L20EnergySecurityBriefingBook.pdf

L20EnergySecurityBriefingBook.pdf
ENERGY SECURITY AND THE L20
October 13-14, 2005
TABLE OF CONTENTS
Oksenberg Room, Encina Hall, 3rd Floor Central
Stanford University, Palo Alto, California
•
Preliminary Program
•
Participant List
•
Background Discussion Paper
David Victor, Barry Carin, and Clint Abbott
•
Topic Readings
1. The Changing Risks in Global Oil Supply and Demand: Crisis or Evolving
Solutions?
Anthony Cordesman
2. Coordination of Oil stocks and Interventions in the Oil Markets
Klaus Jacoby
3. A World Agreement on Oil?
Richard Cooper
4. Energy Security: The Gas Dimension
David Victor
5. Nuclear Energy: Current Status and Future Prospects
Burton Richter
PRELIMINARY PROGRAM
Oksenberg Room, Encina Hall, 3rd Floor Central
Stanford University, Palo Alto, California
Thursday, October 13th
13:00 Introduction & overview of L20 concept (Gordon Smith)
13:15 Objectives for the meeting; Energy security as a possible topic for the L20 (David Victor)
-
discussion (based on background paper)
13:45 Major topics and their policy dimensions
During this period we will address five major aspects of energy markets and examine, in each, areas
where coordinated policy actions may be required and, in particular, where the L20 could play a role.
- Pricing, supply and demand: the world oil market today and prospects
(background paper by Anthony Cordesman)
International institutions for managing price shocks and the “rules of the road” (background paper
by Klaus Jacoby)
- Managing oil supplies in volatile regions (background paper by Richard Cooper)
15:15 Break
15:30 Continued Discussion of major topics: energy security for fuels other than oil
-
The shift to gas and implications for gas security in a globalizing world gas market (background
paper by David Victor)
Energy security for the next nuclear fuel cycle (background paper by Burton Richter)
16:30 Discussion
-
Lead Discussant - Peter Schwartz
Remarks from provocateurs/sceptics - Edgard Habib, Hoesung Lee, Ron Lehman
Initial synthesis of areas where L20 may have leverage – Hans-Holger Rogner, PR Shukla, Jim
Sweeney
17:30 Adjourn
18:30 Cocktails
19:00 Dinner (Three Seasons, 518 Bryant Street off University Avenue, Palo Alto 650-838-0353)
Friday, October 14th
08:00 Breakfast
08:30 Introduction to Day two (chair David Victor)
Remarks: Some ideas on what should be done
-
Barry Carin
Jane Long (LLNL)
Critique by the group - Lead Discussants: George Anderson and Tom Heller
10:30 Break
10:45 Toward an agenda for the L20
-
proposal for main elements for leaders’ level attention to energy security
13:00 Lunch
- Participant List Abbott
Anderson
Carin
Clint
George
Barry
Research Associate
President
Associate Director
Clapp
Jennifer
Fellow
Cooper
Richard
Cordesman
Habib
Anthony H.
Edgard
Heller
Tom
Huntington
Hill
Isnor
Richard
Jacoby
Klaus
Lee
Hoesung
Maurits C. Boas Professor of
International Economics
Arleigh A. Burke Chair in Strategy
Chief Economist
Lewis Talbot and Nadine Hearn
Shelton Professor of International
Legal Studies
Executive Director
Director, Innovation, Policy and
Science
Head of Emergency Planning and
Preparations Division
President
Lehman
Ron
Director
Long
Jane
Associate Director
Murray
Glen
Chair
Richter
Burton
Paul Piggott Professor emeritus
Rogner
Hans-Holger
Head
Schwartz
Shukla
Smith
Song
Peter
P.R.
Gordon
Allan
President
Professor
Executive Director
Programme Officer
Sweeney
James
Senior Fellow
Victor
David
Director
Weyant
CIDA
Representative
John
Professor
Centre for Global Studies
Forum of Federations
Centre for Global Studies
Centre for International Governance
Innovation
Weatherhead Centre for International Affairs
Centre for Strategic & International Studies
Chevron-Texaco Corporation
Stanford University Law School
Stanford University Energy Modeling Forum
International Development Research Council
(IDRC)
International Energy Association
Council on Energy and Environment, Korea
Lawrence Livermore National Laboratory,
Center for Global Security Research
Energy and Environment Directorate,
Lawrence Livermore National Laboratory
National Roundtable on Environment and the
Economy
Stanford University
International Atomic Energy Agency, Planning
and Economic Studies Section
Global Business Network
Indian Institute of Management
Centre for Global Studies
Smith Richardson Foundation
Stanford University, Institute for Economic
Policy Research and Hoover Institution on
War, Revolution and Peace
Stanford University, Program on Energy and
Sustainable Development
Stanford University, Energy Modeling Forum
Energy Security at the L20?
Overview of the Issues
Background discussion paper for L20 Energy Security Workshop
Stanford University, October 13-14, 2005
David Victor, Barry Carin, and Clint Abbott
This meeting is one of several in a project that is exploring the possible creation of the
“L20”—a regular forum at which the leaders of approximately 20 industrialized and developing
countries would convene on a regular basis. The founding logic of the L20, advanced especially
by Canadian Prime Minister Paul Martin, is to provide a means for managing global challenges
that have proved difficult or impossible to settle efficiently through other mechanisms such as
the G8. Through a series of workshops and background papers the L20 team has refined the
central concepts that could guide an L20. Notably, issues are ripe for L20 if they truly require
attention of heads of government—for example, issues that require the brokering of complex
package deals that cut across line ministries, and issues that require sustained high level attention
because that is the one way to ensure proper follow-through. Moreover, the L20 offers the
prospect of success in managing issues that require cooperation between industrialized and
developing countries. Indeed, the closest analogy—the G20 group of finance ministers—was
created in the wake of the Asian financial crisis and played an important role in easing
adjustment to that crisis.
Our task is to see whether the L20, if it were convened, should focus on matters
surrounding energy. Thus we must be severely practical. We must explore the issues to see
where, if at all, leaders must be engaged and there are possibilities for meaningful agreement.
Should “energy security” be on the L20’s agenda? If so, our meeting should conclude with some
concrete ideas for possible elements of an L20 meeting on the topic and thus possible elements
of communiqué on energy security. In effect, our goal is to anticipate how leaders from
approximately 20 of the most important industrialized and developing countries could approach
the issues in a collective fashion. In addition to exploring the issues of energy security we also
intend to foster some discussions on the composition of the L20, the impact on existing fora, the
best means to engage the major powers, and opportunities for civil society to participate in any
future solutions to these global problems.
1
In this overview paper we introduce some key concepts and outline areas where countries
may want to explore possible gains from cooperation. We also introduce the five specific topics
that are addressed in more detail in other background papers.
What is Energy Security?
“Security” has at least two meanings. First, in its narrow and traditional meaning it refers
to territorial autonomy. A nation’s security is a measure of its ability to survive without
territorial interference by others. Ever since Churchill moved the British navy from coal to oil
there has been particularly acute attention to ensuring adequate fuel supplies. For oil is not
nearly so widely distributed as coal; moreover, the assets needed to deliver useful fuels from
crude oil—such as refineries and storage tanks—are themselves soft targets. Thus the ability of
the nation to ensure its territorial integrity has depended partly on its skill in securing energy
supplies.
Second, a broader meaning has arisen where “energy security” is the ability of a nation to
muster the energy resources needed to ensure its welfare. This definition has come into common
usage alongside a general expansion (many say deflation) of the concept of “security.” Some of
this expansion in security matters reflects the growing importance of economic integration in the
welfare of most countries. Insofar as all policies are aimed at promoting welfare, the
expansionists simply maintain that attention at the highest levels of government must focus on a
wide range of matters.
This diversity in definition—from the narrowest and traditional territorial focus to the
wooliest notions of welfare—means that efforts to identify ways that the L20 could engage the
issue require special attention to goals and definitions. While it may be useful, in some sense, to
allow a proliferation of definitions and to foster broad agreements that allow every party to apply
their own concept of “energy security,” useful efforts that command the sustained attention of
leaders probably require more attention to goals.
THE PROSPECTS FOR COOPERATION: GOALS, STRATEGIES AND INSTRUMENTS
Before turning to particular issues that might be on the L20’s agenda we set the scene by
starting with underlying goals that countries might pursue, along with the strategies they might
prefer and the instruments they could deploy. Our purpose is to suggest that some goals,
strategies and instruments are amenable to action by leaders working in concert on a sustained
basis—and thus prime for the L20’s agenda—while others suggest that concerted action is
unlikely to bear fruit. Indeed, we will suggest that looking beyond goals to particular instruments
there is much in the sphere of “energy security” that is not amenable to the L20’s agenda.
Crafting a viable agenda will require care to ensure that the broad rhetoric of energy security
does not become a liability by focusing attention on topics where the L20 is unable to make
headway while eclipsing areas where the L20 could play an important role. In the subsequent
section we look at those particulars.
2
We begin with goals. Table 1 lists a series of goals for “energy security” often articulated by
governments and analysts. In general, attention to energy security within a given country has
started at the top (i.e., the narrowest military and territorial concepts), only to expand and shift
down the list with time. Some of this progress may simply reflect that the narrowest concepts of
energy security are easiest satisfy. For example, many navies and air forces have established
special reserves for marine and jet fuel; governments often have provisions in place that allow
them to divert commercial and strategic stockpiles to military uses in time of emergency. Thus
once these concepts are satisfied the others remain. In general, all of the most highly
industrialized countries have adopted a strategy that includes elements from the middle to the
bottom of the list. Less developed countries, where they have been able, have tended to
concentrate near the top. While there is much attention to China and India trying to attain energy
independence (more on that below), it is easily forgotten that the U.S. did the same until the early
1970s. It framed “energy security” (and the health of the American oil industry) in terms of
American production; it set quotas when lower-priced imported oil began to displace the market
share of dwindling (and thus more expensive) domestic production. Those quotas, in turn, made
it harder for the U.S. economy to respond to the shock of the Arab oil embargo.
In addition to examining goals we must also look at strategies & policy instruments.
Even if nations agreed on goals (e.g., secure lines of supply) there may be strong divergences in
the preferred means of achieving those goals. To the extent that it is not possible to devise
meaningful accommodations of those differences, even broad agreement on goals will not yield
much leverage for collective action through the L20. On Table 1 we array (left to right) the
types of strategies and instruments that are often cited in plans for attaining energy security.
With “Xs” we indicate the types of strategies and instruments that are usually associated with
particular goals.
This table matters because it forces careful thinking about what, if anything, the L20
could achieve if it were focused on the matters of energy security. In particular, at least three
specific implications follow. First, the matrix will help our meeting focus on what is possible.
We do not plan an extensive debate on the proper placing of the “Xs” in the matrix. However,
the array of “Xs” on table 1 suggests that for visions of energy security in the northwest corner
that the L20 may have not have an instrumental role to play. The goals, strategies and
instruments that populate the northwest are mainly autarkic in nature. And where the rules of
self-help dominate there is usually little space for international collaboration. Insofar as
elements of the energy security agenda include locales in the southeast, then the L20, perhaps,
can play an important role. Nonetheless, the L20’s utility will depend on how it amplifies or
supplants other international efforts—a topic to which we will return later when we consider the
international “rules of the road” and the IEA’s stockpiling program in particular.
3
Table 1: Two Dimensions of Energy Security: Goals (rows) and Strategies & Instruments (columns)
Selfproduction
(e.g., closed
fuel cycle,
coal to
liquids)
Fuel autonomy (e.g.,
independence in oil,
gas, fissile material)
Assured fuel
quantities for military
operations
Assured min. Supply
for the economy
Fuel Diversity
Secure lines of fuel
supply (e.g., nuclear
fuel cycles and oil &
gas lines hardened
against terrorist
intrusion)
Stable prices (or not
excessive volatility)
for key fuels (notably
oil, which drives prices
for other fuels)
Preventing Nuclear
Proliferation
Efficient markets (i.e.,
allow price level and
volatility to signal
scarcity)
Energy
mercantilism
(e.g., flag
ownership of
oil fields)
Control
over Sea
Lanes
(e.g.,
strong
blue water
navy)
Domestic
Stockpile
(e.g.,
SPR)
X
X
X
X
Promotion of
alternative
energy
technology
Coordination
of domestic
policies (e.g.,
fuel taxes,
efficiency
incentives)
International
regimes to
coordinate
stockpiles
(e.g., IEA
stockpile
stewardship)
International
regimes to
coordinate fuel
cycle (e.g.,
collective security
for SLOCs,
international
nuclear fuel cycle)
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
4
The need to examine underlying interests will arise most strikingly, perhaps, in our
deliberations about China and India. Both countries are becoming major consumers of oil (and
other natural resources), and their domestic markets are increasingly interlinked with world
markets. Both are substantial oil importers. Yet both, at the same time, are pursuing mercantilist
approaches to energy that are apparently intended to assure particular energy supplies flow into
the country rather than to rely on the whims of a global marketplace. Do we think that this
approach is merely a costly transient that will recede as these countries accept that oil is a
fungible commodity whose particular national origin matters little? Or will resource nationalism
reign—especially as deals are made with national oil companies in regions in such as Sudan,
Venezuela, Nigeria and Russia, that lock in an alternative means of organizing the world oil
market? If the former is correct then the L20 could play an essential role in framing a transition
to global engagement and cooperation for India and China along with other important nascent oil
importers. If the latter is true then cooperation will be hard to forge.
Second, the prospects for convergence (or not) of underlying interests will have a strong
effect on the L20’s membership. The L20 must certainly include the world’s largest economies
and populations—it must embrace the United States, EU, China, Japan and India. Thus
regardless of other members, even these core five have illustrated severe divergence in interests.
Beyond those five parties, however, the criteria for membership becomes harder to devise.
Should Canada, as a good global citizen and architect of the L20 (and one of the world’s largest
producers of natural resources), be a member? Should the EU speak with a single voice (and
can it), or will the EU have multiple seats as it does in the G8 (where fully half the seats are EU
members)? Russia, with its large population, nuclear weapons, and vast energy resources, also
ranks for membership. If energy is to be a major issue for the L20 then probably Saudi Arabia
must participate. Similarly, on matters energetic and most else that could be on the L20’s agenda
the institution should include key regional countries—Brazil, South Africa, Indonesia and
perhaps Turkey among them. One place to start is the membership of the G20 finance
ministers.1 Or perhaps the L20 should not begin with 20 but, rather, a smaller and less unwieldy
group in which it is easier to negotiate and form the camaraderie that is essential to a nimble and
effective institution.
A third reason why table 1 matters is that the divergence in interests suggests the need for
care in devising an agenda that can allow progress in some areas where common interests can be
identified while tolerating divergence in others. This could lead to cooperation of the “big tent”
variety—a broad umbrella agenda under which variable geometries of cooperation could emerge.
The European Union, perhaps the most effective example of international cooperation ever
observed, emerged because its structure allowed such multiple configurations that facilitated
deeper cooperation in some areas (and with some subsets of countries) even as collective action
proved difficult or impossible in other areas. Even in the areas where instrumental agreement is
not immediately possible, the L20 could play an important role in promoting common
1
The G20 Finance Ministers, an institution that still exists, includes the G8, Argentina,
Australia, Brazil, China, India, Indonesia, Korea, Mexico, Russia, Saudi Arabia, South Africa
and Turkey. To avoid confusion, the “L20” has referred to a potential grouping of the Leaders
from these 20 countries.
5
understanding that, with time and effort, could lead to further collective action. The G20 appears
to have played such a role with finance ministers in the aftermath of the Asian financial crisis,
and in many other international institutions the preferences of key countries have changed (with
concomitant increases in the prospects for deeper cooperation) as the institution has focused a
process of learning and adjustment.
PARTICULARS: MARKETS, FUELS AND INVESTORS
The meeting will begin with a discussion of the broad picture and our goals for
evaluating the L20’s prospects and design. Quickly, however, we will shift to particulars. We
will focus on the oil markets, which we consider first, and then we will look at ways that energy
security considerations could affect two other primary fuels: gas and nuclear. Here we introduce
these three fuels—oil, gas and nuclear—and some particular issues that could arise for the L20.
The discussion is not exhaustive, and in our deliberations we will allow time to explore what
may be missing; our purpose is to outline some elements that could help to set an agenda for the
L20 should it be convened to address the questions of energy security.
Oil: Market Fundamentals, Rules of the Road, and Diversity in Supply
Energy security is a prime candidate for the L20, first and foremost, because the price of
oil is headed to the stratosphere and the forward markets suggest that high prices are here to stay
for some time. At its root, the problems do not appear to be related to the geological exhaustion
of oil resources—so-called “peak oil”—but rather to a host of troubles above ground, such as
continued rise in demand and especially the difficulty and wariness of investors in opening new
supplies. Figures 1 and 2 summarize the situation with demand and supply.
Figure 1: World Oil Demand
Rest of World
90
Ukraine
Argentina
80
Malaysia
Venezuela
70
Singapore
Australia
60
Taiwan
Thailand
50
m bd
Indonesia
Iran
40
Saudi Arabia
Brazil
30
Mexico
Canada
20
South Korea
India
Russian Federation
10
Africa
Japan
0
1965
1970
1975
1980
1985
Year
1990
1995
2000
China
EU25
USA
6
Figure 2: World Oil Supply
100000
90000
thousand barrels per day
80000
70000
World Production
60000
50000
40000
30000
OPEC Production
20000
10000
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
19
73
19
71
19
69
19
67
19
65
0
Year
We look at the issues from three perspectives—each covered by a commissioned paper.
The first issue is the overall balance of supply and demand, as introduced by Cordesman. The
market is extremely tight, and insofar as the L20 would be animated by the desire to improve the
oil market’s ability to absorb shocks it should consider whether and where it might have leverage
on issues such as:
• Improving the stability (and attractiveness to investors) of oil exporting nations;
• Creating an effective coalition to break OPEC’s influence;
• Improving the quality of underlying data on the oil market;
• Encouraging investment in new spare production capacity;
• Hardening key oil export infrastructures against terrorist attack and Nature;
• Improving the modeling of oil prices and their macroeconomic effects.
Cordesman’s paper covers a much fuller array of options than the five we summarize above.
