World Energy Outlook 2012

Thursday, November 29, 2012

Fatih Birol, chief economist at the International Energy Agency (IEA), explains findings in the IEA's flagship publication, World Energy Outlook 2012. The report presents authoritative projections of energy trends through 2035 and insights into what they mean for energy security, environmental sustainability, and economic development.

GARY ROSS: Good afternoon, everyone. Let me first, before I introduce our distinguished guest, go through some housekeeping measures.

Welcome to today's Council on Foreign Relations Meeting with Faith Birol -- or Fatih, rather, Birol, who is the author -- the major author of the "World Energy Outlook 2012," which was recently produced by the IEA.

In this room, please completely turn off -- not just put on vibrate -- your electronic devices to avoid interference with the sound system. If you'd like to use an electronic device today, please do so outside of the meeting room. And overflow room with a live feed of the meeting is available.

I would like to remind the members that this meeting is on the record. We are also joined by CFR members around the nation and world who are participating in this meeting. We will be hearing from them during the question and answer session.

Let me now introduce our distinguished presenter. Faith -- no, Fatih, rather, Birol, is the chief economist of the International Energy Agency with the responsibility of the organization's economic analysis of energy and climate change. He -- (phone rings) -- there we go. (Laughter.) A perfect example of why we want everyone to shut off their cellphones.

He oversees the annual "World Energy Outlook," which is the flagship publications of the IEA and is recognized as one of the world's most prominent experts on energy analysis and projections. He's also a founder and chair of the IEA energy business council, which brings together leaders of government and the largest energy companies and policymakers around the world to discuss challenging issues.

He has an array -- a huge array of awards that he's received. I'm not going to take you through all of them, but he's chairman of the World Energy Forum's Energy Advisor Board and has been a member of the U.N. secretary general's High Level Group on Sustainable Energy. He's been awarded the Order of Merit of the Italian Republic; in Germany, the Cross of Merit; in France, United States, Turkey, Dutch, Poland -- he's been awarded. He's quite an impressive -- awards that he's received for his expertise on energy and I think probably also, in part, his public -- great public service.

So with no further ado, let us begin. And thank you for coming here today. It's really an honor to be -- to be presiding over this event with you. In this report -- which is massive, 668 pages to be exact -- (laughs) -- it lays out a number of scenarios. So I think it would be worthwhile to start by introducing the scenarios, but focusing a bit more on the most important one, the central one. And what are some of the key assumptions?

FATIH BIROL: So, first of all, thank you very much, Gary, for presiding this. And thanks a lot of CFR for inviting me. I think 7 years, I guess, in a row to talk with you and to share with you our key findings of the "World Energy Outlook." So the energy work has so many uncertainties on all the fronts that it is -- the best thing is to have different scenarios and different if-what type of approach.

But our central scenario gives couple of messages. I can tell you two, three of them of then we can elaborate. The first one is the fact that the foundations of global energy system are shifting and shifting rapidly. It is driven by the unconventional energy revolution in North American, also Australia. But at the same time, what is going on with the nuclear industry, the cut back of nuclear is many OECD countries are creating additional demand for natural gas, renewables or coal.

And as a result of that, we see a new energy picture, which has implications of the relative economic power of different nations -- U.S. versus Europe, China versus Japan. And at the same time, has substantial geopolitical consequences, ranging from U.S.-Middle East relationship to Asia-Middle East relationship and others. So this is one big change in the global energy system.

The second one is how we use energy today means we will have to see a change in the climate in the next decades to come if we continue with this same type of energy use and same type of energy decisions -- so second one. And third one, and I'll stop here, is something that -- which is not very much produced in the -- these types of discussions we have, a key finding of the study, again.

Today, 1.3 billion people -- about 20 percent of global population -- they have no electricity. They have no access to electricity, in sub-Saharan Africa, India, Pakistan, Bangladesh. And despite the economic work worldwide and in those regions, in the year 2035, there will be still 1 billion people -- especially in sub- Saharan Africa, without having electricity, with all of its consequences.

So three findings -- unconventionals revolution implications on geopolitics and international economics, on climate and the energy access. So just to start with.

ROSS:You know, I was just reading the other day that the president said -- of the World Bank was saying that if there's a four degree centigrade increase in worldwide temperatures by 2060 it would be catastrophic.

