Middle East Economic Survey

VOL. LII

No 29

20-Jul-2009

The Road To The IEF Ministerial Meeting In Cancun, 29-31 March 2010

By Noé van Hulst

Dr van Hulst is Secretary General of the International Energy Forum (IEF), based in Riyadh. This article is based on the IEF background paper for the G8 Meeting of Energy Ministers, 24-25 May, and the author’s presentation to ministers, both available on the IEF website (www.iefs.org.sa).

In their joint statement in Aomori, Japan on 8 June 2008, energy ministers of the G8, China, India and South Korea welcomed the positive outcome of the International Energy Forum (IEF) held in Rome in April 2008 and encouraged the IEF “to swiftly build on this outcome, delivering a program of activities that drive shared analysis by producer and consumer countries tackling: barriers to energy investment; technology development; market transparency; cooperation between international and national oil companies (IOCs/NOCs); human capital through their energy sector skills initiative; and energy poverty. We invite the IEF to report progress with their work program in 2009. We will participate fully in the Joint Oil Data Initiative (JODI) and will provide timely, reliable and complete data to the initiative. Through such cooperative activities, both oil consuming and producing countries should strive to eliminate future uncertainties about oil supply stability.”

IEF ministers in Rome agreed that the world energy scene in the coming decades will be characterized by three key global energy trends:

• Significant growth in world energy demand, in particular because of population growth and economic growth in developing countries. Particularly in the current situation of economic recession and weak energy demand one easily loses sight of this longer-term structural trend.
   

• Fossil fuels will continue to provide the lion’s share of the energy mix. Renewables are certainly growing rapidly, but they have started from a very low base and it will thus take many decades before they will account for a more prominent share in the energy mix.
   

• Increasing interdependence between oil and gas producing and consuming countries. The upward trend of growth in oil and gas trade is set to continue unabated in the coming decades.

This ‘Rome consensus’ highlights the necessity for greater international cooperation and a more result-oriented producer-consumer dialogue based on mutual trust and respect, building towards more common understanding and joint action. In these days of discussions about global energy governance, it is worth pointing out that the IEF is a truly unique forum. It is the only international energy organization open to both developed and developing countries, and to both producing and consuming nations. IEF participating countries now account for over 90% of world oil and gas production and consumption. The IEF enjoys the active participation of the major IEA and OPEC countries as well as that of key producing and consuming countries including Russia, China, India, Mexico, Brazil and South Africa.

The mission of the IEF has always been to enhance and deepen the global producer-consumer dialogue in order to promote more stable and transparent energy markets. It is a mission that is, if anything, more relevant today than ever before if we only look at the excessive oil price volatility that the world has experienced in the last two years. Traditionally, the IEF has strongly focused on the biennial meetings at ministerial level (IEF) and CEO level (IEBF). In the exceptional circumstances of 2008 we even saw two ad hoc ministerial meetings, in addition to the regular IEF –  one in Jiddah (June) and one in London (December). Open and frank discussion is, of course, a very welcome alternative to stony silence or quarreling. However, we strongly believe that a mature producer-consumer dialogue needs to move beyond well-intentioned words to seek practical ways to improve market transparency, investment conditions and sustainability in the oil and gas sector. The IEF Secretariat recognizes the importance of this task and the challenge that it presents.

Responding to calls from ministers at the IEF ministerial meeting in Rome, the IEF Secretariat developed its program of work on three main strands of activity under the over-riding theme of energy security: transparency, investment and sustainability. Within each strand, we have identified concrete activities focusing on topics and themes where the particular angle of the producer-consumer dialogue can achieve tangible results. These activities range from organizing training workshops, symposia and forums, to commissioning research and analysis and advancing our flagship transparency activity, the Joint Oil Data Initiative (JODI). Activities are undertaken with the intention of advancing the understanding and development of each subject to provide appropriate input and concrete recommendations for a productive IEF ministerial meeting in Cancun, Mexico, 29-31 March 2010.

Significant progress has been made in 2008-09 on improving the JODI performance of countries and identifying ways to boost NOC-IOC partnerships and tackling bottlenecks like human resources, but more is needed and other activities are in the pipeline. Some highlights of recent and upcoming IEF events are given later in this article.

