EUROPEAN VIEW

Transcription

EUROPEAN VIEW

E uropean V iew
Volume 4 - Autumn 2006
Energy, Environment
and
Politics
John Bruton Energy and Environment: The Political Conundrum
for EU–US Relations • Mohamed Bin Dhaen Al Hamli
Energy Production in the Gulf Region and the World •
Mohammed Barkindo A New Energy Era: Challenges and
Opportunities for OPEC • Joachim Bitterlich The Future of the
EU’s Energy Policy: Do We Need a European High Authority for
Energy? • Travis Bradford The Economic Inevitability of Solar
Energy • Stavros Dimas Future Trends in Environmental Policies
• Peter V. Domenici The United States and the Challenge of
Energy • Manuel Espino Barrientos Oil and Gas in Mexico •
Yegor Gaidar The Curse of Oil • Mikhail Kasyanov Energy
Security and Russia–EU Cooperation • Malcolm Keay Energy
and Climate Change: Assessing What Works • Christian Koch
European Energy and Gulf Security • Eija-Riitta Korhola “The
Times They Are A-Changin’” • James P. Leape EU Competitiveness,
Energy and the Environment: The Challenge of Synergy •
Claude Mandil Energy Technology Perspectives: Scenarios and
Strategies for a More Sustainable Energy Future • Angela Merkel
Commentary: EU Energy Strategy - The German Perspective •
Andris Piebalgs A New Energy Policy for Europe •
Martin Roman Nuclear Energy, European Energy Resources and
Sustainable Development • David Rothbard and Craig Rucker
Environment, Development and Africa: Europe’s Last Great
Opportunity? • Ernest-Antoine Seillière European Strategy
for Sustainable, Competitive and Secure
Energy:
The
Way
Forward • Erna Solberg Europe and the Challenge
of Energy: What Must Europe Do? • Borys Tarasyuk
Ensuring European Energy Security: The Ukrainian View
A Journal of the Forum for European Studies
EUROPEAN VIEW
European View is a journal of the Forum for European Studies, published by the European People’s Party.
European View is a biannual publication that tackles the entire spectrum of Europe’s political, economic, social
and cultural developments. European View is an open forum for academics, experts and decision-makers across
Europe to debate and exchange views and ideas.
EDITORIAL BOARD
Chairman:
Wilfried Martens, President of the European People’s Party, former Prime Minister, Belgium
Carl Bildt, Foreign Minister, Sweden
Elmar Brok, Member of the European Parliament, Germany
John Bruton, former Prime Minister, Ireland
Mário David, Member of Parliament, Portugal
Ingo Friedrich, Chairman of the Forum for European Studies, Germany
Vicente Martínez-Pujalte López, Member of Parliament, Spain
Loyola de Palacio, former Vice-President of the European Commission, Spain
Chris Patten, former Member of the European Commission, United Kingdom
Jan Petersen, former Foreign Minister, Norway
Hans-Gert Pöttering, Chairman of the EPP-ED Group in the European Parliament, Germany
Alexander Stubb, Member of the European Parliament, Finland
József Szájer, Vice-Chairman of the EPP-ED Group in the European Parliament, Hungary
Andrej Umek, former Minister for Science and Technology, Slovenia
Per Unckel, former Minister of Education and Science, Sweden
Yannis Valinakis, Deputy Foreign Minister, Greece
ADVISORY BOARD
Antonio López-Istúriz, Christian Kremer, Luc Vandeputte, Kostas Sasmatzoglou, Ingrid Goossens, Guy
Volckaert
EDITOR-IN-CHIEF
Tomi Huhtanen
Assistant Editors:
Galina Fomenchenko, Mélanie Dursin, Marvin DuBois, Maureen Epp, Richard Ratzlaff, Jennifer Edwards,
Eduard Friesen
For editorial inquiries please contact:
European View
Editor-in-Chief
10, rue du Commerce - 1000 Brussels
email: [email protected]
Tel. +32 2 285 41 49
Fax. +32 2 285 41 41
Url: www.epp.eu/europeanview
The Forum for European Studies is a think-tank dedicated to Christian Democrat and like-minded political
values, which is engaged in open, comprehensive and analytical debate.
European View and its publishers assume no responsibility for facts or opinions expressed in this publication.
Articles are subject to editing and final approval by the Editorial Board.
This publication is partly funded by the European Parliament.
European View
contents
• Editorial
Energy and the Environment: The Political Conundrum for EU–US Relations.....................................................5
John Bruton
• Energy Production in the Gulf Region and the World. .............................................................................................................. 11
Mohamed Bin Dhaen Al Hamli
• A New Energy Era: Challenges and Opportunities for OPEC............................................................................................ 17
Mohammed Barkindo
• The Future of the EU’s Energy Policy: Do We Need
a European High Authority for Energy?................................................................................................................................................ 23
Joachim Bitterlich
• The Economic Inevitability of Solar Energy. ...................................................................................................................................... 29
Travis Bradford
• Future Trends in Environmental Policies.............................................................................................................................................. 37
Stavros Dimas
• The United States and the Challenge of Energy. ............................................................................................................................. 45
Peter V. Domenici
• Oil and Gas in Mexico........................................................................................................................................................................................ 49
Manuel Espino Barrientos
• The Curse of Oil ...................................................................................................................................................................................................... 57
Yegor Gaidar
• Energy Security and Russia–EU Cooperation................................................................................................................................... 67
Mikhail Kasyanov
• Energy and Climate Change: Assessing What Works................................................................................................................... 73
Malcolm Keay
• European Energy and Gulf Security ........................................................................................................................................................ 81
Christian Koch
• “The Times They Are A-Changin’”. ............................................................................................................................................................ 89
Eija-Riitta Korhola
• EU Competitiveness, Energy and the Environment: The Challenge of Synergy.................................................... 97
James P. Leape
• Energy Technology Perspectives: Scenarios and Strategies for
a More Sustainable Energy Future.......................................................................................................................................................... 103
Claude Mandil
Volume 4 - November 2006
• Commentary: EU Energy Strategy - The German Perspective.......................................................................................... 111
Angela Merkel
• A New Energy Policy for Europe............................................................................................................................................................... 113
Andris Piebalgs
• Nuclear Energy, European Energy Resources
and Sustainable Development. ................................................................................................................................................................... 119
Martin Roman
• Environment, Development and Africa:
Europe’s Last Great Opportunity?. ........................................................................................................................................................... 127
David Rothbard and Craig Rucker
• European Strategy for Sustainable, Competitive and
Secure Energy: The Way Forward............................................................................................................................................................. 135
Ernest-Antoine Seillière
• Europe and the Challenge of Energy: What Must Europe Do?. ....................................................................................... 141
Erna Solberg
• Ensuring European Energy Security: The Ukrainian View................................................................................................. 147
Borys Tarasyuk
European View
John Bruton
Editorial
Energy and the Environment:
The Political Conundrum for EU–US Relations
By John Bruton
As an observer of the political process
in the United States capital, I feel
that 2006 presented the European
Union and the United States with
an excellent opportunity to enhance
cooperation in matters of energy
and the environment. Notwithstanding some
continuing differences over how to tackle
climate change and questions about the EU’s
institutional readiness to deal with energy policy,
we launched a strategic dialogue on energy and
a high-level dialogue on climate change, clean
energy and sustainable development at the EU–
US summit in June.
touted as the way of the future. How
durable this concern is remains to be
seen. The discovery of oil reserves in
the Gulf of Mexico and the drop in
oil prices since the summer to around
$2.50 a gallon seem to have taken
some of the heat out of this debate ahead of
congressional elections in November, but energy
experts say price volatility and the near certainty
of other supply problems mean the energy
debate is far from over. As Rep. John Peterson,
a Republican from Pennsylvania, said recently,
“We’re just another storm away, another pipeline
problem away from high prices.”
These are important first steps, moving us away
from our policy comfort zones into new territory
that could make the difference between whether
we succeed or fail in tackling what are arguably
our greatest challenges: clean, sustainable and
affordable energy, and reducing our carbon
emissions to fight climate change.
Europe, likewise, had its own wake-up call. The
year began with the disruption of gas supplies
because of a price dispute between Ukraine and
Russia. Though it was quickly resolved, Europe
learned it could not afford to be complacent.
Around 50% of the gas consumed by the EU
is imported, mainly from Russia, Norway and
Algeria. Several of our new Member States are
totally dependent on Russia for their domestic
energy consumption. Clearly, a major challenge
for the EU will be making our Energy Dialogue
with Russia work.
There is no doubt that energy, and to some extent
the environment, returned to the forefront of
American concerns in a year that otherwise was
dominated by the ongoing “war on terror”, the
war in Iraq, escalating tensions in the Middle
East (which spilled over into open hostilities in
July and August between Israel and Hezbollah)
and concern about the domestic economy.
Post-Hurricane Katrina gas price hikes put
American commuters on notice that in a world
with shrinking oil reserves, the cost of driving
could become crippling if a gallon of petrol
reached and stayed at $4.00 and above. Democrats
and Republicans alike saw the opportunity and
the danger in an electorate afraid of being left in
the lurch if the supply of cheap gasoline they have
grown dependent on comes to an end. Fearing
voter backlash, alternatives of all kinds were
The energy conundrum
The political conundrum with regard to energy
is not the same on both sides of the Atlantic.
For example, in the recent energy debate in the
US, legislators and policymakers were largely
responding to petrol price hikes in the wake
of a natural disaster (Katrina) and concerned
with ensuring the supply of affordable energy.
In Europe, where energy prices have always
been higher and there is greater dependence on
imported energy, the emphasis is on securing our
supply while managing demand through energy
efficiency and conservation. Between the EU and
Energy and the Environment: The Political Conundrum for EU–US Relations
the US, there is the additional difference that we
are not equals in our institutional abilities to set
energy policy.