However, just the above five reveal the quite diverse roles that the L20 could play and the
distinct difficulties that will arise in convening the L20. We have arrayed them in order of
increasing possible leverage by the L20 (and roughly decreasing importance). Fundamentally,
many of the problems in the oil market are rooted in the difficulty of attracting and sustaining
investment in the states that have the most geologically attractive resources. Fixing that
problem, however, is no easier than solving the problem of national governance altogether, and
in oil states it may be additionally difficult because of the scramble for oil money that tends to
distort all but the strongest systems of government—the so-called “resource curse.” The L20
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may not have much leverage on that problem, but perhaps it could help to array some solutions,
such as fuller use of anti-corruption measures (e.g., “publish what you pay”) and restricted
funding mechanisms (e.g., the systems in Norway, Azerbaijan and Chad—in rough order of
decreasing effectiveness). The final options on this list of five are the easiest for governments to
alter—for example, special programs to harden infrastructure and fuller investments in energy
modeling—yet may have the least leverage on the underlying problem.
A second major issue, addressed in Klaus Jacoby’s paper, is the “rules of the road” for
the international oil market. Ever since the first oil crisis of the 1970s major oil importing
countries have organized themselves through the International Energy Agency (IEA) to
coordinate their management of strategic oil stocks and responses to supply interruptions.
Jacoby’s paper looks at the ways that volatility in oil-producing nations can be countered by
collective action on the part of consumers. The IEA arrangements, which cover 60% of the
world’s demand, include obligations to maintain strategic stocks (90 days worth of net oil
imports), to have mechanisms in place that could restrain demand up to 7-10% of total
consumption, to share oil in an emergency, and other provisions. These arrangements were
triggered in the wake of Katrina, and the present moment offers an opportunity to evaluate
whether such arrangements need updating. Jacoby notes that the world oil market has changed
dramatically in structure since the IEA arrangements were created but that the system has
evolved efficiently. At the meeting, we should consider whether there are special roles that the
L20 could play in improving the system. At least two areas of possible improvement might be
considered. First, the IEA arrangements notably exclude China and India (and most other
developing countries); while the U.S. and E.U. are the largest consumers of oil (see figure 1), the
rate of increase in China and India is staggering. (Some of the Chinese increase reflects vagaries
in the electric power market that will probably settle when the building of central power stations
catches up with the rate of economic growth; even then, the expected increase in oil consumption
is very high.) Second, we should take a fresh look at the rules themselves since they are likely to
come under increasing pressure. Some observers worry that the IEA doesn’t have enough
muscle to ensure adequate collective action in the face of real crisis, although Jacoby’s paper
argues that the IEA arrangements are in good shape. Moreover, the IEA (and most other energy
analysts) are projecting that OPEC’s share of world production (41% today) is likely to rise
again in the near future as OPEC members generally hold the geologically most attractive
reserves. Does this suggest a rising dependence on a cartel that has already proved its muscle,
and if so what can be done to adjust the rules of the road so possible harms are minimized?
Third, the paper by Cooper reassembles these issues by framing what could be a “world
agreement on oil”—and, by implication, a role for the L20 as broker of that agreement. Cooper
argues that major oil-exporting governments, notably in the Gulf, are marked by stability and are
unlikely to deliberately disrupt oil exports. However, internal conflicts might spill over to affect
world oil markets—a possibility that is abundantly evident in recent years. Cooper suggests two
radically different strategies for addressing the problem. One is to create a forum in which
existing low-cost producers (notably Saudi Arabia) would be aided in their efforts to expand
production capacity as well as supply additional data needed to calm markets. The other would
focus on limiting demand for petroleum through aggressive energy efficiency programs and
investment in substitute energy sources. At our meeting we should debate other possible
integrated packages, the role of the L20 in each and the implications for L20’s strategy and
8
membership. As Cooper points out, for example, a production strategy for the L20 will require
the central involvement of Saudi Arabia (and perhaps other candidate producers, such as Iran,
Russia and Nigeria); a conservation and substitution strategy requires the concerted efforts of
major users, with the danger that oil suppliers would have a strong incentive to frustrate effective
action.
Gas: Different from Oil?
We give extensive attention to oil because it is the single largest source of primary energy
(accounting for about two-fifths of the world total), as a liquid dense with energy it is the most
flexible fuel, and thus oil prices tend to signal the price for all energy sources. However, we
have commissioned papers on topics surrounding two other fuels, which allow the opportunity
for focused discussion on additional topics that, in addition to their importance, will help us
focus on a wider package of measures that could comprise the L20’s energy security agenda.
A paper by Victor looks at the emerging global market for natural gas and explores
whether this market will pose similar threats of security as have arisen in the oil markets. He
suggests that the answer is “no”—that supplies of natural gas have proved remarkably stable for
two reasons. First, gas (unlike oil) has many competitors for supplying its service, notably
electric power, and thus strategic interruptions quickly become self-defeating for the exporter.
Second, gas projects are generally much more capital intensive than most oil projects and thus
the incentives strongly favor running a facility—such as a large production field or a LNG export
train—at maximum capacity once the facility is operational, rather than adjusting output
according to the price-fixing aspirations of a cartel. (By contrast, one of the chief enforcement
mechanisms of OPEC has been the availability of spare capacity, notably in Saudi Arabia, that
was built with low capital cost and is relatively easy to operate when needed.) Victor also notes
that the experience in most gas markets is that prices follow oil—either by fiat (e.g., oil-indexed
contracts) or de facto (e.g., due to substitution between gas and oil products such as residual fuel
oil). Thus insofar as the goal with “gas security” is to dampen price swings then success with oil
security will, in turn, have positive effects for gas.
The important issues for gas, argues Victor, concern investor confidence. Gas can help to
promote diversity in fuels, and it has a special role to play in supplanting carbon-intensive coal
for the generation of electric power. Yet the most important frontiers where investment in new
electric power generating capacity is intense and coal is the incumbent—China, India and the
United States—are all countries where gas resources that are readily at hand appear to be
dwindling. For these and similarly situated nations, there has been a special wariness about
dependence on imported gas. The issues are most striking in the market that is least well
developed (China) and thus perhaps most vulnerable to supply interruptions. In China’s case, the
most interesting and attractive gas supply options are Russia—notably the huge Kovykta field
near lake Baikal. Yet Russia’s Gazprom wants to send that gas to the main Russian market in
the West, and so far Gazprom has blocked the Kovykta project; China fears that if such a western
export infrastructure were built that Kovykta supplies would not be secure for China. Similar
issues arise in India, with pipelines from Iran, Bangladesh and Myanmar all technically feasible
yet encountering substantial political obstacles (e.g., crossing Pakistan). For the U.S. the issues
are different and relate to perceived insecurities in LNG supplies. For all these items, perhaps
9
the L20 could play a role. With China and Russia, or with India and her potential suppliers and
transit countries, perhaps the L20 could help to provide an umbrella for these countries to reach
agreements on security of supply. For all countries, perhaps the L20 could call for (and ensure
the success of) efforts to ensure that LNG remains a safe and viable option. In the former, the
L20’s role would be as a political guarantor; in the latter it would use its convening power to
ensure that a vital technology is nurtured.
Nuclear: Taming Proliferation and Encouraging the Next Wave
Finally, Burt Richter looks at nuclear power. Richter notes that for large quantities of
electric power generation—notably in the developing countries, which are likely to account for
nearly all the incremental demand—the most abundant and least costly fuel is coal. The largescale pollution consequences of a massive coal program have forced a rethinking and new
embrace of nuclear as a largely pollution-free option for generating electricity. About threequarters of the 440 existing reactors are in the OECD; many of the new reactors being built are in
developing countries, most in Asia. Net growth in nuclear generation could be modest (e.g.,
16%) or robust (60%), a range suggested by the IAEA that reflects uncertainties in cost, safety,
political acceptability, waste handling, and other issues.
Richter suggests that there are enormous uncertainties surrounding the fuel cycle. Some
of these are technical and relate to the relative merits of a “once-through” system (which
generates much waste but has been a favorite of the U.S. because of its resistance to
proliferation) and systems that involve varying types and degrees of fuel reprocessing. A robust
future for nuclear power would seem to imply significant amounts of reprocessing, not least
because a simple once-through cycle would generate unmanageable quantities of waste. Richter
favors the French system for reprocessing, although there are other alternatives, and he notes that
any scheme would involve working at scale with technologies that remain immature. Richter
also notes that the dangers of proliferation arise not only with the “back end” of the fuel cycle
(i.e, reprocessing and treatment of spent fuel) but also the “front end” (i.e., enrichment of raw
uranium). Thus a system for supplying nuclear fuel implies intervention in the full fuel cycle.
Richter notes that recent reports have found that once-through and many variants of reprocessing
fuel cycles have similar scores in their vulnerability to proliferation, which suggests that
regardless of the fuel cycle chosen a reinvigorated effort to manage proliferation is needed.
The L20 could play several roles here; Richter’s analysis suggests three that our meeting
should discuss. First, there may be a need for collective efforts to study and demonstrate key
technologies needed for a proliferation-resistant fuel cycle. Indeed, there is a long history of
cooperation on big technology programs—not only in nuclear power but also the Human
Genome project, the space station, geophysical research, and other areas. Second, particular
facilities may merit collective operation either because they are too expensive for one
government to run on its own or because it would be unacceptable to some nations that just one
(or a few) have full control over the critical equipment. Third, Richter gives particular attention
to the growing interest in a truly international fuel cycle that would put key facilities into some
form of international control. Such a system, if designed well, could help to reduce proliferation
by hardening the fuel cycle against breaches and also increasing the odds that countries would
rely on a superior international system rather than their own (probably proliferation-prone)
10
national systems. On all three of these fronts the L20’s role could include the creation of a
political framework needed for success as well as the establishment of funding mechanisms and
oversight. Mindful of that potential, however, many countries are also pursuing their own fuel
cycles, and in a few cases the existing IAEA safeguards against proliferation from those fuel
systems have already proved inadequate, and thus any effort by L20 to become involved in such
issues must contend with both their political difficulty and the already existing array of
international arrangements, including bilateral technology sharing programs and notably the
IAEA’s multilateral program.
WHAT IS MISSING?
These five papers and our agenda are far from a comprehensive treatment of the issues.
We have focused on oil because of its central importance and considered other elements that are
critically important and also allow for a more diverse analysis of possible roles for the L20.
Nonetheless, we have left many stones unturned. Among them are possibly aggressive programs
to improve investment in energy conservation and collective efforts to boost renewable energy
sources. Nor have we considered the many intriguing options for advanced coal combustion.
In an effort to draw attention to elements that may be missing from our deliberation, we
offer a simple listing of some possible actions that the L20 could take in relation to energy
security—beyond the items discussed in more detail above and in the five other background
papers:
• Expand the Bio-energy and the Renewable Energy and Energy Efficiency Partnerships
and encourage the World Bank and the financial industry to devise ways to reduce the
cost of financing renewable energy investments
• Instruct Trade Ministers to work together within the Doha trade round to replace food
production subsidies with incentives for farmers to grow environmentally beneficial bio
fuel crops;
• Ask the World Bank, WTO and the OECD to develop incentives, policies and programs
to give priority to overcoming barriers to clean energy. Make Gleneagles’ call for
voluntary energy savings assessments mandatory;
• Evaluate the feasibility of quantitative bio fuel standards and targets for transportation;
• Instruct Finance Ministers, with the assistance of the IMF, to introduce, as appropriate,
fiscally neutral GHG taxes, to be harmonized with the design of an internationally agreed
tradable permit framework. Countries could retain the option of a "safety-valve system",
that is, national tradable permit systems with government promise to sales of additional
permits at a stated price (and thereby cost) ceiling. Taxes can have a powerful effect on
emissions;
• Pursuant to Gleneagles’ encouragement of co-ordination of international policies on
labelling, standard setting and testing procedures for energy efficiency appliances, phase
in global efficiency standards; apply the same approach to automobiles;
• Coordinate the provision of tax credit schemes and other incentives for technologies that
exceed standards (including automobile manufacturing industry);
• Implore member nations to fund incentives by redirecting fossil fuel subsidies;
11
•
Coordinate the creation of greater economies of scale through mass support for
marketable or near market technologies such as hybrid or hydrogen vehicles.
We include this list not as an endorsement of its elements but as a reminder of the wider array of
items that could be included in a package that the L20 could craft. By the end of our meeting we
aim to have identified some of the main elements of such a package, along with an agenda for
the L20 session itself.
QUESTIONS TO CONSIDER
We close with two broad questions that will help to focus our deliberations over the two
days of the meeting.
First, if there is an L20 meeting with energy security on the agenda, what would be a
pragmatic substantive outcome? What decisions at the leaders’ level will yield benefits for large,
important developing and industrialized countries—such that leaders will be willing to back
them at L20 and beyond? What elements relate to short-term aspects of energy security and
which require a longer term perspective?
Second, how would advocates for the L20 get there from here? In particular:
- What are the specific decisions and actions implied in each of the background papers, and
which packages of actions are likely to be most attractive?
- What message or series of events would entice key countries—notably the United States,
the EU and China—to embrace energy security as a subject for L20 attention?
- How do we catalyze support from civil society, including business?
12
Center for Strategic and International Studies
Arleigh A. Burke Chair in Strategy
1800 K Street, N.W. • Suite 400 • Washington, DC 20006
Phone: 1 (202) 775-3270 • Fax: 1 (202) 457-8746
Email: BurkeChair@csis.org
The Changing Risks in Global Oil
Supply and Demand:
Crisis or Evolving Solutions?
Anthony H. Cordesman
Arleigh A. Burke Chair in Strategy
acordesman@aol.com
&
Khalid R. Al-Rodhan
Visiting Fellow
kalrodhan@csis.org
First Working Draft: September 30, 2005
Executive Summary
The future of energy is of enormous importance. The global energy market is intricate
and the analysis of it is uncertain. The ability of policy planners and strategists in
petroleum-consuming nations is limited at best. Most of the known world reserves exist
in regions and countries that are not stable. Consumers cannot control where oil reserves
exist and the geostrategic risks are not likely to change in the near future.
The dynamics of the current oil market rely on four major interdependent areas of
uncertainty: geostrategic risks, macroeconomic fluctuations, nature of resources risks,
and the uncertainty in current and future oil production capacity.
At this point, about all that is certain is that the global energy market is unpredictable and
that recent oil prices have been high and volatile. In four years, the price per barrel of oil
has increased by roughly 108%. The price of crude oil averaged $25.9/barrel in 2001 and
for the first eight months of 2005, the average price crude oil increased to approximately
$54.1/barrel.i
Rigorous, transparent, and credible analysis, however, can improve our understanding of
the forces at play and provide policy makers and analysts the tools necessary to forge
sound energy policy based on real-world realities and risks.
Key Geopolitical Uncertainties
The six major petroleum-producing areas (Middle East, Africa, Asia-Pacific, EuropeEurasia, North America, and Latin America) face major production and resource
uncertainties. It is clear the geostrategic risks facing these regions have tangible
implications on their energy sector and on the global petroleum market. The geopolitical
and military implications are hard to quantify. The risk premium of these uncertainties,
however, will be affected by the following key geostrategic challenges, all of which
could have direct and indirect affect on the global energy market:
•
Stability of oil exporting nations: The stability of oil producing nations is of paramount
importance to the world oil market. The strikes in Venezuela, the War in Iraq, and the ongoing
disruptions of Angolan and Nigeria oil were examples of what could happened if this happened in
other countries such as Saudi Arabia and Iran.
•
Terrorism in the Gulf and oil facilities securities: While the threat from Iran’s conventional
military may be real, the more dangerous threat is that of extremists groups’ asymmetric attacks on
oil facilitates. The Gulf contains over 65% of the world’s “proven” reserves. There is no attackproof security system. It may take only one asymmetric or conventional attack on a Ghawar or
tankers in the Strait of Hormuz to through the market into a spiral at least for the near future.
•
Proliferations of WMD: The success in stopping the AQ Khan does not mean the end of a
nuclear black market. It remains a real threat to the entire world, especially the Gulf, of a nuclear
weapon falling in “the wrong hands” such as Al-Qaeda.
•
Embargos and sanctions: Another OPEC oil embargo is very unlikely, however, if oil is ever
used a weapon to combat US or Western foreign policy or if sanctions were imposed on Iran, for
example, it will have devastating effects on the global economy.
•
Ethnic conflicts and strives: Disagreements over the control of oil revenues by ethnic groups can
destabilize countries and disrupt the flow of oil. Currently, the ongoing conflict in the Niger Delta
and the War in Iraq provide two examples of how devastating such crises are.
•
Natural disasters: Natural incidents in production, export, or refining areas can be damaging to
the energy market. Hurricanes in the Gulf of Mexico have caused supply and distribution
disruption in the US, and have added large premiums to the price of a barrel of oil. Hurricanes
Katrina and Rita, which hit the US during August and September 2005, shut down most of the
refineries in the US Gulf of Mexico and forced the US to release some of their strategic petroleum
reserves.
•
Security problems and accidents: The world can absorb the problems created by most forms of
local conflict and internal security problems when there is significant surplus capacity and prices
start from a relatively low base. Behavior changes drastically, however, when supply is very
limited and prices are already high. Even potential threats to petroleum production, exports, and
distribution can radically alter prices and market behavior. Actual attacks, or major industrial
accidents, can have a much more serious impact. The loss of a major supplier, or a sustained major
reduction in regional exports, potentially can have unpredictable price and supply impacts that
impact on the entire global economy.
Stability in petroleum exporting regions is tenuous at best. Algeria, Iran, and Iraq all
present immediate security problems, but recent experience has shown that exporting
countries in Africa, the Caspian Sea, and South America are no more stable than the Gulf.
There has been pipeline sabotage in Nigeria, labor strikes in Venezuela, alleged
corruption in Russia, and civil unrest in Uzbekistan and other FSU states.
Experts believe that, in the near future, energy supply and transportation routes may be
challenged by transnational terrorism and proliferation. It is equally possible that recent
surges in the demand for oil, supply disruptions by hurricanes, the US refining capacity
bottleneck, and the limited spare production capacity will continue to test the energy
market in the mid to long-term.ii Natural disasters, such as hurricanes and tsunamis, may
also prove to be troublesome to the instability of the energy markets by causing
production, transportation, and refining disruptions.
Macroeconomic Fluctuations
Like all economic forecasts, predicting supply, demand, and prices of crude oil involves
significant uncertainty. Predicting the oil market is notoriously difficult and constant
updates and additions to the models are needed. The most recent EIA, IEA, and OPEC
forecasts have not been adjusted to consider long-term oil prices in the $50 and above
range, even in their high oil price case. Only the EIA analysis partially addresses high
price cases for petroleum and it does not examine the influence these high prices would
have on the demand, supply, and the long-term elasticity of global energy balances.