And I notice that in your central case, you have a 3.6-degree increase, Centigrade, by 2035. Is -- isn't that sort of -- isn't your central case kind of catastrophic?

BIROL: I mean, the results of the case is definitely -- have major implications for our lifestyle now. The world leaders agreed two years ago -- including the U.S. president, Europeans, Chinese and others -- that we have to limit the temperature increase maximum 2 degrees Celsius. And we are far from that. And today there is a international discussion, a meeting, in Doha in Qatar. And you don't -- you barely read anything in the newspapers. The interest for climate change is sliding down in the agenda of many governments. And I think this is definitely bad.

And what does this mean, 3.6 degrees? We will have a completely different lifestyle. It will change: much more frequent extreme weather events, the problem with the sea rise, immigration -- lots of implication. And this is not a -- this is not, as they say, "kinderspiel"; this not a child game. This a real story. This not only a finding of a study; this is a real issue. And the energy sector is in the middle of that because some 80 percent of the emissions which are causing the climate change are coming from the -- how we use energy, how we consume energy.

ROSS:But China -- you didn't mention China. China's the big problem. They're the largest carbon emitter in the world by far.

BIROL: You are right.

ROSS:And you have coal consumption growing in China.

BIROL: Completely right. In fact --

ROSS:How do you -- how do you fix this issue without getting China involved?

BIROL: You are completely right. Let me first of all slightly revise something, that we have one big problem, or perhaps we have two problems -- China and United States. I am sorry to tell you that. So China plus United States make about 50 percent of the global CO2 emissions. If U.S. doesn't move, China will not move. And if U.S. and China don't move, Europeans don't move.

Now, we talk about 3.6 degrees. And you are completely right here: When we look at the future, almost all the growth in emissions coming from the China, India and Middle East. If we were to assume -- as of today, end of November, 2012 -- 20 years, no economic activity takes place in the U.S., Europe, Japan -- we freeze everything 20 years -- if the other countries would continue to use energy as they are doing now, we will be still on our 3.6 degrees trajectory. Nothing will change.

So therefore we have to find ways to make those countries move. And one way of doing -- making them move -- one way is to make some push at home so that it will also push them to go ahead. But to be honest with you, looking at the current international climate policy debate now, I don't have huge hopes that there will be a -- very soon an international legally binding agreement worldwide -- which is a -- I believe a pity.

ROSS:In the report, you have renewables taking -- like, 50 percent of the growth in electricity demand is provided by renewables. And that's sort of a very European kind of centric thing. They've been very successful in growing solar and wind power. I mean, are you assuming that -- and this is what you're assuming for the world -- so are you sort of suggesting a huge amount of subsidization that's going to occur globally? And how much money are we talking about?

BIROL: Now, if you look at -- (inaudible) -- to focus what happened in the last five years, in last -- in the last five years, despite the shale gas and everything, about 47 (percent) -- almost 50 percent growth in electricity generation came from renewables. And these are real data -- what happened in the last five years, 47 percent. And this is not only wind and solar but hydropower in many countries.

And when you look at the future, we need renewables because of addressing the climate change. But in order to get the renewables to see the light of the day, there is a need for government support. Without government support, renewables cannot compete with the traditional energy sources. Today there is about $88 billion subsidies on renewables worldwide -- $88 billion. The largest country who gives subsidy is United States, followed by Germany and other European countries.

But we shouldn't forget -- that's 88 billion (dollars), but we have today over half a trillion dollar of subsidies for fossil fuel consumption -- the oil, coal and natural -- that is for the consumption at the pump. So if you want to look at renewable subsidies, we may want to look at also the fossil fuel subsidies, especially emerging countries -- which gives a boost to Chinese consumption, Indian consumption, Middle East consumption, because if something is very cheap, we use it in a wasteful manner. And it is very cheap in those countries, and -- which gives very strong growth to the energy demand -- among other reasons -- a key driver there.

ROSS:So how much money are we talking about to -- for half of the growth in world electricity demand to be met from renewables? How much additional money is going to have to be spent to subsidize this industry?

BIROL: I think when we look at the future, we -- if we want to see that happening, each year more than $150 billion needs to go to renewable subsidies.

