Assessing Today's Supplies to Fuel Tomorrow's Growth: Implications of Global Energy Supply Outlook

Today, I will share the principal findings of our publication World Energy Outlook-2001 Insights: Assessing Today's Supplies to Fuel Tomorrow's Growth. Japan is a key member of our agency the IEA-both financially and intellectually. We published this book in October 2001; 1999's publication was on pricing, 2001's looked at supply. The study in 2003 will cover energy investment needs.

Why this study? There are growing concerns over energy security, resource (oil) availability, supply costs, and investments. Our objectives were to identify and analyze factors behind medium and long-term energy supply trends as well as the cost drivers at the global and regional levels (the backbone of the study). We wanted to be "fuel-neutral," meaning we did not want to recommend a fuel mix, as countries may choose more expensive fuels for security or environmental reasons.

The most important graphic of our study for foreign and economic policy depicts this trend: by 2020, most energy production will come from non-OECD countries. The first implication of this trend is that investments need to flow to non-OECD countries; yet, at present, regulations inhibit this flow. Second, supply security is an issue; the countries that will be producing most of the energy are those with politically sensitive backgrounds.

The first main finding regarding the global oil supply outlook is that conventional reserves are adequate to meet demand to 2020 and beyond (based on the current technology). Second, more oil will be extracted from existing reservoirs, and more oil will be found. Third, price stability and security of supply will depend on timely and massive investment. Technology advances will allow people to extract more oil from existing reserves, as well as to discover new oil fields.

Also, regarding the global oil supply outlook, investment and costs will depend on the sources of supply, upstream technology, government policies, and industry developments. The bulk of the long-term supply growth will come from the Middle East and the former USSR (FSU), which includes Russia and the Caspian region. Unconventional oil, meaning heavy low-quality oil needing refinement, could play an increasing role as technology lowers its cost.

According to the authoritative US Geological Survey (USGS), because of technological progress, estimates of remaining reserves have doubled from the early 1980s to the present. There are an estimated 960 billion barrels of oil remaining today. This means that in 2020, we will have 260 billion left, if there are no additional sources found. And this is the pessimistic view.

When will oil production peak? The year of peak production varies with resource estimates and the decline rate assumption. But the mean estimate is that production will peak in 2037. There are two components of investment need: first, 76 million barrels are needed per day now and 96 million per day will be needed in 2010, so 20 million more per day are needed. Second, major oilfields will become less efficient, we assume by 5%. Put together, 60 million more per day will be needed.

The major Middle East oil producers have a supply cost advantage; they produce at $4 a barrel. Canadian unconventional oil is becoming more competitive, however. Gas-to-liquids is also becoming more cost effective. But the Middle East and Russia have the advantage now.

Our research shows that revenues fall when prices are high. Why? First of all, a higher price will cause demand to fall. Second, with high prices, oilfields outside the Middle East will become more profitable for non-OPEC producers. Finally, high prices will enhance technological development for the non-OPEC producers. OPEC should, then, follow a middle price.

Currently, companies owned by OPEC countries now operate the majority of the Top 20 oil production. By 2020, the ratio could get even higher, depending on investment flows. There will be growing oil import dependence in Asia. In all key regions in Asia, reliance on important oil, in particular from the Middle East, will increase significantly. If oil prices increase, China's economy will become vulnerable.

Next we look at the global gas supply outlook. Gas markets are poised for rapid growth. Resources are abundant, but getting the gas to the market could involve a rising cost (especially transportation). Costs will depend on the distance to the market, upstream and transport technology, and government policies. New supply chains will promote market integration.

Without new reserves, the amount of the world's remaining gas reserves (including proven reserves) is an estimated 453 to 527 tcm. This is enough gas for the next 60 years. But 50% is in Russia and Iran; and 75% is from the Middle East and FSU. Transport costs are likely to rise in many cases as supply chains lengthen. In Europe, gas transportation distance will increase and security will become more important. The UK, Norway, and the Netherlands produce gas, but they will have to import more in the future.

Will there be a global gas market? We are not 100% sure. Expanding pipeline networks and new LNG projects will promote regional and global gas integration.

Coal, meanwhile, remains the largest energy source for power generation. Vast and widely dispersed reserves contribute to energy price stability and energy security. Productivity improvements and competition keep coal supplies stable. Environmental concerns (CO2 and air pollution) pose the greatest challenge to the future supply. Sustained investment in CCT is crucial to the future of coal.

