Energy security in an international context

The slides in pdf

Ladies and gentlemen!

It is a distinct pleasure for me to be here in Bergen today at the Energy Foresight Symposium.

I have been asked to speak about energy security.

This is obviously a matter of high importance to any country. Secure and stable supplies of energy at affordable prices are vital for our economies and way of life.

In recent years concern for energy security has once again grown. Energy security has become a driver for new energy policy and a major topic on the international agenda.

However, energy security is not the only challenge related to energy.

Climate change and global warning, caused by emissions from fossil energy, is now widely seen as a dangerous and urgent problem that needs immediate action. 

It is essential that governments address the issues of energy security and climate together.

Particularly for oil, energy security is seen as an issue.

Diversification of sources of supply is basic to energy security. But oil resources are, as we know, strongly concentrated to the Middle East. It is a fact that these regions historically have been politically unstable and frequent disruptions to oil supplies have occurred.

Further, oil cannot be easily be replaced by other fuels. Almost all energy consumption in transportation is oil, and for the foreseeable future we will be dependent on oil based transportation fuels.

Oil transportation routes are also somewhat vulnerable. About 20 % of the global oil supply is transported through the Hormuz strait. Now, there is a risk that the conflict between UN and Iran about uranium enrichment – in a worst case scenario – might impact on the flow of oil trough Hormuz. This would be a grave situation indeed.

However, despite disruptions to supplies, OPEC – the swing supplier - has been able to maintain supplies to the market by keeping spare production capacity. In a context of high geopolitical tensions and supply risks, a reserve capacity of a certain size is a precondition for market stability.

Due to strong demand growth in recent years, OPEC’s reserve capacity and thereby the supply cushion has diminished significantly. However, the leading OPEC member – Saudi Arabia – has targeted a spare capacity of around 2, 5 – 3 mbd and is investing accordingly. Other OPEC members are also investing in new reserve capacity.

Yet, a reserve capacity of some million barrels might not be sufficient if a war, engulfing the major producers in the region, were to break out. Such event cannot be ruled out completely, what could have severe impact on the oil market and the global economy. 

Therefore, it is understandable that countries seek to reduce oil import and dependence on oil, even if it has a cost attached to it.

Increased supplies of oil from sources outside the Middle East would be welcome from an energy security point of view.

But high costs and limited oil resources are constraining supply from a growing number of Non-OPEC countries. For many years growth in production from Non-OPEC sources has on the whole been pretty modest. Most forecasts point to that growth in Non-OPEC production will gradually slow and peak within 10 years time. Even higher oil prices than we have today cannot significantly alter this outlook.

Norway is typical in this respect. Crude prices have been increasing, but oil production growth has been disappointing and we have been forced to reduce production forecasts. I will come back to developments in Norway later in my speech.

Many countries now support bio fuels, not only with the purpose of improving energy security, but also as a measure to curb CO2-emissions. 

The EU countries have now agreed to a bio fuel target of 10 % by 2020.  The US president in his recent state of the union speech proposed to increase the use of bio fuels by 5 times the current level within 10 years time

Forecasts indicate that global production of bio fuels could increase by 20 % annually or even more the next decade.

But there are some question marks about the economic viability of bio fuels.
Prices for corn – the main feedstock in US bio fuel production - have recently gone up, partly because of growth in bio fuel production. This will reduce profitability of bio fuel production.

Increased bio fuel production could also lead to higher food prices. This is the fuel versus food trade off.

This could be avoided if new ways of producing bio fuels become viable, such as cellulosic ethanol. However, some technological challenges have to be overcome before this technology becomes commercial. 

What is clear is that bio fuels require high oil prices to be commercial. This is also the case for much of the crude production in Non-OPEC countries, where upstream costs are generally higher than in the Middle East. High oil prices will also serve to dampen oil demand growth and make investments in energy efficiency more profitable.

Therefore, if one is worried about energy security, a high oil price should be welcomed.