And I have to be frank with you, I see many governments in the world are giving a second look at the renewable subsidies, especially in Europe, because we have a major problem in terms of our finances in Europe, and they give a second look. So we cannot take it for granted that subsidies -- government support to renewables -- will continue as is now, and renewables seem like they will still need subsidies to grow. They cannot compete, especially with gas and coal, in the electricity generation.

And if you also continue and look at the -- what's happening nuclear power, there is a growing room for natural gas, renewables and others, because nuclear power in many countries -- especially in the OECD nations -- developed nations -- is going down. And for me, unfortunately.

ROSS:I mean, much of the subsidies you talk about in the fossil fuels are residing in the Middle East countries -- the major oil-exporting countries, North Africa. So, I mean, that's probably 150 (billion dollars), 200 billion (dollars) of the -- of the total. So that's not likely to change, is it?

BIROL: Half of it from Middle East and half of it from the emerging Asian countries; you are completely right. We were hoping -- in the year 2010 many Middle East and North African countries wanted to reform their fossil fuel subsidies, but what we have seen after the Arab Spring -- (inaudible) -- start to reforming those subsidies, those subsidies went up, increase significantly. So as a result of that, the -- in those countries -- even in Saudi Arabia, we see a very strong growth of domestic oil consumption, because it's very cheap, and as a result of that, the availability of export of oil is getting less and less because the export of oil is a function of production and domestic consumption. If the consumption grows so strongly because of very cheap prices, then we have less oil for exports. So I do not expect that there will be a major change there.

But let me just tell you one thing about subsidies which I find very interesting, because many governments say that we need these subsidies to protect the poor. This is a main justification, but what we have found out in our study is, out of this 500 -- over $500 billion fossil fuel subsidies, only 8 percent goes to the lowest 20 percent income group; 80 percent goes to the medium- and higher-income levels, so it doesn't help the poor, it more helps the medium- and higher-income levels.

ROSS:The -- you know, that penetration of renewables should sort of throw off quite a bit of gas -- natural gas to be used in other -- in other end uses, and it doesn't seem that you're growing natural gas all that rapidly in the transportation sector where it can compete with oil. So I'm curious your take on that.

BIROL: Natural gas -- there are different natural gas stories. What we see in U.S. and Canada is a bit different in Europe, in -- or in Asia-Pacific. So in Europe, natural gas prices are five times higher than United States, and in Asia-Pacific, eight times higher than United States, the prices. And just -- we should remember that only five years ago -- not much -- five years ago, in these three regions, natural gas prices were more or less the same -- only one dollar difference perhaps. And in five years of time, Europe five times higher and Asia-Pacific eight times higher. If it is so -- prices are so high even though gas will penetrate the markets very strongly, the high prices is a major handicap in many cases.

So we see a golden age of gas -- we are in that -- but in order to see beyond North America a huge penetration, we need to see gas prices of low gas price in the United States and the gas price in Europe and Asia-Pacific to converge a bit to give more room for the growth. In Europe, for example, there is something happening very, very unusual because of what happens in United States. It is the following: if I made a -- if I would -- made a survey here in 2011, where do you think the largest growth of coal consumption took place in 2011? Everybody would say China is number one -- agree on that.

But number two in the world, where the largest growth of coal came from in the world, is Europe -- 7.2 percent, which has never been the case in the last 40 years. The reason is the following: in United States, shale gas penetrated the market -- electricity generation -- and coal went out. That coal which went out of the U.S. markets came to Europe, crashed the coal prices and with the high oil -- high gas prices which are indexed oil prices in Europe, there is a big difference between coal and gas, and people started to use coal in Europe.

And the point of departure is what happens in United States, because the cheap coal came to Europe, and in Europe, we have 7.2 percent growth of coal consumption last year, which has never been the case. So the cheap gas in the United States is good news for U.S., but it does not necessarily mean cheap gas for the rest of the world, but we still see a 50 percent growth in the next 20 years of the global gas demand.

ROSS:Won't there be great pressure to break that link between gas and oil, which is particularly strong out in Asia, and even Gazprom and Russia is holding onto? I mean with all -- with U.S. now going to have LNG exports --

BIROL: Yes, exactly.

ROSS:-- and all the excess LNG -- the incremental LNG coming elsewhere? So is this oil-gas link going to break?

BIROL: Yes, I think what happens now this year, especially with the shale gas showing that it's a consistent growth there -- unlike some traditional export -- traditional gas exporters expected, there's a strong growth there -- we are entering to the start of the end of the oil index gas pricing.

