Clingendael Energy Lecture
Clingendael Energy Lecture of H.E. Mrs. Maria van der Hoeven, Minister of Economic Affairs of the Netherlands, The Hague, 22 May 2008
"Energy Policy in a Changing World"
Clingendael Energy Lecture of H.E. Mrs. Maria van der Hoeven, Minister of Economic Affairs of the Netherlands, The Hague, 22 May 2008
Ladies and Gentleman,
Developing energy policy is a Herculean task. It is about energy security, efficiency and the environment. These issues are complex by nature, hard to reconcile and sometimes even contradictory.
But to be honest, it makes the position of energy minister one of the most challenging and fascinating ones in the field of public policy today. It is therefore a pleasure to be here and to examine what I see as the greatest challenge, not only for me but for all of us: meeting our worldwide growing energy demand in a sustainable way.
Let me start with a dilemma. There are many disadvantages and risks to our present energy system. Still, fossil fuels provide the bulk of our energy supply. Other, more sustainable alternatives are attractive, but these can only contribute in a modest way. They still have a long way to go before they can compete with fossil fuels.
We all know that our world is addicted to oil and, increasingly, to gas also. In Asia coal makes a large contribution to the energy mix. More than ever, energy makes the world go round. It is indispensible for business and pleasure, for education and health care and for many other industrial, commercial and social activities. And although we use our conventional energy sources a lot more efficiently than before, energy demand keeps on growing.
In the western world growth is moderate, in Asia and other parts of the world we see a hunger for energy, fuelled by robust economic growth. Altogether this leads to a growth of the global energy demand by 50 per cent in the coming 25 years. It will be increasingly difficult to provide the world with enough energy. The low-hanging fruit has been picked already, the world is running out of easy, cheap oil.
It is evident: we need to change our habits. Yet, we all know that changing habits is difficult. We want to "green" our energy use without actually changing our lifestyles. But, in many ways, it would be preferable to make more profound changes, using less energy and also resorting to other sources of energy. People's budget and the environment would benefit and our present scarce resources would have a longer lifespan. That is why the government, working together with many stakeholders, has drawn up an Energy Transition programme. In that context, we have started all kinds of activities to develop ways and means to innovate our energy supply system, to use totally new concepts and techniques and to develop new ways of thinking and acting. However promising these new developments may be, it will take years before they may contribute substantially to covering our energy demand.
In short, the dilemma is: how to reconcile our persisting dependency on fossil fuels with the need to move towards a sustainable energy system.
To resolve this dilemma we need to follow two parallel tracks. We need to invest in sustainability. which means raising energy efficiency and increasing the use of renewables. At the same time, we need to pay attention to energy security, since we cannot do without fossil fuels. And I think they will remain indispensible.
I'd like to offer you three propositions, which I will expand on to explain how I think we can shape a solid and imaginative new energy policy.
Here is my first proposition:
There is enough oil and gas to meet global needs, now and in future
According to the reference scenario of the International Energy Agency in Paris, global energy demand will rise by over 50 % in the coming 25 years. It will be no surprise that China and India together will account for a large part of this growth: about 45%. And, again no surprise: fossil fuels will continue to dominate the fuel mix. Should energy policy not change, this would lead to continued growth in carbon dioxide emissions and an increased dependence of consuming countries on imports of oil and gas, especially from the Middle East and Russia.
I will address the issue of climate change later on; for now I will focus on the issue of energy security.
Recently the price of a barrel of oil reached the level of 135 dollars. I don't know what this Olympic year still has in store for us, but I do know that the oil price has already broken every record. The market is tight and will probably remain so for a number of years. The welcome announcements of Russia and Saudi Arabia on stepping up their production will not change this. What is the cause of this upward trend? I see a number of underlying causes and tensions.
First and foremost, the rising global demand: in China and India, not to mention Middle Eastern countries, and many others, the demand for oil keeps on rising. At the same time, growth in production is failing to keep pace. The reason for that is primarily economic. Less than ten years ago the oil price was ten dollars per barrel. This cheap oil may have been great for consumers, but it also meant that there was no incentive to invest. When prices are low, no one invests in new capacity.
Today we can still feel the consequences:
- there is little spare capacity. Incidents like attacks on Nigerian oil pipelines threaten production, raise the fear of shortages and thus the price;
- there is hardly any equipment available. Oil rigs are fully booked and only available in years from now;
- and, finally, human resources are scarce. People have left the industry when activity was slack and it takes time to find qualified personnel for extra production, new explorations, etc.
So first and foremost there is a tension in the market for oil, and in its slipstream, for gas.
As a second source of tension, I would like to mention the problem of perverse price signals. In Europe energy prices are high because of high crude prices and because of taxes. But in a large number of countries prices are too low to cover the costs of crude oil and refining. As a consequence, consumers have no incentive for energy efficiency. That is why in a number of countries energy consumption is skyrocketing.