Despite the fact that today’s European Union
grew out of the original common market for
coal and steel, the EU does not have a common
energy policy. What kind of cooperation is
possible if both our machinery and our goals are
not entirely the same? And in the global context,
how do we balance our need for energy with
support for democracy when so many energyrich countries are governed undemocratically?
The US and Europe both face a very big energy
challenge. Together we account for more than
40% of the world’s energy consumption, using
the lion’s share while only accounting for a
fraction of world population.
According to the Annual Energy Review 2005
from the US Department of Energy, US reliance
on imported energy in 2005 was 29% and
trending upwards. The US imports 25% of the
oil processed worldwide and that could increase
by 2% in 2007—an extra 400,000 barrels a
day. The transportation sector is a major cause
of increased demand for petroleum. Most US
energy (85%) is produced from fossil fuels (coal,
petroleum and natural gas), 8% from nuclear
and 6% from alternative renewable energy.
As for Europe, we rely on foreign sources for
50% of our energy consumption. Due to rising
demand and falling domestic production, this
figure could rise to 70% by 2030 in a businessas-usual scenario. The EU aims to increase the
share of renewable energy from 6% to 12% by
2010, and increase the market penetration of
biofuels to 5.75% in the same timeframe.
These energy models are not sustainable. In the
past year alone, natural and man-made supply
shocks exposed our vulnerabilities in dramatic
fashion. In the US, Hurricanes Rita and Katrina
sidelined more than 5 million barrels a day
in refining capacity in Texas and Louisiana,
and initially shut down 25% of US crude oil
European View
production and 20% of natural gas production
from the Outer Continental Shelf in the Gulf
of Mexico. Not all of this capacity has been
restored. BP’s announcement in August that it
would temporarily shut down production at the
Prudhoe Bay oilfield in Alaska due to corrosion
of its pipelines meant a temporary 2.5% loss
of supply to the US. In Europe, the New Year
2006 gas price dispute between Russia and
Ukraine gave us serious pause and accelerated
the Commission’s work on an integrated strategy
for European energy security (published in the
March 2006 Green Paper).
As the largest energy users and each other’s largest
economic partners, Europe and the US cannot
pursue divergent strategies on energy. We have
to cooperate. Although energy is not a common
policy of the European Union, cooperation
between the EU and the US on energy issues
has formed part of our relationship since 1995
and has gradually increased. In 2005, we agreed
to work closely together on energy technologies
like hydrogen and carbon sequestration and on
research on nuclear energy via the Euratom–
US Agreement and ITER (the International
Thermonuclear Experimental Reactor project).
In June 2006, President Bush, President Barroso
and Chancellor Schüssel (for the Austrian EU
Presidency), took cooperation one step further
by launching the strategic dialogue on energy
and energy security. We are now in intense
discussions on how to take this forward through
concrete actions to diversify energy sources and
supplies, make our infrastructure more secure,
promote market-based energy policies and
accelerate investment in cleaner, more efficient
energy sources.
As soon as President Bush pledged to end
America’s addiction to oil in his January 2006
State of the Union address, it was clear to me
that Europe needs to pay close attention to how
America’s energy policy will rise to the challenge.
Any decisions taken on this side of the Atlantic
will have an impact on our vast economic
relationship, businesses and consumers. In that
John Bruton
sense, it could be said that President Bush’s bold
pronouncement, though directed at America,
provided additional impetus for EU–US
cooperation on energy. This new impetus is
very timely as the EU develops its own energy
strategy.
So, at the height of the 2006 energy debate, and
on the eve of the EU–US summit where the
strategic dialogue was agreed, I embarked on
a round of meetings with members of the US
Administration, Congress, representatives of the
petroleum industry and energy experts from a
range of think tanks to explore the potential of
our cooperation in broad and specific terms. The
people I met represented the gamut of expertise
and opinion and often disagreed on the detail
about what America could and should do. Some
were seeing an “energy crisis” for the first time;
others were veterans of the energy crises of the
1970s, officials serving in the Administration of
President Jimmy Carter, who in an April 1977
speech called this issue “the moral equivalent of
war”. Despite differences in age and experience,
the one thing they all agreed on was that the
energy question would not go unanswered this
time, with the war in Iraq, ongoing volatility in
the Middle East, uncertainty about how much
oil is left and the growing consensus about global
warming as a threat.
These conversations nonetheless convinced me
that there are some hurdles to be overcome to
make our cooperation truly fruitful. They fall
into the following categories.
Institutional. Despite the fact that energy
matters were a centrepiece of the EU–US
summit in Vienna in June, outside of the US
Administration, many experts and Members
of Congress had not begun to think of the
EU as a potential partner. This does not stem
from isolationism—in fact, many I spoke to
emphatically rejected the idea that the US could
or should strive to be energy independent.
Most believed it was in the US’s long-term
interest to strive for energy interdependence
involving cooperation with allies. However, it
was the International Energy Agency (IEA) and
producing countries they automatically invoked.
As a net energy consumer, the EU has yet to be
seen as a full-fledged energy player and potential
partner for the US.
Political. Members of Congress from both
political parties were passionate about energy
security, but divided on solutions. Representatives
of the farm states frequently advocated corn-based
ethanol, turning farms into biorefineries, and
revitalising rural communities with a homegrown
fuel industry. Representatives of non-farm states
pointed to other higher-yielding ethanol crops
such as sugar cane or miscanthus grass, citing
the success of Brazil’s ethanol programme and
concern that using corn for ethanol will drive up
food and feed prices. States with mining interests
push clean-coal technology, which is suitable for
power generation, but not for transportation,
unless and until electric cars are reintroduced to
the US market on a large scale.
In the several bills introduced in Congress in
2006, there was no unifying thread. The House
of Representatives passed bills to counter price
gouging and to allow oil drilling in Alaska’s Arctic
National Wildlife Refuge; but others, promoting
offshore drilling, increased ethanol production
or more cooperation with major consumer
countries, failed to pass. Falling gasoline prices
and a shift to more pressing concerns are the
likely reason, but so is the fact that just a year
ago, Congress passed the most comprehensive
energy legislation in decades, the Energy Act of
2005.
What to focus on. It was clear in all my discussions
that US energy policymakers are focused on the
supply side and on technological solutions to
meeting the growing demand for energy in order
to keep the US way of life as it is. Europe, on the
other hand, pursues an approach that is balanced
between supply and demand, emphasiing the
need to reduce consumption through more
use of public transport, home insulation and
good energy habits. American officials and
representatives speak at length about the exciting
developments taking place in the development
of biofuels and clean-coal technologies. While
technology will be an important part of the
solution to dwindling supplies, our dialogue
must avoid getting bogged down in the merits
or demerits of various alternatives and focus on
the regulatory and investment issues involved as
we make the shift to cleaner alternative fuels.
Energy efficiency appears to be a most promising
area for cooperation. The renewal this autumn
of the Energy Star Partnership Agreement on
energy-efficiency labelling in office equipment
is good, but we could do more, for instance, in
the commercial building sector. Commercial
buildings are normally rented out. As the
property investor does not cover the energy cost,
property investors have little incentive to invest
in improved energy efficiency in buildings.
Another barrier is the misperception that energyefficient buildings cost more, are less attractive,
more difficult to build, etc., despite substantial
evidence to the contrary. The building industry
and architects need to be convinced that there is
a market for green buildings. And buyers need
to be convinced that it is worth the additional
investment. We could also do more to look at
our cooperation with third countries that have
great potential for energy savings, e.g. China,
India, Russia and Ukraine.
European oil and gas supplies principally come
from geopolitically uncertain regions, and a
concerted European approach is just beginning.
The US enjoys a more favourable situation, with
a substantial share of the net oil requirements
coming from Canada, Venezuela and Mexico.
We share the same goal of diversifying importer
and transit countries, and in this regard, the
Baku–Tbilisi–Ceyhan oil pipeline connecting
South Caucasus and Central Asia to Turkey is a
welcome development for both of us.
The environmental conundrum
The political conundrum with regard to the
environment is also considerable, and one of
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the most pressing and politically difficult issues
between the EU and the US at the moment is
how to tackle climate change.
Commentator Walter Shapiro (‘Fiddling While
the Earth Burns’, Salon.com, 26 May 2006)
recently wrote that climate change is not a
political winner in the US because the political
payoff is too far removed from the present:
Environmental policy is not like Freudian
analysis, where the honest recognition of a
problem is tantamount to a cure. Nothing
in our political system is geared to deal with
direct threats like irreversible climate change
that are, for the most part decades away. The
issue horizon for Presidents and Members of
Congress is the next election, not 2040.
But climate change is already happening, also
in the US. Permafrost in Alaska is melting,
forcing people to move, Arizona and Arkansas
have suffered severe droughts, and noticeable
changes have occurred in the weather patterns
in other states. If polls are any indication, the
pressure on politicians to respond is greater in
Europe than the US. According to a recent Pew
Global Attitudes survey, only 19% of Americans
worry a great deal about global warming while
Europeans and Asians worry significantly more.
For Europe, which believes an international effort
is needed to tackle climate change effectively—
initially through a modest effort under the Kyoto
Protocol—the political conundrum is, I suppose,
how credible we are in persuading developing
countries to practise sustainable development
if the United States is not on board. American
dynamism, inventiveness and technology
make it a key partner for the EU to reach an
international response based on common but
differentiated responsibilities.