United States gave a precious gift to Europeans, deliberate or not -- I don't know if it's deliberate, but they gave very, very nice present to Europe, because Europeans now can negotiate with the traditional gas exporters, with the -- about the prices. Because there are other options now; instead of only one major gas exporter, there are other things coming on. The U.S., as you said, will be soon a gas exporter. From Asia, Australia is coming as a natural gas exporter, and many countries we thought would be a gas importer don't need any more gas imports because they are producing themselves. So therefore, I expect that there will be a change in the gas pricing sometime soon.

And already, some countries in Europe, they have successfully negotiated with gas (problem ?), because of the station and brought the gas prices down -- Poland, Germany, Italy, they have very handsome benefits from that (station ?).

ROSS:If I could swing a little bit to the oil market, and maybe -- you have a hundred pages in your report on Iraq, and Iraq accounts for something like 40 percent of the incremental oil supply growth between now and 2035 --

BIROL: That's right.

ROSS:-- 40 percent. I mean, you have numbers that are way higher than most other forecasters in terms of potential Iraqi production. I mean, I can see where the below-ground assumptions are quite clear, but what's going on above ground that makes you so confident to think that Iraq's going to be so stable to see growing production every year up to levels that, you know, people would think are sort of unlikely normally?

BIROL: So in the World Energy Outlook every year, we focus on a country. Last year, it was a major work on Russia and this year on Iraq. We have been visiting Iraq several times, Baghdad, Erbil, Basra, working with the Iraqi government, but also with the companies over there, American companies, Japanese, Europeans and the others. What we say is that today, Iraq produces about 3 million barrels per day; in 2020, this would go around 6 million barrels a day, doubling. And this is 50 percent lower than the government targets, 50 percent lower than government targets, which is based on the contacts with the international oil companies they already made.

So Iraq produces oil about 13 times cheaper than the oil sands in Canada, 11 times cheaper than in Russia, so I can go on like this. But as you mentioned, there are political problems, and the biggest political problem in Iraq today is there is not a consensus between Baghdad and Erbil, the Kurdish Regional Government. And there is no single hydrocarbon law that everybody pays attention to. If this problem is solved, there are some technical issues that -- in terms of pipelines, export capacity -- they will be solved as well. And I am confident that Iraq will be a crucial country in the next years to come in terms of global supply.

Iraq is a bit different than many other countries in the region. And I'm not talking about the geological difference, but I'm talking about the very fact that Iraq is a country where the international oil companies can go and invest, whereas some of the neighbors of Iraq, it is by law forbidden, by constitution forbidden, the international capital to flow in.

Second, Iraq as a country is run a bit differently than the -- some other countries in the region. So this gives us, at least to me, a hope that Iraq can play a significant role in the next years to come in the region, and in the world, huge potential.

ROSS:And you're assuming that potential is realized.

BIROL: We will assume this potential is realized in a (factional matter ?). If the -- if there was tomorrow a political consensus in Iraq, if this particular problem is solved, I think our numbers would be on the lower side. Our resource number -- I don't want to go into detail -- but resource number in the book, I can bet -- I can bet with you that in two years of time, those numbers will change, and change upwards. Because in Iraq, years and years, during the Saddam regime, there was almost no exploration work. Nobody looked for oil. You find something if you look for. If you don't look for it, you cannot find it. So therefore, now the (exploitation ?) work has started, and those resource numbers will go up as a result of those new activities.

But a big challenge is an agreement between Baghdad and Erbil. This needs to be done, and I think not only the many wise men and women who are trying to make this happen, but also international community is pushing the different parties there to come together and have a consensus.

ROSS:The only thing I'd say is recently, if anything, the companies -- the major companies have been running away from Iraq, going up north.

But today about 80 percent of the production is coming from the south of Iraq around Basra. There are four supergiant fields there -- coming from there. But north of Iraq is one of the most active petroleum basin in the world in terms of exploration, and the companies -- many companies are going there.

There are, of course, differences between the government and the companies. I don't know who is right, who is wrong there. But I hope they will find a -- they'll find a solution which is good for the companies, good for the Iraqi government, but most importantly, good for the Iraqi people, because Iraq -- today in Iraq we talk about so much energy resources. But the -- an average Iraqi citizen gets eight hours of electricity only, which is a shame -- that they have so much oil and gas. And therefore I believe with increasing revenues, they will get power plants which will have to reconstruct the country and give a better life to the Iraqis.

