GLOBAL & REGIONAL KEY ENERGY ISSUES:HOW TO FACE THEM

- Slav Slavov -

WEC Regional Coordinator for Europe & Central Asia

Current Process Status: Driving Forces

• Goals, targets &commitments as defined by:

- Agenda 21;and PFIA21

- UN CSD, 9th session, April 2001

- Johannesburg Plan of Implementation (JPOI)

- UNCSD-14 (April 2006): SG report on progress

- Participation: Governments, industry, NGOs

ENERGY: GLOBAL ISSUES• Access to energy for poverty alleviation

• Integrating of energy for SD into national policies

• Support efforts to improve functioning of markets

• Encourage PPP, to give impetus to energy for SD goals

• Strengthen the role of major groups in policy making

• Promote increased R & D in varies technologies

SUSTAINABILITY: THE REGIONAL DIMENSION

• Regions face different priority challenges: For example:- Access to energy for poverty alleviation (poor countries)- Reducing CO2 emissions (developed countries only)- Internalisation of external costs (western Europe)- Technology transfer (developing countries)

• Conclusion: (1) Developed countries-environment & security ;(2) developing countries- economy & social development.

Key Energy Issues

Enhance security of supplies and reduce further dependency on oil;

Pursue market reforms in energy sector while secure reliability of electricity markets;

Enhance energy efficiency in both, supply and demand sides, with particular emphasis on C/E Europe.

Key Energy Issues

Preserve environment & climate by:- promoting inter alea Kyoto mechanisms;

- promoting market for renewables;

- enhancing R & D on nuclear, oil substitution & CO2 sequestration;

- harmonization of energy tax systems;

WEC AND SUSTAINABLITY

• WEC contribution to this global process:

- World Energy Assessment Study;

- WEC Global & Regional Studies and Scenarios;

- WEC 19th Congress, Sydney, September 2004: Delivering sustainability: Challenges & Opportunityfor the Energy Industry

19th World Energy Congress, Sydney 2004

Main conclusion:

Delivering sustainability to energy sector should be a priority objective. It is achievable but..... challenges are many; and they must be tackled now and urgently if sustainability is to be achieved in this century.

SECURITY OF ENERGY SUPPLIES

• WEC`position on security - AAA

• WEC`Recommendation: Keep all the options openas

diversity is the backbone of a robust, less vulnerable energy system, even if the optimum mix would vary according to the local conditions.

SELECTED KEY ISSUES

• Security of supplies in liberalised markets;Europe`s vulnerability;

• Energy Intensity and Energy Efficiency.

What future evolution?

THE TWO POSSIBLE ENERGY WORLDS

• Definition of a “CONCAVE” energy trajectory: All published scenarios, e.g. WEC-IIASA, shape an accelerating energy demand over time in which “Acceptability” is the binding constraint

• Definition of a “CONVEX” energy trajectory: Still unexplored domain of decelerating energy evolution in which “Availability”, “Accessibility” and “Acceptability” are all binding constraints

SECURITY OF SUPPLIES (1)- the risks-

• Energy fundamentals revert back to 1970s/1980s crises:- volatility of oil prices;- continuous growing import dependency; - growing reliance on one supplier-Middle East;• But under different conditions:- today oil is used in transport sector only;- oil share in Europe`s energy market is less than 10%;- price increases dictated by the market imbalance;

SECURITY OF SUPPLIES (2)- the risks-

• Investment risks & uncertainties persist, as: - full implications of market liberalization unclear; - impact of market opening on contracts (take or pay ?); - longer supply routes and fear of terrorism;

and recent doubts: - oil reached the peak, no spare capacity; - oil & gas might face geological constraints ??? - price escalation of hydrocarbons;

WHAT PROSPECTS FOR OIL

• Peak of the non-Middle-East production reached;

• Maturity of OPEC Middle –East seems also reached.

NON-ME OIL AND TECHNOLOGY

NON MIDDLE-EAST OIL PRODUCTION (MB/D)

20

30

40

50

60

70

1985 1990 1995 2000 2005 2010 2015 2020

Uncertainty

Deepwater

FSU

Others non ME

Annual decline> 1 Mb/day

Sources: PETRODATA & IEA

FUTURE OIL BALANCE?

0

1

2

3

4

5

1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

Gt/y

OPEC Middle-East

Rest of the World

OIL DEPENDENCY ON MIDLE EAST

• 2/3 European oil imports from ME in 2025-2030;• at average, the OPEC- ME fields are 50 years old;• they might produce for many years, but: like Marathonians (unlike sprinters)

• Recent studies (Matt Simmons) show Saudi Arabia could already be mature (confirmation of Hubert curve); and ambiguity about Kuwait reserves;

• Current role of OPEC

- - today oil is used in transport sector only;- oil share in Europe`s energy market is less than 10%;- price increases dictated by the market imbalance;

THE 1973 SHOCK…

US OIL PRODUCTION 1900-2000

0

1

2

3

4

1900 1920 1940 1960 1980 2000

BIL

LIO

NS

BA

RR

EL

S P

ER

YE

AR A growing gap that

OPEC could not fill

WHAT PROSPECTS FOR NATURAL GAS

• Production peak reached in OECD regions;

• Production rise elsewhere with the LNG boom;

• Higher price would limit consumption:tendency to use it in residential & commercial markets only.