I believe attitudes within the United States
are changing in a way that favours greater
cooperation. Despite the other distractions
(a protracted war and a cooling economy),
and the Bush administration’s ambivalence
John Bruton
on the matter, the subject of global warming
and climate change made a comeback in the
US in 2006 thanks to high-profile activity by
statesmen and business leaders, and mounting
evidence of rising temperatures and shrinking
ice caps. Momentum seems to be building from
within the United States—at state level and
city level, and within the business and religious
communities—for the US to re-engage in the
fight against climate change.
Seven north-eastern US states—Maine, New
Hampshire, Vermont, Connecticut, New York,
New Jersey and Delaware—are already involved
in the Regional Greenhouse Gas Initiative to
cut their emissions by 10% by 2019 and other
states may join them. They are inspired by the
EU’s CO2 emissions trading scheme, an idea
that ironically originated in the US for trading
SO2 and NOx, but which is being implemented
successfully in Europe.
For example, in a summer marked by searing heat,
drought and wildfires across the US, Former Vice
President Al Gore’s documentary An Inconvenient
Truth attracted large audiences to become the
third highest-grossing documentary in the US
since 1982. The message of that movie is simple:
without action, the ice sheets in Greenland and
Antarctica could collapse, triggering rising sea
levels, a shift in the Gulf Stream, the cooling of
parts of Europe and a refugee crisis. By taking
action now, global warming can be reversed, but
it requires an educational and individual effort
as well as action by government and business.
Iconic business leaders are also calling for
change to meet the energy and environment
challenge. On this side of the Atlantic, Ted
Turner, the native of Ohio who brought
24-hour news to our living rooms and
revolutionised cable television, has been urging
the World Trade Organization to attempt to
break the deadlock over agricultural subsidies
and tariffs by providing support for biofuels. Sir
Richard Branson, founding Chairman of Virgin
Airlines, single-handedly brought aviation on
board when he pledged to invest $3 billion over
10 years to fight global warming and to further
the search for clean energy sources to replace
the fossil fuels that contribute to it. It may take
mavericks like Turner and Branson to blaze a
new trail.
More recently, lead climate specialist James E.
Hansen of the NASA Goddard Institute for
Space Studies has come out with findings on
climate change that the Washington Post has
called “terrifying”. Hansen’s research shows
that the earth has been warming by 0.2 degrees
Celsius over each of the past three decades, and
warns if CO2 emissions continue to increase by
2% a year, the sea level will rise several metres
per century, with the eventual rise of tens of
metres, enough to transform global coastlines
and flood major parts of the US, including
Florida and major East Coast cities.
In September, there were several more indications
that influential Americans want to get serious
in fighting climate change. Governor Arnold
Schwarzenegger of California signed legislation
to cap greenhouse gas emissions from industrial
sources, while the State Attorney General filed
to sue General Motors, Toyota, Ford, Honda,
Chrysler and Nissan for monetary compensation
for the damage it says their emissions are doing
to health, the economy and the environment.
The EU is taking serious steps to address its
own greenhouse gas emissions. Launched in
2005, the EU’s Emissions Trading Scheme is the
largest multi-country, multi-sector greenhousegas emissions trading scheme worldwide. Latest
data indicate that the EU has delivered on its
commitment to stabilise emissions of CO2 at
the 1990 level in 2000, and is committed to a
collective 8% cut in emissions by 2008-2012 in
line with its Kyoto obligations.
The EU, which today accounts for 14% of the
world’s greenhouse gas emissions, will have
reduced that figure to around 8% by 2050.
Since 2000, we have launched more than 30
initiatives to address climate change, including
research and development on energy efficiency
and alternative renewable energy sources such as
wind, sun, water and even waste.
Conclusion
What I am sure of is that 2006 has in many
ways marked a new beginning in transatlantic
relations. A couple of years ago, climate change
was off-limits and energy was still unripe for
the kind of strategic dialogue we have just
launched.
Because of the different paths and proclivities
that have brought us to this point, the road
ahead will not be easy, but it is important that
we seize this opportunity with open-mindedness
and determination. To make the Strategic Energy
Dialogue worthwhile, we need to focus not only
on issues of supply (alternatives, infrastructure,
etc.), but also on demand (conservation). To
make a real dent in greenhouse gas emissions,
technological advances will help, but we
must also become less wasteful. Above all,
the dialogues we have just launched must not
become bureaucratic battlegrounds for our
different positions, but areas of common ground
where we can make real progress.
Energy and the environment are crucial to
our survival. Any rational person agrees that
we need to act. Yet a gradual, but ultimately
dramatic, increase in sea levels does not seem
to be as politically compelling as the sticker
shock of $4.00 a gallon for gasoline. In our
consumer society, it is not easy for any politician
to set policies that require some sacrifice, but
without conservation through either greater fuel
efficiency or changes in lifestyle, it is difficult to
believe we can reduce our energy consumption
and our impact on the environment.
It is very encouraging that a lot is happening
in Europe and the US, and between Europe
and the US. Even on the environment, despite
a hiatus in cooperation, we are probably less
far apart than we think. We both want a clean
and safe environment for our children; we both
want clean energy technologies; we both want
sustainable energy and development; we both
believe in innovation as a powerful component in
the solution; and neither of us wants to commit
10
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economic suicide as we become more energy
efficient and environmentally responsible.
However, GDP should not be the only goalpost
we focus on. The EU has demonstrated that
proactive climate policies produce results and
that they do not endanger economic growth.
Climate change has the potential to do a great
deal more damage to our civilisation than to
our economy, so leadership is essential and we
should give it.
John Bruton is the Head of the European
Commission’s Delegation in the United States.
He was Prime Minister of Ireland from 1994 to
1997.
Energy Production in the Gulf Region and the World
By Mohamed Bin Dhaen Al Hamli
The production of
hydrocarbons is the
dominant
economic
driver in the Gulf region
and gives this region
an important role to
play on the world stage. However, this is not to
overlook the fact that economic diversification
has been a central objective of countries within
the region for decades, and, to varying degrees,
has been characterised by robust growth, high
educational achievement and the rigorous
application of state-of-the-art technology.
The countries that make up the Gulf region have
many parallels among their cultures, histories
and traditions, as well as long-established
trading links, in addition to being net exporters
of oil and/or gas. Six are members of the elevencountry Organization of the Petroleum Exporting
Countries (OPEC): the Islamic Republic of Iran,
Iraq, Kuwait, Qatar, Saudi Arabia and, my own
country, the United Arab Emirates. Indeed, four
of these states—Iran, Iraq, Kuwait and Saudi
Arabia—are founder members of this successful,
influential intergovernmental body, which was
set up in Baghdad in 1960.
I have been honoured to be appointed Alternate
President of the OPEC Conference for 2006.
Next year, I will serve as the full President and
will ensure that the Organization maintains its
longstanding commitment to achieving market
order and stability to the benefit of producers
and consumers alike.
Six regional states also make up the Gulf
Cooperation Council (GCC), a very active
group which was set up in Abu Dhabi in 1981
to bring about coordination, integration and
interconnectedness among its members in all
fields in order to achieve unity among them.
They are Bahrain, Kuwait, Oman, Qatar, Saudi
Arabia and the UAE.
Hydrocarbon potential of the Gulf region
According to figures from the recently published
OPEC Annual Statistical Bulletin, which covers
the period up to 2005, the Gulf region possesses
64% of the world’s proven reserves of crude oil,
with 740 billion barrels (bnb). It has the world’s
top five proven crude reserve holders, with Saudi
Arabia holding 264 bnb, Iran 136 bnb, Iraq 115
bnb, Kuwait 102 bnb and the UAE 98 bnb.
To put this in perspective with regard to major
consumer areas, the United States of America
has 21 bnb of proven crude oil reserves and
Western Europe has 17 bnb, while the emerging
economies of China and India have 16 bnb and
6 bnb, respectively.
The situation is similar with proven natural gas
reserves, with the one major difference being the
huge quantities of this hydrocarbon—57 trillion
standard cubic metres (tcm)—that reside in the
former Soviet Union (FSU). Nevertheless, the
Gulf region, with 73 tcm, still possesses 41%
of the world total. Iran, with 28 tcm, Qatar, 26
tcm, Saudi Arabia, 7 tcm, and the UAE, 6 tcm,
have the four next largest reserves after the FSU.
Putting this into perspective, again in relation to
consumer country reserves, the USA has 5 tcm,
Western Europe 6 tcm, China 2 tcm and India
1 tcm.
The picture changes somewhat when we turn
to the production figures, which are out of line
with the above-mentioned global proportions
for reserves of both oil and gas. In the case of
oil, the Gulf region accounts for just 31% of
world production—a 22 million barrel-per-day
(mb/d) average in 2005—compared with 64%
for reserves. The discrepancy is much greater
11
for market natural gas production, with 11%
set against 41%. This works out to 498 billion
standard cubic metres (bcm) in 2005. On a
country-by-country basis, Saudi Arabia was
second to the FSU in 2005 with 9.4 mb/d of
crude oil, while the next-highest Gulf producer,
Iran, was in fourth place with 4.1 mb/d. The
third-highest Gulf producer, Kuwait, was in
eighth place with 2.6 mb/d.
For marketed natural gas, Iran is the biggest Gulf
producer, with 95 bcm in 2005. However, this
compares with 802 bcm for the FSU, 517 bcm
for the USA and 186 bcm for Canada.
Such large discrepancies between reserve
strength and production levels mean that Gulf
producers have far greater potential than other
producers do to meet future rising demand for
conventional oil and gas.
I have one last point to make on the subject of
market share. Since the early 1990s, the Gulf
region’s share of world crude oil production
has fluctuated within an annual average range
of around 29–33%. On the other hand,
throughout this period there has been a steady
increase in the Gulf ’s share of world-marketed
natural gas production, rising from 5% in 1990
to 11% in 2005. Indeed, this trend stretches
back almost unbroken at least to the time of
OPEC’s establishment in 1960, when the share
was just 0.6%.