Transparency And JODI

The core objective of JODI, coordinated by the IEF Secretariat, with the participation of member countries from APEC, Eurostat, IEA, OLADE, OPEC and UNSD, is to provide an accurate, timely and comprehensive database on the oil market: crude oil production, oil products supply (refinery output) and demand, stocks (levels and variation) and trade (imports and exports). The free availability of better and more timely data to market players reduces the likelihood of excessive oil price volatility and leaves less room for massive speculation.

The IEF and its JODI partner organizations work hard to improve the quality of data collected for JODI. A wide range of supportive activities sponsored by the partner organizations including training statisticians, sharing best practices and developing knowledge on data collection have all contributed to significant improvement in the submission, timeliness and completeness of oil data to JODI, with almost 100 countries participating in the initiative today.

The December 2008 update indicates that a record 71 countries submitted their most up-to-date data to JODI despite the added pressure of deadlines being tightened by two days. The initiative’s latest participation assessment on data submission, timeliness and completeness in 2008 shows significant improvement in all three evaluation categories (see the table below). 

Ultimately, the success of JODI will depend on the achievement of full data transparency delivered by all participating countries against each evaluated measure (three ‘smiley faces’ in the table). The IEF Secretariat calls for this as a collective target of all countries to be achieved by the end of the year 2009.

JODI Participation

Strengthening JODI – Extension To Gas And Investment Plans

Against the background of the trend towards globalization in the gas market, the IEF Secretariat and its JODI partners are currently assessing the extension of the initiative to cover natural gas data. The issue was also discussed during the first IEF-IGU Ministerial Gas Forum in November 2008, where ministers and industry leaders noted that improving transparency on gas market information such as prices and flows will contribute to the reduction of uncertainties, improve predictability and facilitate project planning.¹  On the basis of a feasibility study, the IEF Secretariat is presently working on developing practical methodologies to achieve such an extension and will report on the issue to the 12^th IEF ministerial meeting in Mexico in 2010.

Following the call from energy ministers at the ad hoc meetings in Jiddah and London for expansion of JODI to include, among other things, upstream and downstream capacities and expansion plans, the IEF Secretariat is presently working on a pilot data sampling project. IEF energy ministers will soon be requested to provide the necessary data and thus contribute to better informed planning decisions and to a reduced potential for significant supply and demand imbalances in the medium term.

Of course these extensions will be very useful, but given the scale of the task it is unrealistic to expect quick results. It may take a long time for these efforts to bear fruit. However, with the support of IEF ministers, the issue of scale should not deter us from embarking on this path which in the longer term will help to further improve the transparency of the oil and gas markets. 

Transparency And Oversight Of The Paper Oil Market

There is now a growing consensus that we also need more transparency and better oversight of the paper oil market. In the 3^rd Asian Ministerial Energy Roundtable held in Tokyo on 26 April, the chair’s summary stated: “Participants recognized that excessive fluctuations in oil prices are undesirable for both energy producers and consumers, and that financial markets have an impact on oil price formation. Participants were made aware of the discussions under the G20 on strengthening financial supervision and regulation. Regarding transparency of commodity markets and supervision on over-the-counter markets, participants appreciated national authorities’ efforts, and called for further harmonized actions such as the introduction of position limits.”

The recently published proposals of the International Task Force on Commodity Futures Markets (March 2009) should also be mentioned in this respect; rapid implementation of these proposals would increase transparency and improve oversight. The signals coming out of the new US administration are encouraging in this respect.

Investment

The low price levels in the last quarter of 2008 and the first quarter of 2009, in conjunction with the economic recession and associated credit crunch, have contributed to a significant slowdown of capital expenditure in the oil and gas sector, particularly for marginal investment projects in high-cost areas. The IEA recently estimated that upstream capital expenditures in 2009 may be more than 20% lower than in 2008. Although oil prices have recently gravitated towards more investment-friendly levels, many companies understandably remain extremely cautious given the fragile economic and financial situation in the short term.