The following key factors influence the oil market, and each involves major uncertainties
and unknowns:
•
Problems in import-dependent developing countries: Countries with relatively free market
economies that are highly developed are rich and flexible enough to adapt to high prices and
supply problems far more flexible than poor countries, countries with serious foreign reserve and
balance of payments problems, and importers with high levels of subsidies for oil and gas. By and
large, the impact of high prices is not modeled in such terms.
•
The sustainable and spare capacity of oil producing countries: There is a growing debate over
spare capacity of OPEC nations, and their ability to “balance the market.” Perceptions are as
important as realities. The market’s lack of confidence in the producers to meet the demand adds a
risk premium to any estimates and pushes prices up.
•
The cost of sustaining and expanding petroleum production and exports, and of the
necessary investments: Most of today’s estimates of the cost of future production are badly dated,
and do not take into account the cost of the most advanced technology for exploration,
development, and production, or the scale of the investment needed in distribution in areas like
port facilities, new tankers, refineries, etc. Cost models need a major reevaluation.
•
Country capability and practice in sustaining and expanding petroleum production and
exports: There is little effort to assess country-by-country capability to use best practices, and
adopt the most advanced technology and methods. Countries like Kuwait and Iran have failed to
move forward in using such practices for very different reasons. Countries like Iraq face
insurgency, the risk of civil war, and a long legacy of underfunding proper development.
•
The long-term elasticity of demand: The development of alternative sources of energy,
efficiency, and conservation have long-term effect on the market, but time lags, investment costs,
and delivery prices are uncertain at best in the foreseeable future.
•
The Long-term elasticity of supply: Major debates exist over the size of proven, possible, and
potential resources’ rates of discovery, development and production costs, fields’ life, and the
impact of advanced technology.
•
The refining capacity and inventory build up of the importing nations: The lack of ability by
importing states to refine crude oil and distribute it to the domestic market in a timely manner can
build bottlenecks. These bottlenecks exert upward pressure on the price of crude oil and squeeze
the average consumer at the gas bump.
•
The overall health of the global economy: While it is clear that oil prices and economic growth
in developed countries are negatively correlated, it works both ways. High oil prices have negative
effect on economic growth in consuming states, but low economic growth in industrialized nations
causes a decrease in demand for oil and lower oil prices.
•
The rise of new economic powers: In recent years, the oil market has experienced an unexpected
increase demand of oil from countries in Asia such as China and India. According to the IMF, this
surge from emerging countries could account for 40% of the increase in oil demand in 2004.
•
Lack of investment: These pressures and uncertainties add to the economic risk premium causing
oil prices to rise further. Moreover, while higher oil prices may provide incentives for private and
public investment in the oil industry, the lack of geopolitical stability, and ability to predict how
long high oil prices will continue, prevents many from investing in these areas.
Providing the kind of massive surges in the demand for oil projected in recent studies, requires
massive investments to build new infrastructure and finance new technologies. In 2003, the IEA
projected that the world oil demand would rise by 60% by 2030, and that the world energy market
would need $16 trillion of cumulative investment between 2003 and 2030 or $568 billion a year.
Even this estimate is based on unrealistically low estimates of investment cost and outdated
assumptions about the sophisticated exploration, development, and production technology and
equipment needed in modern oil fields. Yet it still requires vast transfers of capital.
It is too soon to draw any firm conclusions about the impact of high oil prices on global
oil dependence, on US and other imports, and on increases in conservation and the supply
of alternative fuels, but these factors indicate that high prices are not necessarily bad for
the global economy and could trigger market forces that offset their short-term negative
effects. The fact, however, is that no one really knows given the complex mix of
elasticities involved because meaningful modeling and analysis is only beginning.
Nature of Resource Risks
Given the strategic risks faced by oil producing nations, claims about production goals
and capacity and oil reserves have long been a political tool. Some producers have
inflated their “proven” reserves to project strategic importance, which has added to the
uncertainty and the lack of transparency.
The fall of the Shah in 1979 and the Iran-Iraq War, for examples, led to a competition in
the Gulf to announce new levels of “proven” reserves to demonstrate the strategic
importance of given countries, and major increases in the claims made by Iran, Iraq,
Saudi Arabia, Kuwait, and other countries.
Limited hard data are available to validate many national claims and plans. Yet,
credibility in this area is of enormous importance because as we will see key modelers
depend on each country’s report for their demand-driven models to forecast the global
supply and demand. In many cases, data are lacking, there is little validation and
transparency, and current models and estimates simply assume levels of petroleum
capacity that may never exist.
The global energy market faces key uncertainties in the determining the exact nature of
reserves, which include:
•
True nature of reserves: There are ongoing debates on the reliability of reserves. The USGS
2000 continues to be the benchmark estimate. However, as with any estimates, forecasting
uncertain. Furthermore, analysts disagree about the definition of “known” vs. “undiscovered” vs.
“proven” resources.
•
Impact of technological gain: Some experts argue that aging oil fields have higher water cuts and
that “vertical” wells cannot be used. Other energy estimates do not take into account new
technological developments, which may change the estimate of “possible” & “probable” reserves.
•
Ability to substitute for current super-giant and giant fields: Some experts have argued that
new field discoveries do not support reserve estimates, and major producers such as Saudi Arabia,
Iraq, Kuwait, and UAE rely on aging super-giant fields that were discovered in the 1950s and
1960s and are in decline, and that none of their kind has been found in recent years.
•
Rate of decline in fields: The percentage of the oil reserves in the fields that have pumped out is a
contentious and uncertain estimate. Analysts and investors have to rely on independent estimates
and the announcements by oil companies.
•
Rate and size of new developments and discoveries: Outside analysts have to rely on the
discovering country’s announcement and statement for estimate of any new discoveries.
Moreover, it remains uncertain whether certain countries are “over explored” or “under-explored.”
•
Inaccuracy of 3-D seismic modeling: Some experts have argued that new technologies that use
computer modeling are not enough. They provide a good estimate of possible reserves, but they do
not replace old fashion drilling and physically measuring actual reserves.
In many cases, it is not clear that the Energy Information Administration (EIA),
International Energy Agency (IEA), Organization of Petroleum Exporting Countries
(OPEC), or United States Geological Survey (USGS) have applied sufficient rigor to a
country-by-country reexamination of such estimates. (The USGS does use a different
methodology because it looks at the basins on a geological potential basis, but the data
available are uncertain and dated.)
Lack of Robust Modeling
Modeling urgently needs to examine supply-driven models, not just demand-driven
models. Equally important, the key modelers of global energy supply and demand have
not yet chosen to react to the recent rises in oil prices and examine cases that go above
$50 a barrel in detail. There have been some preliminary efforts by the IMF and the EIA
in its International Energy Outlook 2005. Projections by OPEC, the IEA, and the latest
EIA’s forecasts need to be revised or expanded to examine such cases, and to examine
the implications of a world with a “sustained” $60/barrel, $80/barrel, or even $100/barrel
oil.
The modeling of sustained high price cases is just beginning, but previous modeling
efforts do provide important warnings. If oil prices drop back to the level between $31
and $35 a barrel (in 2003 dollars), as assumed in the reference case of the International
Energy Outlook 2005, the EIA estimates that world demand for oil will increase from 78
MMBD in 2002 to 119 barrels per day in 2025. This projected increase of world oil
demand would require the global oil production to increase by 42.0 MMBD over the
world’s 2002 capacity levels--accounting for approximately 38% of the world’s energy
consumption through 2025.iii In addition, a 2004 EIA report estimates that the US and its
major trading partners in developing Asia will account for 60% of the increase in world
demand through this period.iv
More generally, many laymen do not understand the wide range of problems in
foundations on which forecasting methodology is based. It is all too clear that the
modeling the EIA, IEA, and OPEC used in the global petroleum supply and demand
forecasting has been driven by estimating global demand at comparatively low oil prices.
Reports by the EIA, IEA, and OPEC could provide a better benchmark for the global
energy market if they addressed certain areas of deficiencies. The key gaps and areas of
uncertainty in the International Energy Outlook 2005, for example, include:
•
Parametric analysis: They lack of any parametric analysis of its oil price forecast. Furthermore,
models such as the IEO treat major shifts in energy cost and different levels of economic growth
largely as independent assumptions and variables.
•
Economic growth rates: They do not provide sufficient explanation as to how the rates of
economic growth interact with the price of oil and how the price-elasticity of demand changes
over time given an economic growth rate.
•
Countries’ plans: They do not take into account country-by-country plans in forecasting oil
production capacity. If they do, there is little explanation of how such plans have changed since
their last forecast and how realistic or unrealistic those plans are.
•
Indirect imports: The reports do not make estimates of indirect imports of oil/petroleum from
other regions in terms of the energy required to produce finished goods. The US, for example,
indirectly imported very significant amounts of oil in the form of manufactured goods from Asian
countries dependent on Middle Eastern oil imports.
•
Technological improvements: They do not explicitly analyze technological improvements and
the role technological breakthroughs in enhancing oil recovery and exploration for new oil
reservoirs, development that have significant affects on future oil supply and the oil market.
•
Relation of oil prices to demand of alternatives and conservation: No credible explanations are
given of the interactions between different oil prices and the level of oil supply and demand, or
changes in the supply and demand of gas, coal, nuclear power, renewables, electricity, and
conservation.
•
Supply and demand elasticities: No effort is made to determine the very different patterns of
elasticity in supply and demand for gas, coal, nuclear power, renewables, electricity, and
conservation that have to emerge over time if oil prices remain so much higher than in the past, or
the major uncertainties that will inevitably result from such changes.
•
Discontinuity theory: Models and forecasts use smooth curves and largely “static” assumptions.
Growth in demand and supply tends to be at constant rates or in predictable curves. Reality never
produces consistent trends or allows trees to grow to the sky. There is a clear near for an
assessment of what kind of sudden events or discontinuities are critical and for some form of
Baseian approach to risk analysis.
As a result of these gaps, the current forecasts of EIA, IEA, and OPEC now do little more
than illustrate what might happen in a world where virtually everything goes right from
the importer's view, where export capacities automatically respond to need, and political
and military risk have no impact.
Oil Production Uncertainties
If high-sustained demand growth actually occurs, virtually all sources indicate that it will
put a growing strain on both global petroleum supply and export capacity. The BP’s
Statistical Review of World Energy 2005 reported that in 2004, the average total world
production was 80.26 MMBD—higher than the 2003 average by 3.206 MMBD. In 2004,
OPEC produced 32.927 MMBD, which is a 7.7% increase from their 2003 production
levels of 2.241 MMBD, Russia increased its production by 0.741 MMBD (+8.9%), and
China by 0.089 MMBD (+2.9%).v
Non-OPEC supply so far has been slow to respond to the high oil prices. In fact, it
increased by only 0.046 MMBD in 2004 (31.8% of which came from the FSU).
According to the US DOE, the expected increase in Non-OPEC oil production for 2005 is
0.92 MMBD.vi In the years of 2005 and 2006, more than half of this non-OPEC increase
is estimated to come from the FSU and the Atlantic Basin, including Latin America and
West Africa.vii
The EIA forecasts the total world production capacity in 2025 for the low, medium, and
high price cases as follows: 135.2 MMBD for the low price case, 122.2 MMBD for the
reference case, and 115.5 MMBD for the high price case. In both the 2004 and 2005
cases, the projected increase in total world production capacity is still significant. By
2010, it could increase from 14.6 MMBD to as high as 21.6 MMBD. The “high price”
case, however, is far easier to achieve in the real world than the “reference” or “low
price” cases.
As is clear from these numbers, as the price oil decreases, production capacity increases.
One notable exception is that Non-OPEC countries’ production capacities have the
opposite reaction to a change in the price of oil. OPEC countries largely drive this
relationship between price and production capacity. From an economics point of view, a
decrease in the price of oil decreases the willingness of suppliers to produce and sell oil.
The IEO2005, however, shows the opposite effect for OPEC countries. One possible
explanation is that OPEC countries control the price of oil with their quotas.
The shift toward high oil prices could, however, sharply reduce the growth in future
demand for oil, and lead to major new investment in all forms of energy supply,
conservation, and efficiency. In the interim, however, the following points production
and resource risks now affect oil-producing nations in their efforts to expand their spare
capacity:
•
Little “sustainable” spare capacity: With the exception of Saudi Arabia, in 2005, the rest of the
world had no spare capacity. If there were sudden surges in demand (high economic growth) or
distributions in supply of other exporters (the Iraq War in 2003, Venezuela strikes in 2004), will
producers be able to meet such shortage?
•
Elasticity in importer conservation, efficiency, and alternative supply and time/uncertainty
lags: One of the flaws of the current forecasts by the EIA, IEA, and OPEC is that they do not take
into account changes in the elasticity of supply and demand. Long-term and mid-term elasticities
have an impact on the demand, supply, and price, which in turns changes investment incentives
and production capacity.
•
Producablilty at given prices: Some experts have argued that the “easy oil” era is over. Oil
recovery is more costly, and the price of oil has to be high enough to cover variable, fixed, and
sunk costs and investment, but not too high that it exerts downward pressure on demand.
•
Technological gain in the upstream & downstream sector: Current production capacity
forecasts do not and may not be able to anticipate technological gains in the upstream side of the
industry, especially demand-driven models. Producers strive to improve efficiency by investing in
R&D and new technological innovations, but it remains uncertain how much, how, and when
these technological gains may bear fruits in terms of real-world change in the level of recovery.
•
The “sustainable” inflow of foreign investment: Natural depletion of current oil fields is
inevitable. Expansion programs, therefore, are needed to replenish this natural decline, but
developing countries are in need of foreign investment in terms of both capital and technological
sharing. The lacks of security and stability, rigid foreign investment and tax laws, and limited
transparency have prevented the inflow of much needed foreign investment into developing
countries.
Estimates of near term spare capacity are increasingly uncertain and inevitably differ.
According to the IEA, in early 2005, OPEC had 1.92-2.42 MMBD spare capacity, but
according to the EIA, it had 1.1-1.6 MMBD. In both cases, practically all of the spare
capacity was from Saudi Arabia. HETCO forecasted that in 2005, OPEC would increase
its production by 0.70 MMBD. Again, most of the increase will depend on Saudi
Arabia’s ability to increase its capacity. HETCO forecasted an increase in Saudi
production capacity from 10.68 to 11.15 MMBD.viii
Solving Supply Issues Relating to Middle Eastern Oil
The potential impact of high oil prices in easy the strain on world oil supplies becomes
clearer when one looks at the impact of oil prices on the need for Middle East and North
Africa (MENA) conventional oil production capacity.
•
The IEO2004 called for major increases in MENA oil production capacity. It forecast that Saudi
Arabia’s production capacity in 2025 would be 31.5 MMBD for the low price case, 22.5 MMBD
for the reference case, and 16.0 MMBD for the high price case.
•
The IEO2005 forecasts that conventional MENA production capacity in 2025 will be 51.1 MMBD
for the low price case, 39.5 MMBD for the reference case, and only 28.1 MMBD for the high
price case.
These contrasts are even more striking for Saudi Arabia. For many years, most of
OPEC’s projected increase in production capacity in both the EIA and IEA models has
been driven by Saudi Arabia. In recent times, the Saudi production capacity has received
a lot of attention. Some analysts have questioned the Kingdom’s ability to meet sudden
surges in demand because of its lack of spare production capacity, and others – like
Matthew Simmons – have estimated that Saudi production may be moving towards a
period of sustained decline.
In 2002, Saudi Arabia had an oil production capacity of 9.2 MMBD. This capacity was
roughly 9.0-10.5 MMBD in 2004, and has so far averaged 10.5-11 MMBD in 2005. Like
most of its predecessors, the IEO analysis for 2004 called for truly massive increases in
Saudi oil. It forecast that Saudi Arabia’s production capacity in 2025 would be 31.5
MMBD for the low price case, 22.5 MMBD for the reference case, and 16.0 MMBD for
the high price case.
Te IEO2005 forecasts that Saudi Arabia’s production capacity in 2025 will be 20.4
MMBD for the low price case, 16.3 MMBD for the reference case, but only 11.0 MMBD
for the high price case. Yet, Saudi Arabia already plans to increase its production
capacity to 12.5 MMBD by 2009.
Most analysts, including current and former Saudi Aramco officials, believe that the 20.0
MMBD is an unattainable production capacity. At this point, one can argue that the
Kingdom could reach this production capacity only if two things happen: there are major
technological breakthroughs that enhance recovery of existing oil fields or help find new
reservoirs and there are major supply disruptions that forces Saudi Arabia to meet the
shortages in supply.
General Patterns of Oil Dependence
The US and China are key “drivers” in the increasing demand for energy imports and
production capacity in most models. However, current models project that African and
Middle Eastern imports could double by 2025. India could emerge as a major new
importer, as could other Asian states. Russia could increase domestic consumption
sharply in ways that would reduce its exports. Western Europe and Japan are the only
major importers not projected to make massive increases in potential demand. Once
again, however, the failure to model the high prices or examine supply by supply by
supplier nation in credible terms, leaves massive uncertainties.
US Import Dependence
The US has become progressively more dependent on both a growing volume of imports
and steadily growing imports from troubled countries and regions. Direct US petroleum
imports increased from an annual average of 6.3 MMBD in 1973, to 7.9 MMBD in 1992
to 11.3 MMBD in 2002, and 12.9 MMBD in 2004. Some 2.5 MMBD worth of US
petroleum imports came directly from the Middle East in 2004.ix Additionally, the
average US petroleum imports from the Persian Gulf alone equaled 2.3 MMBD in the
first 6 months of 2005, 2.4 MMBD in 2004, 2.5 MMBD in 2003, 2.2 MMBD in 2002, 2.7
MMBD in 2001, and 2.4 MMBD in 2000.x
If one looks at OPEC exports as a percent of US imports, these ranged from 47.8% in
1973, and 51.9% MMBD in 1992, to 39.9% MMBD in 2002, and 43.6% MMBD in
2004. If one looks at Gulf exports as a percent of US imports, these ranged from 13.6% in
1973, and 22.5% MMBD in 1992, to 19.7% MMBD in 2002, and 19.3% MMBD in
2004.