Economic development
Let me digress for a moment and look at some
of the benefits oil and gas revenue brings to Gulf
producers.
First, it contributes towards providing the funds
required for investment in future oil production
capacity to enable secure, stable supplies for
consumers in the years ahead. Indeed, there is
an obvious symmetry here because an orderly
market will in itself result in sound revenue
viability for the future.
12
European View
Second, it helps oil producers pursue their own
paths of sustainable development. Crude oil is a
finite resource, and these countries must do all
they can to diversify their economies and develop
the appropriate supporting infrastructure
while they have commercially viable reserves of
crude. This way they will sustain the economic
momentum generated by the receipt of these
revenues and continue to prosper as reliance on
oil decreases in the future.
And third, it furthers socioeconomic
development in other countries. The Gulf States
fervently believe that clean and safe energy is a
vital requirement for developing countries as
they seek access to modern energy services in
their often protracted struggle for socioeconomic
development, sometimes from a state of extreme
poverty. Without outside assistance, many appear
to have no means of escape from the poverty
trap. We are constantly mindful of the fact that
poverty eradication is the first UN Millennium
Development Goal, and that a comprehensive
and balanced approach to implementing the
three pillars of sustainable development—
economic development, social development and
environmental protection—is required.
For decades, Gulf producers have provided
development assistance, on both a bilateral and
multilateral basis, as an expression of SouthSouth solidarity, friendship and mutual support.
This aid has taken diverse and innovative forms,
including loans, grants and equity participation,
in an attempt to maximise the impact of the
assistance delivered and to meet the changing
needs and priorities of the beneficiary countries.
The OPEC Gulf producers are also members of
the OPEC Fund for International Development,
which is a Vienna-based multilateral aid agency
whose total commitments in its thirty-year
history exceed $8 billion.
Nevertheless, in writing all of this, it is important
to mention here that these countries’ heavy
dependence on oil and gas exports for their
revenue means that movements on world energy
markets can have a significant impact on their
economic activities. This has been especially true
over the past couple of years with the big rises in
the oil price. Clearly this has meant that a fresh
new climate of change and opportunity is now
apparent in the Gulf region. Supporting this, of
course, is the additional income generated by the
rise in oil revenue.
Thus, at differing levels across the region and in
accordance with individual sovereign policies,
there is not just a revitalised will for change and
a commitment to change, but also an increased
ability to finance change. Moreover, populations
are rising rapidly and are relatively young; hence,
the potential for growth is large. Thus, with its
growing requirement for industrial and consumer
goods and services, the region offers enhanced
opportunities for trade with outside parties.The
countries in the region are making the most
of this opportunity to enhance their domestic
infrastructures and diversification strategies,
so that they can pursue sound, sustainable
development goals. This demonstrates the benefits
that have been provided by active hydrocarbons
sectors in the past, as well as the strong potential
for this to continue in the future.
The achievement of sustainable development
goals in the Gulf countries is not only beneficial to
the countries involved and the region as a whole,
but should also make a valuable contribution to
trade and commerce in neighbouring regions.
As regional cooperation is central to this, it will
rely heavily upon the Gulf countries’ ability to
play to their strengths—whether these be found
in hydrocarbons, trade and commerce, financial
institutions, service industries or more traditional
areas.
Furthermore, wherever an area or sector is seen
to have a competitive edge, the importance of
having a high level of educational achievement
across a wide range of matching disciplines cannot
be overemphasised. The opportunities must be
there to apply the acquired knowledge and skills
to the emerging or revitalised economies so as to
improve growth rates and enhance the process of
diversification.
The employment of highly trained personnel is
especially important for our oil and gas sectors to
ensure that these remain sharp and focused and
able to continue to generate the required levels of
revenue on a steady, predictable and sustainable
basis, at the same time as satisfying the growing
world requirement in a full and timely manner.
Notably, this growing demand is expected to
include a sharp increase in exports from the
Gulf to Asia, particularly for oil, due to the fact
that the latter region’s energy supply capability
cannot keep pace with its rapidly rising demand,
especially from China and India.
All of this places a premium on sound investment
policies to ensure that at all times in the coming
years there is sufficient production capacity
available to meet rising demand and absorb
short-term fluctuations. As I noted earlier, there
is plenty of oil and gas in the Gulf region to help
meet demand for decades to come.
On top of this, increasing attention is being
paid to investment in the downstream and
petrochemicals in the Gulf region at a time of
serious shortages in some downstream sectors in
consumer markets and the upward pressure that
this has been putting on international oil prices
generally. Benefiting from access to the latest
technology, as well as to the growing knowledge
and skills to apply it and enhance the supporting
sales, marketing and distribution infrastructure,
this is significantly raising the value-added on
hydrocarbons and providing higher financial
returns. The resulting high-quality, clean
and efficient products make an important
contribution to trade in manufacturing and
services and enrich the process of sustainable
economic growth. Gulf countries are also
increasing their investment in the downstream
sectors of some consuming countries.
Investment opportunities
Across the domestic supply chain, Gulf producers
approach the investment issue in a variety of
ways, since, as individual sovereign states, they
are all different, encompassing a rich blend of
13
geologies, cultures, heritages, political leanings,
and economic and social systems. Nevertheless,
despite this diversity, they aspire to the same set
of guiding principles with regard to overseeing
the oil market’s welfare.
Numerous possibilities exist, although recently
a move towards more involvement by the
international oil companies (IOCs) in the
upstream activities of some Gulf producers has
been observed. However, other producers might
choose to meet the investment challenge through
their own national oil companies (NOCs), or
they may do it in partnership with other NOCs,
IOCs or service companies, having access to the
best-available technology and finance.
Relative to other global production areas, the
region’s resources are low-cost and easy to
develop. Moreover, these countries have the will
and the capability to develop these resources, so
as to meet the rising levels of world demand that
have been forecast for the years ahead.
However, there are considerable uncertainties
about the level of future world oil demand and
hence the size of the investment that is required for
the timely development of the region’s abundant
energy resources and the expansion of upstream
and downstream production capacity. This is
particularly the case in the current global market
conditions. Clearly, both over-investment and
under-investment can be damaging, costly and
wasteful. Therefore, every effort should be made
by consuming countries to reduce uncertainties
by providing more consistency and transparency
in their energy and environmental policies.
All in all, Gulf producers recognise that they are
an integral part of the global economy and have
a responsibility to ensure that their oil makes
an effective and meaningful contribution to
industrial, commercial and domestic life in the
industrialised and, increasingly, in the developing
world. But this also involves all responsible
parties in the industry.
14
European View
The role of OPEC
Writing now from a more general OPEC
perspective, our organisation has welcomed the
growing awareness within the oil community
at large—OPEC and non-OPEC producers,
consumers, the international companies and so
on—of the importance of a collective approach
to nurturing the essentials of the industry, such
as the achievement of order and stability with
reasonable prices, secure supply, predictable
demand and fair returns to investors. These are
all qualities that find expression in the OPEC
Statute, which was drafted shortly after OPEC’s
establishment in 1960 and which has provided
the guiding principles for our subsequent
actions.
Order and stability can best be achieved in a sustainable manner if every effort is made to remove
excesses and volatility from the market—hence,
the importance we attach to effective market-stabilisation measures and the reason why we hold
several Ministerial Conferences a year to monitor developments and make adjustments to our
production agreements as and when necessary.
There has been much activity in this regard over
the past two and a half years, in the unusual conditions that have prevailed in the market during
this period, and OPEC’s actions have had notable success in moderating the excessive volatility.
With regard to cooperation and development,
OPEC is particularly pleased with the advances
made in these areas in recent years, involving
the major players from all sides of the industry
and the steadily increasing institutionalisation of
such processes. Notable here is the establishment
and development of the specialist ministeriallevel producer-consumer body, the International
Energy Forum, which has its headquarters in
a Gulf state, Saudi Arabia. The establishment
last year of three formal energy dialogues,
which OPEC entered into with the European
Union, with China and with Russia, is another
milestone. In addition to setting out proposals to
jointly examine in-depth topical issues of mutual
interest, these dialogues have already begun to
provide a much clearer understanding of the
respective views of all the parties involved.
With specific regard to Europe, trade between
the EU and the GCC and the EU and OPEC
exists at many levels. It is a two-way process.
Although OPEC is seen primarily as a crude-oil
organisation, its members also possess vertically
integrated industries in oil and gas. Longstanding
energy relationships exist independently among
companies in the two groups, and these have
prospered for decades. There are also established
oil and gas producers in the EU, as well as
providers of other forms of commercial energy,
especially coal and nuclear. Members of both the
EU and OPEC derive enormous benefit from
the flow of their respective goods and services.
Indeed, in the longer term, our member countries
themselves want to diversify their economies to
such an extent that an increasing amount of
their exports will be non-oil goods and services.
In light of all this, the establishment of the EU–
OPEC Energy Dialogue has been very timely
and has enormous potential to benefit all the
parties involved.
Conclusions
To conclude this article, I should like to suggest
some special challenges for Gulf producers, as we
set our sights on the future in an industry that
many observers believe is undergoing a process
of fundamental change.
First, I think Gulf producers should help ensure
that the integrity of oil and gas, as the world’s two
frontline commercial energy resources, remains
intact at all times. Their superior qualities over
other sources of energy should be emphasised
repeatedly to discourage shifts towards less
efficient, less accessible and less abundant sources
for political or emotive reasons, under pressure
from powerful vested interests elsewhere in the
world.
