Perspectives on future energy supply

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Ladies and gentlemen!
I am very pleased to be here at the CSIS and to have this opportunity to discuss energy issues with you.  It is a topic which has gained much importance in the last couple of years, as both geopolitical and climate change concerns have brought energy back to the forefront of the global political agenda. 

We know that for the foreseeable future energy demand will continue to increase.  This growth will come both from the industrialized and from the developing countries.  In countries like China and India, the growth in energy consumption will probably accelerate, as the population gets wealthier and demands energy services we in the West take for granted.

The International Energy Agency – the IEA – estimates that even with our best efforts to restrain energy growth, the world consumption of energy will, according to their Alternative Policy Scenario, increase with 38 % by 2030.  In this more sustainable scenario we see that in 25 years time fossil fuel will still meet 77 % of the energy demand.  We also learn that even if tough measures are implemented, US energy demand will by 2030 have increased with as much as 18 %.  

So, as I see it, our major energy challenge is that we must supply the energy that the world economy needs to keep growing, but we must do so in a manner that is both reliable and environmentally sustainable. 

In short:  We will need a lot of secure and clean energy.  

 

1. Norway as an oil and gas supplier 
Throughout my presentation I will give you some examples of what Norway can do to meet this challenge. 

The basic objective for Norway is to be a stable and predictable supplier of energy. We have for many years produced around 3 million barrels per day of oil.  And with a domestic consumption of just over 200 000 barrels per day, we have long been one of the world’s major oil exporters.  Most of the oil goes to countries in Western Europe, but with about half a million barrels per day, the US also receives an important share of our oil.

In 2006 we produced 3.1 tcf of natural gas.  With negligible amounts used domestically, we rank third among the world’s largest gas exporters.  And we will soon by-pass Canada to second place, as our gas exports by early next decade will increase with 50 percent to around 4.6 tcf.  This implies that exports from Norway will account for nearly a third of natural gas consumption in countries such as France, Germany and Britain.  This is equal to the current market share of Russian gas in Western-Europe.

 

2. Energy Security
This brings me to the question about energy security more generally.  It is a complex issue.  It affects energy choices, trade and political relations between countries as well as the environment.

At least 4 different issues are discussed under the headline of energy security. 
First, there is the question of whether resources will be sufficient to meet future energy demand?  Particularly for oil, this has been a much debated issue.  However, today most experts believe that oil and energy resources should be sufficient for several decades yet.  I share this view.  I think we will manage this through research efforts, new and improved technology, enhanced oil recovery and development of non-conventional resources. 

Given that there are sufficient resources, the next question is whether timely investments in new production capacity will be made. 

Many see the National Oil Companies – the NOCs – as obstacles to the objective of timely investments.  In the Middle East and other oil rich regions, the NOCs dominate both the upstream and downstream activity. Globally, National Oil Companies now control around 90 % of oil and gas reserves and 75 % of production.
Personally, I think it is wrong to make the investment issue a question of NOCs versus IOCs.  In some cases where the NOCs are very integrated into the state budget, it may be problematic to finance new investment.  But with the oil prices of recent years, there is generally no shortage of cash among the NOCs. 

Nor is the availability of technology a major hurdle any more.  Today, the supply industry is able to offer state of the art technology to anyone that has money.  International engineering companies also have management for hire of large development projects.

Whatever role the NOCs and IOCs will have – the importance of the investment and operating environment must be underscored.  A stable, predictable and transparent system will facilitate investments in the energy sector.

The third issue that affects energy security has been labeled “resource nationalism”.  As a new term resource nationalism encompasses many actions by host governments.  In some cases there are clearly reasons to be worried.  However, all changes to framework conditions in producer countries should not be labeled resource nationalism.  Now that oil prices have moved to a much higher level than the 20 dollars of a few years ago, it is evident that governments would want a fair share of the windfall profit. 

Actually, Norway is one of the very few producer countries who has not increased the government take in the last years.  The simple reason for this is that we already had a high government take.  As our oil sector is maturing, there is a limit to how much we can take while remaining attractive for new investments by the oil companies.  
The fourth issue affecting energy security is the question of supply source diversification.  Oil resources are, as we know, strongly concentrated to the Middle East.

We should try to increase investments and supplies from sources outside the Middle East.  However, high costs and limited oil resources are constraining supply from a growing number of Non-OPEC countries, Norway included, and I will come to that soon.  Realistically there is little we can do about the increased dependence on oil from the Middle East.

However, I would not advocate that our relations with the Middle East producers should be based on mistrust.  Having used the oil weapon in 1973 they learned a very hard lesson.  Oil permanently lost market share to other energy sources, and Middle East oil lost market share to non-OPEC producers.  After a few years with very high oil prices, they then experienced the price collapses of the mid-eighties and the late-nineties.  I am convinced that as a group, they will never do the same again.

 

3. Producer consumer dialogue
Instead of confrontation and mistrust I think energy security is better served by having an open and constructive dialogue between producers and consumers. 
Energy security is a two-way street.  Where the consumer is looking for security of supply, and the producer is seeking security of demand.  The interests of both parties must be taken into account for a stable energy relationship to emerge.
The reality of energy interdependence is reflected in the producer-consumer dialogue which has evolved under the auspices of the International Energy Forum (IEF) and in close collaboration with both the IEA and OPEC.  This dialogue serves to promote global energy security by focusing on issues of common interest.