Future US gross petroleum imports will vary sharply according to price. If prices are low
($20.99/barrel), imports rise to 47.86 MMBD in 2025. If prices are moderate
($30.31/barrel), US gross petroleum imports are still 43.43 MMBD. If prices rise to
$39.87/barrel, however, US imports are only 38.87 MMBD, and they would be far lower
at $50, $60, $70, or more per barrel. Even the “high price” case leaves the US with nearly
60% dependence on oil imports in 2025, but the impact of this dependence on world
supply is far lower than if oil prices are low or moderate. The EIA estimates of future US
imports indicate that moderate oil prices will lead to major increases in US imports from
the Gulf (from 2.5 MMBD in 2000 to 6.0 MMBD in 2025), the Americas (from 3.1
MMBD in 2000 to 5.0 MMBD in 2025), and “other” including North Africa (from 2.7
MMBD in 2000 to 6.2 MMBD in 2025).
The size of direct US imports of petroleum is only a partial measure of US strategic
dependence on imports. The U.S. economy is dependent on energy-intensive imports
from Asia and other regions, and what comes around must literally go around. While the
EIA and IEA do not make estimates of indirect imports of oil from the Gulf and other
regions in terms of the energy required to produce the finished goods, the US imports
them from countries that are dependent on Middle Eastern exports, analysts guess that
they would add at least 1.0 MMBD to total US oil imports.
The failure of the DOE and the EIA to explicitly model such indirect imports, and their
steady growth, is a long-standing and critical failure in US energy analysis and policy. It
seems almost certain that the that the future increase in such indirect imports will, for
example, vastly exceed any benefits in increased domestic energy supply that will result
from the energy bill just passed by the US Congress in the summer of 2005.
Surge in Chinese and Indian Demand for Oil
According to China's state media reports, China imported 79.9 million tons of oil in first
three quarter of 2004, which represented a 40% increase from the first eight months of
2003.xi In 2002, China consumed 5.0 MMBD. According to EIA 2005 high price
estimates, this number could triple by 2025 (12.50 MMBD for the low price case, 14.50
MMBD reference case, and 16.1 MMBD for the high price case).xii
According the BP Statistical Review of World Energy 2005, Chinese imports totaled 3.40
MMBD in 2004. China imported 0.15 MMBD from the US, 0.038 MMBD from South
and Central America, 0.052 MMBD from Europe, 0.365 MMBD from the FSU, 1.264
MMBD from the Middle East, 0.709 MMBD from Africa, 0.045 MMBD from
Australasia, 0.044 MMBD from Japan, 0.824 from other Asia Pacific, and 0.010 MMBD
from others.xiii
China’s domestic production could reach 3.8 MMBD in 2020, but its demand is likely to
be more than three times as high.xiv During 2004, China imported 40% of its oil
consumption, despite the fact that it produced 174 million tons of oil during the whole
year. Some experts believe that recent high oil prices can provide the right incentives for
investment into new technologies to enhance recovery and exploration and increase
China’s domestic output, and reduce reliance on oil imports.xv
There is also the “India factor.” Oil composes 30% of India’s energy consumption, but
the country has only 5.4 billion barrels of oil.xvi India in 2001 consumed 2.1 MMBD, 2.2
MMBD in 2003, and according to the EIA’s reference case forecast Indian consumption
will reach 2.67 MMBD in 2010 and double to as high as 4.9 MMBD in 2025.xvii
i
WTI Crude oil spot price, adapted from the EIA historical database, available at:
http://www.eia.doe.gov/oil_gas/petroleum/info_glance/prices.html
ii
John J. Fialka, “Search for Crude Comes With New Dangers,” Wall Street Journal, April 11, 2005.
iii
EIA, International Energy Outlook 2005, July 2005, Pages 2-3.
iv
See http://www.eia.doe.gov/emeu/cabs/pgulf.html, DOE/EIA estimated in September 2004 that the
Persian Gulf contains 715 billion barrels of proven oil reserves, representing over half (57%) of the world's
oil reserves, and 2,462 Tcf of natural gas reserves (45% of the world total). In addition, at the end of 2003,
Persian Gulf countries maintained about 22.9 MMBD of oil production capacity, or 32% of the world total.
Perhaps even more significantly, the Persian Gulf countries normally maintain almost all of the world's
excess oil production capacity. As of early September 2004, excess world oil production capacity was only
about 0.5-1.0 MMBD, all of which was located in Saudi Arabia.
According to the Energy Information Administration's International Energy Outlook 2005’s reference case
forecast, Persian Gulf oil production increased from 18.7 MMBD in 1990 to 22.4 MMBD in 2001 to 20.7
MMBD. It is expected to reach about 28.3 MMBD by 2010, and 35.2 MMBD by 2020, and 39.3 MMBD in
2025.
The estimate, however, does change in the high oil price case: it is expected to reach about 24.4 MMBD by
2010, and 26.2 MMBD by 2020, and 27.8 MMBD in 2025.
v
EIA, Monthly Energy Review, March 2005, Page 149
vi
Edward Morse and Thomas Stenvoll, “The New Supplier(s) of Last Resort,” Weekly Market Review,
Hess Energy Trading Company, LLC, April 1, 2005.
vii
EIA, International Energy Outlook 2005, July 2005, Page 26.
viii
Edward Morse and Thomas Stenvoll, “The New Supplier(s) of Last Resort,” Weekly Market Review,
Hess Energy Trading Company, LLC, April 1, 2005.
ix
BP, Statistical Review of World Energy 2005, June 2003, Page. 17.
x
EIA, “Petroleum Imports from Qatar, Saudi Arabia, U.A.E. and Total Persian Gulf,” Monthly Energy
Review, August 2005, available at http://www.eia.doe.gov/emeu/mer/pdf/pages/sec3_9.pdf
xi
“China reports soaring oil imports,” BBC News, available at:
http://news.bbc.co.uk/1/hi/business/3654060.stm
xii
EIA, International Energy Outlook 2005, July 2005.
xiii
BP, Statistical Review of World Energy 2005, June 2005, Page 18.
xiv
Jin Liangziang, “Energy First: China and the Middle East,” Middle East Quarterly, Spring 2005,
available at: http://www.meforum.org/article/694
xv
“China to control its reliance on oil imports,” Xinhua, April 23, 2005, available at:
http://www2.chinadaily.com.cn/english/doc/2005-04/23/content_436862.htm#
xvi
EIA, Country Analysis Brief, “India,” available at: http://www.eia.doe.gov/emeu/cabs/india.html
xvii
EIA, International Energy Outlook 2005, July 2005.
Coordination of Oil stocks and Interventions in the Oil Markets
Klaus-Dietmar Jacoby*
_______________________________________________________________
1. Background
To give some background to the rationale behind the establishment of stocks of oil to be used
strategically during emergencies, I will refer to historical precedents in the United Kingdom
and France. The origin of the notion of the need for oil stocks to be used for national security
goes probably back to World War I, when Lord Admiral Winston Churchill first became
aware of the need to procure fuel (in this case, coal) for his military fleet. In 1917, France
experienced a rupture in oil supplies when its army required more petrol than was available,
as available supplies were diverted for use in the Russian Revolution and by American
submarines. Consequently, in 1925, France imposed on its oil industry to reserve stock
representing 25% of the declared amount of oil delivered for consumption during the last 12
months, or 91.25 days of domestic consumption.
In order to supply fuel for military operations during World War II, countries resorted to
compulsory demand restraint programs such as fuel rationing.
As Germany had no
indigenous oil production, it succeeded in a type of ersatz fuel switching by converting coal
into a type of petrol. But it was following Egypt’s blockade of the Suez Canal in the 1950s
that European politicians became increasingly aware of the necessity of maintaining oil
reserves. Eventually, in 1968, the six members of the European Economic Community
(Belgium, France, Germany, Italy, Luxembourg, and Netherlands) agreed to maintain a
minimum level of crude oil stocks and oil products corresponding to 65 days of domestic
consumption. In 1972, this obligation was raised to 90 days.
*
Klaus-Dietmar Jacoby is Head of Emergency Planning and Preparations at the International Energy Agency,
Paris.
1
The IEA’s initial stockholding obligation as formulated in 1974 was “to maintain emergency
reserves sufficient to sustain consumption for at least 60 days with no net oil imports”
[Article 2.1 of the International Energy Program (IEP)]. In 1975-6, the Governing Board
raised the minimum legal obligation from 60 to 90 days by stipulating incremental increases
until the 90 days’ level was achieved in 1980. Throughout the 1980s and 1990s, the overall
emergency reserve stock level of IEA net importing countries has been well above 90 days,
peaking at 193 days in 1986. The IEA used its stocks in 1991 during the Gulf War, when it
made 2.5 million barrels per day available to the market.
By the latter half of the 1990s, many changes in the oil market resulted in a renewed focus on
assuring supply of oil in case of a disruption for both oil-producing and –consuming
countries. The market became more globalize with increased production from of non-OPEC
producers, and output increased to keep pace with the booming U.S. and Asia Pacific
economies. But OPEC’s slow reaction in adjusting its production quotas to accommodate the
Asian economic crisis of 1998 and U.S. economic downturn of 2000 made oil prices drop.
Emergency plans and procedures of the International Energy Agency and its member
countries were reviewed and reshaped in anticipation that possible computer problems related
to Y2K could seriously impact energy security, Then, just as OPEC and non-OPEC producers
had instituted lower production quotas to regain control of oil prices in 2001, the terrorist
events of 9/11 raised fears that oil could again be used as a weapon.
Other geopolitical events, along with perceived diminution of the ability of oil producers to
compensate for a supply loss by using spare capacity, have acted to create a climate of
uncertainty about future supply. In 2002-3, problems in Venezuela led to a strike at PDVSA,
causing Venezuelan production to plummet. Both social unrest in Nigeria, which affected that
country’s oil production, and the second war in Iraq in 2003 reinforced possible risks of a
significant supply disruption. With spare capacity in oil-producing countries at historical
lows and demand from fast-growing economies like China or India increasing, the market
must find new balance. In this context, economies are more vulnerable, as increasingly high
oil prices could negatively effect economic growth. Also, because of tighter management of
stocks due to technological innovation, even historically smaller supply disruptions could
have significant market ramifications. Reminding the world of the existence of the IEA’s
collective stockpile through well-timed news releases serves to assuage the insecurity.
2
A core activity of the International Energy Agency is to create a reliable emergency response
policy. The IEA was established after the first oil price shock in 1974 with an overriding
mandate to establish, maintain and improve systems enabling our member countries to
mitigate the risk of oil supply disruptions. The Agency’s 26 member countries span the globe.
Broad membership is important as interdependency in the global oil market means that
regional disruptions have the potential for global impact. The IEA includes major oil
producers and consumers in its outreach activities and collaboration on energy security
issues.
With globalisation and interdependency of energy markets, the IEA’s energy security focus
relates not only to oil security but also encompasses gas and electricity. Security of natural
gas supply, in particular, is becoming more important with the growing share of gas in the
global energy mix.
Furthermore, it is now widely understood that the attainment of energy security embraces
other policy objectives too. Indeed, as far back as 10 years ago, IEA member governments
stated their “Shared Goals,” which included a commitment to “seek to create the conditions in
which the energy sectors of their economies can make the fullest possible contribution to
sustainable economic development and the well-being of their people and of the environment.”
2. Response Measures and Procedures
By signing the IEA treaty - an “Agreement on an International Energy Program” (IEP), 16
OECD countries founded the IEA as an autonomous body of the OECD. The IEA now has 26
Member countries which represent some 60% of total world oil demand and include all EU
countries as well as some of the new EU countries. Core commitments of the member
countries under the IEP Agreement include:
-
The maintenance of oil reserves equivalent to at least 90 days of net oil imports;
-
To have ready a programme of demand restraint measures to reduce national oil
consumption by 7 to 10%; and,
-
To participate in an oil sharing system in a severe supply disruption using these tools.
-
In addition, member countries cooperate with the oil industry for advice and operational
assistance in emergencies.
3
The committee for discussion and development of security policies and procedures is the IEA
Standing Group on Emergency Questions (SEQ), which is comprised of representatives from
our member countries, together with a representative of the European Commission as an
observer. The SEQ makes recommendations to the IEA Governing Board for consideration
and adoption and it is assisted by an Industry Advisory Board, which includes senior
representatives of oil companies headquartered in IEA member countries.
To reflect the evolution of energy markets since the IEA was established, its underlying IEP
Agreement treaty obligations to share oil in an emergency have been reinforced by a system
of co-ordinated emergency response measures that can be readily calibrated to the
circumstances at hand. This concept, introduced in 1984, is known as “Co-ordinated
Emergency Response Measures” (CERM). It established a flexible framework for
international consultations on co-ordinated stockdraw and other response measures in the
event of an actual or potentially significant oil supply disruption. The formal sharing system
has not been deployed to-date and CERM-based collective responses reflect the belief that,
under normal circumstances, the global oil market is fully capable of determining the most
efficient initial physical re-allocation of supplies in any given crisis scenario. Collective
action utilizing stocks and other measures provides a strategic safety net to reinforce the
market.
3. Response Potential
On the supply side, stocks are by far the most rapid and effective response measure to meet
physical supply shortfalls or the threat of an imminent shortfall. IEA stocks are for strategic
use to avoid negative economic impacts of a severe supply disruption; they are not to be
deployed as a means to manage the market.
As at 1st June 2005, total combined government-controlled and industry-held stocks in IEA
countries were about 4 billion barrels. IEA net importing countries held an amount equivalent
to 118 days of the previous year’s net imports, but when stocks held by net exporting
members are taken into account, stock coverage actually rises to the equivalent of 152 days of
net imports, well above the minimum requirement of 90 days. The ready availability of stocks
is important when OPEC spare capacity is unsure and commercial stocks are low. In this
context the IEA Secretariat sees, with some satisfaction, a trend in member countries to create
4
or increase Government-controlled stocks in place of mandatory industry stocks. With the
completion of U.S. effort to fill its Strategic Petroleum Reserve (SPR) to its 700 million
barrel capacity, the government-controlled reserves held by IEA members are at an all-time
high of nearly 1.5 billion barrels. To put this in perspective, IEA government-controlled
reserves could compensate for a 2 mb/d supply loss for about 700 days, nearly two years.
IEA members also hold over 2.5 billion barrels of commercial stocks.
Other response measures on the supply side, such as fuel switching or surge production,
would not contribute as much now as in the past. An IEA survey (IEA, 2001) showed that
only a few countries like the United States, Japan or Italy have significant potential to switch
from gas to oil or vice versa, a result of the trend to replace oil with natural gas in electricity
generation. Nevertheless, the IEA is updating this fuel switching survey and will discuss the
outcome and implication on short and long term policies. The capacity for surge production
as a potential response to a global supply disruption has also diminished.
On the demand side, policies and measures to save oil have a relevant importance,
particularly for the transport sector. Member countries are obliged by the IEP to have ready
demand restraint programmes which may include light-handed measures to increase public
transit usage, car-pooling, eco-driving, telecommuting (working at home) and speed limit
reductions as well as more compulsory measures like driving bans and fuel restrictions. The
IEA 2005 study, “Saving Oil in a Hurry”, evaluated the potential oil savings by various
measures if implemented in all our member countries with the conclusion that, inter alia:
•
Car pooling and driving bans could save more than one million barrels per day.
•
Speed limits, free public transit, telecommuting, compressed work week (fewer but
longer workdays), driving bans (1 in 10 days) and eco-driving can save more than
500 000 barrels per day.
•
Other measures such as reduced speed limits, encouraging public transit,
telecommuting, compressed work week, driving bans and eco-driving could save
more than 500,000 b/d.
4. IEA Co-ordinated Action
There has been no need to draw on IEA’s emergency stocks since 1991, but as widely
reported in the press, this does not indicate inactivity. Indeed, as scenarios evolved in the
wake of September 11th, the strike action in Venezuela, unrest in Nigeria and war in Iraq, the
5
IEA Secretariat was carefully assessing the situation on a daily basis and kept in close contact
with our member countries, the oil industry and strategic non-member countries. The IEA and
its member countries were ready to act in coordination with oil-producing countries, in
particular, with OPEC countries, and the markets knew it. For these reasons, the possible risk
of a supply disruption was minimized and price spikes and their duration were limited.
The IEA regularly carries out Emergency Response Exercises, which serve to train to staff in
Administrations and industry in IEA emergency procedures as well as to give the opportunity
for an in-depth exchange of views between experts from Administrations and the oil industry
to review procedures and to introduce, if necessary, new measures to react to market changes.
Since 2002, these exercises have included participants from major oil consuming countries
outside the IEA, like China. In 2004, a special Emergency Response Exercise for nonmember countries with the participation of delegates from China, India, ASEAN countries,
Brazil and new EU member countries was held.
Most recently, IEA member countries were tasked with developing a response to a series of
supply disruption scenarios. From this, we learned that an overwhelming majority would first
use stockdraw (82%), followed by demand restraint (12%), and then fuel switching or other
measures (6%) -- answers which closely corresponded to the actual IEA response during the
first Iraq war in 1991-92.
5. Security of Gas and Electricity Supply
The IEA’s work on energy security is not limited to oil. In particular, the concept of security
of gas supply has broadened beyond country borders. The external dimension of security of
supply requires increased attention given the growing import dependency of most IEA
member countries. While import dependency is not, in itself, a threat, it requires governments
and companies to pursue their efforts to diversify natural gas supply (supply sources and
mode of imports: pipeline gas vs. LNG) and transmission routes.
With liberalisation of the natural gas industry, the market is becoming more fragmented due
to both the unbundling of activities and the entrance of newcomers in the market. The
responsibility for security of supply has therefore to be defined and shared between all
players involved, including governments, producers, suppliers, traders, regulators and
6
customers. Policy makers have the responsibility of creating a framework for security of
supply and defining the objectives for security of supply and the responsibilities of each
market participant. For some countries, gas storage will be the most economic choice for
ensuring security; for others, supply flexibility and diversity is adequate to ensure security.
The IEA (IEA, 2004) published a comprehensive study on “Security of Gas Supply in Open
Markets” and is involved in monitoring gas security in its member countries. It has also
started a dialogue with member governments and the gas industry to review the changing
concept of security of gas supply in open gas markets and the roles of the different
stakeholders. However, it is our belief that when the framework has been defined and the role
of the different players defined, governments should leave market players the choice of
instruments/means to provide the required level of security of gas supply.