Strong proven coal reserve growth closely correlates with strong coal production growth, which has occurred in regions with competitive commercial coal industries. Global coal productivity has grown by three times in 20 years. Advanced technology and economies of scale have reduced supply costs through improved mining productivity. Advanced mining technology and management in key coal producing countries will ensure future productivity growth. Coal prices are less dependent on long-term contracts. There are more flexible pricing mechanisms and there has been a rapid evolution of the steam-coal spot market. Sustained price increases are unlikely; expect stable prices.

Future investments in coal supply hinge upon improvement of environmental performance. A breakthrough in clean coal would change the world energy scene.

As for the global renewable energy supply outlook, resources are plentiful but present economic potential is limited. For example, there is enough wind to meet world demand by four times. Environmental protection and security of supply are the largest benefits. Substantial cost reductions will be required. Economics could improve if benefits are reflected in prices, by implementing, for example, a carbon tax. Government support will be necessary.

Most renewable energy is hydroelectric, but shares of wind, bioenergy, and solar will increase. The cost of renewables will continue to fall but the rate and timing are uncertain. Technological development, market penetration, and learning curves can reduce costs, but it won't be enough.

Wind may compete with fossil fuels within the next decade. But intermittence and site availability could limit development. You need a backup for wind, such as diesel, in case the wind stops blowing. Photovoltaic is capital intensive and large cost reductions are necessary for it to become competitive.

The shortest chapter of our book was on area where we saw the fewest problems: the uranium supply outlook. There are abundant reserves. There is no security of supply concern. Key factors affecting supply are demand for nuclear fuel, secondary supplies of uranium, and future production in FSU countries. Government policies are key. After 9/11, nuclear power plants are seen as potential terror targets. Uranium is only 5 to 10% of the cost of nuclear energy: this is peanuts.

Beyond 2020, technology advances will affect choice and cost of future energy systems. The key long-term uncertainties include the following: recovery rates and unconventional oil; transport costs and hydrates of gas; combustion technologies of coal; and the costs and policies affecting renewables and nuclear. Hydrogen and carbon capture could revolutionize energy supply.

In sum, proven energy reserves can meet demand to 2020 and well beyond. The principle uncertainty in the energy supply outlook is cost. Technology will lower costs, but rising demand will have to be met by more distant reserves. Government policies matter. Prices will also influence and the amount of investment.

Massive investment will be needed. Acquiring capital for the expansion of energy infrastructure is a major challenge. Non-OECD countries will need the bulk of investment. The lowering of market barriers will stimulate investment. Increased FDI and partnerships reduce investment risk and cost of capital.

Trade in fossil fuels will grow faster than demand. Flows of oil and gas will rise from the Middle East and FSU to the US, Europe, and Asia. Supply chains will lengthen. Security of international sea-lanes and pipelines will become more important. And there will be geopolitical implications.

Government policies will shape the energy-supply landscape. Governments do have a role. Everything must not be left to the markets.

Q: You emphasize the importance of investment. How do you reduce market barriers?

The problem is in the Middle East. First of all, we must convince countries in the Middle East to allow their companies to work with foreign companies, assuming they get a fair share of the profit. This requires political trust and confidence, which would reduce the risk and, therefore, reduce capital costs.

Q: What is the IEA's role in ensuring a steady supply of energy?

We highlight companies' transparency. Regarding the Enron story, it was mostly a case of lack of transparency.

Q: In the trade of energy, I believe market mechanisms are already in place. What do you mean "trade rules"?

Gas must sometimes travel through several countries to reach the consumer. Rules have not been set, for example, regarding transaction fees. In the WTO, there is a need for a regulatory framework on import and export fees and transport.

Q: I think pipelines should be decided case-by-case, not internationally.

But governments, not companies, should decide. Through the WTO, governments can make a framework.

Q: There is a framework-the Energy Charter Treaty-on transportation. It can be a model. Russia has not yet ratified it.

Q: What about gas cartels?

Gas turbines are cheap an environmentally friendly. I am not sure if the current political context can allow Middle Eastern countries to get together with the West to make an agreement that would harm consumers. I don't see it happening.

Q: What do you see for pipelines between Russia and East Asia?

Current pipeline ideas will not be feasible for decades.

Q: For your outlooks, what was your assumption for Chinese economic growth?

China is crucial. Our assumption was lower than the US government's assumption. Our average is between five and six percent for 20 years. Also we don't believe in China's official GDP numbers. After revisions, their "seven percent growth" may actually be four or five.

Q: What is your opinion of deregulation?

It can improve price signals. But it has created problems because people only invest if they think they will get a return. Governments need to provide a framework.