Exclusive interview IEA-Director Maria van der Hoeven: “We cannot rule out new revolutions”

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In its new World Energy Outlook (WEO), the IEA is cautious about the prospects of unconventional oil and gas outside the US. As regards shale gas, it notes that “uncertainty remains over the quality, the costs and public acceptance.” Yet in an interview with Energy Post, IEA Executive Director Maria van der Hoeven notes that “the gas is there. All geologists are agreed on that.” Moreover, “there may be other surprises in store, for example with methane hydrates”, she says. “We cannot rule out that new revolutions may take place.”

Each year the International Energy Agency highlights one particular message coming out of its annual flagship publication, the World Energy Outlook (WEO). In 2010, the WEO – in many ways the “Bible” of the international energy sector – stressed the “unprecedented uncertainty” in global energy markets, partly as a result of the economic crisis. In 2011, the threat of global warming took centre stage. Last year, the message from the WEO that made headlines across the world was that the US would overtake Saudi Arabia as the largest global oil producer by 2020.

This last seemed to be a rather upbeat message (at least from the perspective of the oil industry) after two sombre years . This year ’s main theme, however, seems to be a lot less optimistic once more. In the new WEO, the IEA stresses that the “opening up of new oil resources … does not mean the world is on the verge of an era of oil abundance”. Indeed, the Paris-based OECD organization, founded in 1974 by the “Western world” as a counterweight to oil cartel OPEC, even notes that the good old Middle East will “take back its role as a key source of oil supply growth from the mid-2020s.”

So has there been too much optimism about North American energy prospects? It is one of the questions we asked Maria van der Hoeven, Executive Director of the IEA, in an interview we had with her on Wednesday, when she presented the WEO’s findings in The Hague at the Dutch energy think tank CIEP (Clingendael International Energy Programme). Van der Hoeven, former Dutch Minister of Economic Affairs for the Christian-Democratic party, has been Executive Director of the IEA since September 2011.

Doesn’t this year’s major message from the WEO, which puts the Middle East and OPEC back on their throne as the world’s dominant oil supplier after 2020, contradict last year’s announcement that North America will become an increasingly dominant player? 

No, not at all. We said that the US would become self-sufficient in oil, thanks to its revolution in tight oil and a gas exporter thanks to its shale gas revolution. This development of unconventionals in the US is real, it’s a truly great development, which had been underestimated before. The prospects of US tight oil are perhaps still underestimated. So we will see oil exports from the US and we will see gas exports from the US and Canada. At the same time, however, demand in the East is growing immensely. This means the oil trade from the Middle East will go much more to Asia. Moreover, although the boom in the US is real, we see it slow down around 2020, because of the available resources. The Middle East will then take its place again as number one oil producer and exporter.

In the WEO it says that “technology unlocks new types of oil resources and improves recovery rates in existing fields, pushing up estimates of the amount of oil that remains to be produced.” Yet it adds that this does not mean we can expect an “era of oil abundance: an oil price that rises steadily to $128 per barrel (in year-2012 dollars) in 2035 supports the development of these new resources.” Why does the oil price continue be so high if there is no lack of oil?

Mainly because oil is becoming ever more costly to produce. Deepwater oil off Brazil, Arctic oil, tight oil, oil sands – all of these resources require large investments.

You don’t think that OPEC is holding back the production of oil to keep prices high?

No, there is enough oil available. There is a balance between supply and demand.

But the prices stay high?

There is also a risk premium involved. In particular the situation around Iran is very uncertain.

Yet we seem to be on the verge of a breakthrough with Iran. Wouldn’t that change the market?

We have to wait and see if there will be a breakthrough. And then we have to wait and see what the consequences would be. For instance, the consequences within OPEC. You can’t always go by what you hear. Things are not always what they appear to be.

What about Iraq? The IEA said last year that Iraq is the world’s best hope for substantial production growth of low-cost oil.

We also said that the projections from the Iraqi government were very high. There are still many problems in that country. In safety, investment conditions. But the oil is there. Iraq is one of the great growth prospects.