 

4. The European perspective
Norway has always resisted the temptation to turn energy into more of a political or strategic commodity than it already is.  We believe that this has served our interests well, solidifying our reputation in global energy markets as a predictable and reliable supplier of oil and gas.  Besides, the reality of interdependence tends to work against producer countries that politicize energy pricing or “play the energy card.”
This reality can be seen in Russia’s relations with Europe.  I do not want to diminish the significance of Russia’s disputes with Ukraine last year and with Belarus this year, but is it really an accurate assessment to say that Russia is using energy to exert pressure on Europe?

True, some countries are highly dependent on Russian energy, but Europe as a whole only depends on Russian gas for about 30-35 percent of its supplies.  Russia, for its part, is dependent on Europe for 80 percent of its export market and has no easy opportunity to shift this gas to any of its other potential buyers, such as the Asians.

As far as I can tell, it makes absolutely no political sense for Russia to cut off gas to Europe and discredit itself in the international energy markets.  This would also send a very negative message to China and India, two of the potentially lucrative energy markets that Russia covets.

 

5. Norway and the High North
I told you that the Norwegian oil sector is maturing.  However, our geologists estimate that nearly a third of the petroleum resources are yet to be found on the Norwegian Continental Shelf.  That is over 20 billion barrels of recoverable oil equivalent.

Unfortunately, by the end of the last millennium we saw a negative trend in the exploration activity on the Norwegian shelf – fewer exploration wells and fewer major discoveries.  Measures had to be taken to realize the potential still there.

Consequently, we have in the last few years made several amendments to our licensing system.  The main changes are:

• Introducing a new licensing system in mature areas on the Shelf, 
• fiscal incentives to reduce fallow acreage,
• attracting new and competent oil companies to the shelf, to foster new ideas and increase competition,
• and a symmetrical tax system where the oil companies are reimbursed 78 per cent of their exploration costs.

Today we see a massive upsurge in activity on the Norwegian Continental Shelf.  In my opinion, this is not only the result of a high oil price, but also the changes in the framework conditions.  Over 40 new oil companies have entered since year 2000 and exploration activities have rebounded.  This will create the basis for future production.

The Norwegian petroleum activity started in the North Sea some 40 years ago. Since then it has gradually moved to the north.  Today we venture along the Atlantic Margin and to the High North, beyond the Arctic Circle into the frontier areas of the Barents Sea.

The optimism regarding the resource potential of northern waters is partly based on estimates by the US Geological Survey (USGS) assessing that the Arctic holds a quarter of the world’s undiscovered hydrocarbons.  Considerable reserves of oil and gas have already been found in the Barents, Pechora and Kara Seas, such as the Snøhvit and Goliat fields on the Norwegian side, and the huge Shtokman gas field 500 kilometers north of Russia.

It implies that the High North can be a key area for global oil and gas supply in coming decades.  However, oil and gas extraction in the Arctic also faces significant challenges – technological challenges related to low temperatures, long distances and darkness, as well as environmental challenges.

No area on earth is today unaffected by human activities.  Still, the human foot-print in the Norwegian Barents region is small.  It is regarded as an environmentally sensitive area.  There have been widespread public concerns about permitting petroleum activity in an area where it may have grave consequences.  People are in doubt about the petroleum industry’s capability to perform such activities without adverse incidents.  I know the same concerns are important factors here in the US too.

In the eyes of the Norwegian public, a licence to operate in an arctic environment cannot be taken for granted.  The government is required to balance all interests and prohibit activities if the risks are too high.  The industry has to demonstrate safe and non-polluting operations, and convince the public of their abilities.  It is a responsibility that rests heavily on the shoulders of both.

In Norway we have addressed this challenge by developing a so-called integrated management plan for the marine environment in our northern and arctic waters.  The management plan was finalized last spring, and it considers the compound effects of all human activities on the marine environment in the area. 

Environmental consequences of such diverse activities as fishery, maritime transport, long-distance pollution and petroleum extraction have been integrated.  Petroleum activities of course play an important and potentially severe part in this.

This work did attract large public attention, and it was important to us that all aspects and opinions were involved in the process.  Finally, the proposed plan was discussed on the highest level in the Norwegian government.  Our decision was to allow petroleum activities in certain parts of the Norwegian Barents Sea, whereas other areas were deemed too sensitive and vulnerable.

Given these premises of safe and sustainable operations, the petroleum resources of the Barents Sea will, once they are produced, be of strategic importance.  The likelihood that the United States will be one of the key markets will further strengthen the strategic links across the Atlantic.

Norway and Russia share the Barents Sea and many of the sustainability challenges of the High North.  If we are to maintain the northern seas as some of the cleanest, richest and most productive marine areas in the world, our two countries must cooperate - on the harvesting of fish stocks, exploration, production and technological developments in the petroleum sector, and on the adoption of health, safety and environment standards in petroleum operations and maritime transport.
On the Russian side, President Putin has called for a strategic energy partnership between our two countries in the High North, and successive Norwegian governments have accepted the invitation.