Electricity is also a concern of supply security, as several shortfalls in recent years in OECD
countries all over the world have shown. Similar to gas, electricity shortfalls have mostly
national and regional impacts but no global ones. Therefore, while there is no urgency to
introduce global emergency response policies and measures, there is nevertheless the need to
analyse the different types of emergencies and how best to avoid shortfalls or to remedy the
situation. In this context, the IEA has recently published a study on “Saving Electricity in a
Hurry” which deals with temporary shortfalls in electricity supplies. Key messages are how to
develop a strategy to save electricity quickly and what measures might be appropriate to use.
6. Challenges
As the oil market continues to evolve, the IEA and its Members recognise the importance of
keeping pace with market dynamics. One by-product of the increasingly sophisticated oil
market is price volatility. This is an issue of common concern to producers and consumers.
The IEA does not believe strategic oil stocks can be effectively used to address price
fluctuations. This would distort market mechanisms and signals, and invites unnecessary
confrontation with producers. The IEA believes emergency oil stocks should be reserved for
emergency use. Issues of volatility and other market imperfections should be addressed, inter
alia, through dialogue and data transparency.
7
The IEA’s World Energy Outlook (forthcoming) projects that by 2030 the world will be
consuming two-thirds more energy than it is today. Almost three-quarters of the increase in
demand is expected to come from the transport sector and oil is expected to still dominate this
sector. Meanwhile, consumption in developing countries and the transition economies is
expected to grow much faster than in the OECD. Under one scenario, almost two-thirds of
incremental demand for oil between now and 2030 is projected to come from outside the
OECD, particularly from Asian economies.
If policies do not change and this scenario becomes a reality, it would have significant
implications for security of supply which cannot be addressed adequately from an insular
perspective. The success of IEA efforts today to reach out to these emerging consuming
countries and to encourage the adoption by these countries of the principles embodied in the
IEA’s Shared Goals can, we believe, significantly improve global energy security in the
coming decades.
The Agency is proactively involved in the wider producer/consumer dialogue at the
Ministerial level in the International Energy Forum and at a technical level in the Energy
Experts Meeting, as well as regional and topical workshops and seminars. Also, the Agency
has Memoranda of Understanding in place with Russia, China and India and extends its
global reach further through collaboration with regional organisations. The IEA is committed
to forging a dialogue and cooperation with regional bodies, thus avoiding duplication of
effort and ensuring that topics of specific regional concern are addressed and evaluated from
a global perspective.
The span and scope of the Agency’s outreach programme reflects the IEA’s commitment to
improved global energy security and a clear recognition of the increasingly global nature of
security of supply issues. As advocates for the collective benefits to be derived from
adherence to the IEA shared goals to which all EU countries subscribe, the IEA Secretariat is
confident that with sustained and targeted effort, this wider collaborative effort will bear fruit
and global energy security response policies will converge.
8
REFERENCES
IEA (2005), Saving Oil in a Hurry, International Energy Agency, OECD/IEA, Paris.
_____ (2004), Security of Gas Supply in Open Markets, International Energy Agency,
OECD/IEA, Paris
_____ (2005), World Energy Outlook, International Energy Agency, OECD/IEA, Paris,
forthcoming in November, 2005.
Points to Discuss
¾ The IEA policy is that oil prices should not be used as a reason for an emergency stockdraw.
(Only a severe supply disruption should serve as a trigger.) Do you think this economically
reasonable?
¾ If oil prices increase further in the direction to $100/barrel, what do you think the IEA and its
members should do?
1. Implement voluntary and/or compulsory demand restraint programmes
2. Change oil-related fiscal policy
3. Declare a severe supply disruption and start drawing down stocks
¾ The IEA and its member countries released oil stocks only in response to the 1991 Gulf War. Do
you think that the emergency stock potential has much more in common with deterrent systems
like nuclear weapons, i.e. “show them but better not use them”?
9
September 2005
A World Agreement on Oil?
Richard N. Cooper
This paper addresses ways to cope with potential instability in the world oil market, with a view
to whether action by the L20 can do anything about it. It is often said that the major geographical source
of oil, the “Middle East,” is a highly turbulent and politically unstable area. In fact, there has been
remarkable political stability in the region, at least as measured by the longevity of its political leaders
and key decision-makers. King Hussein of Jordan came to the throne in 1952, and Asad became
president of Syria in 1972. Both have been replaced smoothly in the last few years by their sons. Rulers
of Libya, Oman, and the UAE have been around for over 30 years. Saddam Hussein became president of
Iraq in 1979 and was a key decision-maker before then; his rule was ended by the United States in 2003.
Mubarak became president of Egypt after Sadat’s assassination in 1981, and was just re-elected. Fahd
became king of Saudi Arabia in 1982, but as Crown Prince he had been effective ruler for seven years
before then; the pattern was repeated when Abdullah became king on Fahd’s death in 2005, after about a
decade as effective ruler as Crown Prince. Even the Iranian revolution and its firmly ensconced clerical
regime are now 26 years years old. Only Lebanon and the Palestinians have experienced continual
turbulence during the past three decades, and neither is directly concerned with production of oil.
It is true that oil supplies have been disrupted three times by political turbulence, in 1979-80 with
the Iranian revolution and subsequent invasion of Iran by Iraq; in 1990 with Iraq’s invasion of Kuwait;
and in 2003 with the US invasion of Iraq, following a long UN embargo that limited Iraq’s exports of oil.
In all cases Saudi Arabia (and others) increased their production of oil to compensate for the shortfall,
although not with perfect timing.
Interruptions in flows of oil can originate outside the Middle East as well, as we have learned in
recent years with serious disturbances in Nigeria and in Venezuela in 2003, and with the extensive
damage to both crude production and especially refinery production by hurricane Katrina on the US Gulf
1
Coast in 2005. Nonetheless, there are some reasons to be concerned about potential turbulence in the
Middle East, for at least three reasons. First, the Israel-Palestinian conflict remains unresolved, and could
flare up to a point at which Arab oil suppliers curtail their exports (or more likely limit increases in
production) to show sympathy for the Palestinians and to put pressure on the United States to be less
solicitous of Israel.
Second, some states have designs on their neighbors, although the removal of Saddam Hussein
has probably limited the main threat under this heading. Only Jordan among countries in the region has
settled borders; and Iran may desire to destabilize the regimes of neighboring countries if not literally
coveting their territory (although it occupies several islands claimed by the UAE). Further afield,
Kashmir (between India and Pakistan) and Cyprus (between Turkey and Greece) remain areas of
contention, although each is over a thousand miles from Kuwait at the head of the Persian Gulf.
Third, several countries face acute problems of succession after today’s long-lived leaders pass
away (Libya and Egypt especially come to mind), although as noted recent successions in Jordan, Syria,
and Saudi Arabia have been relatively smooth. Islam as a creed for political organization holds leaders
accountable to the rule of law as well as to specifically religious injunctions on behavior. So rulers that
deviate from acceptable behavior risk religious wrath, and authoritarian regimes provide no peaceful
outlet for this dissatisfaction. The clerical regime in Iran faces the age-old tension between Islamic
severity and Persian indulgence, as well as tensions with Iranians who wish to be part of the modernizing
world.
Nonetheless, the governments of the oil-producing countries have a continuing interest in
producing and selling oil, since it is the main source of public revenue in all the oil-producing Middle
Eastern countries, and they are unlikely deliberately to disrupt the flow of oil. They may however resist
increasing supplies in the interests of raising world oil prices.
The last qualification is highly relevant. The US Department of Energy projects world demand
for oil (assuming 3.0 percent growth in the world economy and an oil price of around $27 a barrel) to
grow from 77 mb/d in 2000 to 121 mb/d in 2025. More than half of this growth needs to come from
2
OPEC, concretely from Venezuela and the Middle East, the only areas of OPEC that can expect to
produce substantially more oil than they are now providing. Thus if this 2004 projection comes to pass,
world dependence on oil from the Persian Gulf will grow substantially, from 29 percent of the world total
in the mid-1990s to nearly half in 2025. To provide this increment of over 25 mb/d, significant
investment in exploration and development must occur in the countries of the Persian Gulf, and especially
in Saudi Arabia, which allegedly has the largest proven reserves, at around 250 billion barrels, but with
Iraq, Iran, Kuwait, and UAE all making significant contributions.
Vulnerability
For the reasons noted sitting governments are not likely deliberately to disrupt the flow of oil.
Disruptions are therefore most likely to arise from internal conflicts between contending claimants to
leadership. This could arise either as an inadvertent by-product of the conflict, or deliberately if one
faction wanted to deny oil revenue to a competing faction. A succession struggle is likely to be confined
to a single country, although factions may enlist tacit or overt support from neighboring countries.
But that still leaves the possibility of disruption by non-state actors – disaffected ethnic, religious,
or other political groups – attacking the sitting government or even the system of government; or by a
government that perceives it has nothing to lose. How much damage could be done?
There are two sources of exit for Persian Gulf oil: (1) through pipelines to loading terminals in
the Gulf, thence into tankers that exit through the Strait of Hormuz to the Arabian Sea and the open
ocean; (2) through pipelines to loading terminals on the Red Sea (Saudi Arabia) or the Mediterranean Sea
(Iraq through Turkey), thence into tankers destined for distant refiners and distributors. Before reaching
the loading terminals the oil must be gathered from disparate oil wells and the gas and other unwanted
materials separated from it. Thus there are four potential bottlenecks: gas-oil separators, which are large,
expensive pieces of equipment; pipelines to terminals; loading terminals, which are relatively few in
number; and the Strait of Hormuz. For oil pumped to the Red Sea, the Suez Canal might seem to be a
potential bottleneck. But it was closed for 15 years following 1967, giving great encouragement to
supertankers, the largest of which are too large to use even the enlarged Canal, but offer cheap
3
transportation despite that. In any case, the most rapidly growing markets for oil are in Asia, and tankers
can exit the Red Sea to the south.
Pipelines are long and vulnerable, and can be cut without too much difficulty. But they are easy
to repair. Gas-oil separators are highly specialized and expensive machines, with long procurement lead
times. A loss could be significant, but can be avoided by installing spare capacity and ordering spare
machines. Loading terminals are robust and relatively easy to protect physically against raids, except by a
well-armed foreign power. Of course, effective protective, preventive, and remedial measures assume
that a government is effectively in charge. Civil war or major and persistent guerrilla actions could be
highly disruptive.
What about the Strait of Hormuz? Despite its constrictive appearance on a world map, this is not
a small body of water. The Strait is about 35 miles wide at its narrowest point (about twice the width of
the English Channel), and exceeds 45 meters in depth throughout most of its width, sloping gradually
from the Iranian side to over 200 meters deep off the coast of Oman. The two ship channels (one for
incoming vessels, one for out-going vessels, each two miles wide with two miles separation between
them) lie wholly within the territorial waters of Oman at the Strait’s narrowest point. In the mid-1990s
traffic averaged about 60 ships a day, roughly one-quarter of which were tankers. This is heavy, but only
one-third the traffic through the slightly narrower Strait of Malacca, and somewhat lighter than the traffic
through the much narrower Bosporus.
The Strait of Hormuz is thus much too large and too deep to be blocked, as the Suez Canal was in
1967. Military forces could however attack shipping, and the Strait could be mined by a national power
of some means. Iran could do either. It has acquired Kilo-class submarines from Russia and land-based
silkworm missiles from China. Its air force has attack planes originally provided by the United States and
France. It mined the Persian Gulf during the 1980-88 Iran-Iraq war, especially after Iraqi aircraft bombed
its offshore oil-loading terminals, and presumably maintains a large inventory of mines. Of course such
actions in the Strait, in the territorial waters of Oman, would be an act of war. Conceivably, Iran could
deny responsibility for mine explosions that damaged one or several ships. It could even feign
4
participation in search for mines. The presence of mines would inhibit commercial shipping, and
insurance rates for Gulf-bound vessels would rise substantially, perhaps prohibitively. So some
disruption could be caused, but short of war it would be temporary. Even with war, the Strait could be
cleared relatively quickly (measured in weeks, not days) if US and allied forces were engaged to do so.
But as noted above, Iran has no interest in preventing oil from being shipped out of the Persian
Gulf, or merchant goods from being shipped into the Gulf. Iran is highly dependent on both oil revenues
and on imported goods. Thus an attempt by Iran to block the Strait would be an act of desperation,
induced by what Iran considered extreme provocation, such as an attempt by its neighbors or the
international community to embargo or blockade Iran.
Thus we have two questions: Will the Persian Gulf countries make investments to increase oil
production on the required scale? Will the world find it acceptable to be drawing such a high proportion
of such a critical product from a single region? These questions in turn suggest two quite different
strategies, the first to do what can be done to assure the required investment, the second to diversity
energy sources so significantly that the investment will not be required. Both require international
collaboration, but of quite different kinds, and involving different parties.
First strategy: Assuring Saudi Investment
The first strategy is to persuade the Gulf governments, and especially the government of Saudi
Arabia, the key player, to commit to making the extensive investments required, over time, to increase oil
production and export by the required amounts to assure a price, say, in the range $20-25 a barrel (in
dollars of 2005). Government commitments are required because all these countries have national oil
companies that control the flow of oil, although how Iraq rebuilds its productive capacity remains to be
seen, and could involve private companies to an extent not seen in the Gulf since the early 1970s. This
assumes, of course, that the Gulf countries can increase their oil production by a factor of roughly two
over the next two decades. Matthew Simmons (2005) has recently argued, based on an examination of
hundreds of technical papers by petroleum engineers working in the country, that Saudi Arabia is
5
currently at or even exceeds its optimal economic production, that except for two areas the country has
been widely explored, that further large fields are unlikely to be discovered, that the current large fields
are being over-exploited (from the perspective of ultimate recovery) and soon will experience declining
production. Saudi Arabia will therefore have to struggle to maintain production in the vicinity of ten
mb/d; doubling that production on a sustained basis, on this view, would be impossible. The Saudi
government, in contrast, has recently suggested that it will increase productive capacity to 13 mb/d,
although so far as I know there is no evidence, either in terms of committed funds or exploratory and
developmental drilling, to suggest that the process has actually started.
The L20 might provide a forum in which Saudi Arabia could be cajoled to provide much more
information than it has traditionally done on its capacity-building plans, and secondly to commit itself to
make investments in new capacity against expected growth in world demand for oil (net of increased nonOPEC production), including the construction of spare capacity to help deal with occasional shortages
arising elsewhere, as it has in fact done during the past 30 years; and to stock spares of expensive, longlead time equipment such as gas-oil separators, as insurance against terrorist or other disruptive actions.
Such investments would themselves (by agreement) be made more transparent, be monitored, and be the
topic of occasional review by the L20 or their deputies. The commitment also might involve the
construction of new or enlarged pipelines to the Red Sea, to reduce dependence on the Persian Gulf as a
point of exit, although this might be less economic in view of the rapid growth of markets for oil east of
Arabia.
Such a commitment by Saudi Arabia would no doubt also stimulate the other Gulf countries to
increase their investments in additional production, so long as it could be done economically, so as not to
lose market share to Saudi Arabia. The details of allocation of additional investment (including perhaps
Venezuela, the other OPEC country with significant known possibilities for expanding production) could
and would no doubt be worked out within OPEC.
The other major oil producers within the current list of L20 countries are Russia and Mexico, as
well as Canada and the United States. Russia at least in principle allows private exploitation of its oil
6
reserves, subject to government taxation and other government regulations, although that may change in
the coming years. Mexico maintains a national monopoly on oil exploitation, and has (deliberately?)
limited its increases in production more or less to incremental domestic needs during the past two
decades, although that may be due in part to technical limitations on the ability of Pemex to exploit
increasingly deep offshore oil. Both countries would no doubt demonstrate a strong interest in any L20
discussions of oil production, but neither is in a position to make the commitments (assuming Simmons is
wrong) that Saudi Arabia is, and the policies of each would very likely be influenced by any prospective
commitment by Saudi Arabia, and indeed could be made part of a broad L20 agreement.
This strategy of course implies increasing dependence for oil on OPEC, and on the Persian Gulf
in particular, with the vulnerabilities noted above. Furthermore, it would re-enforce the position of Saudi
Arabia in the world oil market, and in particular its ability to threaten to withhold oil (explicitly or
implicitly) motivated by political or economic considerations. Such a strategy would place heavy weight
on continued cooperation by Saudi Arabia over the coming years within an agreed L20 framework.
If these consequences are unacceptable, an alternative strategy is needed.
Second strategy: Vigorous Diversification of Energy
The starting point for the alternative strategy is that high and growing dependence on the Persian
Gulf for a critical input to modern economies is unacceptable at a fundamental level, particularly when
the critical resource is state controlled and sold at a price that is routinely managed through restriction of
supply – the situation that has obtained since 1974. This alternative involves an aggressive pursuit of
conservation and development of substitute products. To be viable, such a strategy requires agreement on
an effective floor below which oil prices would not be allowed to drop, say $20 a barrel, to prevent Saudi
Arabia from undermining alternative investments through occasional bouts of low pricing.
The elements of such a strategy have been outlined in many places: most explicitly by Shultz and
Woolsey (2005), but also in Lovins and Datta (2004), and in Lackner and Sachs (2005). New
technologies are not required for a serious start, although existing technologies would be improved and
7
near-proven technologies would be developed more urgently if such a strategy were adopted. The key
elements would be: 1) pushing motor fuel conservation hard, especially clean Diesel and hybrid vehicles;
2) high priority work on improved batteries to further (1); 3) pushing ethanol and bio-diesel hard,
especially cellulosic biofuel that relies mainly on agricultural and forestry waste products; 4) faster
development of Canada’s (and perhaps Russia’s) tar sands; 5) further development of coal liquefaction.
Hybrid cars – internal combustion combined with electric motor – can double the mileage of
automobiles and light trucks. They could be strongly encouraged, either by raising CAFÉ standards or by
imposing higher taxes on gasoline and perhaps non-hybrid cars. Of course, people cannot buy more such
cars than are being produced, so the automobile firms need to be encouraged strongly to increase their
production of improved hybrid vehicles. Clean diesel fuel also significantly increases mileage, so the
environmental regulations tilting against diesel should be reviewed in view of improved diesel fuel, as has
been done in Europe.
Mileage can be increased further with better, cheaper batteries, which could fuel automobiles on
short trips, 10-20 miles, which would cover most household auto use. Batteries could be charged from
house current, at rates equivalent to $1 a gallon. This technology is not yet at hand, but it seems to be
close; further work should be accelerated and, if successful, rolled out with the hybrid cars.