There seem to be a certain sense of disappointment about the development of unconventional oil and gas outside the US. With regard to oil, the WEO says “Light tight oil shakes the next ten years, but leaves the longer term unstirred”. And: “no country replicates the level of success with light tight oil that is making the United States the largest global oil producer.” With regard to shale gas, it says: “There is … potential in some regions, notably China, parts of Latin America and even parts of Europe, to replicate at smaller scale the US success in developing its unconventional gas resources, though uncertainty remains over the quality of the resources, the costs of their production  and, in some countries, public acceptance for their development.” Does all this mean we are we in for a bit of a disappointment?

The gas is there. All geologists are agreed on that. That applies both to coal-bed methane and shale. But the circumstances under which the resources must be exploited are very different in various places. China has huge shale gas reserves, but they are located in a dry area, mountainous, difficult to reach, with a very limited availability of water. Still, China will put a lot of effort into developing its shale gas resources, though not in a substantial way before 2017. And there may be other surprises in store in the future. For example, the methane hydrates off the coast of Japan and also off Canada. Both in Canada and Japan the first test drillings have taken place. This is still at a very early stage. But shale gas was in the same position ten years ago. So we cannot rule out that new revolutions may take place through technological developments.

The WEO projects that gas prices in Europe and Asia will continue to be substantially higher than in the US for the next twenty years. In Europe twice as high. How do you know this? Isn’t there a possibility that gas will turn into a buyers’ market if renewables make good progress in Europe?

That’s always possible. Maybe it will also help if we produce more biogas. But our projections are based on what we see now. By the way, at this moment gas prices in Europe are three times as high as in the US, so the difference will narrow somewhat, but it will remain large. This has a lot to do with the additional transport and liquefaction costs Europe must pay for the import of gas. Don’t forget that domestic production in Europe is declining. The production of Groningen, the largest field in Europe, is going down. Resources will have to come from outside the region. So you can’t simply compare European prices with the Henry Hub price in the US.

Some people are expecting a revolution from below in renewable energy and decentralized production. Although you project a larger share of renewables, you don’t seem to take this possibility into account.

It won’t be a revolution, but an evolution. But renewables are making steady progress and we believe that this is a necessary progress. Still we are not promoters or renewable energy, like IRENA (the International Renewable Energy Agency, which is sometimes pitted as a rival to the IEA, editor). We present a comprehensive picture of energy supplies and how they relate to each other. We also point out that the problem of renewables is not just the production, but also distribution and infrastructure. If you can’t organize this in such a way that people can either use renewable energy locally or that it’s integrated into the electricity system, it’s no use.

You are talking about an evolution in renewables, at the same time you say that if we continue on our current path, even with this evolution, the world will become 3.6 degrees warmer. That’s difficult to take in.

Well, what we say is that if we continue like this it will get between 3.6 and 5.6 degrees warmer. So you have to start doing things differently. If you really want to achieve a different outcome and limit warming to 2 degrees, you need a much stronger growth of renewables, you need carbon capture and storage, you need more energy efficiency, you need less subsidies for fossil fuel consumption, you need to reduce gas flaring. And so on. Then, yes, the scenarios will come out differently. But if for instance the lignite development goes on in Germany the way it is doing now, then that’s a very odd outcome in relation to all the subsidies that go to renewable energy.

What method for reducing CO2 emissions do you prefer: emission trading, a carbon tax, emission performance standards?

It does not matter what mechanism you choose as long as it’s effective and as long as it doesn’t contradict other methods you use. The EU Emission Trading Scheme (ETS) functioned well at the start.

According to the WEO, energy demand in OECD countries will barely rise to 2035 and will be less than half that of non-OECD countries in 2035. What does this mean for the position of the IEA as an OECD-organisation?

The IEA is steadily expanding its reach to non-OECD countries. We have forms of cooperation and partnership going on with all large emerging economies and many smaller ones, including in the Middle East and the Caspian region. We work with each other on data, statistics, analysis – the basis of policy. But we also have 41implementing agreements in technological areas, e.g. in renewables, gas, oil, energy efficiency. China is involved in 17 of those, to mention an example.

But given the relative decline of OECD demand, is it still necessary to maintain extensive emergency oil stocks, which was after all the raison d’être of the IEA?