Second, I believe it should be made clear at all
times and in all places that the world has sufficient
oil and gas reserves to meet the projected rises in
energy demand for decades to come, and that
most of these reserves are located in the Gulf,
whose producers have an excellent, longstanding
record as reliable suppliers of energy.
Third, Gulf producers should continue to do
what they have been doing so successfully in
the past and ensure that they are always ready
to supply the oil and gas that consumers need,
as and when they need them and in the most
environmentally friendly manner possible.
Fourth, a rapidly developing challenge for Gulf
producers is to turn more of their attention to
the downstream, at home and abroad, in view of
the shortages that have manifested themselves in
consuming countries, particularly over the past
two and a half years. These shortages have been
to the detriment of the oil market generally,
affecting both prices and stability.
And finally, there is the longstanding challenge
of ensuring that revenue from oil and gas sales
continues to be used wisely to help producers
diversify their economies away from heavy
dependence on their hydrocarbon sectors. A
good example is my own country, the UAE,
where in recent years the contribution of the
services sector to the national economy has been
on the rise. Despite similar advances in other
Gulf States over many years, this nevertheless
remains an ongoing challenge, particularly in
keeping pace with rapidly moving developments
elsewhere in the world.
Mohamed Bin Dhaen Al Hamli is the Alternate
President of the OPEC Conference and the United
Arab Emirates’ Minister of Energy.
15
Mohammed Barkindo
A New Energy Era: Challenges and Opportunities for OPEC
By Mohammed Barkindo
We live in a world today
where anxieties and
concerns about local,
regional and global
energy security top the
political agendas of
countries around the world—concerns regarding
not just oil, but the entire energy value chain.
This issue reflects the fact that there have been
fundamental changes to both the character and
dynamics of the world energy industry since the
turn of the century.
This has been especially apparent in the oil
sector—OPEC’s principal field of activity—and
indeed, this trend has accelerated over the past
two and a half years. Thus, there has been greater
intensity in efforts to examine the way ahead,
and this has resulted in some familiar perennial
debates being pursued with renewed vigour in
such key areas as global resources, the supply
and demand balance, price stability, short- and
long-term investments, and the future role of
technology.
At the same time, many broader-based issues are
affecting the harmonious progress of humanity
generally, such as the environment, sustainable
development and the eradication of poverty, and
how the provision of modern energy services
meshes with these concerns. In OPEC, we attach
a great deal of importance to this.
Yet we all need to be cognisant that amid such
volatility and risk in what is being termed a
‘new energy era’ of shifting market dynamics,
uncertainty and challenges abound but so
too does opportunity. The focus must be on
understanding the needs of each stakeholder and
viewing the entire energy market holistically.
Understanding the challenges and opportunities
we all face will help achieve the twin goals of
increasing market stability and enhancing
market predictability.
Price volatility
Perhaps the first issue to tackle is the question
that has recently captured many news headlines
worldwide: why are oil prices at their current
level? This past summer we have seen levels rise
to over $70 a barrel, though towards the end of
August and into September, we have witnessed
a drop of more than $10. Though it should
be noted that in real terms these recent levels
are still below those experienced in the early
1980s, when the OPEC Reference Basket would
have reached $85 at today’s prices, they have
also occurred at the same time as significant,
sometimes even greater, rises in other energy and
non-energy commodities. For example, nickel
and copper prices have multiplied by a factor of
four since 2001.
There is no straightforward answer to the
question of why current oil prices are so high.
What should be noted, however, is that although
price rises make for easy news headlines, it is their
volatility that should most concern the industry:
the recent drop of more than $10 a barrel over
a period of three weeks even though the balance
between supply and demand remained relatively
unchanged; a rise of $8 over a period of a month
from June 20 as tensions flared in the Middle
East; a single-day rise this year of more than $4.
These sharp rises and falls are not conducive
to a stable market environment and not in the
interest of any industry stakeholder, whether
producer or consumer.
In this regard, what needs to be recognised is
that these price movements have often flown
in the face of some of the very basic oil market
fundamentals. For instance, prior to 2004 there
17
was a simple industry yardstick. If commercial
stocks in consuming countries were high, then
prices would generally fall. If these stocks were
low, then the opposite was generally true. This
yardstick has been one of the endemic ‘oil
market fundamentals’. Yet today, while the level
of OECD (Organisation for Economic Cooperation and Development) commercial stocks
is high and in fact is at its highest level since
1997, with OECD stocks currently providing
54 days of forward demand cover, oil prices, as
we all know, have remained on the high side.
The price rise has been influenced by a
convergence of factors, including strong
economic growth and, in turn, oil demand
growth, which has risen to unexpectedly high
levels since 2004; consequently, and despite
there continually being sufficient supply, this
has led to dwindling levels of spare capacity.
Other contributing factors include tightness in
the downstream refining sector and speculative
behaviour—indeed, open interests for crude
oil on the NYMEX (New York Mercantile
Exchange) passed the one-million-contract mark
for the first time in April. As it stands, this is
approximately 1.2 billion barrels and over 14
times higher than the current daily oil output.
Moreover, there has also been pressure on prices
from both real and perceived uncertainties—for
example, natural disasters such as last year’s
hurricanes in the Gulf of Mexico, geopolitical
concerns such as the recent ones in the Middle
East, and other unexpected events like the recent
partial closure of British Petroleum’s key Prudhoe
oilfield in North America.
There has obviously been a tendency to compare
today’s situation with that of the 1970s, which
has led to such questions as whether we have
entered a new price era. Whether or not this is
so remains to be seen, but what is interesting
to note is that today—with a far more global
marketplace, advances in IT and the increasing
role of futures and options—price speculation is
playing a much more prominent role.
18
European View
It is important that the issue of speculation—in
what is termed the market for ‘paper oil’—is
addressed in an effective manner, and soon,
because speculation can exacerbate price
volatility and disruption within the market.
OPEC has been doing as much as it can
to restore price stability at reasonable price
levels, and other responsible parties have also
responded, to varying degrees and in accordance
with circumstance and capabilities. All things
considered, OPEC is not at ease with extreme
price levels, whether too high or too low, as these
are damaging to both producers and consumers.
The changing dynamics of demand
What is interesting is that the recent price rises
have fundamentally been demand driven, a
divergence from the supply-driven rises of the
1970s. This begs the question: just what are the
changing dynamics of demand? Demand has
been propelled in large part by robust global
economic growth, and in turn oil demand
growth, with a particular focus on developing
countries such as China and India, alongside
the continued and significant growth in the US.
Indeed, world oil demand growth over the last
four years has been almost 7 millions of barrels
per day (mb/d), higher than for any other fouryear period in the past quarter of a century.
Furthermore, the volatility facing the oil industry
has had analysts contemplating the possible price
impact on the global economy as a whole, due to
oil’s leading role in the world energy mix. Yet
what has emerged in the last few years is that
economic growth has remained fairly resilient.
One key reason is that the world is now far
more efficient in its use of oil. On top of this,
rising wealth levels among the populations of
industrialised countries, and the fact that any
switch away from oil, where viable, has already
taken place, further augment the reduced
interdependence between economic growth and
price.
Nevertheless, the issue of developing countries
needs to be highlighted in this regard. World
Mohammed Barkindo
economic growth and strong commodity prices
can be expected to support growth in most
developing economies. Moreover, the growing
interdependence through international trade
is important for both regional and global
economies, and in this regard, trade talks are
central to ongoing growth prospects. However,
much more can be done towards helping
developing countries achieve growth and
sustainable development. Here specific reference
must be made to the critical Doha Round of
World Trade Organization (WTO) negotiations,
which have recently been suspended. A positive
outcome to this trade-specific issue is essential
for developing countries to progress in the
global marketplace, particularly in agriculture. A
failure of the Doha Development Round would
undermine the multilateral trading system and
could potentially lead to more protectionism.
The changing dynamics of supply
In a similar vein to demand, there are also
some significant changes in the dynamics of
supply. These include the resource base debate;
new technological developments that increase
exploration success rates, enhance oil recovery
and reduce costs; the relative future role of OPEC
and non-OPEC supply; the changing and in
many instances expanding role of National Oil
Companies; increasing awareness of the need to
protect the environment; the role of biofuels and
other alternatives; tightness in the downstream
sector; and the rising project costs involving such
issues as infrastructure and skilled labour.
The resource base debate
With regard to the resource base, the question we
often hear is: are the resources available to meet
future demand? OPEC’s unequivocal response
to this question is yes. Estimates from the US
Geological Survey of ultimately recoverable
reserves have practically doubled since the
early 1980s, from just 1,700 billion barrels to
over 3,300 billion barrels. Energy supply will
continue to rely primarily on fossil fuels in
the coming decades, and oil will remain the
leading commercial energy source. There is no
physical shortage of the conventional and nonconventional resources needed to meet demand.
It is important that the industry persistently
drives home these points and underlines the fact
that the issue is not about availability: it is about
deliverability.
Technology and the environment
In satisfying increases in demand, OPEC
acknowledges the importance of taking
advantage of technology and all forms of supply.
In this regard, we acknowledge that alternative
energy sources have a role to play in the global
energy mix. We also consider that it is likely to be
decades before any of these alternatives acquire a
significant share of the global energy mix. For
example, biofuels, which are currently receiving
much attention, have to date provided only one
percent of the world’s liquid transport fuels.
In many cases, however, governments have set
ambitious targets for these alternative fuels,
supported by expensive and unsustainable
fiscal incentives, as well as often short-sighted
policy initiatives. Moreover, the energy balance
of biofuel production is debatable. It is also
important to appreciate that when large-scale
production of biofuels for export replaces
local food production, especially in developing
countries, the impact could mean significant
increases in food prices, and possibly hunger
and malnourishment. Is this compatible with
the very first UN Millennium Development
Goal, which stresses the critical importance
of reducing, by half, both the proportion of
people living on less than a dollar a day and the
proportion of people who suffer from hunger?