Mileage in terms of petroleum can be increased further by mixing gasoline with ethanol or
making biodiesel from agricultural products, including waste products. Here the promising new
developments are the possibility for using waste agriculture and forestry products, mainly cellulose, to
produce liquid fuel through bio-transformation. Even offal from chicken rendering plants, and old tires –
indeed almost any organic material – can be used. Automobiles using electricity and biofuels could reach
mileages of up to 500 miles per gallon of petroleum product – a huge reduction in oil demand from that at
present.
In addition, unconventional oil could be developed more rapidly, including the infrastructure to
move it. The Canadian tar sands are said to be economic at $22 a barrel, and already produce about 1
mb/d. They are abundant – second only to Saudi Arabia in proven reserves – and are being developed,
8
but could be developed faster and more conspicuously. Venezuela and Russia also have abundant tar
sands that could and no doubt under the right conditions would be developed.
Finally, coal liquefaction is a proven technology. Germany used it during the Second World War,
and South Africa developed operating plants in response to the economic sanctions that were imposed
against that country for many years, and allegedly can produce liquid fuel from coal economically at $45
a barrel. With a large rollout and larger scale plants, this cost could undoubtedly be reduced, perhaps by
fifty percent as suggested by Lackner and Sachs (2005).
The problem with such concerted strategy for reducing demand for petroleum, partly through
conservation, partly through substitutes, is that Saudi Arabia (and perhaps others, such as Iran) could
undermine any private investment based on an oil price in excess of $x by selling oil for long enough
below $x to undermine the investment, in effect predatory pricing by a quasi-monopolist. Such a
possibility strongly inhibits new investment in both high-cost conventional oil and in alternatives. Thus
this strategy would be greatly enhanced by agreement among major users of oil not to accept oil priced
below some agreed level, say $20 a barrel. Such an agreement would be implemented by agreement to
impose a variable levy on crude oil from Saudi Arabia or elsewhere priced below $20, to bring the tariffinclusive price to the targeted minimum. Such a tariff could be on an MFN basis; but so long as Saudi
Arabia is not a member of the WTO it could legally be applied to Saudi oil alone, since that country is the
major potential challenger to the strategy.
The main purpose of the strategy would be to reduce dependence on Persian Gulf oil. It would
have the effect of weakening the oligopoly power of OPEC, but that would not be its main purpose. This
contrasts with the suggestion of Morse and Jaffe (2005), who have proposed that Saudi Arabian oil be
discriminated against unless Saudi Arabia opens its territory to private exploration and development. But
compliance by Saudi Arabia with the Morse/Jaffe proposal would increase, not reduce dependence on
Persian Gulf oil, although it would reduce state influence in oil pricing.
9
Composition of the L20
Either of these two strategies requires international cooperation: the first mainly by Saudi Arabia,
the second by the major exporters of manufactured products, including China, Brazil, and India, to assure
a common cost of oil, a key industrial input. Here is the conundrum: it is difficult to discuss Strategy 1
without the presence of Saudi Arabia, since agreement by that country would be necessary; it is difficult
to discuss Strategy 2 in the presence of Saudi Arabia. Thus the composition of the L20 will shape, or at
least limit, its agenda. The composition of the group needs to be formulated with an eye on the
prospective agenda, and on desired outcomes.
References
Cooper, Richard N., “World Trade, the Middle East, and the Stability of World Oil Supplies,”
The World Economy, 21(June 1998), 471-481.
Lackner, Klaus S., and Jeffrey D. Sachs, “A Robust Strategy for Sustainable Energy,” Brookings
Papers on Economic Activity, No.2, 2005, forthcoming.
Lovins, Amory B., E. Kyle Datta, and others, Winning the Oil Endgame: Innovation for Profits,
Jobs, and Security, Snowmass, CO: Rocky Mountain Institute, 2004.
Morse, Edward L., and Amy Myers Jaffe, “OPEC in Confrontation with Globalization,” in Jan H.
Kalicki and David L. Goldwyn, eds., Energy and Security: Toward a New Foreign Policy Strategy,
Baltimore, MD: Johns Hopkins University Press for Woodrow Wilson Center Press, 2005.
Shultz, George P., and R. James Woolsey, “Oil & Security,” Committee on the Present Danger,
2005.
Simmons, Mathew R., Twilight in the Desert: the Coming Saudi Oil Shock and the World
Economy, Hoboken, NJ: John Wiley & Sons, 2005
10
Energy Security:
The Gas Dimension
David G. Victor
Stanford University and the Council on Foreign Relations
BEYOND OIL
For more than three decades Americans have examined their energy security through the
lens of oil. Liquid in form and dense with energy, oil has been unbeatable in moving cars,
trucks, and airplanes. Oil prices arise in a world market that is often buffeted by geopolitical
gyrations, occasionally with severe effects on the world economy. Outside oil, however,
questions of energy security have barely arisen. And while oil is the single largest source of
primary energy for the world economy, nearly three fifths of the world’s energy comes from
sources that are close to home and available with confidence (figure 1).
This oil-centered concept of energy security is set to change rapidly. Prized for its high
efficiency and clean burning, consumption of gas has grown sharply since the 1950. Natural gas
has become an indispensable fuel, especially for the generation of electricity. Gas drillers, like
all who hunt and gather, are exhausting the conventional gas sources close at hand and are now
tapping more distant and exotic locales. Consequently, most of the world’s largest gas markets
face the prospect of importing large amounts of natural gas. In the United States, for example,
onshore gas production is declining sharply; while deepwater production in the Gulf of Mexico
and techniques for extracting the natural gas from coal seams in the West have filled the gap,
total U.S. domestic gas production has been nearly flat since the early 1990s. Almost all the
incremental U.S. demand in gas over that period has been supplied by imports from Canada; yet
in recent years Canadian supplies have also begun to dwindle, leading North American gas users
to look further afield.
2
Figure 1:
Structure of Global Primary Energy Consumption: Historical data and IEA WEO 2004
Projections
100%
Other renewables
80%
Nuclear
Hydro
60%
Natural Gas
Oil
40%
Coal
Biomass and
Waste Total
20%
18
60
18
70
18
80
18
90
19
00
19
10
19
20
19
30
19
40
19
50
19
60
19
70
19
80
19
90
20
00
20
10
20
20
20
30
0%
These issues are hardly unique to North America. In Europe, the gas market emerged in the
1950s around local supplies in areas such as in the Netherlands and in northern Italy. For the last
three decades, however, most new supplies have come from outside western Europe—notably
Russia and Algeria. About 30 percent of the gas in the west European market comes from
Russia; the fraction approaches 100% in parts of central and eastern Europe where bottlenecks in
the pipeline network and the absence of convenient alternative energy sources gives Russia (i.e.,
Gazprom) a secure monopoly. So far, Russia has proved to a highly reliable supplier. From the
time that the first Russian export pipelines began operation around 1970, through even the
darkest period of the cold war in the early 1980s, the record of Soviet gas deliveries was
remarkably consistent. Only the 1990s—after the Cold War had ended—did the Russian supply
hiccup for two brief periods. One, in 1995, arose in the wake of political turmoil in Ukraine, the
main transit country for Russian gas exports. These troubles spurred Gazprom and a German
importer to build a bypass line around Ukraine and through Belarus, which was seen at the time
as more reliable. The second interruption, in February 2004, lasted only a day and involved
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relatively small amounts of gas in transit along that new pipeline across Belarus. Belarus had
fallen out of Russian favor, and Gazprom was freezing its users to demand higher prices and
control of the pipeline. These events are rare because Gazprom knows that they are a one-shot
game. In the early 1980s Algeria—the second-largest exporter of gas to Europe, after the Soviet
Union—left a costly pipeline that crossed the Mediterranean empty for nearly two years while it
haggled over price. (At the same time, Algeria was the largest supplier of LNG to the United
States and demanded higher prices. The U.S. government refused to let private importers pay the
new price, Algeria’s LNG supply faltered, and the U.S. actually shut one of its LNG terminals—
only in 2004, more than two decades later, the facility on Elba Island was reopened.) The
experience branded Algeria as an unreliable gas exporter and explains why Algeria, ever since,
has fallen far short of its potential role of gas exporter. Algeria’s catastrophic strategy—an effort
to do for its gas exports what Algeria and other OPEC members had achieved in higher oil
prices—is long remembered as a misstep. It is unlikely, but not impossible, that Russia could
strategically or accidentally become a flaky supplier, and such a risk requires contingent
planning.
In the coming decade the big news for gas-poor markets will be rising gas imports in the
form of liquefied natural gas (LNG). There has been steady progress in the entire chain of LNG
technologies—the compressors and coolers that turn it into a minus 260 degree Fahrenheit liquid,
the stainless steel tanks and special ships for storage and conveyance, and the receiving terminals
that regasify the liquid to useful form. The cost of moving a quantity of LNG today - through
the whole chain of compressors, coolers, tanks, ships, and regasifiers - is just two-thirds that of
the projects that began operation in the early 1990s.
LNG matters because it appears to be changing the structure of gas markets. In its
natural state, gas is bulky and costly to move except by pipeline. Even as pipeline technologies
have improved—in part under competition with LNG—it is impractical to build most pipelines
longer than a couple thousand miles, and underwater pipelines are especially costly to install and
operate. Thus most natural gas markets have been regional affairs—covering Western Europe,
or bits of Latin America or North America, for example—often with large variations in price
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between markets because it was nearly impossible to move gas from glutted regions to those
where prices were dear. As a compact liquid, natural gas can move in a global market.
LNG has allowed much longer distance gas transportation, but until very recently the
LNG business did not yield an integrated world gas market. The reasons are technological,
financial and political. The basic technologies for LNG have been known since the 1940s and
were first used as convenient way to keep gas on hand for moments of peak demand. (The worst
accident in LNG history occurred in 1944 at the very first of these early “peaker” LNG storage
facilities—in Cleveland. A ruptured tank filled the sewers with gas, and the subsequent
explosion killed 128 people and leveled one square mile.) As a scheme for bulk trading, LNG
was really pioneered in the late 1960s by Japanese engineering companies; their government,
aware that Japan’s growth required energy resources and the country was poorly endowed with
its own, led the effort. LNG trains are capital intensive, and justifying the expenditure required
long-term contracts (typically 20 to 25 years). In this contracted market, there was no fungibility
of supply, which is the hallmark of a global commodity. The banks that financed these projects
liked point-to-point trading because revenues were easier to predict; the Japanese government
also favored dedicated trading because it assured security. The business was extremely lucrative
as the Japanese governments was willing to allow its gas and electric companies to pay high
prices for LNG, which was seen as more secure than oil. While other countries—the United
States, Korea, Taiwan, Italy, Spain and France—also imported LNG, Japan dominated the
business and valued security over flexibility. Nearly everywhere, until the 1990s, LNG trading
routes were more like long, dedicated pipelines than fungible cargoes that could sail to whatever
port offered the best price.
These managed markets are now changing. The world’s largest gas markets—the United
States—is been open to competition since the late 1980s. The Western European gas market is
now increasingly governed by rules and trading relationships that allow markets to determine
prices and shipments. Elsewhere in the world—in South America and India, notably, but not yet
in China—market forces are arriving, slowly, for gas. At the same time, the cost of LNG trading
has declined—making it competitive with local gas sources in many markets, not just in securityminded Japan—and new suppliers and users of LNG are creating a liquid market. The
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significance of LNG is not its sheer volumes, but the prospect for arbitrage. The volumes are
still small—in 2003, for example, just 6% of the world’s gas consumption was moved as LNG.
Even if the volumes of gas traded as LNG remain small, this arbitrage is already connecting
disparate markets into something resembling a global market. As shown in figure 2, while the
total production of gas today is about 2.5 times the level in 1970 international trade has risen
sharply. LNG trade has increased more than sixty-fold during the period. Pipelines dominate
international gas trade because bulk gas over relatively short distances is easier to move by pipe
than as LNG (figure 3).
The emerging global gas market will force policy makers in the U.S. and other gas-using
nations to adopt new thinking about energy security. LNG offers the potential for a more
efficient and environmentally ‘friendly’ energy system, but the security challenges will be
difficult to handle because they do not map easily onto any of the existing foreign policy
apparatus. Key decisions about fuel choices will be made by regulators, especially in the electric
sector, who are not accustomed to pursuing a global security strategy. Insofar as the LNG
industry itself has worried about security, it has hardened its facilities against the already
miniscule threat of terrorist attack; yet the much larger risks arise from market manipulation and
interconnections in a global gas market that local regulators have barely contemplated. In
addition to preparing the markets where gas is used, a successful gas security strategy will
require engaging with the world’s largest gas producers—notably Russia, which holds onequarter of the world’s gas reserves, is already the world’s largest producer and exporter, and is
best positioned to be a direct and indirect supplier to the U.S. market.
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Figure 2:
Global Gas Trade and Production, 1970-2004
70
60
Index (1970=1)
50
Pipeline Trade
40
LNG Trade
Production
30
Total Gas Trade
20
10
0
1970
1975
1980
1985
1990
1995
2000
2005
Figure 3:
World Gas Trade, 1960-2004
700
600
Billion Cubic Meters
500
400
LNG
300
200
Pipeline
100
0
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
Data Source: IEA, BP
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RUSSIA’S SPECIAL ROLE
A full tour of the world’s gas producing and consuming regions is beyond the scope of
this paper, but the most striking feature of this emerging gas market is the central position of
Russia. Russia’s proximity to the European market has already made it the world’s largest gas
exporter, accounting for 21% of all the international trade in gas. (The next largest exporter,
Canada, is far behind.) Russia is poised to become even more dominant supplier in the global
gas market. While world is generally rich in gas resources—proved reserves will last 70 years at
current production level, and likely resources are many times that level—Russia unquestionably
controls the largest cache (about 27 percent of the world total, see Figure 4). While most of
Russia’s richest resources are found in difficult terrain or distant from markets (or both)—in
Northwest Siberia where permafrost makes it difficult to anchor equipment to the ground, in the
icy seas off Sakhalin and in the Arctic where drilling is costly and dangerous, and off Lake
Baikal where more than three thousand kilometers of pipelines are needed to reach the closest
markets in China and Korea—technological change is making it feasible to tap those resources
economically. The size of the resource is staggering. The giant Shtockman field in the Barents
Sea, discovered only in 1988, has reserves double those of all Canadian gas fields combined.
The Kovykta field near Lake Baikal holds roughly twice the reserves in all of China. Most of
Russia’s gas appears to be in the Far East where essentially none of the potential has been
tapped; active drilling could find still more super-giant gas fields. With an attractive
environment for investors to apply capital and new technology, Russia is the prize in the gas
world.
Russia’s biggest liability is the firm Gazprom, a state-dominated company that controls
nearly all gas production, piping and distribution. Like most state energy companies, Gazprom
is organized to yield political benefits rather than economic efficiency and sustainable profit.
The firm is heavily indebted and would be bankrupt under western accounting standards. Its
assets are not financial but political—Gazprom, unlike any other player in Russian gas, can
mobilize the power of the Russian state and thus is assured of a lucrative role in any gas project.
As incumbent owner of Russia’s pipeline system it can control which firms are able to sell their
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gas, which explains why 93% of all the gas produced in Russia comes from Gazprom’s own
fields even though the ownership of gas resources is more evenly distributed and includes
independent gas companies and oil companies. The neighboring gas-rich countries of
Kazakhstan and Turkmenistan are also at the mercy of Russia and Gazprom when they attempt
to move their gas across Russian territory to markets in Ukraine and especially the west.
Landlocked Turkmenistan, is especially disadvantaged because it has huge gas production but no
access to markets. Gazprom has forced Turkmenistan to accept prices that are about one-third
the level at which Russia exports gas to the west and has appropriated the difference for itself.
This predatory arrangement explains why Gazprom’s production strategy for the near term relies
on the fact that it is cheaper to buy gas from Turkmenistan than to invest in practically any new
gas producing project.
Figure 4:
2004 Global Natural Gas Proved Reserves by Countries
Others
14%
China 1%
Norway 1%
Russian Federation
27%
Australia 1%
Malaysia 1%
Indonesia 1%
Turkmenistan 2%
Kazakhstan 2%
Iraq 2%
Venezuela 2%
Algeria
3%
Iran
15%
Nigeria
3%
USA
3%
Qatar
14%
United Arab Emirates
3%
Saudi Arabia
4%
Data Source: BP 2005
Note: "Others" is included the
countries with reserves less than
2 trillion cubic metres
Gazprom’s dysfunction is a looming problem for the West because Russia is already the
largest fixture on the world gas market, and success in creating an attractive place for new
production is important to the realization of a vision of globally available gas supplies at low
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cost. Western experts have poured obsessive attention on the need to open the Russian gas
market to alternative suppliers, such as through the adoption of rules that allow “third party
access” to the Russian pipeline network and break the grip of Gazprom on trading and marketing
of gas. Such initiatives are probably a fantasy, and the most likely outcome is that Russia will
sustain and solidify its position as the world’s largest gas producer and exporter while, at the
same time, keeping Gazprom intact. Indeed, within the last year Russia has not only reasserted it
special position as Russia’s gas hegemon, but it has also used the power of the Russian
government to help acquire assets that are making Gazprom a large state-owned oil producer as
well.
Among the many problems created by Russia’s dysfunctional system for owning and
managing its gas infrastructure is economic inefficiency. At present, Russia yields just 85 cents
of economic output per cubic meter of gas that it consumes. In contrast, other nations that share
Russia’s frigid latitudes are much more efficient—for example, Canada produces $8 and Finland
$32 in income for each cubic meter of burned gas. If Russia used gas with Canadian efficiency
then Russia would liberate 360bcm of gas, or nearly three times as much as it exports today to all
the European Union. Such comparisons are obviously unfair because Russia and Canada differ
in many ways, but they are a first order indication of the massive inefficiency that remains to be
undone. Skeptics will argue that so much will be difficult to change in Russia, but it is sobering
to recall that the same arguments were made about the U.S. in the early 1970s. Faced with the
shock of higher energy prices—a rise not dissimilar to the increase in internal prices that could
occur in Russia—Americans found myriad ways to save energy. In 1974 the Ford Foundation
published A Time To Choose, a report by the leading experts of the day on the possible futures
for U.S. energy consumption to the year 2000. The actual energy consumption in the U.S. in
2000 was equal to the lowest level that the Ford group imagined would be achievable. With
sustained effort, markets can deliver striking changes in technology and efficiency at a profit.