ROSS:Another place where there's a huge amount of oil which is known is in the United States. I mean, we have shale crude in the United States. Some people estimate -- and we know it's there because it's the original source rock for the conventional oil that was exploited for a couple hundred years. And there are some estimates that are -- you know, that there's a trillion to a trillion-and-a-half barrels of a resource -- source rock in the United States alone.

And I noticed in your report that you're only assuming 3 million barrels a day plus production by 2025. And we think, actually, that by the end of next year, production will be 2 million barrels a day of shale crude. And based on your price assumptions, which are -- have ever-rising real prices, there's no reason to think the economics of shale crude will not be phenomenal, that you'll see massive expansion.

So the question is, one, why do you have such a low production? Why is your recoverable reserves -- that you're assuming only 35 billion, when in fact -- that -- which is -- you know, 35 billion of 1.5 trillion is peanuts. You know, why isn't it higher? And why wouldn't that -- can't that be a lot larger than what you're assuming?

BIROL: So we are -- we are concerned with the (institution ?), when it comes to the reserves numbers and so on, to be on the safe side. But even our numbers show, as you might have read in the papers -- we say in World Energy Outlook that in the 2017, only five years from now, United States will be the largest oil producer of the world, overtaking Saudi Arabia -- in five years of time. And this is mainly as a result of what is happening with the tight oil. But the numbers we have, which are proven reserves, are good enough to go off to -- up to 2020. And we see a slowing down afterwards. If there are new resources proven, then of course our numbers will be on the lower side.

Another problem with the tight oil -- I am sure you know these things much better than -- (inaudible) -- the tight oil fields -- wells have a -- very deep decline rates. And in order to keep the production going up, like the bicycle, you have to always turn the -- turn the pedal, which requires a lot of investment, lots of efforts. So it is not like the -- some other fields, like Iraq, for example -- you drill it, and it -- the oil comes out. It's a bit different type of story. And it requires a certain level of process. But still we see significant growth in the U.S. oil production, which makes U.S. the top oil producer of the world in five years of time, overtaking Saudi Arabia.

Of course, Saudi Arabia remains the largest exporter of the world. This is something else, largest exporter; but U.S. being the largest oil producer of the world. But I hope you are right that it is even higher than that. But we are on the -- on the conservative and careful side.

ROSS:Fatih, I think we're going to -- it's time to open up for questions, if that's all right with you.

At this time I'd like to invite members to join our conversation with questions. Wait for the -- please wait for the microphone and speak directly into it. Stand; state your name and your affiliation as well. And please limit yourself to one question, and keep it concise to allow other members to speak and ask questions. I'd like to remind national members to email their questions to

So with that, we will open it up to questions. And -- yes, ma'am.

QUESTIONER: Nina Gardner, Strategy International, sustainability adviser to ENEL. Fatih, I've heard you for 10 years now; I'm a real groupie. And this is the most dire prediction on climate change that you have ever made, packaged with all the other numbers. What would your advice be to the people in this room who are investment bankers, who represent oil companies, think thanks, academics, to do -- because 3.6 percent -- degrees higher is not sustainable.


QUESTIONER: And I also wanted to ask you whether -- what is the exact number for the fossil fuel subsidy in the U.S. vis-a-vis the renewable subsidy in the U.S., and how quickly you think we can get there in terms of phasing out the fossil fuel subsidy? Thank you.

BIROL: One by one, or?


BIROL: OK. So this is -- let me start the following: We look at the fossil fuel subsidies on the -- on the consumption side, on the pump station or electricity use and so on. In the U.S. and other countries, fossil fuel subsidies, if there are any, are more on the production side. But let me tell you one thing about the fossil fuel subsidies, for me fossil fuel subsidies is the number one public enemy of the fight against climate change.

Why? Because the following: We talk about the carbon price, for example -- carbon tax, carbon price, $10, $20, whatever it is. Why? Because if you put that price, it will provide a disincentive for people to use fossil fuels -- $10, $20. This $520 billion means an incentive of $110 per ton of CO2 to use more carbon. So $110 per ton of CO2, you give a -- you give an incentive for the people to use more fossil fuels and to increase the carbon -- (inaudible) -- emissions. And this compares with the very rich efforts in Europe and elsewhere to try to put 10 (dollar), $20 ton of CO2 carbon price to reduce the -- for the disincentive for carbon.