Despite the current economic and financial crisis and the subsequent demand slowdown, global energy demand in the longer term will continue to grow over the coming decades as we have seen. When the world economy eventually recovers, energy demand growth will quickly pick up again.

To satisfy such demand growth, huge investments are needed. According to earlier estimates by the IEA, the world will need to invest approximately $12 trillion in the oil and gas sector up to 2030 (or nearly $500bn/year) to maintain the supply-demand balance. The majority of this investment is, however, needed to compensate for the substantial natural decline of oil and gas production from existing fields.

Yet, many barriers and uncertainties are holding back investment in the sector, including those affecting future oil and gas supply and demand outlooks.²  One obvious example is the area of biofuels. Noting some obvious drawbacks and potential limitations of biofuels, IEF ministers tasked the IEF Secretariat to work together with relevant organizations in conducting a realistic and comprehensive assessment of the future and potential environmental and economic implications. The assessment is underway and findings will be reported to IEF Ministers at their meeting in Mexico in 2010.³

In this article we will discuss three challenges facing the petroleum industry that the IEF has been addressing in targeted events: technology, human resources and cooperation between national and international oil companies.

Technology

In December 2008, the IEF Secretariat gathered representatives from oil companies, technology and service providers, international organizations and representatives from producing and consuming countries, from developed and developing countries to address the role of technology in enhancing global energy security.⁴  Some of the key findings from that symposium convened in partnership with the IFP are:

• There is a large technological potential to improve recovery rates from existing fields thereby adding significant quantities of oil and gas to the current reserves. The global recovery rate in oil is 35%. Adding 1% to this measure provides two years of additional oil consumption at current rates.
   

• Research and development funding should be maintained despite current budget constraints.
   

• The development and deployment of carbon capture and storage (CCS) holds the potential to contribute not only to the reduction of CO₂ emissions but also to enhancing oil recovery. It is one of the new technologies singled out for its potential contribution to both environment and efficiency.

Human Resources

The IEF held a symposium⁵  on tackling the human resources crunch in April 2009, hosted by the Ministry of Energy in Qatar, with the participation of representatives from oil and services companies from producing and consuming countries, as well as representatives of educational institutions. The symposium resulted in some interesting conclusions and recommendations:

• Commonly held negative perceptions of the industry should be challenged by better communicating the reality of the modern oil and gas sector as a high-tech, diverse, and environmentally conscious entity, integral to the long-term future of the global economy. The industry must persuade its detractors that it is part of the solution rather than the cause of the problem.
   

• Simple proactive measures already practiced by many in the industry hold great potential if applied more widely across the sector. Key amongst these best practices to attract, motivate and retain talent is the implementation of mentoring programs which facilitate succession planning and knowledge transfer.
   

• Cooperation between industry and academia, wider provision of scholarships targeted at key disciplines, the sponsoring of academic programs and support for internship schemes were cited as examples of proactive initiatives with the potential to attract, develop and retain interest in the sector as a career path of choice.
   

• Companies must resist short-term economic pressures to implement cuts in workforce. Long-term commitment to maintain skills development is necessary to reverse the insecurity bred by historical response to downturns.  

Cooperation Between NOCs And IOCs

In March 2009, the IEF held its first NOC-IOC Forum, hosted by the Ministry of Oil in Kuwait and KPC.⁶  Debate among participating senior decision-makers from National and International Oil Companies, representatives from producing and consuming countries, as well as from service companies and the financial sector led to a number of valuable recommendations and conclusions:

• Industry should learn from past experience and not respond to short-term economic pressure to implement large cuts in jobs, training and capital spending, as that may sow the seeds of the next cost escalation and price spike.
   

• In many areas of the world, successful cooperation exploiting the synergies between NOCs and IOCs already takes place. However, with a view to future trends, NOCs and IOCs need to develop creative and innovative models of cooperation that go beyond the conventional approach. The current oil price environment may be a catalyst for new schemes of partnership.
   

• A balanced and stable regime in host countries was identified as a key element for a win-win partnership between NOCs and IOCs. Partners should favor dialogue and re-negotiations or mediation when they have different views on what “changing circumstances” mean for contracts.
   