Where does this leave us? Well, with the need
to acknowledge that in the meantime all other
available energy sources must be accessed,
enhanced and utilised to meet demand in both
the developed and developing world. Oil, as
the leading fuel in the global energy mix for
the foreseeable future, is very much integral to
this, and with this in mind, we recognise the
19
importance of making sure fossil fuel use is
consistent with environmental concerns. In fact,
the oil industry has a long history of successfully
improving the environmental credentials of oil,
addressing concerns about local pollution and
improving air quality.
continued move towards demand for lighter and
cleaner products. On top of this increasing need
for further distillation and conversion capacity, it
is estimated that an additional desulphurisation
capacity of more than 20 mb/d will be required
over the next 10 years.
In going forward there is a need to meet the
challenges imposed by possible environmental
concerns, whereby technological options that
allow the continued use of fossil fuels in a
carbon-constrained world must be considered.
One promising option is carbon capture and
storage (CCS), applied to large stationary sources
of CO2 emissions such as power stations and
industrial sites, which together account for over
half the energy-related CO2 emissions. CCS can
also be used in conjunction with CO2-enhanced
oil recovery, which offers a win–win opportunity
by not only storing CO2, but also increasing oil
reserves in mature fields.
It is estimated that $160 billion in downstream
capacity investment will be required by
2015, with another $150 billion needed for
maintenance and for replacement of lost capacity.
Yet such amounts are not forthcoming: there is an
investment gap of something approaching $100
billion. What is required is a more concerted
effort to ensure that sufficient capacities are in
place. Most importantly, however, it needs to
be recognised that even though OPEC Member
Countries have taken the initiative to invest in
downstream projects, the primary responsibility
for investment in this sector lies with consuming
countries.
Industrialised countries, having the financial and
technological capabilities, should take the lead in
this area by promoting large-scale demonstration
projects and the application of this technology,
including the use of the Kyoto Protocol’s Clean
Development Mechanism (CDM), in accordance
with the principle of common but differentiated
responsibilities and respective capabilities. For its
part, OPEC is demonstrating its commitment to
the environment through its active participation
in the International Energy Agency (IEA)
Greenhouse Gas Research and Development
Programme; and in September this year, OPEC
Member Country Saudi Arabia hosted an EUOPEC roundtable on CCS, as well as the First
International Conference on the CDM.
Infrastructure
constraints
The downstream is also important
From the supply perspective, the downstream
is also critical. As mentioned earlier, current
downstream tightness in the form of inadequate
refining capacity is putting much pressure on oil
prices generally. In addition to this, in the future
there will be rising volumes of crude oil that
needs to be refined, as well as the expectation of a
20
European View
and
human
resource
Another challenge, and one that is sometimes
overlooked, is that of the cost of infrastructure,
such as rigs and tankers, as well as the cost and
availability of human resources. For example,
upstream project costs have increased by 50%
since 2003. This can be seen in the fact that
rig rates and the costs of steel and other raw
materials are shifting significantly upwards.
In the area of human resources, the industry
is experiencing a shortage of skilled labour
for engineering, procurement, construction
and operations, and as a result, wages have
increased. During 2005 alone, wages in the
industry increased by about 15%. The number
of students enrolling in petroleum engineering
courses has also shown a significant decline since
the mid-1980s. To alleviate the skilled manpower
shortage, efforts should be made to help facilitate
education and training in energy disciplines. The
industry needs to make itself more attractive to
prospective graduates—this includes making it
easier for students to enrol in universities across
Mohammed Barkindo
national borders—and to employees around the
world.
The longer-term outlook
Bringing these threads of supply and demand
together, OPEC’s future outlook for the market
anticipates oil demand in the Reference Scenario
rising by over 30 mb/d over the next 20 years,
reaching 113 mb/d by 2025. This is under the
assumption that no particular departure in trends
for energy policies and technologies takes place.
From a supply perspective, in the medium term
the total non-OPEC output has the potential to
grow substantially; in the period 2005–10, our
projections show 6 mb/d growth. In the longer
term, however, it is expected that OPEC will be
relied upon to supply most of the incremental
barrels. By 2025, OPEC production levels,
including natural gas liquids, are anticipated
to rise to 54 mb/d; but even then non-OPEC
countries will account for the larger part of
world oil production.
Investment and capacity additions
It all points to the need for vast amounts of
investment, yet as we all know, investments do
not materialise merely by a click of the fingers.
Let me stress that from OPEC’s perspective the
necessary investments are being made today.
OPEC crude capacity expansion plans already
in place are expected to result in almost 38
mb/d of crude capacity by the end of 2010, an
increase of nearly 5 mb/d. The capacity growth
is underpinned by more than 100 projects
totalling $100 billion, and these projects are in
addition to energy infrastructure investments.
All this is expected to further increase OPEC’s
spare capacity over the next five years and is a
further demonstration of OPEC’s continued
commitment to oil market stability and the
seriousness it attaches to security of supply.
Yet it is not just about investment today; it
is about investment tomorrow and every day
thereafter. Doubts over future oil demand
translate into large uncertainties over the amount
that OPEC Member Countries will eventually
need to supply, signifying a heavy burden of
risk. It thus needs to be taken into account
that the security of demand must go hand-inhand with security of supply. Both are of equal
importance.
The importance of security of demand can be
expressed very succinctly in figures. Over the
next 15 years, for example, scenarios developed
at the OPEC Secretariat suggest that the amount
of oil required from OPEC could genuinely
range by close to 10 mb/d. When talk turns
to interpreting this in terms of investment,
the figure takes on a very worrying look. The
expected cost ranges somewhere between $230
billion and 470 billion, a huge amount for
OPEC Member Countries, all with competing
needs in such areas as health, education and
infrastructure. It should also be remembered
that in the oil industry, investment requirements
are very large and subject to long lead times and
payback periods.
The way forward
So, do the changing dynamics of price, supply
and demand underline the notion that we are
entering a ‘new energy era’? At the moment
it is difficult to say, but what is clear is that
there are many new realities at play. The future
offers both challenges and opportunities from
the supply and demand perspectives, as well
as from the standpoint of both upstream and
downstream, in terms of investment, technology
and the environment. The central thrust of these
challenges and opportunities is global energy
security for all.
With this in mind, the international community
should never lose sight of the fact that energy
security means different things to different people.
In the developing world, the lack of basic energy
services is a severe impediment to the alleviation
of poverty. Halving the proportion of people in
the world whose income is less than $1 a day
was the first declared Millennium Development
Goal. Bringing people out of energy poverty
21
is a focus for us all, and the benefits for those
involved are obviously huge.
OPEC very much believes that enhanced
dialogue and cooperation provides the best
platform from which to collectively address the
concerns of all stakeholders. To this end OPEC
continues to devote much effort in this direction,
with dialogue now being widened and deepened
in an open and constructive spirit. The most
recent result of this was the establishment last
year of energy dialogues between OPEC and the
European Union through the Third OPEC–EU
Ministerial Meeting held earlier this year. OPEC
has also entered into dialogue with China, Russia
and many other stakeholders.
It is important that we continue to work together,
collectively going forward. If we can meet the
challenges and opportunities before us, it will be
to the benefit of us all.
Mohammed Barkindo is Acting Secretary General
for OPEC.
22
European View
Joachim Bitterlich
The Future of the EU’s Energy Policy:
Do We Need a European High Authority for Energy?
By Joachim Bitterlich
From the standpoint
of a foreign observer, it
must seem that Europe
is behaving in a strange,
hardly comprehensible
manner. The whole
world is talking about energy policy and the
associated ramifications. States are scrambling to
secure a stable supply and to develop alternatives
to the present sources and means of production.
In this context, the European Commission, the
central EU institution, is not putting forward a
formal energy proposal, but only a Green Book as
a first step in order to test the political waters.
The EU at a crossroads?
The EU Member States continue to act on their
own; their reaction to the Commission consists
in postponing any decision till the spring of
2007. At the same time, a fierce struggle is taking
place not only between the Member States and
the energy companies, but also among the
companies themselves to control the national
market(s) and the price of energy.
Mergers between European energy companies or
attempted mergers are making daily headlines
in the newspapers: Should Spain agree to the
takeover of its national No. 1 company, Endesa,
by the German EON? Should France abandon its
national policy guidelines, defined only one year
ago, and continue to push in favour of a merger
between Suez and GDF or allow an alternative
merger, that between ENEL and GDF?
In many countries politicians and regulators have
severely criticised the producers, believing that
they have gone too far in raising prices. Energy
producers, on the other hand, believe that the
liberalised markets are working; they point to
sustained investments to modernise power plants
and suspect they are being scapegoated by the
politicians. Especially in Germany, this discussion
has become a real national debate. Politicians,
consumers and industry are complaining
about the level of prices for electricity and gas;
together with the Netherlands, Germany has the
highest prices in Europe. Within this debate we
can observe a growing populist element as the
pricing mechanisms are hardly comprehensible
to outsiders.
Thus far I have not found a satisfying answer
to the question whether and to what extent the
prices in the different EU Member States can
really be compared. The variations in prices are
due to a number of reasons: different geographical
conditions, the energy mix available in each
country and especially the degree of direct
or indirect influence the states exercise on the
means of production, on prices and in particular
on the different kinds and levels of taxes in the
field of energy.
With higher energy prices has come a tendency
to impose stronger controls and more regulation
in certain Member States. Some of those involved
are speaking of a turn away from a liberal system
towards a planned economy or even towards
cold expropriation; or they are asking whether
the trend towards energy liberalisation since the
middle of the nineties was a move in the right
direction.