Russia is hardly the only potential supplier in this future gas market. Other countries rich
in gas resources could emerge as pivotal. Iran, with the world’s second largest resources, is
geologically well positioned. However, the Iranian political climate is a liability in the new
world of global gas trading and private investment. Even more than in Russia, private investors
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in Iranian gas projects must contend with the risk that the political environment could shift,
stranding investments. (And American companies are completely excluded from Iran due to
U.S. sanctions.) Iran’s largest gas field is offshore in the Persian Gulf and shared with Qatar,
whose fortunes are rising because the government has been able to combine its rich gas resources
with a political and commercial environment that investors believe is stable and conducive to
long-term projects. Gas resources are abundant elsewhere in the world, and in some places have
been able to offer similarly attractive commercial settings. Australia, Egypt and Libya are
among the rising stars; Algeria’s star appears to be fading; Trinidad, Nigeria, and Indonesia are
among the other large established LNG suppliers that seem likely to remain important. But only
Russia combines a pivotal position in both the bulk pipeline export of gas (thanks to its
proximity to Europe) and a potentially large role as LNG supplier.
POSSIBLE PRESSURES AND ROLES FOR THE L20
The fundamental advantages of gas over its competitors—especially coal—are strong and
durable. The shift to gas is good news for environmental quality in the locales where it is burned
instead of other fossil fuels. Because it emits much less CO2 than all the other fossil fuels, gas
will also lighten the pressure of climate change on the global environment. And because gas is
deployed mainly for efficient and flexible generation of electric power, the shift to gas and
electricity are strongly associated with economic modernization and growth. In every major
economy, industrialization has been synonymous with electrification. Small and responsive gas
power plants, coupled with advanced electronics, are key elements of advanced power grids that
deliver highly reliable clean electricity needed for computers and other essential devices of the
post-industrial information economy as well.
While the advantages for gas are strong, for large importers the shift to gas will raise
troubling questions about security. This paper is part of a larger effort to explore possible
agenda items for the L20—a standing forum of the leaders of about 20 key industrialized and
developing countries. What could the L20 do to help advance the agenda for gas? I suggest four
answers.
Victor on Gas Security, Oct 2005
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11
First, the L20 can help to articulate a vision for why a global gas market will aid security,
not undermine it. That vision will require, initially, avoiding the wrong analogies with oil. In
oil, the industrialized world responded to the risk of interrupted supplies by building and filling
strategic stockpiles and coordinating through the International Energy Agency to manage such
reserves as a single global public good. Pressure will arise for an analogous response to the
globalization of the gas market, and a credible federal strategy for gas must articulate why a
mandated stockpile approach to gas security would be extremely unwise. Compared with oil, it
is much more costly to store gas, and in every large gas market there is already considerable
amount of private storage that already responds to expected seasonal and annual swings in price.
In managing sharp peaks in price, LNG is also playing a role. In 2004 the U.S. imported one
cargo of LNG that had been stored temporarily in Spain, and onshore use of LNG is a longstanding part of U.S. storage. There are 96 onshore LNG storage facilities, dotted mainly across
the Eastern United states, and dedicated to keeping gas on hand when demand for gas exceeds
the capacity of the local pipeline network—most are in the Northeastern U.S. and deliver gas
only a few days per year during cold snaps. There is not much else that federal policy should do
to promote storage as a response to concerns about security.
Rather than storage, the most efficient way to reduce vulnerability to shocks in supply is
by lubricating a more flexible demand. Through the 1990s, power plants and some industrial
facilities gradually removed their capacity to switch between oil and gas; that, along with higher
oil prices, explain why U.S. industry barely cut demand in response to the recent spike in gas
prices; from 1999 to 2000, gas prices doubled and consumption still rose by nearly 4%. Some
low-value applications, such as ammonia fertilizer producers, have cut or shut their production
and moved overseas (e.g., Trinidad, where gas is plentiful and cheap), but most of the easy and
automatic flexibility has been exhausted from the American system. In large measure, the
relative cost of fuels and the location of industrial facilities are matters for markets to settle, but
as the U.S. market becomes more dependent on imported gas and the flexibility of LNG cargoes
rises, it is easy to see that a few percent of U.S. gas supply could quickly become unavailable;
such amounts, while seemingly small, are larger than the change in supply that has caused gas
prices for the last five years to be double the average of the previous half-decade. In the Atlantic
Victor on Gas Security, Oct 2005
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basin, such a scenario could begin with a sharp rise in the need for imported gas, such as would
arise if there were a severe disruption in Russian exports—such as occurred in the middle 1990s
(albeit briefly) in the midst of turmoil in The Ukraine. (90% of all Russian gas exports cross
Ukranian territory.) In the pacific basin, such a scenario could begin with a sharp rise in the need
for gas in China, Japan or Korea. Indeed, in recent years Korea and Japan have demanded
abnormally high amounts of LNG—due to very hot weather and because of persistent problems
with Japan’s nuclear industry, which has created a need for LNG as a replacement fuel.
Worldwide, many scenarios arise. On the current trajectory, the Middle East could supply onequarter to one-third of world LNG by 2020, and that neighborhood is famous for concentrated
troubles that impede time-sensitive shipping. A strike in India’s or China’s coal mines could
create a surge in demand for those countries rapidly expanding LNG facilities. And a prominent
accident with LNG could create pervasive difficulties such as port closings and costly
surveillance. As with any globally visible technology, such as nuclear power, trouble anywhere
can create political opposition everywhere.
Second, the L20 can play a role in advancing key gas projects. In the past, gas
infrastructure projects generally have created stability between supplier and user countries rather
than dependencies. In Europe, notably, major international pipeline projects were political
endeavors—such as the large pipelines built in the 1970s and 1980s from the Soviet Union under
the orchestration of the German and French government and the novel underwater pipeline from
Algeria to Sicily built with Italian technology and capital. These projects sought to use gas
revenues and immovable pipes as means of binding these countries on the periphery to the
European commercial and political core. (The Reagan administration in the height of the cold
war saw things differently and tried to kill the largest Soviet pipeline project by withholding key
technologies for gas compressors and pipelines and threatening trade sanctions against German
suppliers. German and Soviet suppliers circumvented the sanctions and built their own pipes and
compressors.) Especially for the Soviet Union this strategy has worked well.
A large role for gas in the future will require the construction of some key infrastructure
projects. One is a pipeline network from Russia to China (and perhaps on to Korea). A second
is a pipeline from either Iran in the West or Myanmar or Bangladesh in the East to India. A third
Victor on Gas Security, Oct 2005
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is an expanded pipeline network from Bolivia to the rest of its neighbors. None of these projects
can be created from the top down by an institution such as L20, but high-level blessing can help
to focus minds and effort on finding ways to clear the barriers that are stopping these projects.
Third, the L20 can help to fix a problem that is likely to loom large for questions of
energy security. Namely, questions about the gas dimension to energy security will arise through
the parts of national regulatory systems that are rarely engaged in matters of national security
strategy: electricity regulators. A well-articulated plan for assuring gas security (and for why a
global gas market is not threatening to security) will help these regulators avoid spurious
arguments that would hurt the prospects for gas. At present, many regulators are finding that the
coal lobby is filling the vacuum with a litany of reasons on why locally abundant fuels (notably
coal) should be favored for the future.
Fourth, the L20 would be uniquely positioned to pursue a comprehensive gas security
strategy because it would engage key countries of geopolitical importance for current and future
gas markets. Notably, it would involve key gas importers today (U.S. and Europe) and the likely
large importers of tomorrow (China and India). It will include key net suppliers (notably Russia
and Canada), but the L20 as currently conceived is unlikely to include other potential
hegemons—notably Iran and Qatar. To be credible, the L20 will need to find a way to engage
such countries on an ad hoc basis.
In some ways, the L20 will not have a strong advantage over the G8 in that both
institutions involve Russia, and it seems to be essential that Russia be engaged in order to assure
gas security. A coherent strategy for encouraging investment in Russia’s gas industry must
begin with the realization that outsiders will have little direct leverage. The Russian
government’s vision of its geopolitical position is built on control of hydrocarbons. The Russian
state is reasserting its authority in oil and gas, creating a managed internal “market” that gives
preference to strategically important sectors, and using the exports of oil and gas to create special
positions with China, the EU and the United States. At the same time, Russia is aiming to create
national energy champions—Gazprom, for example, is the kernel of a vertically integrated
energy company. Not only does it control gas but its production of oil is also set to rise, and
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Gazprom has taken a stake in the Russian electric power company and is also venturing into
district heating services. According to this new logic, the waning of Russian power after the cold
war is to be rebuilt through the control of hydrocarbons. Given this vision, it is not surprising
that liberal western ideas such as open markets and free publication of data on gas trading—such
as enshrined in the E.U.’s Energy Charter Treaty—have been rejected by Russia as unacceptable
interference. A more subtle and responsive strategy is needed.
Part of the strategy is obvious and already being implemented. The west can serve
Russian and western interests by diversifying transit routes out of Russia. New transit routes—
such as the proposed Baltic Sea pipeline, which would allow Russian exports to bypass Belarus
and Ukraine—will allow importing markets to reduce the risk of troubles in transit countries. A
western strategy will also require encouraging Gazprom and other Russian companies as
investors. Investment and operations outside Russia, at a world class level of performance, will
offer a useful conduit for new technologies and ideas, which in turn will help Gazprom better
manage its operations more efficiently. In addition to carrots, some sticks are also needed to
engage Russia. Western nations must be prepared to make access to their markets conditional
upon market-compatible behavior. The dangers are already evident in Europe where Gazprom
has injected itself into nearly every market—mainly through cross-holdings that give it access to
pipelines and to information that is essential to controlling markets. In central European markets
the dangerous domination of Gazprom has already arrived; yet European competition authorities
have been slow to impose clear rules against price fixing and market domination because some
European states (notably Germany) fear that those same rules will be applied to break up their
own national gas champions. Although most gas in Europe is still traded under contracts that are
indexed to oil, the European gas market is in the midst of a shift to true gas-on-gas competition.
That effort will fail without stronger market discipline, and the U.S. has a stake in cooperating
with E.U. authorities to ensure that the transition is orderly since the integration of the U.S. and
European markets means that anticompetitive practices in Europe will affect (albeit very slightly
today) the operation of markets at home. Ideally, the Energy Charter Treaty would offer a
framework for such competition, but that track has proved unproductive because the large treaty
is inflexible and contains provisions that are incompatible with the divided federal systems of
government that prevail in the North American market. A better track would be to build on the
Victor on Gas Security, Oct 2005
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informal transatlantic cooperation on competition that already exists in other areas; indeed, that
cooperation has been strained by conflicts over aircraft subsidies, Microsoft and other topics
where the US and EU diverge. Here is a topic where they should agree.
Victor on Gas Security, Oct 2005
Not for Quotation or Citation
Nuclear Energy:
Current Status and Future Prospects
Professor Burton Richter
Stanford University
October 1, 2005
1. Introduction
Nuclear energy is undergoing a renaissance, driven by two very loosely-coupled needs;
the first for much more energy to support economic growth worldwide, and the second
to mitigate global warming driven by the emission of greenhouse gases from fossil fuel.
With the current mix of fuels, growing the economy increases emissions and increased
emissions lead to climate change that will eventually harm the economy. Nuclear
energy offers one part of the way out of this circle. In this paper I discuss the reasons
for and the size of the projected growth in nuclear energy; safety issues; and the
coupled issues of waste disposition and proliferation prevention. An appendix describes
the state of reactor technology and where it might be heading.
2. Why Nuclear?
Many forecasts of energy demand in the 21st century have been made and all give
roughly the same answer. The International Institute of Applied Systems Analysis, for
example, predicts in their mid-growth scenario (figure 1) primary energy demand
increasing by a factor of two by mid-century and by nearly another factor of two by the
end of this century. By the year 2030 the developing countries are projected to pass the
industrialized ones in primary energy use, and China will pass the United States as the
largest energy consumer. It is worth noting that economic growth in China and India is
already higher than assumed in that scenario.
Fig. 1. IIASA Projection of Future Energy Demand
Supply constraints on two out of the three fossil fuels are already evident. Oil prices
have surged and now are over $60 per barrel. Demand is rising at an average rate of
about 1.5 million barrels per day per year (faster recently), requiring the output of
another Saudi Arabia every ten years to keep up with increased demand.
While there is a lot of natural gas, there are transport constraints that are limiting
availability to the big consumers. Natural gas prices have risen and now are at the
unprecedented level of $9-$10 per million BTU.
The only fossil fuel in abundant supply is coal. However, it has serious pollution
problems. Expensive technological fixes are required to control environmental problems
that have large-scale economic consequences.
Concern about global warming is increasing and even the United States government
has finally said that there is a problem. The Intergovernmental Panel on Climate
Change (IPCC) forecasts, in the business-as-usual case, an increase in atmospheric
carbon dioxide to 750 parts per million by the end of the century with a consequent
global temperature rise of 2° to 5° C, less at the equator and more at the poles. We can
surely adapt to this increase if it is small and occurs smoothly. If it is large and
accompanied by instabilities in climate, economic and societal disruptions will be very
severe.
The global-warming issue has caused prominent environmentalists to rethink their
opposition to nuclear power. The question to be confronted is which devil would they
rather live with, global warming or nuclear energy? James Lovelock, among others, has
come down on the side of nuclear energy.
When economic self-interest and environmental self-interest both point in the same
direction, things can begin to move in that direction. They now both point to the need for
new large-scale energy sources and carbon-free energy is the most desirable. Nuclear
energy is one such source. While it cannot be the entire solution to the energy supply
and environmental problems, it can be an important part if the public can be assured
that it is safe, that nuclear waste can be disposed of safely, and that the risk of weapons
proliferation is not significantly increased by a major expansion.
3. Nuclear Power Growth Potential
At present there are about 440 reactors worldwide supplying 16% of world electricity
(NEA Annual Report 2004). About 350 of these are in the OECD supplying 24% of their
electricity. The country with the largest share of nuclear electricity is France at 78%,
whose carbon-dioxide intensity (CO2 per unit GDP in purchasing power parity terms) is
half the world average (figure 2), encouraging for the environmentalists. About 30 new
reactors are under construction now, mostly in Asia.
2
Fig. 2. CO2 Intensity
GDP (ppp)
Area
World
(Billions of U.S. Dollars)
CO2/GDP
Kg/$(ppp)
42,400
0.56
France
1,390
0.28
Projections for growth in nuclear power are uncertain because of uncertain costs along
with the three potential problems mentioned earlier, safety, waste disposal, and
proliferation risk. The IAEA projection (figure 3) of July 2004 for the year 2030 ranges
from a high of 592 GWe (gigawatt-electrical) to a low of 423 GWe. This represents a net
growth of between 16% and 60% over the next 25 years. The recent MIT study “The
Future of Nuclear Power” (July 2003) projected about 1000 GWe by 2050 and a recent
Electricite de France projection is for about 1300 GWe (private communication). The
more aggressive growth numbers imply completions of about two 1-GWe power plants
per month for the next 45 years.
Fig. 3. Nuclear Power Projection to 2030
The cost of the new Finnish light water reactor (LWR) reactor is about Euro 1800 per
KWe. Costs will come down with series production and locations more benign than
northern Finland. Recent presentations to a DOE special committee on the future of
nuclear energy in the U.S., by Westinghouse, General Electric and AREVA, claimed
that cost of electricity from a new nuclear plant in the U.S. would be comparable to a
coal plant after first-of-a-kind engineering costs have been recovered and after coming
down the learning curve with five or so new plants. Even so, projections like those
above will represent the expenditure of 1-2 trillion dollars on nuclear plants in the next
50 years. It is not clear that we have the trained personnel for the construction,
3
operation, or regulatory needs of a system that large. However that is another story. We
may not need all the people if the waste disposal and proliferation issues are not
addressed soon.
4. Safety
There’s little new to say on safety. Reactors of the Chernobyl type have never been
used outside the old Soviet bloc. Even for reactors of that type, the accident would not
have happened had not the operators, for reasons we will never know, systematically
disabled all of the reactor’s safety systems.
The new generation of light-water reactors has been designed to be simpler to operate
and maintain than the old generation, and has been designed with more passive safety
systems. Some designs are claimed to be passively safe in any kind of emergency.
With a strong regulation and inspection system, the safety of nuclear systems can be
assured. Without one, the risks grow. No industry can be trusted to regulate itself when
the consequences of a failure extend beyond the bounds of damage to that industry
alone. Recent examples of corrosion problems in a U.S. reactor and in several
Japanese reactors show again the need for rigorous inspections.
5. Spent Fuel Treatment
In discussing the safe disposition of spent fuel, I will set aside proliferation concerns for
now, and return to them later. Looking separately at the three main elements of spent
fuel (figure 4) might lead one to believe that there should be little problem. There is no
real difficulty in principle with the uranium (U) which makes up the bulk of the spent fuel.
It is not radioactive enough to be of concern; it contains more U-235 than natural ore
and so could be input for enrichment, or could even be put back in the mines from which
it came.
Fig. 4. Components of Spent Reactor Fuel
Component
Per Cent
Of Total
Radio-activity
Radioactivity
Untreated
required
isolation
time (years)
Fission
Fragments
Uranium
Long-Lived
Long-Live
Component
4
95
1
Intense
Negligible
Medium
200
0
300,000
There is no scientific or engineering difficulty in dealing with fission fragments (FF)
alone, the next most abundant component. The vast majority of them have to be stored
for only a few hundred years. Robust containment is simple to build to last the requisite
time. There are two long-lived FFs, Iodine-129 and Technetium (Tc)-99. No biological
system has any ability to separate isotopes, so I-129 can simply be diluted with non-
4
radioactive iodine. The Tc is relatively inert and only present at a low level. It can be
handled with the actinides as described below.
The problem comes mainly from the last 1% of the spent fuel which is composed of
plutonium (Pu) and the minor actinides, neptunium, americium and curium. For some of
the components of this mix, the toxicities are high and the lifetimes are long. There are
two general ways to protect the public from this material: isolation from the biosphere for
hundreds of thousands of years, or transmutation by neutron bombardment to change
them into more benign FFs.
Isolation is the principle behind the “once through” system as advocated by the United
States since the late 1970s as a weapons-proliferation control mechanism.
The plutonium in the spent fuel is not separated from the rest of the material, and so
cannot be used in a nuclear weapon. I do not believe the once-through system is
workable in a world with a greatly expanded nuclear power program.. Its problem is a
combination of public suspicion that the material cannot remain isolated from the
biosphere for hundreds of thousands of years, and technical limitations.