The third tension results from the functioning of markets at one hand and the growing role of states and state or national oil companies at the other hand. Of course no one disputes the fundamental and sovereign right of countries to decide how to exploit their mineral resources. But by making a strong coupling between the state and the energy sector, investment decisions tend to become more political instead of reacting on the demand for oil and gas. This may easily lead to deferred investments and thus stagnating or even declining production.
This, and that is my fourth point, leads to tensions between producer and consumer countries. Today, as in the past, consumers ask and sometimes even demand rising oil production. On the other hand producers maintain the view that the market is fully supplied with oil and that there is no reason to enhance production. By the way, the fact that Saudi Arabia implements its ambitious investment plans to step up its production shows that some producers do see that there might be a problem with supply in the near future.
There are two other tensions, the one between growth and environmental protection and the other between energy production and food production. Regarding the latter I would only say that we should take care that alternative fuels like biofuels do not harm the food supply. From what I have heard and read I do not get the impression that the present and sudden surge in food prices is caused by the production of biofuels. But I am no expert and we should really closely watch what is going on in this field. In any case it is good news that several companies are developing the second generation biofuels, produced from waste and non-edible parts of plants.
I will come back later to the environmental issue.
In summary, it is important to bear in mind that the present tightness of the market is not the consequence of an absolute shortage of oil and gas reserves. For the coming decades there are ample reserves of conventional and unconventional oil and gas. For coal the proven reserves suffice for about 200 years. However, due to earlier price drops and uncertainties, the investments have been too low to be able to anticipate on the current growing demand, resulting also to strains in the coal market.
The IEA estimates that from now until 2030 a global cumulative investment of 22,000 billion dollars is required worldwide. This figure defies all powers of imagination, but taking into account the global GDP and the fact that we are talking about a 25 year time span, the annual required investments on average are only a few percent of world-GDP. This should not be prohibitive amount.
Nevertheless, for a number of years now, the IEA has been voicing its concern because investments are lagging behind, resulting in problems in the medium term. Properly functioning markets and more economically driven investment decisions would make the difference.
More opportunities for international oil companies to form joint ventures and to invest in producer countries would certainly help as well. I want to encourage companies from producer countries to invest in consumer countries too. Investing in each other's economies will strengthen international economic cooperation. I am convinced that this would improve opportunities for pragmatic and businesslike cooperation. Both parties could achieve a good return on investment and what is equally important: exploration and production, especially from more complex reserves, would certainly rise, thus helping to solve the tightness of energy markets. I am convinced that such an approach would be beneficial to all: producers, consumers and national and international oil companies.
The need for international economic cooperation leads on the my second proposition: national and EU interest reinforce each other.
In the leading Dutch financial newspaper (Financieele Dagblad) the Secretary-General of the International Energy Forum, Noe Van Hulst, said: "There is no such thing as a national energy policy". I could not agree more, my examination of the international energy situation confirms this.
The import dependency of energy consuming countries will increase. Let me give you an impression:
- Import dependency of the EU for oil was at the beginning of this century about 75%, in 2030 the EU estimates it to be 92%, an increase of 20%.
- As for gas the growth of import dependency will even be larger: from 48% to 80% in 2030, a rise of almost 70%.
This gigantic shift is caused by the continuing growth of gas demand and by the depletion of indigenous reserves, the Dutch reserves included. In about 15 years our country will become a net importer.
It will take us some time to get used to that:
- Financially, because the state budget will miss out on about 10 billion euro's per year and for the consumers because the gas price will rise, at the very least because of the distance the gas has to travel.
- Most of all, our country will have to get used to the fact it will no longer be untouchable: worries on the world's gas security problem will in future also be ours!
Greater import-dependency will inevitably lead to more interaction and growing trade flows worldwide. International contacts on energy will grow. Examples of international cooperation include the International Energy Forum and the International Agency, which is an organisation of OECD and thus consumer countries. The IEA is deliberately reaching out to other non-member countries like India and China, and seeks cooperation with OPEC and its member countries.
A major question is whether this multilateral cooperation will survive the resource crunch, whether it will survive in a world with a strong competition for resources. Will a growing number of countries play the bilateral card? And what about the EU? Shouldn't the EU join forces, thus strengthening its negotiation position towards third countries? How can Europe work on speaking with one voice in energy matters?
I will not go along with those who say that doing business with producers on a bilateral basis, will undermine the position of the EU. For me this is an oversimplification. My approach is threefold:
First, we need to determine what we want to reach. For my part this is accessibility of reserves by private companies. The result would be that energy will be timely available on the market and that it can be transported freely throughout the EU. Therefore the completion of the internal market as well as the improvement of interconnections within the EU is essential.
Second, we need to determine what the roles and responsibilities are. Governments determine the framework conditions, they determine the terms of trade, stimulate investments in infrastructure or invest themselves. But they do not conclude contracts. This is the core business of private companies. As for the EU, my view is that a clear regulatory framework for trade and investments is of major importance. It is an outstanding task for the EU to negotiate in the WTO, to discuss and negotiate the new Partnership and Cooperation Agreement with Russia, to discuss on ways and means to promote energy efficiency. All these activities determine the framework for trade relations, within which companies can move freely to conclude contracts. But again, neither states nor the EU do conclude contracts.