• Cross-investment throughout the value chain, vertical and horizontal integration in host countries and access of NOCs to consuming countries’ markets were identified as mutually beneficial approaches which improve security of supply for importing countries and enhance security of demand for producing countries. Governments can help in encouraging this developing trend. 
   

• NOCs and IOCs must seek value-driven long-term partnerships which go beyond the basic joint-venture business practices to cover technological and project management skill-sharing, and demonstrate alignment of mutual interests and commitment to the development of local infrastructure, and generation of indigenous employment opportunities.

Sustainability

Energy is an important input for global development and it is hard to imagine a future without energy. Given the projected long-term demand increases, even with much higher energy efficiency around the world, and recognizing the dominance of fossil fuels in the energy mix for decades to come, there is an urgent need to improve the environmental sustainability of the production and consumption of fossil fuels.

CCS development and commercial deployment may have a strong role to play in contributing to delivery of a sustainable energy future. CCS technology used in conjunction with CO2 enhanced oil recovery is a ‘double-win’ option as it reduces greenhouse gas emissions while at the same time increasing recoverable reserves in mature fields and hence contributes to global energy security. CCS technology promises great potential to tackle climate change, although there is still a long way to go before it makes a significant impact on greenhouse gases emissions. Cost of implementation and the need to reduce energy consumption of transportation and storage of CO2 are among obstacles still to be overcome before CCS technology attains commercial viability.

CCS, particularly its combination with enhanced oil recovery, was addressed at the IEF-IFP Symposium in December 2008. Building on the findings of this first event, the IEF will hold a symposium on CCS technology, focusing on ways to accelerate the deployment of CCS in particular in oil and gas producing countries, in September 2009 in Beijing in conjunction with the Global Carbon Capture and Storage Institute (GCCSI).7 The event will be hosted by the Energy Research Institute (ERI) of the National Development Reform Committee (NDRC).

Sustainability of the global energy future also implies a broader access to energy for the world population. Without access to modern energy services, the poor are deprived of opportunities for economic and social development, as well as their health.

Yet, billions of people have no energy security at all because they simply lack access to modern energy services, which is one of the key impediments to achieving the Millennium Development Goals (MDG). Some 2.4bn people rely on traditional biomass for basic energy needs and 1.6bn people lack access to electricity. In the absence of vigorous new policies, these figures will unfortunately be roughly unchanged by 2030.

Many initiatives have been taken around the globe to tackle energy poverty, but the key question remains whether this is sufficient to make a dent in energy poverty and address concrete ways and measures to reverse this trend and deliver an MDG-derived target of halving energy poverty by 2015 (that is bringing modern energy to at least 1.3bn more people).8 The symposium that the IEF is preparing for the end of 2009 will focus on this objective.

Notes:

1.   See the closing statement by the IEF Secretariat and the International Gas Union (IGU), 24 November 2008 (available on www.iefs.org.sa).

2.   The IEF Secretariat has commissioned a study on identifying the key uncertainties hampering investment, ‘Unpacking Uncertainty’ by PFC Energy, to be presented to the 12th IEF ministerial meeting in Cancun, 29-31 March 2010.

3.   ‘Assessment of Biofuels’ report, being undertaken by former IEA executive director Claude Mandil and former OPEC research director Adnan Shihab-Eldin.

4.   IEF-IFP symposium, ‘Role of Technology in the Petroleum Sector Enhancing Global Energy Security’, Riyadh 15 December 2008 (see www.iefs.org.sa).

5.   IEF Symposium, ‘Tackling the Human Resources Crunch in the Petroleum Industry, Doha, 13-14 April 2009 (see www.iefs.org.sa).

6.   First NOC-IOC Forum, ‘Enhancing Global Energy Security through Cooperation and Partnership’, Kuwait, 30-31 March 2009 (see www.iefs.org.sa).

7.   Agenda published on IEF website (www.iefs.org.sa).

8.   11^th IEF ministerial meeting called for IEF countries solidarity and a step-change in the collective effort of all international organizations involved to help achieve the Millennium Development Goals by halving poverty rates by 2015.