic man. I really—thank you very much for that. I'm very positively surprised, but this is very good.

First of all, stranded assets is an issue, if we have a chance to read our book, we are the first one who raises issue, assets, especially for oil, gas and coal. What we say is—leave aside the NGOs and anything. What we say is the following. Even—leave aside the climate policy-driven world, just where we are today, with these trends, around 2050, about 50 percent of the fossil reserves will remain undeveloped, even with the current trajectory. Leave aside the 450, I mean, climate policy. If it's a climate policy-driven world, more than two-thirds of the reserves will be undeveloped or stranded.

But here, I think it is easy to say this, but one has to dive a bit into this. Not every fossil fuel is a fossil fuel. They are not the same. Now, about this—about this fossil fuels, almost 80 percent in coal that's—we have to look at it, there are different things.

The share of oil and gas is much, much less, and this is a very small portion of the game. The fuel, which would be negatively affected from those trends, will be mainly coal. And when we say fossil fuels, our colleague said that I am optimist, just to balance out my optimism with a rather pessimistic remark.

I was in—before here, I came here from Norway. In Norway, there was a big meeting, and one of the colleagues—one of the presenters, there was Mrs. Brundtland, the former prime minister of Norway...

ROOSEVELT: Right, right (inaudible) yeah.

BIROL: ... and she made a major report, Brundtland report, 1987, to put the sustainable development first—the first time in the agenda on behalf of the U.N. secretary general at that time.

So in that report, when the sustainable development came, one of the major recommendations was lowering the share of fossil fuels. And since 25 years, everybody tries to decrease the share of fossil fuels for climate change and everything, more renewables, more nuclear efficiency, and so on.

Twenty-five years ago, when this move started, the share of fossil fuels in the global energy mix was 82 percent. And after 25 years, of all these efforts, all the governments, the share of fossil fuels in the global energy mix today is still 82 percent. So I hope I can balance out my optimism with this one, so this is—I don't need to comment more.

ROOSEVELT: Go ahead. I see you.

QUESTION: Thank you. Richard Strother (ph). In the Kurdish area of Iraq, how large are those reserves? Whose capital and technology might be brought in? And what is the geopolitical implication of it being exported either through Turkey or through Iraq?

BIROL: I don't get easy questions here, by the way.

ROOSEVELT: No.

(LAUGHTER)

BIROL: So—now, Iraq has huge resources. First of all, let me talk about Iraq, and I will come to Kurdish part, the northern part of Iraq. And these resources are huge. And I believe—I believe we are still in the beginning, because you have resources and you find resources when you look for it.

During the Saddam period, there was no exploration work. You find something if you look for it; otherwise you don't find it, in normal cases. So, therefore, I believe the resources in Iraq will be even higher than what we have now, which are already very high. And not only that, it is very low cost, the geology is very simple, very easy.

Now, about 10 percent, 15 percent of these resources are in the northern part of Iraq in the Kurdish Regional Government territory. And they have a different way of developing those resources compared to the central government. They provide other conditions, other investment framework, and, therefore, today, the KRG, the Kurdish Regional Government, region is one of the most dynamic basins in the oil industry in the world. Everybody is almost there.

And they can quickly increase their oil production, and there are different ways to export this oil, including through Turkey, but there are some other—they have some other options, but from an economic point of view, the cost point of view, the Turkey option seems to be one of the important ones.

But to be honest with you, if Iraq was to flourish as a result of oil—and all the, in fact, conditions are there—there is a need Baghdad and Irbil, the capital of KRG, needs to work together. Otherwise, it may not end up to the results that we all would like to see.

There is a huge potential in north, but there's a huge potential in Basra, huge potential in Basra. Therefore, the political tensions in the country I see as the single barrier for Iraq to be a prosperous country in the Middle East. According to our numbers, I can tell you that if Iraq could produce our rather modest projections, come to about 6 million barrels per day, about 2.5 today in 2020, 6 million barrels per day, and that increase, the Iraq GDP in 15 years of time will be equal to the Saudi GDP of today. So there may be another Saudi Arabia-equivalent rich country in the Middle East if those political tensions are resolved, and definitely it will be good news for north of Iraq, south of Iraq, and center of Iraq. I think this is the main challenge in front of the Iraq and its neighbors today.

ROOSEVELT: Interesting. Time for one more question, and the lady in the back.

QUESTION: I know we've been talking a lot about oil development and shale gas development in the industrialized world, but you're seeing more and more exploration and development of oil in more environmentally fragile areas, like Virunga National Park in the Congo and in the forests of Ecuador and in the Arctic. I know you're—you always say you're not an optimist and you're a pessimist, but what can be done to try to alleviate or mitigate any kind of environmental impact in these places that have so little protection?

BIROL: I think—to be very frank, I work with many oil companies since several years work, meaning exchange views, discussions, debates, et cetera. I see more of a growing understanding of the oil companies paying attention to environmental sensitivities. They are perhaps not necessarily doing it—maybe some of them—for the sake of environment, but for the sake of their image, they have to do it, because we, the consumers, now reach that level that the companies who are not paying attention to the environmental sensitivities will be—in one way or another may see some challenges.

But today, if I can leave you with one thing, between the climate change and the issue you mentioned, there is one—we have many colleagues from oil companies here. There is one issue that they can help the entire world, namely, today we talk about the carbon dioxide emissions, but there is another very important, very dangerous greenhouse gas, which is methane.

And many of the today, the big companies during the production of oil and gas, they let methane to escape in the atmosphere. And to be honest with you, this can be very easily—with very simple technical arrangements, this can be fixed, this problem. So, therefore, this is appeal to all of them. This year in Davos, in January, we will make this appeal to all the oil executives to be—to be a part of the solution and address their methane emissions to capture them, first to report them and then to capture them, and this would be a very easy solution and very important saving in terms of the economics, because they can use this gas, but more importantly, to reduce the greenhouse gas emissions. It can be a very good service, and, therefore, it can improve their image globally.

ROOSEVELT: Great. Well, please join me in thanking Dr. Birol.

(APPLAUSE)