Energy security concern is not confined to oil, but is also an issue in gas markets.  But different from oil, there is yet no global market for gas. Therefore, gas security differs issues among regional gas markets.

Most forecasts show that the demand for gas will increase in the years to come.  The IEAs World Energy Outlook allow for an average annual growth in gas demand of about 2 % a year from 2005 – 2030, with the highest growth  taking place in emerging economies and in the power sector. 

There is a mismatch between resource endowment and demand around the world.  One of the regions where this mismatch will increase the most in the next decades is Europe.

The graph behind me shows EUs own expectations for the composition of its energy demand in the coming decades. We can see a clear trend towards increased share of gas in the energy mix.

The mismatch between resource endowment and demand in Europe can be viewed as a challenge.  The indigenous production in EU is falling rapidly and may be halved by 2020 compared to today. According to the graph behind me, the drop in indigenous EU-production and the increase in demand for gas will be offset by three major factors, namely increased pipeline export from Norway, increased pipeline export from Russia and the entry of large LNG-volumes.

As regards Norway, we are today the second largest exporter of gas to the EU and we will remain so for at least the next decade.

Norwegian export to EU was around 85 BCM in 2006, up from a relatively modest export level of around 30 BCM a year through out the 80`s and 90`s. We could see an even further increase to somewhere between 125 and 140 BCM a year by early next decade.

Our policies regarding gas export are driven by maximizing the value of our total petroleum resources through predictable, competitive, efficient and transparent framework conditions. Our aim is to be a long term, reliable supplier of gas.

Russia will continue to be the dominant supplier of gas to the European Union.  In the media last year the EUs dependence on Russian gas has been discussed intensively. From my point of view I am not sure the dependence of Russian gas is something to worry too much about.  As is the case for Norway and EU, Russia and the EU are interdependent. Russia needs the income from gas export to EU and EU needs Russian gas. To risk being seen as an unstable producer would be costly for Russia both with regard to short term money loss and long term loss of reputation and credibility. In our opinion, Russian has been a stable supplier of gas to Europe.

The last major source for gas into EU the coming decade will be LNG.  I will comment a bit more on LNG later, but before doing so I will make some final comments on security of supply. As I have mentioned several times, the mismatch between demand and endowment of gas is considered a major challenge for many importing countries. Diversification of supply sources is a key word in this respect. As regards the EU we can see from the figure that they will have an increasing diversity of supply in the years to come.  That is a healthy sign. 

The main focus for import dependent countries should be to ensure competitiveness in the international gas markets.  One important factor in this respect is to ensure easy and competitive access to their transmission systems for international gas companies. Utilizing the growing international gas markets is as far as I can see the most important way of ensuring security and diversity of supply.

As I have mentioned, gas markets are not as developed and integrated as the market for oil.  The importance of geographical location of exporting countries, the limited flow of gas in pipelines across borders and the high cost of transportation have so far limited the growth of large international markets for gas. This situation could however change with the likely development of LNG as an instrument for integrating the markets. As the graph from IEA shows, the pattern in inter-regional trade of gas is expected to change during the next decades.  Today the majority of inter-regional gas trades are made through pipelines.  However towards 2030 IEA estimates that the majority of inter regional trades will be done by LNG. This could result in the convergence of gas prices in the different markets, including prices on pipeline gas. A more integrated world market for gas will in my view increase the security of supply and the attractiveness of gas for import dependent countries.

As I pointed to, one must expect that fossil energy demand will continue to grow, particularly in developing countries, where there is a large unsaturated demand for energy.

Coal is the most important energy source in countries like China and India. These countries will continue to use coal, because they have no alternatives.

This will cause CO2 emissions to grow fast, with harmful consequences for the global climate.

The UN’s Intergovernmental Panel on Climate Change recently confirmed our worries about climate change. Their report highlights the scientific consensus regarding the quickening and threatening pace of human-induced climate change. If no action is taken, there could be a continuing increase in global temperatures and, by the end of the century, all regions of the world could potentially face serious consequences for their economies and ecosystems. Consequently, we are faced with a major challenge that requires us to take actions.