We share our knowledge in this area as well. Some importing countries are very interested in this mechanism. Exporting countries have other interests. The IEA offers a forum to look at many different things together. Next week at our bi-annual ministerial meeting virtually all large non-OECD countries will be present.

Still, do we as OECD still need emergency stocks?

That’s for our member states to decide, not for me. The point is that countries, large and small, are increasingly aware that their own security of supply is connected to the security of supply of other countries. Good relations, procedures and mechanisms on how to react in crises are important for everyone.

Will the IEA still be an OECD-organisation in 2035?

I wish I could answer that question. I can’t answer that yet. What I do expect is that the importance of energy is so great that an independent institution like the IEA will continue to be needed. The IEA of today is not the IEA of 1974. Then it was only about oil. Now we have reports about oil, gas, coal, unconventionals, energy efficiency, renewable energies, electricity markets.  All things that are important also for emerging economies.

Some (surprising?) highlights of the World Energy Outlook 2013

  1. “The market for natural gas gradually becomes more global, with potential implications for pricing. Gas demand rises by almost half to 2035. New sources of gas, both conventional and unconventional, bring greater diversity to global supply.
  2. The global cost of fossil-fuel subsidies expanded to $544 billion in 2012 despite efforts at reform. Financial support to renewable sources of energy totalled $101 billion.” (In her presentation in The Hague, Maria van der Hoeven noted that fossil fuel subsidies mainly refer to price subsidies for gasoline and power in poor countries, but she said that of the $544 billion, only 8% went to the really poor that need these subsidies.)
  3. “Brent crude oil has averaged $110 per barrel in real terms since 2011, a sustained period of high oil prices that is without parallel in history.”
  4. “Energy-intensive sectors – including chemicals, primary aluminium, cement, iron and steel, pulp and paper, glass and glass products, and refining – account globally for 20% of industrial value added, 25% of industrial employment and 70% of industrial energy use.  Lower gas and electricity prices in 2012 in the United States relative to Europe equated to estimated savings of close to $130 billion for the entire US manufacturing industry.”
  5. “Estimates of ultimately recoverable resources of oil continue to increase as technologies unlock types of resources, such as light tight oil, that were not considered recoverable only a few years ago. Our latest estimates for remaining recoverable resources show 2 670 billion barrels of conventional oil (including NGLs), 345 billion of light tight oil, 1 880 billion of extra-heavy oil and bitumen, and 1 070 billion of kerogen oil. Cumulatively, 790 billion barrels of oil need to be produced in total to meet projected demand (…)”
  6. Unconventional plays, such as light tight oil or oil sands, are heavily dependent on continuous investment and drilling to prevent the large initial decline rates for individual wells translating into rapid field-level declines. Total upstream spending in the oil and gas sectors is expected to rise to more than $700 billion in 2013, a new high.”
  7. “Fossil fuels continue to dominate the power sector, although their share of generation declines from 68% in 2011 to 57% in 2035. Coal remains the largest source of generation, with strong growth in non-OECD countries far outweighing reductions in OECD countries. Natural gas expands the most in absolute terms of any source, increasing in most regions.”
  8. “In Europe, gas-fired generation regains favour versus coal gradually on rising CO2 prices and the need for flexible capacity, but only gets back to 2010 levels after 2030. Beyond fossil fuels, nuclear power maintains a 12% share of electricity generation globally, with expansion mainly occurring in Asia.”
  9. “The share of renewables in total power generation rises from 20% in 2011 to 31% in 2035, as they supply nearly half of the growth in global electricity generation. Renewables overtake gas as the second-largest source of generation in the next couple of years and approach coal as the leading source by 2035.”
  10. “China sees the biggest absolute increase in generation from renewable sources, more than the gains in the European Union, United States and Japan combined.”
  11. “Global subsidies to renewables reached $101 billion in 2012, up 11% on 2011, and need to expand to $220 billion in 2035 to support the level of deployment in the New Policies Scenario. In 2012, renewable subsidies were highest in the European Union ($57 billion) and the United States ($21 billion).
  12. Wind becomes competitive in a growing number of regions, with about one-quarter of generation over the period to 2035 not requiring any subsidy. Solar PV becomes competitive in only a limited number of markets (when measured at “cost parity”) and requires an average subsidy of $130 /MWh through to 2035 in order to compete.

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