Now, what shall we do? To be honest with you, when I look at it worldwide, I am getting less and less hopeful because of the following: The more we wait, the costly it will be the fix the climate problem. The more costly it will be, the more difficult it will be to have an agreement among the countries in the world. And the longer it takes to have an intelligent agreement, the more costly it will be. So the saga continues because we are looking in the infrastructure today -- power plants, factories and so on -- which are run basically by coal and other fossil fuels. And it will be very difficult to change that later on.

So my only hope today when I look at what kind of instruments we have to address the climate change, renewables are going difficult times, the nuclear power is going down in many OECD countries, and other technology, carbon capture and storage, but that is fading away. The main instrument we have today is energy efficiency. If we can push the energy efficiency button, this could definitely help us at least to buy some time, perhaps, to get the other technologies in place.

So my suggestion here -- to the colleagues here, to look at the energy efficiency options worldwide. And the U.S. government -- in fact, the first Obama administration did an excellent job in terms of introducing the CAFE standards. And as a European, I would say finally and -- (inaudible). And this is a good first start, but we need to see the efficiency implements in U.S. and elsewhere along the same lines.


QUESTIONER: My name is Andrew Gunlach, Arnhold and S. Bleichroeder. I'd like to hear you compare a little bit the cost structures of world energy and also bring in the demand picture. This year was really -- if we knew a year ago what demand would have been this year, we would have all thought energy prices were much lower, but supply was even worse, right? But some people say that this country, the United States, has the lowest cost of oil in the world and it's only the subsidies in the Russia, in south -- in Saudi Arabia that make that oil so expensive to produce. What are you thoughts on that?

The second thing is driving miles here are not going up. Standards are improving. Who knows what'll happen with trucks and diesel. But we're not in -- just look at our pipelines, there's no volume growth on any of our refined or crude pipelines, right? So where's all the oil going? And you -- alluded to earlier was your rising price of oil, but you need demand for that.

BIROL: Now, in terms of cost, our analyses show that today the -- for example, the tight oil, if you're talking about that, it is definitely more expensive to produce that compared to, for example, Iraq and other Middle East countries. There's an order of magnitude of difference.

But with the current prices we have, they provide a very nice profit to the investors. There's no problem from that. OK, with the current prices, when you look at it today, we produce about -- close to 90 million barrels of oil worldwide. There's not one single drop of oil that we cannot produce at the prices we have now.

But U.S. -- the tight oil is a bit on the higher side, such is the -- for the offshore production in many countries because technology requires higher cost, whereas in Middle East, geology is much easier and therefore lower costs. And your question -- second question is very well formulated. Where will this oil go -- the U.S. oil? So I think U.S. will still need oil to meet the demand, even though demand will be declining. But it will be less and less.

In terms of natural gas, I think U.S. will need natural gas at all, but I believe there are options and advantages of also exporting natural gas. And in terms of oil, if U.S. is going to export oil or not -- this is definitely, among other things, a policy issue -- but I see that this may well be an important question in front of the U.S. policymakers sometime very soon, to see pluses and minuses there. It may be coming sometime very soon, this question.

ROSS:It's interesting; they just -- on Wednesdays an industry report is released for the U.S. market, and it shows supply and demand. And this week, the latest four-week average U.S. crude oil supply is up a million barrels a day over last year. So it's not that U.S. supplies -- it is indeed growing very rapidly and will continue to grow because of these shale developments.


QUESTIONER: I'm Gerald Pollack (sp).

In the United States, there's been a great deal of opposition to fracking to extract natural gas, and there have been well-publicized problems associated with it. To what extent are these problems inherent in the process, and to what extent are they the result of technical deficiencies in the processes employed by the companies involved? And can those deficiencies, to the extent that they exist, be rectified?

BIROL: I imagine two years ago, we made a report: Are we entering a golden age of gas? And the answer we said is yes, but we can see a golden age of gas if there's a major growth coming from the unconventional gas, shale gas. And the very obstacle to see a big growth in terms of shale gas is the concerns related to the production -- extraction of shale gas.