OECD HAS PEAKED

NORTH AMERICANGAS PRODUCTION…

RUSSIAN GAS

RUSSIAN GAS

Siberia

DEPENDENCY ON RUSSIAN OIL & GAS

• Europe depends 40% of Russia on gas and 25% on oil;

• Russian reserves move far way from Europe and close to the Asian markets;

• Asian markets are more attractive than Europeans;

• Gazprom seek partners and distribution markets;

• Russia may continue to be a reliable supplier.

- - today oil is used in transport sector only;- oil share in Europe`s energy market is less than 10%;- price increases dictated by the market imbalance;

WHAT PROSPECTS FOR COAL

• Increased use of coal for CTL and power generation;

• Risk of limited use in power generation exist if:

- energy efficiency in combustion stay low;

- CO2 sequestration technology stay late, behind 2020.

Coal reserves are abundant!

2005 IEA VIEW OF WORLD CTL & GTL

kb/d

WHAT PROSPECTS FOR NUCLEAR

U N C L E A R ?but

getting more place in the Energy Agenda

Reforms in elmarket should`n conflict with security

Adequacy and Reliability are the backbone of a modern

power system; Costumers and economy need 100 percent reliability; Disruptions caused by ``brownouts`` and `` blackouts``

imply substantive costs to economy and households; A clear ``trade off`` between operators and regulators; Sharing responsibility for securing supplies in a

liberalised market.

SECURITY OF SUPPLIES

- Conclusions on Fuel Imports -

• Scarcity of resources create supply imbalance and call for large price increases.• The current and future oil price volatility will affect GDP severely, future economic recessions might be worst than previous.• Oil price volatility lead to price increases in other fuels, but mostly of gas, making it less competitive.• Current policy and market tools do not support investments neither in upstream nor in energy infrastructure. • Europe becomes more dependent on imports and vulnerable in infrastructure;• Energy crisis lower GDP growth and energy intensity.

World Energy Intensity

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025

1973

The world energy intensitywas constant (set to 1,0)before the first oil shock

and declines after

SECURITY OF SUPPLIES - Conclusions on Fuel Competition- • Oil price increases affects differently other sources:• fossil fuels might reduce gas market share; boost coal use and non traditional (synthetic liquids, coal gasification);

- speed up R &D on hydrogen and CO2 sequestration;• nuclear: re-consideration of policies; speed up R &D on technology & waste storage;increase the market share;• RES: Increasing the share to the possible extend;• efficiency: Ease investments for further improvements

• Investment risks & uncertainties: - increasing the share of production outside Europe; - impact of market opening ( take or pay ?);

• Longer supply routes and fear of terrorism;

• Full implications of market liberalization unclear;

and recent doubts:• Oil might face geological constraints ???

• But under different conditions:- oil share in energy (Europe) is less than 10%;- price increases dictated by the market de-balance;- oil production reached the pick, no spare capacity;

SECURITY OF SUPPLIY- Conclusions on internal market-

• LIBER shifted responsibility to market, but barriers still exist to become fully competitive;• LIBER confirmed a higher level of energy service, and management, perhaps lower costs (?) but not lower prices. Some disadvantages:

• The market remain national;• The role of stakeholders not well defined;• Uncertainty about security of supply (disruption);• Reserve capacities declined, in generation and interconnections, investments are rather cyclical.

therefore• Markets require new policy instruments (cost-effective) to manage risks and cover costs of disruption;• In electricity, reliability contracts and capacity markets prove to be most effective, for ensuring adequacy and reliability of market operation;

What is needed to enhance security of oil & gas supplies

- re-defining policies, in view of recent circumstances;- assess & increase if needed, by regulations the emergency stocks, in particular that of natural gas;- encourage diversification of supplies & accelerate development of strategic projects (Nabuko?);- ensure conditions & support partnerships with upstream supply companies (Gazprom?);- encourage a regular dialogue (on policy & company level) with suppliers and neighbouring ``energy corridors``countries.

What is needed to enhance security in electricity market

• First, more transparency and harmonization is needed;

• Markets require some new policy instruments (cost-effective) to manage risks and cover costs of disruption; (Re-consideration of the Directive ?)

• The market should be more encouraged to invest in security: reliability contracts and reserve capacity could be effective market instruments, for ensuring adequacy and reliability of market operation;

What is needed to reduce EURO-dependency on import

- Main directions formulated in the ECnew Green Paper;among which:

- policy of fuels substitution; increase the share of RESby policy and market tools (Renewable Energy Road Map);

- enhance EE in energy supply & demand, in particular in the new members (with 20%by2020).- launch a public debate on nuclear;- Finance R & D in CO2 sequestration & nuclear.

- re-considering each energy mix and min. quota for

SECURITY OF SUPPLIY- WEC-Europe contribution-

• WEC is carrying out two regional studies, namely:1. Vulnerability of Europe to Energy Crises; and2. Future of Nuclear power in Europe.

• WEC & EC cooperate on this issue:annual seminars.• Joint EC-WEC Seminar on Security of Supplies

(Brussels, Friday 30 June 2006)under the chairmanship

ofEC Commissioner: Mr. Andris Piebalgs;

andWEC-Vice Chair Europe: Mr. Pierre Gadonneix

Global Energy Information Service