The question is what it takes to realize this ambition and achieve a quantum leap in economic and industrial cooperation between Norway and Russia.  It is really a question of testing Russia’s readiness to engage in real win-win partnerships.
Political agreement between Norway and Russia on a delimitation line in the Barents Sea would release considerable potential for cooperation in the petroleum sector. Today’s area of overlapping claims, which covers a total of 175 000 square kilometers, would then likely be opened for exploration and production.
The combination of industrial complementarity and geographic proximity also constitutes potential for energy cooperation between Norway and Russia.  Both sides stand to gain from cross-utilization and co-development of skilled labor, specialized offshore technologies, logistical networks and other infrastructure in the High North.

 

6. Climate Change
Energy supply is important, but most important is the future of the planet.  The challenge is to reconcile these competing aims.

What then is Norway’s perspective on energy security and climate security?  What characterizes us as a state?

To put it briefly, our personality as a state is determined both by our role as a major energy supplier, and by our ambition to be a leader in safeguarding the environment – not least through the development of low-carbon and green technologies.

The last Energy Outlook from the IEA presents a reference case where the increase in global energy demand leads to global emissions of 40 billion tonnes of carbon dioxide in 2030.  This is more than 50 % higher than in 2004.  If we are to succeed in stabilizing the average global temperature, major changes has to be made.  And soon.

The Kyoto Protocol was a first step.  Still, the Annex One countries that have ratified the protocol represent less than one third of global emissions – and the share is shrinking.  To make a real difference, we need more countries to take on stronger commitments.  As we develop a broader and more ambitious post-Kyoto climate regime, we urgently need countries with large national emissions on board.  The US, Australia, and the larger developing countries such as China and India must contribute.

As long as developing countries have per capita emissions way below the average of Kyoto signatories, I think the economic contribution from these countries will be small.  The challenge would be to enter into practical cooperation between Kyoto signatures and India and China and others to really cope with CO2 emissions from thousands of coal plants in these countries.  A massive investment and technology transfer from the developed to the developing world is needed.

Technology will play an important role in including the developing countries.  Energy efficiency and Carbon capture and storage provide promising opportunities.

 

7. Carbon Dioxide Capture and Storage
As a major producer of fossil fuels Norway has an important role in contributing to technology development and enhanced capacity.

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

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 meters below the seabed.  Storing CO2 in such formation is unique.  This is the only facility in the world where large quantities of CO2 are stored in a geological formation under the seabed.  We have meticulously monitored the formation for more than 10 years and it is clear that the CO2 stays in place.

A similar process will be used later this year, when production of natural gas and condensate start from the Snøhvit field in the Barents Sea.  Here 700 000 tonnes of CO2 will be separated annually from the natural gas and re-injected and stored in a formation 2 600 meters under the seabed.  Incidentally, the natural gas from Snøhvit will be liquefied, and a large part of it will be shipped as LNG to the Cove Point terminal in Maryland – creating yet another strategic bond between the United States and Norway across the Atlantic.

There are several other projects for large scale CO2-handling in Norway.  The one at the Mongstad refinery is unique in that the Norwegian government and Statoil have signed a binding agreement to establish a full-scale carbon capture and storage project in conjunction with the combined heat and power plant that will be built at Mongstad.  The project is to be fully operational by the end of 2014.  The first stage of the project will be in place at the start-up of the proposed cogeneration facility in 2010.

The Mongstad project will be one of the first of its kind.  By this we move from the research/small scale phase to actual construction of a full scale CO2 capture facility.  Several technological solutions will be tested in parallel in the first phase of the project.  This arrangement will ensure that technological developments in Norway will have a broad international relevance and will not be project-specific to Norway.  Knowing that the world energy demand will increase substantially by 2030, I believe that carbon capture and storage is an important step in our battle against global climate change.

Let me sum up:
Consumption of fossil energy will continue to grow strongly in the next decades, especially in countries like China, India and the developing countries.  We are dependent on fossil fuels and will be so for a long time.

Basically, increased use of energy is good thing, as energy is needed to improve living standards and combat poverty.

Energy security is vital. Disruptions of supply will probably continue to occur. However, interdependence between consumers and producers illustrates that it is fully possible to work towards a common goal of reducing such risk.

Norway will for many years to come continue to contribute to security of supply by exporting substantial volume of oil and gas.

We will continue exploiting the resources on the NCS, including the Barents in the High North.  Co-operation with Russia is paramount to unlock the values in the Barents and the Arctic region.

It is inevitable that CO2 emission will continue to increase and thereby intensify the process of global warming and climate change.

The challenge is how we can meet the growing energy need without damaging the global climate fundamentally.

I have pointed out that technology will be a vital option. Improved energy efficiency is one.  Developing carbon capture and storage has the potential to reduce the emissions from the use of fossil fuels to near zero.  These are some measures in addition to internationally binding agreements.

Most of all, solutions have to be sought on a political level in co-operation with other key stakeholders.  Thus, Washington could hardly be a better place to address these issues.

I would like thank you for your attention!