And I can tell you that some of those concerns are legitimate concerns as a result of some of the operations here and there made. So what we have done is that we make (annual ?) report because we thought that the -- if the industry would like to see a golden age of gas, they have to apply golden rules to their way of producing and extracting shale gas.

We look at the issue of water, issue of chemicals, issue of implicates (sic) on local communities. And what we have found out is that with the existing technology -- no need for new discoveries -- with the existing technology, if the right regulations are put in place and the operators followed those regulations -- and we made a list of them -- with a bit higher production costs -- the additional investment which we have calculated to be around 7 percent additional cost -- you can minimize most of these problems, if not nullify them, including the flaring of methane.

So -- but this has to be done in a proper manner, because some of those concerns were legitimate concerns. And I think the shale gas industry needs to get a social license to operate. And this can only happen if they make the production of shale gas, extraction of that, in a proper manner, in line with the regulations and the rules that we and others have prescribed.

ROSS:The others -- actually, there's a related question from Susan Kaufman at Purcell -- Susan Kaufman Purcell at the Center for Hemispheric Policy. She's asking, what are the chances Obama administration, especially the EPA, will heavily regulate these activities, making it impossible for the U.S. to surpass Saudi Arabia as the largest oil producer in the world in a couple years?

BIROL: I think in terms of oil production, I do not see a major problem in terms of the environmental issues. The -- what needs to happen is that a responsible way of continuing of shale -- shale oil production, and with the price levels we have, we will see in five years of time -- again, once again, our numbers are much less bullish than many others. We will see -- United States is going to overtake Saudi Arabia and will make giant steps towards self-sufficiency or independence or whatever you say.

I should also add one thing here: The self-sufficiency issue is not -- as many media reported after our book came out -- not only is a result of the growth in the shale oil production, but at the same time, again, is a result of the slowdown of the oil demand mainly driven by the new CAFE standards. And as a colleague just asked there, the demand will be less in the future and the production will be higher as a result of that the imports will be much less compared to today. So there are two legs of that. One success story is -- what happens in North Dakota, and the other success story will come from Detroit.

ROSS:We have a question from Arnold Baker at ABB Consulting in Albuquerque, New Mexico, and it's a very interesting one.

Why do you think that most energy analysts missed seeing the emerging shale gas and oil revolution, and what major thing or things do you think we might be missing now about our energy future?

BIROL: So, Arnie is a good friend of mine, and I should tell him that four years ago, again, even here -- I imagine there was a podium here on the right-hand side -- at that time I was allowed to show some slides. One of my slides was, there's been a silent revolution is taking place in the United States in terms of shale gas, that we have indicated. And this silent revolution became very large and beyond United States.

So what can happen in the future, (another ?) prediction? I would be -- I will be surprised if we see China is realizing something similar to United States in terms of shale gas. They have the resources, and they have a government which pushes the shale gas production substantially -- significant amount of subsides in China for shale gas production. But of course, in terms of technology, investment framework, very different than U.S. conditions, but this, if I have to give a suggestion to Arnie, it is a -- we may want to look at on the production side shale gas and China.

On the -- on the consumption side, perhaps, again in United States, we may well see sometime soon natural gas being used in this or that way in the transportation sector replacing oil products. So this may be another, how shall I say, prospect that I wanted to share with you.

ROSS:Doesn't China seem to want to be husbanding their shale gas for transportation use and --

BIROL: Currently, it is so small in the U.S. The -- for example, in the OECD countries in general, natural gas is a shale energy mix about 25 percent. In China it is only 4 percent now and is mainly used for the electricity generation. I think they will first use shale gas for the electricity generation to reduce the coal, because in China the main driver for shale gas is energy security, but also reduced coal consumption to address the environmental problems, not climate change but mainly because of the local pollution issues. So I think it will come later, but the first phase of China using gas will be more on the electricity generation side.


QUESTIONER: Gary Sick, Columbia University. I -- many analysts think that we actually have -- pay a premium for the price of oil, especially the oil coming out of the Middle East, because of the threat assessment and that many people believe there's going to be some kind of a closure of the Strait of Hormuz or there's going to be a fight in the region or that even somebody might invade Iran. I mean, this is something that the Iranians at least take very seriously. I wonder if you agree with that, that there is a premium that we pay that -- above and beyond the demand side that, in fact, we pay more than we need to and whether your figures take any of that into account at all in terms of what effect it might have, if we should even have an improvement in the political situation in the region.

