CNBC's Yergin on Energy Security, Natural Gas Supplies, And Politics
What’s the impact of growing competition for energy resources and markets on global politics at a time of high prices? That was one of the main questions at this year’s "East Meets West" conference, just concluded, in Istanbul, Turkey. This cosmopolitan crossroads on the Bosphorous – part of the city in Europe and part in Asia – really is where east meets west, and increasingly so as Turkey becomes the energy hub between Central Asia and the Middle East, and Europe and the Mediterranean. The conference is hosted by Cambridge Energy Research Associates (CERA) in partnership with DEIK, the Turkish international chamber of commerce, and the sponsors included CNBC-e, CNBC’s Turkish affiliate. The theme this year was "New Frontiers of Energy Security," and the speakers included four presidents: Ilham Aliyev of Azerbaijan, Mikheil Saakashvili of Georgia, Ahmet Sezer of Turkey, and Victor Yushchenko of Ukraine, as well as the energy minister of the United Arab Emirates (and president of OPEC), and the Energy Commissioner of the European Union.
CNBC.com caught up with conference chair Daniel Yergin – CNBC’s own global energy expert and CERA’s chairman – to find out what were the big issues at this key energy conference, which was celebrating its 10th anniversary.
Why was this year's theme the "new frontiers" of energy security?
We wanted to include the traditional issues about oil, but also get to the hot questions about natural gas supplies and markets and the whole environmental side. That too is part of energy security.
What were the key points on energy policy?
We heard different messages. The energy commissioner of the European Union -– that is, its energy minister -- Andris Pielbags, said that the new EU energy policy is determined to catalyze "nothing short of a new industrial revolution" in the form of "a massive shift towards renewable energy." He laid out some very aggressive targets – that the EU get to 20%renewables in its energy mix by 2020. This is as much for climate change reasons as it is for energy security.
It’s also clear that this is, as he put it, "ambitious," very much so, given that 2020 is only 13 years away. The speech by the oil minister of the United Arab Emirates, who is current president of OPEC, was in part a reply to this line of thinking.
What do you mean?
Minister Mohammed al-Hamli presented OPEC’s new outlook, which includes $630 billion of investment required to develop new oil and gas capacity by 2020 in order to help major growth in oil demand. He described the meaning of energy security for exporters as being "security of demand." He got people’s attention when he said that "the biggest threat to future energy supply security is the repeated policy announcements by major industrial countries of gradually reducing their dependence on oil." This could result, he warned, in making "investors shy away from making the required investment to meet future demands." It would be a "waste" to put money into building new capacity for which there would be no market. In other words, the OPEC countries could cut back on that $630 billion investment program because of uncertainty as to whether the demand would be there.
He also commented on some of the legislation in Congress, didn’t he?
He referred particularly to the "NOPEC" legislation, which seeks to sweep aside the immunity of sovereign countries and would authorize antitrust action against member countries of OPEC. Support is very high in Congress. But if such legislation is enacted, he said, OPEC countries might be reluctant to take the legal risk of exporting oil to the United States. As it is, only about 10% of Persian Gulf oil comes to the United States. What looms ever larger in the minds of the exporters is the booming Asian market for oil.
Meeting Europe's Natural Gas Needs
Is there a new "great game" in Central Asia in terms of competition among the United States, Russia, and even China?
Not in terms of oil. At least not any more. Previous years at the conference saw – and heard – some pretty intense and acrimonious debate about whether to build the Baku-to-Ceyhan pipeline. But that pipeline was dedicated last year and it’s now a reality, carrying almost a million barrels per day over a course of more than a thousand miles, from the shores of the Caspian Sea in Azerbaijan to Turkey’s Mediterranean coast – and then to world markets. This is the route out of the Caspian that bypasses both Russia and Iran.
Although I wouldn’t use the term “great game,” the big competition today is over natural gas. The geopolitical implications are very significant. In addition, so many tankers are passing through the Bosphorous, which is the living room of Istanbul, that the drive to develop pipelines that bypass the Bosphorous remains strong.
What’s it about?