The first technical problem comes from the heat generated in the first 1500 or so years
of storage (figure 5) which limits the density of material that can be placed in a
repository (the early heat generated from FFs is not difficult to deal with). The decay of
plutonium-241 to americium-241 which then decays to neptunium-237 is the main
source of heat during the first 1000 or so years. Limitations on the allowed temperature
rise of the rock of a repository from this source determine its capacity.
Fig. 5. Computed Yucca Mountain Repository Temperatures for Direct Disposal of
25 Year Old, 50 GWD/MT PWR Fuel
5
The second technical problem is the very-long-term radiation. Here the same plutoniumto-americium-to-neptunium decay chain maximizes the long-lived component, requiring
isolation from the biosphere for hundreds of thousands of years.
To use a United States example, if nuclear energy were to remain at the projected 20%
fraction of U.S. electricity needs through the end of the century, the spent fuel in a oncethrough scenario would need nine repositories of the capacity of Yucca Mountain. If the
number of reactors in the U.S. increases by mid-century to the 300 GWe projected in
the MIT study, the U.S. would have to open a new Yucca Mountain every six or seven
years. This would be quite a challenge since the U.S. has not been able to open the first
one. In the world of expanded use of nuclear power, the once-through cycle does not
seem workable.
The alternative to once-through is a reprocessing system that separates the major
components, treating each appropriately and doing something specific to treat the
component that produces the long-term risks. The most developed reprocessing system
is that of France and I will use it as a model. They start by separating spent fuel into its
three main components, FFs, uranium, and the actinides which are further split into Pu
and the three minor actinides. They make mixed oxide fuel, MOX, by mixing the Pu
with an appropriate amount of U. The extra U goes back to an enrichment facility. The
fission fragments and minor actinides are vitrified for eventual emplacement in a
repository. The glass used in vitrification appears to have a lifetime of many hundreds of
thousands of years in the clay of the proposed French repository. The French
Parliament has held a series of hearings early this year and is expected to soon issue
its report on the acceptability of this system.
MOX fuel plus vitrification solves part of the problem but not all of it. The next question
is what to do with the spent MOX fuel. The French plan is to keep it unreprocessed until
fast-spectrum reactors are deployed commercially (see the appendix for a description of
the reactor types). These fast-spectrum reactors have higher average neutron energy
than the LWRs now in use and can burn a mix of plutonium and uranium-238 and, in
principle, burn all of the minor actinides as well. It is possible to create a continuous
recycling program where the plutonium from the spent MOX fuel is used to start the
fast-spectrum system, the spent fuel from the fast-spectrum system is reprocessed; all
the plutonium and minor actinides go back into new fuel, and so forth. In principle,
nothing but fission fragments goes to a repository and these only need to be stored for a
few hundred years.
This sounds good in principle, but there’s much work to do before putting it into practice.
The only fast-spectrum system with which there is much experience is the sodiumcooled fast reactors (SFR). However, only plutonium-uranium fuel is qualified for the
SFR. Fuel containing minor actinides is not. Facilities to test and qualify the new fuels
are in short supply. The U.S. has foolishly killed off its Fast Flux Test Facility at Hanford.
France plans to shut down the PHENIX reactor in 2009. The only facilities that will be
left are in Japan and Russia. Clearly a coherent international program is needed to
support and to use these remaining facilities in an international R&D program.
6
The two other fast-spectrum systems under discussion in the international Generation
IV program, lead-cooled and gas-cooled, are far behind the SFR in readiness for
deployment. In the U.S. there is talk of selecting a fast-spectrum candidate in 2012. In
France the date is 2015. In both cases, it is doubtful that enough will be known about
alternates to the SFR to allow them to be chosen.
The Nuclear Energy division of the U.S. DOE has been looking at a model system for
treating spent fuel. The reference system (figure 6) uses both light-water reactors and
fast-spectrum reactors. The light-water reactors are used to burn down the plutonium in
the LWR spent fuel, followed by burning the remainder in fast-spectrum systems with
continuous recycle. The idea is that Pu is stabilized in the thermal reactors and
eventually burned down in the fast systems. One does not have to wait for large scale
deployment of fast systems to begin the treatment of spent fuel.
Fig. 6. Two-Tier Schematic
LW
Separatio
Plan
Fast
(one for every 7 -8 LWRs)
Reproce ss ed
Fuel
Actinides
U&FF
Repository
The light-water reactors in the model burn half the plutonium. It is assumed that in the
future, light-water reactors will reach a burn-up of 70 MW-d/kg and in that case it would
take one recycle of an inert matrix fuel (plutonium plus minor actinides without additional
uranium) or three recycles of MOX fuel to reach a 50% plutonium burn-up. The fastspectrum system is configured as a burner rather than a breeder with a conversion ratio
(plutonium out/plutonium in) of 0.25 or less. In this model one fast spectrum burner is
required for every 7-8 LWRs. It is, thus, possible to deploy special burners and to begin
a consumption of the spent fuel before the world has switched to fast-spectrum
systems.
The only materials that go to a repository are fission fragments and the long-lived
actinides that leak into the fission-fragment waste stream because of small inefficiencies
in the separation process. If these can be held to about one percent or less, the
required isolation time is on the order of 1000 years, a time for which isolation can be
assured with very high confidence. Efficiencies of greater than 99% have been
demonstrated on a laboratory scale.
The government could fund the construction and operation of the burners from the
current 0.1 cent per KW-hr waste disposal fee built into the cost of nuclear electricity by
selling the electricity and from savings from the much reduced cost of the simplified
repository required.
If, for proliferation prevention reasons, one requires that the minor actinides be included
in the LWR fuel it will take longer to deploy a system. Only standard MOX has been
7
licensed for LWRs. For fast burners, no fuel containing the minor actinides have been
licensed anywhere.
6. Proliferation Prevention
Preventing the proliferation of nuclear weapons is an important goal of the international
community. Achieving this goal becomes more complex in a world with a much
expanded nuclear-energy program involving more countries. Opportunities exist for
diversion of weapons-usable material at both the front end of the nuclear fuel cycle, U235 enrichment; and the back end of the nuclear fuel cycle, reprocessing and treatment
of spent fuel. The more places this work is done, the harder it is to monitor.
Clandestine weapons development programs have already come from both ends of the
fuel cycle. South Africa, which voluntarily gave up its weapons in an IAEA-supervised
program, and Pakistan made their weapons from the front end of the fuel cycle. Libya
was headed that way until it recently abandoned the attempt. There is uncertainty about
the intentions of Iran.
India, Israel, and North Korea obtained their weapons material from the back end of the
fuel cycle using heavy-water-moderated reactors to produce the necessary plutonium.
The level of technical sophistication of these countries ranges from very low to very
high, yet all managed to succeed. The science behind nuclear weapons is well known
and the technology seems to be not that hard to master through internal development or
illicit acquisition. It should be clear to all that the only way to limit proliferation by nation
states it through binding international agreements that include effective inspection as a
deterrent, and effective sanctions when the deterrent fails.
The science and technology (S&T) community can give the diplomats improved tools
that may make the monitoring that goes with agreements simpler and less overtly
intrusive. These technical safeguards are the heart of the systems used to identify
proliferation efforts at the earliest possible stage. They must search out theft and
diversion of weapons-usable material as well as identifying clandestine facilities that
could be used to make weapons-usable materials.
The development of advanced technical safeguards has not received much funding
recently. An internationally-coordinated program for their development needs to be
implemented, and proliferation resistance and monitoring technology should be an
essential part of the design of all new reactors, enrichment plants, reprocessing facilities
and fuel fabrication sites.
One issue that is being revisited is the relative proliferation resistance of the
once-through fuel cycle compared to those of various reprocessing strategies. An
analysis has been done recently by an international group of experts for the U.S.
Department of Energy. Their report, “An Evaluation of Proliferation Resistant
Characteristics of Light Water Reactor Fuels,” November 2004, is available on the
DOE’s website (www.nuclear.gov) under Advisory Committee Reports. The
methodology created in this analysis is to give a risk score for every phase of the
8
nuclear fuel cycle and then sum the risks over time. An example comparison is shown
in figure 7. The results of this analysis are shown in figure 8. Surprisingly, the oncethrough and all of the variants of reprocessing have about the same score. The
increased risk during the phase where plutonium is available in reprocessing scenarios
is balanced by the decreased risk of diversion during enrichment, where less
enrichment is required, the increased radiation barrier after the second burn and the
increased difficulty of fashioning the weapon from ever-more degraded materials. These
scores should not be read as precision measurements. All they really say is that to
sensible people once through is not that different from reprocessing.
Fig. 7.
9
Fig. 8. Relative Proliferation Resistance Score (higher is better)
The isotopic vectors from these various scenarios are shown in figure 9. As one goes
down the table, heat generation and radiation levels increase, and it becomes more and
more difficult to fashion a weapon from the residual plutonium. The last two entries in
the table for IMF (Pu or Pu plus MA without the U that is in MOX) give heat and
radiation levels that is very difficult to deal with. Needless to say this report has
generated considerable controversy. A second and independent analysis is being done
by a group in the international Generation IV program. It will be interesting to see if they
get the same answer.
Recently the IAEA Director General Dr. ElBaradei and United States President Bush
have proposed that internationalization of the nuclear fuel cycle begin to be seriously
studied. In an internationalization scenario there are countries where enrichment and
reprocessing occur. These are the supplier countries. The rest are user countries.
Supplier countries make the nuclear fuel and take back spent fuel for reprocessing,
separating the components into those that are to be disposed of and those that go back
into new fuel.
10
Fig. 9. Plutonium Isotopic Mixture and Properties after Various Reactor
Treatments (ANL)
If such a scheme were to be satisfactorily implemented there would be enormous
benefits to the user countries, particularly the smaller ones. They would not have to
build enrichment facilities nor would they have to treat or dispose of spent fuel. Neither
is economic on small scales and repository sites may not be available with the proper
geology in small countries for 100,000-year storage. In return for these benefits, user
countries would give up potential access to weapons-usable material from both the front
end and the back ends of the fuel cycle.
If this is to work, an international regime has to be created that will give the user nations
guaranteed access to the fuel that they require. This is not going to be easy and needs
a geographically and politically diverse set of supplier countries.
Reducing the proliferation risk from the back end of the fuel cycle will be even more
complex than from the front end. It is essential to do so because we have seen from
the example of North Korea how quickly a country can “break out” from an international
agreement and develop weapons if the material is available. North Korea withdrew
from the Non-Proliferation Treaty at short notice, expelled the IAEA inspectors, and
reprocessed the spent fuel from their Yongbyon reactor, thus acquiring the plutonium
needed for bomb fabrication in a very short time.
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However, the supplier countries that should take back the spent fuel for treatment are
not likely to do so without a solution to the waste-disposal problem. In a world with a
greatly expanded nuclear power program there will be a huge amount of spent fuel
generated worldwide. The projections mentioned earlier predict more than a terawatt
(electric) of nuclear capacity producing more than 20,000 tons of spent fuel per year.
This spent fuel contains about 200 tons of plutonium and minor actinides and 800 tons
of fission fragments. The once-through fuel cycle cannot handle it without requiring a
new repository on the scale of Yucca Mountain every two or three years.
Reprocessing with continuous recycle in fast reactors can handle this scenario since
only the fission fragments have to go to a repository and that repository need only
contain them for a few hundred years rather than a few hundreds of thousands of years.
The supplier-user scenario might develop as follows. First, every one uses LWRs and
all of the enrichment is done by the supplier countries. Then the supplier countries
begin to install fast-spectrum systems as burners. These would be used to supply their
electricity needs as well as to burn down the actinides. Eventually, when uranium
supplies begin to run short, the user countries would go over to fast-burner systems,
while the supplier countries would have a combination of breeders and burners as
required.
7. Conclusion
In summary, nuclear energy can be an important component of a strategy to give the
world the energy resources it needs for economic development while reducing
consumption of fossil fuels with their greenhouse-gas emissions. If this is to happen on
a large scale, advances in both physical science and technology and political S&T will
be required.
The physical S&T can produce better and safer reactors, better ways to dispose of
spent fuel, and better safeguards technology. This can best be done in an international
context to spread the cost and to create an international technical consensus on what
should be done. Countries will be more comfortable with what comes out of such
developments if they are part of them.
While the physical S&T development can best be done in an international context, the
political S&T to create better mechanisms for proliferation control can only be done
internationally. The IAEA seems to be the best place to start and the first baby steps
may be in progress. However, it will be difficult for an organization as large as the IAEA
to create a framework for a new international nuclear enterprise if too many voices are
involved at the start. It might be better if a broadly-based, but compact, subgroup does
the initial work. If I were setting up such a group, the minimum membership would
include Canada, China, France, India, Japan, Russia, South Korea, United States, and
representatives of the larger potential user states, Brazil and Indonesia, for example.
I think it will not be difficult to create mechanisms for the front end of the fuel cycle. The
back end will be the problem and the most intractable issue is likely to be where the
final waste product is stored.
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Appendix 1
Reactor Types
This section aims to give a quick summary of the reactor types in use or under
development. Three good general web sites for more information are the Uranium
Information Center (www.uic.com.au), the World Nuclear Association (www.worldnuclear.org), and the DOE’s Nuclear Energy division web site (www.nuclear.gov).
1. The Workhorses
Most of the world’s power reactors are fueled with enriched uranium and cooled with
light water (LWRs). They come in two varieties; pressurized water and boiling water
cooled. For the purposes of this summary they are equivalent. Until recently the U-235
enrichment was about 3.5%. The fuel produced about 33 GWt-d/MT (gigawatts-thermal
days per metric ton of heavy metal). Enrichment has been going up and the energy
produced per MT has been going up as well. It is forecast that with enrichments of 5%6%, burn-up of up to 70 GWt-d/MT will be achieved within a decade or so.
Work on very long-lived cores is in progress and Toshiba is willing to sell a 100-MWe
reactor with a life time of 20 years without refueling. While these reactors are
expensive, they may be economical for places far from standard power grids and where
the very large standard reactors are not needed.
2. Heavy Water Moderated
The original version of this type of the reactor is the Canadian CANDU. These are
fueled with natural uranium, heavy-water moderated, and heavy-water cooled. They
are continuously refueled, eliminating the shutdowns required to refuel the LWRs.
Advanced versions are being developed in Canada and India. These are still heavywater moderated, but light-water cooled. In addition, they may use enriched uranium.
Canada is promoting a system that uses 2 % enrichment which together with the lightwater cooling is said to allow a considerable simplification in design with a consequent
reduction in capital and operating costs.
3. Thorium Cycle Reactors
Thorium itself is not fissionable but has a large neutron capture cross-section leading to
the production of U-233 which is fissionable. Thorium reactors have been operated for
development purposes in Europe, Russia, India, and the United States. India, which
has large reserves of thorium and small reserves of uranium, has said it plans to
develop thorium-cycle reactors for power production. The Indian plan starts with a
heavy-water reactor to produce plutonium. The plutonium is used with thorium in a
reactor operating as a breeder to produce U-233. The U-233 is then used with thorium
in an advanced heavy-water reactor operating as a U-233 breeder.
4. Gas-Cooled Reactors
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Reactors using carbon dioxide as a coolant have operated for many years in the United
Kingdom. This design is now out of favor. Helium-cooled reactors are under
development in several places. The most advanced is the Pebble Bed Reactor whose
tennis-ball-sized fuel elements are composed of a uranium nugget surrounded by a
carbon coating. The fuel elements move continuously through the reactor and no down
time is required for refueling. Most work is based on a German design. A German 15MWe prototype operated from 1966 –1988. South Africa and China are building models
at the 100 -200 MWe scale. These are to be modular allowing the construction of large
plants by combining many modules.
5. Sodium-Cooled Reactor
This reactor uses uranium and plutonium, produces a “fast” neutron spectrum (higher
average neutron energy that the “thermal” spectrum of the LWRs), and can operate as a
breeder producing more fuel than it consumes. Such reactors can use U-238 with
plutonium as a fuel, thereby increasing the fuel supply more than a 100-fold compared
with the natural abundance of U-235.
6. Generation IV
The Generation IV International Forum (GIF) was formed in January 2000 by ten
countries (Argentina, Brazil, Canada, France, Japan, South Africa, South Korea,
Switzerland, United Kingdom, and United States) and the European Union. The GIF
looked at opportunities for development of the next generation of nuclear reactors and
sorted through all the proposals selecting six for future R&D. These six are briefly
described below.
6.1 Very High-Temperature Reactor: The VHTR is a thermal spectrum, helium
gas-cooled reactor that is to operate at temperatures of 950° C or above. The
main interest is in its potential to produce hydrogen. It would also have a higher
thermal efficiency for electricity production. Hydrogen is to be produced through
the sulfur-iodine process, but the efficiency of this process and its rate constants
are not known at the temperatures being discussed. Difficult materials problems
exist in building a reactor to operate at these high temperatures.
6.2 Super-Critical Water Reactor: This water-cooled thermal spectrum reactor
operates with single-phase fluid flow above the critical point of water, hence its
name. The purported advantages are higher thermal efficiency because of the
higher temperature of the water allowed, and simplification in the design of the
plant because there is no change in phase from water to steam.
6.3 Molten-Salt Reactor: This uses a bath of molten fluoride salts with an
epithermal spectrum. It is capable of continuous fueling and no fuel rods have to
be fabricated. A small molten-salt reactor was operated in the United States
years ago. The main problem of this type of reactor is the extremely corrosive
nature of the fluoride salts.
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6.4 Sodium Fast Reactor: This is to be an advanced version of the reactor
described in section 5.6. This kind of reactor has been operated for many years in
the U.S., France, Russia, and Japan. Its fast spectrum makes it potentially
effective in transmutation of nuclear waste as well as in breeding. The concern
with this type of reactor has been with leaks of highly flammable sodium cooling
fluid. Japan has a proposed simplified design that uses much less sodium in its
cooling system than the previous designs.
6.5 Gas Fast Reactor: This fast-spectrum reactor is helium gas-cooled. It has a
potentially higher electrical efficiency as well and is purported to have safety
advantages.
6.6 Lead Fast Reactor: This fast system is cooled with molten lead. The only real
experience with it is in the Alpha-class submarines of the former Soviet Union.
Two of these submarines were lost at sea for unknown reasons. The rest are
sitting in the docks in Russia with their reactors cold and their lead frozen. Russia
has been unwilling to allow the dismantlement and inspection of the reactors to
look at the state of the piping. Lead is a highly corrosive fluid.
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