BIROL: This is a very tough question for international diplomats. So to be honest with you, I cannot go so much detail here. But what I can tell you is the following. In many of the countries in Middle East, the production of oil, one barrel is maximum five (dollars) to $10, which is about one-tenth of what is -- what the price is today. But many of those governments need higher prices to balance out their budget. Break-even -- break-even price today in many of those countries for their budget is between 80 (dollars) to $90. And since those countries are today very influential in terms of the energy price making, I think we will see, I believe, higher oil prices in the next years to come, despite the oil coming from United States. And let's do not forget that another driver of the (might ?) higher or high oil price expectations in the next years is, it is not very cheap to produce oil -- shale oil in the United States. It is a unit, a certain level of price in order to make those investments attractive for the investors. So putting these two things together, in many, many countries in the Middle East, you (need ?) a certain level of oil prices to balance out the budget there for this or that region, plus, in the countries like U.S., Brazil, you need higher prices in order to make those investment attractive. I do not have much hopes as a consumer to see a big drop in the oil prices in the very near future.

ROSS:How did the IEA outlook handle interruptions? Because the history of our business is, while they're unpredictable, they're certain. There's been one every three years for the past 60 years, and in fact, there's been one every year for the past three years. So how did the the -- how did you handle that in your outlook?

We need water in energy sector for electricity generation for cooling the plants. We need water for biofuels, shale gas productions, other fossil fuel production. It is becoming a major issue.

When we look at the future, we see that this 15 percent will increase substantially. And as such, the limit of water will become, our study shows, a critical factor in defining the economic viability of many energy projects. Normally, when we look at energy projects, we look at how much is the capital cost, how much is the fuel cost and other things. But now another factor comes in the picture because of the water scarcity, if there is water or not, and how much does it cost to bring that water? So therefore water is becoming a critical factor.

We were talking about Iraq. One of the major problems in Iraq is to get water pumped into the fields and to get the oil out, and -- (inaudible) -- investments to get the sea water there and to pump into the oil fields, inject them to get -- to get oil. So you are completely right, and we have a specific chapter on this, how important the water will be -- important is not the right word -- critical water will be for the future energy production, electricity and fossil fuels and biofuels.

ROSS:Well, Susan Kaufman Purcell had another question. She asked, why are you so optimistic on Iraq and so conservative about the United States? (Scattered laughter.)

BIROL: It is much cheaper in Iraq to produce one barrel of oil, and in United States, it is still expensive. And in Iraq today, we produce about 3 million barrels per day. And when you compare with the resources that Iraq has, it is completely small peanuts. You thought about the 35 billion barrels, what we have for the shale oil -- these are the resource numbers -- this 35 billion barrels -- for the colleagues to put into context, it is six years of U.S. oil consumption with the current resources.

Well, of course this can grow, but when you look at Iraq -- huge resources. So-- and I am very happy to hear this from two people -- from Susan and from you, Gary -- that our numbers for United States is on the conservative side, because up to now, up to this meeting, I was always -- people told me that we are rather on the bullish side. But I don't know what the Iraq numbers are. But for me, United States -- one of our key findings -- overtaking Saudi Arabia is a bullish number and bullish statement in itself. So I don't want -- I don't know what you -- whom you want to take over, if not Saudi Arabia, to go over. But this is -- I think this is good enough for the United States to go ahead on that. But Iraq -- let's say -- Iraq -- 3 million barrels per day out of almost 145 billion barrels of proven reserves.

ROSS:How about next year you spend more time here in the United States, and you write a special thing on the United States and spend less time in Baghdad, and we'll see what you come up with? How's that?

BIROL: I came United States much often than to Baghdad. (Laughter.) It is -- it is -- it is -- it is definitely much easier in most cases to come to United States -- (laughter) -- than Baghdad. But definitely both of the countries will increase the production, which is good for everybody for the energy security, that both U.S. and Iraq is going to increase their oil production.

ROSS:Fatih, thank you so much for an outstanding presentation. (Applause.) And it's been delightful. And keep up the good work, because it's keeping everyone busy.

BIROL: Thank you very much. Thank you very much.

(C) 2012 Federal News Service






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