How can we meet global energy needs without harming the the global climate ?

Is carbon capture and storage (CSS) part of the solution to this problem ?

Carbon capture and storage can make it feasible to produce electricity from gas and coal, with very limited emissions of CO2. It would of major value for the climate and for the energy security as well. 

IEA estimate that carbon capture and storage can account for nearly 30 % of total emission reductions by 2050.

As a major producer of fossil fuels, Norway has an important role in contributing to development of carbon capture  technology.

Norway has extensive experience in storing CO2 in geological structures. Since 1996, one million tonnes of CO2 per year have been separated from gas production on the Sleipner Vest field in the North Sea for storage in a geological formation 1,000 metres below the seabed.

When production of LNG commences from the Snøhvit field in the Barents Sea later in 2007, 700 000 tonnes of CO2 will be separated annually from the natural gas and re-injected and stored in a formation 2 600 metres under the seabed.

Most elements of the CCS chain are to a large extent proven technology. CO2 capture technology is, however, not yet applied in full scale power plants. One major challenge is to reduce the cost of capturing CO2.

In order to realize CCS technologies on a commercial basis as soon as possible, the Norwegian government and Statoil have launched the Mongstad agreement. The purpose is to establish a full-scale CCS project in conjunction with the combined heat and power plant currently under construction at the Mongstad oil refinery outside Bergen.

The CCS project should fully operational by the end of 2014. The technology development stage of the project should be in place in 2010. This is a unique agreement. And the decision to execute is taken!

The project could also be of great interest to any other future fossil-fuelled power plants. With the Mongstad CCS project we move from the research phase to actual construction of a full scale CO2 capture facility.

Norway has been a large producer of oil and gas for many years. However, there are still large unexplored areas on Norwegian Continental Shelf (NCS).

One third of mainland Norway lies north of the Arctic Circle. Norway has the responsibility for managing resources in waters six times the size of its mainland territory.

Some estimates indicate that the Arctic regions might contain as much as 25 per cent of undiscovered global petroleum reserves, although this cannot be determined until we have harder facts.

The Barents Sea is one of the most prospective regions of the Artic and is still largely a frontier area. Our estimates of undiscovered resources in the Norwegian part of the Barents Sea, sum up to more than 6 billion barrels of oil equivalents – with a large upside potential. In the northern parts of the Barents Sea we know the geology only little, but the potential is there. The Area of Overlapping Claims is of course geologically very much unknown.

The Artic regions are environmentally sensitive. It is crucial that exploration and development of the energy resources in these waters is carried out in a sustainable manner.

The Norwegian Government last year presented the Integrated Management Plan for the area from Lofoten to the Barents Sea. The plan is a pioneering effort to achieve an ecosystem-based management of the oceans surrounding Norway.

The Barents Sea environment is currently in a satisfactory state. To preserve the environment in its current state, the Government has imposed some restrictions on petroleum activity in the management plan area.

However, I believe that the Management plan shows that coexistence among various activities and interests; petroleum, fisheries, tourism, shipping and wildlife, is not only possible but also desirable in the Northern Areas. 

The strong interest we have in artic region, make it important for us to strengthen our long standing cooperation with Russia. Russia and Norway are both significant producers of oil and gas. We are neighbours in the North, and we share the responsibility of managing the vast Barents Sea.

Moreover, it is in both countries interest to develop an ever closer co-operation to ensure sustainable management of the natural resources in the Barents Sea.

As the cooperation between our two countries progresses, there will be business opportunities for the offshore industry in both countries. The Norwegian supply industry is already engaged in cooperation with Russian partners. The Norwegian supply industry is in my view very competitive and can contribute with technology and expertise to future developments of Russian petroleum fields, Shtokman included.

We will continue to develop our co-operation with the Russians, not least with regard to agreeing a delimitation line in the Barents Sea. Together we share the ambition of developing this region in accordance with the highest environmental standards.