Thirdly: every country has the right to promote its economic interests. That is why nation states tend to support their companies when they are operating abroad. This is also why we have promoted and approved the participation of Gasunie in Nordstream. Developing into an important gas hub enables us to capitalize on our natural gas expertise, even after we have become a net gas importer. For the same reason we want to interest LNG suppliers as Algeria in delivering gas to the regasification terminals in Rotterdam, which are now being developed.
To conclude: looking at the different roles and responsibilities, I am convinced that bilateral and EU policies do not conflict with each other. They could even strengthen each other when they are done within certain framework conditions negotiated and set by the EU. Companies can then function properly within this framework.
This brings us to my third proposition: climate policy strengthens energy security. As you will know, the EU and its member states have formulated ambitious goals. In 2020 we want to have reached:
- a 20% reduction in CO2-emissions
- 20% renewables in the total energy mix
- 20% increase in energy efficiency
- 10% biofuels in transport fuels
The Netherlands has even gone further and is aiming at a reduction of 30% in CO2-emissions, while the EU is only prepared to set this goal if other countries in the world (the US, Canada, Australia, etc.) are prepared to reduce their emissions substantially.
Our goals are ambitious. They show that we are committed to tackle the climate issue. As I said before, the share of renewables is still very modest. Without clear goals and supportive measures this will never change. The combination of ambitious targets and a sophisticated subsidy scheme will help to increase the share of renewables. There are still substantial possibilities for energy efficiency and innovation. I was struck by the determination of the horticulture sector to innovate its greenhouses and start to produce renewable energy. I will follow this with interest.
At the same time I want to be realistic. Energy demand in the world is rising fast, renewables do the same but will need time to become substantial. As a consequence fossil fuels will stay dominant in the decades to come. Even with a major climate policy we will still be needing the 22,000 billion dollars investments in energy the IEA considers necessary.
Meanwhile there are chances in combining problems and possibilities. Let me mention two examples.
1. Our own gas reserves will gradually deplete, but our capacity to store gas will remain an important asset for the gas market. Also our knowledge to use gas efficiently will remain. Russia needs to access to storage to accommodate its export flows to Europe. The Netherlands could provide this service. Russia also has to improve efficiency because of its rapidly growing gas consumption, we can cooperate with them. This could result in a win-win situation.
2. Since fossil fuels will still be dominant for the years to come, it is important to think about and work on cleaner use of fossil fuels. My philosophy regarding CO2 is: reduce, use and store. Reduction is to be realised by efficiency measures, by process innovation and using biofuels in coal generators. CO2 can also be used in greenhouses and production processes, which gives it a useful and productive destination.
The remaining CO2 will have to be stored permanently in aquifers or empty gas fields. For that reason, we will organise an international conference together with Saudi Arabia to exchange practical experiences in this field. Carbon Capture and Storage can help to reduce CO2-emissions to the atmosphere as long as efficiency and renewables are not large enough to reduce the emissions substantially.
These are only two examples, but I am sure that with some creativity we will discover a lot more opportunities.
Ladies and gentlemen,
In a few weeks the Dutch government will publish its Energy Report, a White Paper containing the strategic view on energy policy and energy innovation in the coming few years. It will not only encompass traditional issues as energy efficiency and renewables, but also new initiatives regarding transition to a sustainable energy system. In this Energy Report we will argue that the energy supply system has to become clean, smart and diverse and will outline what the government will undertake to shape it in this way.
International energy policy is the first of the three major issues. The second one is the energy mix in North-West Europe and in the Netherlands, including the position of coal and nuclear power generation. Finally the report will discuss the future of our energy infrastructure.
The report will be published against a background of an ever changing global energy situation and uncertainty about energy supplies and prices. It will therefore not only present a long-term view as I did in this presentation, but also specific policy for the years to come. I cannot disclose further details of the report, since it is still under discussion in the cabinet.
To conclude
I have explained my view by putting before you three propositions:
Firstly, there is enough oil and gas to meet global needs, now and in future.
Even in the longer run, scarcity will not be an imminent problem. There is energy for decades or even longer. Well-functioning markets and a stable investment climate will help to bring the necessary resources to the market.
Secondly, national and EU-interests reinforce each other.
Bilateral relations do not undermine the EU. Since they have a different role, I do not believe countries are undermining the position of the EU. The Union should concentrate on creating the right and stimulating environment for companies to do their (energy) business. Dialogue and economic cooperation are the best safeguards for energy security.
Finally, climate policy strengthens energy security.
With its emphasis on efficiency and renewables, climate policy strengthens energy security policy. By diversifying and developing new energy sources, we can make the energy mix more varied and so reduce our vulnerability.
Following these three lines of approach we will make serious steps towards a sustainable energy future. In 2050 our energy supply system has to be a lot cleaner, just as reliable and on top of that: affordable. To achieve these goals we need to pursue an active energy policy, at home and abroad. Sometimes we have to break with the past and travel new roads. But change is the last thing I am afraid of.
Thank you for your attention.