Some observers stress, moreover, that the
considerable rise in prices represents a serious
danger to the economic growth deemed necessary
to boost Europe and to reduce unemployment.
At the same time, others are convinced that a
new energy policy might, due to the considerable
amount of announced and potential investments
in new power stations and infrastructure, be
23
The Future of the EU’s Energy Policy: Do We Need a European High Authority for Energy?
the key to relaunching economic growth over
the coming years. In Germany alone, energy
producers have announced investments in new
power stations of €18–20 billion between now
and 2011. Putting aside for a moment the main
points of contention in the public discussion, we
have to recognise, if we are honest with ourselves,
that the price of basic services (in Brussels jargon,
general services)—water, waste management,
energy and public transport—is still relatively
moderate in comparison with other necessary
and useful requirements of life.
In this context, we should remember that 20
years ago German analysts believed that DM 1
was the maximum consumers would pay for a
litre of petrol and that consumers would change
their habits radically if the price went higher.
Today the price is around €1.30, i.e., double that
price, but our habits have not changed at all.
How should we assess this situation? Was the new
Green Book a wise reflex of the EU Commission
or does it show the lack of political courage of
the Commission and of the Member States?
In the face of the renewed urgency of an
unwelcome but serious theme, what should be
our common European analysis and response?
The basics
Energy policy has again become a real challenge,
a threat, but there is no common approach, no
common policy within the EU. There are more
or less closed national markets confronted by
a mixture of short-, medium- and long-term
risks in various combinations, but the EU is
not a single player and thus has little influence
over international markets. Most of our energy
resources are found in the most politically unstable
regions of the world: North America, Europe and
Asia consume 70% of the oil extracted, but two
thirds of the reserves lie in the Middle East.
Emerging economies such as China or India are
becoming our competitors in terms of the available
supply. Some observers are already talking about
24
European View
the need to prepare for a “supply war”. A glimpse
at the world reserves of gas is enough to illustrate
this situation: Russia has about 47.4 billion cubic
metres, Iran 26.6, Qatar 25.8, Saudi Arabia 6.6,
the United Arab Emirates 6, the United States
5.4, Nigeria 5 and Algeria 4.5.
Who will be the key players and key allies in the
future? Will it be the United States, since it is
the greatest consumer at present, or Asia, the
emerging continent?
Or will we have to face a situation where the
Middle East, fed up by US policy, allies itself
with China in the near future?
Europe consumes at present 17% of the world’s
energy, the United States 29%, Asia more than
20%—11% by China and 4% by India.
Moreover, Chinese consumption per capita
today is 17% of that of the United States or
26% of that consumed by the EU. What will
the situation look like in 10 years’ time, given
that China’s economy is growing at an average of
around 10% per annum?
Incidentally, energy is a domain in which
Europe is becoming increasingly dependent on
countries outside Europe: the forecast rises to
70% for 2030 in contrast with 50% at present.
However, we should note that US dependence
today is nearly 70%.
We should also note that the commercial giants
controlling this market today are the usual
suspects: the well-known multinationals such
as Shell, Exxon and BP, or—and here suspicions
are probably much stronger—the national
companies which control the oil and gas reserves
in the world, such as the Saudi Aramco, NIOC
(National Iranian Oil Company), Gazprom,
INOC, Qatar Petroleum, etc.
Furthermore, the challenge has become even
greater because of a number of ongoing external
crises and problems.
Joachim Bitterlich
First, the nuclear issue with Iran: I have some
doubts whether the European and Western
strategy has been the right one. The Iranians
began to negotiate more seriously the moment
the United States became visibly involved. But
the dilemma for the Western world remains:
sanctions have never shown the expected
results and a military intervention would be an
enormous risk. Intervention cannot be excluded
in the eyes of the Americans. For them, but
not for them alone, a scenario even worse than
bombing would be that Iran gets the bomb. I
am convinced that only an even-handed, joint
approach makes sense and could open the path
to a solution.
Second, the question of the reliability of
Russia and the dependence of at least some EU
Member States, in the first place Germany, on
Russia. The doubts about the reliability of Russia
were accentuated some months ago by its harsh
attitude towards Ukraine.
Third, the rapidly growing nationalism and the
reassertion of state control in Latin America:
We have only to look at the developments in
Venezuela or in Bolivia to see examples of this.
The European ‘state’ or the ‘état des lieux’
In the last two decades, EU Member States have
developed totally different energy mixes—take
only France and Germany, for example.
What should be their responses to the current
situation? Should France not be developing
a third or even a fourth pillar alongside the
nuclear and hydroelectric options? Should not
Germany be revisiting its planned withdrawal
from the nuclear option and at least extend
the operational life of its nuclear power plants
to reach figures comparable to those in other
Member States?
Should we not promote the renaissance of coal—
obviously, clean coal—and renewable energy?
The areas that could be considered a common
denominator among the countries of Europe
seem to be limited in number: increased economy
and efficiency, increased diversification of supply,
increased protection of the environment, less
CO2 and more use of renewable energy.
Is this a sufficient answer in the face of the
challenge that confronts us? Let us first come
back to a short analysis of the pros and cons of
the different sources:
The retention and development of the nuclear
option remains vital. It is evident that the major
concern of a large part of the population in
different countries with regard to security and
nuclear waste has to be taken into account.
But in Europe the construction of a new nuclear
power plant is under way only in Finland.
In France, the planning process has started,
and Great Britain and the Netherlands have
launched review processes in favour of building
new nuclear power plants.
The United States has made a remarkable
decision: they have determined to double the
operating life of their existing nuclear power
plants, whereas China has put on track a gigantic
programme to construct new nuclear plants.
Water is a precious but limited resource and a
competitive one, yet environmental concerns,
especially about dams, remains a significant
obstacle to the development of this resource.
Coal represents today 28% of the energy
consumption worldwide (36% oil, 23% gas).
It has lost its predominant position in Europe
over the last decade, but appears to be on the
point of making a comeback, the new catchword
being ‘clean coal’. Research is under way and a
project will probably be industrially feasible in
10 years—but with the consequence of doubling
the current prices!
Gas also remains indispensable, but the EU
depends on imports (30% from Russia, 22%
from Norway, 16% from Algeria, 30% from
25
other countries such as Nigeria or Qatar).
Germany alone depends on Russia for 34% of
its gas and this is increasing. Is this the right path
to further development?
also give thought to the nature of our physical
infrastructure. Should we not be encouraging
the development of smaller, more decentralised
local plants?
Wind energy has become ‘smart’ in many EU
Member States, but still represents one of the
most costly energy sources. This renewable
source, apart from the visual problems caused
to the countryside, can only be used as a limited
complement to other means of production; it has
to be permanently ‘subsidised’ by other means of
production as its use depends on the reliability
of wind. Its widespread development can only
be considered a ‘green illusion’. Solar energy is
making considerable progress, but remains only
a relatively expensive complement for the time
being. Geothermal energy only exists at certain
places and has hardly been exploited, but it is a
promising complementary source.
The European marketplace
‘Green oil’—biomass, biogas, bioethanol, wood—
is a recent addition to the discussion. Its potential
contribution is probably underestimated at
present in the areas of energy and regional heating
systems. Its share could go well beyond 10% in
the future. The same comments apply to energy
production from the incineration of waste.
What should therefore be the main elements of a
better energy policy; what should be the essential
components of a real European market?
There is also another factor and widely
acknowledged source that is still underestimated as
well and greatly under-exploited: the efficiency of
our generating plants and distribution systems.
Recent studies that compared energy efficiency
across the EU revealed that the leaders are
Estonia, Slovakia and the Czech Republic. They
are followed by Belgium, Lithuania, Finland,
Latvia and Sweden. Germany, France and Spain
lie somewhere within the EU average. Even
if we have introduced new technologies and
undertaken many positive steps since the first oil
crisis in the seventies, it is evident that we could
do and achieve much more in this field.
Given these factors and the necessary reflection
taking place in every country to decide in what
direction to develop its own energy mix, we must
26
European View
A common market
The deregulation or—more accurately—the
liberalisation of the EU market, which we began
in the middle of the nineties, should be complete
by 1 July 2007. This constitutes a foundation,
but it is still inadequate.
We had the forward-looking idea in the middle
of the nineties to liberalise the energy market,
but developments have shown that we have not
yet reached our goal, which was to strengthen
competition and thereby lower prices.
Let us look at the most important ones:
- Deregulation of which key components?
- Strict unbundling of production, transport
and distribution?
How far should
‘unbundling’ go?
- National independent regulators or regulation
at the European level—by an independent
body or by the Commission?
- Extension of interconnections as the key to
access all the national markets?
- Integration of neighbours such as Switzerland
or even Russia?
- A real common policy to manage supply,
production, transport and distribution—or
just the coordination of national policies?
Who should be the arbitrator in case of
disputes?
From the very beginning, deregulation and
liberalisation should have been complemented
by the ‘unbundling’ of production, transport
and distribution, and accompanied by strong
Joachim Bitterlich
interconnections among the EU Member
States.
Furthermore, a genuine common market
presupposes common rules, primarily with
respect to competition (but on the basis of what
prices and which markets?), and the necessary
regulation. Such a system should take into
account the specific nature of energy production
and distribution as a service of general interest.
In whose hands should regulation be, and who
should permanently monitor it? Should this be
done by independent national regulators, by an
independent European regulator or by the EU
Commission as guardian of the treaties?
The national regulators are asking for new
legislation in order to ensure especially that crossborder energy markets function well. But should
we agree with the idea of the EU Commission
to create a central watchdog in the EU? Or is it
not more important to reach, at least as a first
step, a minimum level of harmonisation of the
different codes of Member States for using their
energy grids and infrastructure? In this context,
we should not underestimate the aversion to the
Commission obtaining new powers that exists in
at least some Member States.