It’s a question of who is going to supply the additional natural gas that Europe needs. The issue in its present form burst into public view with the Russian cut-off of natural gas to Ukraine at the beginning of 2006 and the strong European reaction to it. Suddenly natural gas became the central focus of energy security for the Europeans, who became much more intent on diversifying sources of natural gas. In other words, not becoming more dependent on Russia. And that means, in addition to liquefied natural gas, getting supplies from the Caspian region -- what Commissioner Piebalgs diplomatically called the "fourth corridor." Just this week, Turkey started to receive Caspian gas from Azerbaijan’s Shah Deniz field through a $4 billion pipeline. Some of that gas will also go to Greece.
The U.S. government has become a big and vocal proponent of a Trans-Caspian pipeline that would tap the abundant reserves of Turkmenistan on the eastern side of the Caspian Sea. The idea is that these additional supplies would flow from the Caspian into Turkey and then up into the heart of central Europe through the planned "Nabucco" pipeline. The Russians do not like the idea of a trans-Caspian pipeline at all. It would be directly competitive with Russian sales to Europe, all the more so as Russia is also importing gas from Turkmenistan to fill out its commitments to European markets and is in the first stages of launching a massive new investment program to develop the next frontier of Russian gas. Thus, the destination of Caspian gas, and the choice of transport route, has become a new irritant and source of controversy in U.S.-Russian relations.
The day before our conference opened, the Russians announced a new "South Stream pipeline" that would cut across the Black Sea directly to Bulgaria. The Turks were very upset, fearing that they are being bypassed as an energy hub. To many at the conference, it seemed intended to preempt the proposed Nabucco line.
That risk was clearly in the minds of all the presidents who spoke at the conference – Presidents Aliyev of Azerbaijan, Saakashvili of Georgia, Yushchenko of Ukraine, and Sezer of Turkey. Listening to all of them, one would end up pretty convinced that the Caspian will become a significant supplier of natural gas to Europe through the Turkish hub. And it certainly looks like Europe will need that gas. But also, of course, Russia will continue to be by far the largest seller of gas into Europe.
Several hundred people from the energy industry were there, from as far away as Beijing and Denver. What’s on their minds?
One thing, for sure, is costs. Everybody is aware that rapidly-rising costs are leading to delays and postponements and the down-scaling of plans. We shared the latest numbers on our IHS/CERA Upstream Capital Cost Index, which shows how fast costs for everything from steel to drilling rigs to people is going up. One oil company executive described an off-shore project that had been estimated by the company, with a lot of contingencies, at over $800 million. Way off. The lowest bid came in north of $3 billion. That project will not go ahead.
Minister al Hamli of the UAE observed during the conference that development costs for oil and gas projects have increased three-fold in the last few years. That resonated with Thamir Ghadhban, who is a key architect of Iraq’s new petroleum law – and one of the most experienced oil people in Iraq -- and is often tabbed as the future head of the new Iraq National Company. He said that before the Iraq war it had been estimated that $25 billion would be required to increase Iraqi production from about 2.5 million barrels per day to 6 million barrels. He now put the price tag at $50 to $75 billion. That is one of the reasons he noted for the need for participation of international oil majors, along with their skills in project management, exploration, and heavy oil development.
Energy Security and the Environment
What about the environmental side of energy security?
This was addressed from a number of different angles. Liu Zhenya is president of State Grid, the largest company in China and the largest utility in the world. He talked about how, with ultra high voltage lines, China could tap vast amounts of hydropower in the remote western part of the country to meet the huge power demand in the eastern part of the country, helping to reduce the need for new coal generation of electricity. Rajendra Pachauri is the chairman of the IPCC -– the Intergovernmental Panel on Climate Change. This group is the source that everyone cites for the impact of climate change. He explained how the whole system actually works -- that the IPCC is the coordinating committee and referee for research conducted by other groups and researchers around the world. In the clean energy panel, we presented some of the results of our own new study, "Crossing the Divide," which tries to assess the timing and scale of renewables and other forms of clean energy. On the "Carbon Tipping Point" plenary, it was pretty much concluded that things have already tipped. The financial community is taking renewables seriously, and carbon markets could grow quite rapidly.