A common market also requires a certain degree
of interconnection among the Member States—a
vital basis for healthy competition and for a true
European network of electricity (and gas). At
present, cross-border flows represent only slightly
more than 10% of European consumption. The
goal should be around 30% in order to secure
open markets.
But how should an interconnected network
be developed, who will finance it and what
will be its market share? Will this be public
infrastructure or are Brussels and governmental
financial incentives enough to convince the
players in this market to develop and operate
such an interconnected network? Or will the
current tendencies toward thoroughgoing price
controls and the obligation to reduce the price of
access to the grid push the energy transportation
market into the hands of the public domain, or at
least to a body administered or co-administered
by the public domain? Who can be considered
the better administrator of this infrastructure?
Has the private sector not proven in the past its
capability to run these networks well and in a
responsible manner? The producers will only be
able and ready to continue if the public sector
leaves them the necessary freedom and margin
of manoeuvre.
At the same time, it is also important to decide
whether we do not have a vital interest in
integrating our European neighbours such as
Switzerland and Norway into this EU market,
given the nature of our geography. The same
reasoning is valid for our wider neighbours:
How is cooperation or even an association to
be developed with our neighbours to the south
(Algeria) and to the east (Russia, Ukraine and
Central Asia)?
Last, but not least, the Member States have to
re-examine their respective energy mixes with
the aim of modernising and diversifying the
means of production, of reinforcing the relative
weight of renewable energy and of strengthening
applied research in the field of energy.
Need for a common policy
The overall key issue will be to decide whether
we need a common policy in order to manage
supply, production, transport and distribution—
or do we just need to ensure the coordination
of national policies to avoid potential problems
between Member States? If the latter, who should
be the arbitrator in the case of disputes?
Furthermore, we shall have to reach consensus
about the types of supports that should
complement a common policy or policy
coordination. There are several elements:
• The permanent monitoring of the European
and international markets, including the es-
27
tablishment of an early warning system—but
which institution will undertake to do this,
the International Energy Agency or the EU
Commission?
• The setting of objectives to reduce further
CO2 emissions and to increase energy efficiency, including developing the use of ‘green
oil’.
• The promotion of innovation in applied research and development.
All these questions lead to a final point: do we
need a ‘Common European Authority’ headed
by a ‘High Representative’ in the field of energy
or not? Should it be based on the 1950s model
of the High Authority for Coal and Steel,
which later became the Commission—and
therefore be headed by the competent member
of the EU Commission—or on another type of
institution?
In the light of the challenge, I am convinced,
the answer has to be “yes, but”: we need a
real internal market in the field of energy, and
an authority to play the role of a permanent
coordinator, monitor and arbitrator. The
external component—a common foreign policy
in the field of energy—has to be part of this
coordination.
Unfortunately, a first reading of the Green book
of the Commission released on 8 March 2006
has not been very encouraging. The cautious
conclusions of the European Council meetings
of 23 to 24 March and 15 to 16 June 2006
state the common aims and reveal the basis of
an agreement on political priorities and a plan
of action in time for the session of European
Council of March 2007.
However, present debates have still not led to
what might be called either a breakthrough
or a new European policy. Compared with
the caution of the European institutions, the
language of the declaration of this year’s G8
summit in St Petersburg seemed to be much
more courageous.
28
European View
The reason for the caution once again appears to
be a consequence of the traditional differences
between France and Germany in this field:
France seems to be more in favour of a centralised
common policy with the corresponding
institutions, while Germany and Britain—which
can point to a string of successes in this area—
are against such an integrative, in their view antiliberal approach.
Let us accept that we are still at an early stage
of the debate about one of the major challenges
of the 21st century. Moreover, it seems that we
find ourselves, as we did 56 years ago, at a stage
where we have to become aware of, where we
have to recognise the strategic implications of
the situation—or does the price of oil have to
rise even higher, beyond the $100 per-barrel
mark, for us to realise what is really at stake?
Joachim Bitterlich, Ambassador (ret.), is the former
diplomatic and security advisor to the German
chancellor Helmut Kohl. He is now Executive
Vice President of International Affairs, Veolia
Environment Paris. The opinions expressed are the
personal views of the author.
Travis Bradford
The Economic Inevitability of Solar Energy1
By Travis Bradford
In circumstances reminiscent
of
the
1970s, leaders of the
industrialised
world
are today facing rising
threats from volatile
energy prices, inadequate access to fuel supplies
and insecurity arising from potential nuclear
states. More disturbingly, our use of energy is
creating new, larger concerns. Global climate
change, the risks of resource peaking in oil and
natural gas reserves, and an aging utility grid now
add to the urgency of the problem. And while
global energy intensity per capita has continued
to fall in the industrialised world, the absolute
use of primary fossil-fuel energy sources is 83%
higher today than in 1974.2
This growth in energy demand is projected
to continue for decades to come, with much
of it expected to occur in the burgeoning
industrial societies of China and India and in
other countries of the developing world. The
combination of these factors—growing global
demand, perpetually risky supply and volatile
prices—is leading to a potential “perfect storm”
of threats that weigh heavily on the minds
and decisions of governments, businesses and
consumers throughout the world.
Inevitably, mitigating the threat to the world’s
energy frailty will come when opportunity and
motivation collide. It may happen through
effective foresight and planning, which
compensates for the risks and costs of our current
energy system, or it may be in response to a
return of a 1970s-style energy crisis. Whatever
the catalyst, the industrialised and developing
nations of the world will have to address these
issues by using energy more efficiently and by
developing and deploying local, sustainable,
renewable energy sources. Many potential
solutions are being pursued. From renewed
interest in nuclear power to the ‘new renewable’
energies of wind power, biomass and geothermal,
businesses and policy-makers are pursuing
a menu of choices based on their respective
expertise, natural resource endowments and
political will. Iceland is tapping into its natural
stores of geothermal energy. The countries of
northern Europe, including the UK, Denmark
and Germany, are attempting to take advantage
of their vast and reliable wind resources and lead
the world in wind power deployment. Land-rich
but oil-poor Brazil is rapidly deploying biofuels
to power their transportation infrastructure.
Each of these technologies has a role to play,
and many will be components of the solution to
the problems our current relationship to energy
creates.
Many solar energy generation technologies
continue to be researched and deployed and hold
some promise of potential for adding to the list
of energy choices, among them electricity from
photovoltaic (PV) cells. While the technology is
conceptually simple and socially desirable, it is
widely assumed that PV is both too expensive and
too far behind in terms of market penetration to
have a meaningful impact on the juggernaut of
the world energy infrastructure. In part because
people remember solar energy’s false promises
in the 1970s, the technology is widely seen as a
desirable but uncompetitive energy source in all
but niche markets and remote small-scale power
applications. However, recent developments in
the PV industry have shown that PV is a mature
and viable energy solution, positioned for a
1
Adapted from Travis Bradford, Solar Revolution: The Economic Transformation of the Global Energy Industry (MIT Press, 2006).
Copyright © 2006 by Travis Bradford. Reprinted by permission of the MIT Press (http://mitpress.mit.edu).
2
Key World Energy Statistics 2006, International Energy Agency, p. 6.
29
The Economic Inevitability of Solar Energy
dramatically larger impact in meeting the world’s
energy challenge than is commonly predicted.
Taking a critical look at appropriate measures
of cost effectiveness shows that in many
markets today, such as Japan, Germany and
the American Southwest, PV has become a real
choice, evidenced by a growing base of hundreds
of thousands of users worldwide. From this
established market, PV is poised to transform
radically the energy debate within the next
decade as its prices relative to other sources make
it ever more competitive in larger and larger
markets.
Due to certain unique characteristics of the
PV technology, it will be difficult to arrest its
growth in relative cost-effectiveness or market
deployment especially when compared to either
traditional energy choices or even many of the
‘new renewables’. And though it will be many
years before solar energy provides a substantial
amount of the world’s energy generation, the
increasing obviousness of the solution is slated to
have a surprisingly dramatic impact on decisionmakers, from end users to electric utilities to
government policy-makers.
Given the economic inevitability of this clean,
distributed energy resource and its availability to
consumers in every nation, whether industrialised
or developing, efforts made to increase scale
of production and further reduce the cost of
PV will pay economic and social dividends for
decades to come.
Why has solar re-emerged?
While a number of industrial governments have
been supporting the research and development of
PV in the last 25 years, including the US National
Renewable Energy Laboratory, the industry owes
its current opportunities to the policies of the
Japanese and German governments. In 1995,
the Japanese government implemented a 70,000
Roofs Program, which initially subsidised 50%
of the cost of installing PV on a buyer’s home.
The intent of the programme was to create a
30
European View
stable domestic market for PV that would drive
the growth and accumulate expertise in PV
manufacturing and installation in the otherwise
energy-poor Japanese market.
Through this programme and additional market
support, the average cost of an installed PV
system in Japan has come down by half since
1995; and the subsidy from the government
was gradually reduced and then phased out
completely in 2005. As a result, depending on
location and amount of sun, PV can provide
electricity to homeowners at a price competitive
with grid electricity in Japan today. After a
decade of 45% annual growth in their PV
market, Japanese manufacturers, including
Sanyo, Sharp and Kyocera, now manufacture
half of the world’s solar panels and have stated
plans to double manufacturing capacity this year
alone. To date, this programme has powered
over 200,000 Japanese homes with grid-tied
systems.
For similar reasons, the German government
instituted a 100,000 Roofs Program of their own
in 1999. When coupled with the Renewable
Energy Law passed in 2000, PV systems can
now be installed with subsidised financing and
receive up to 50 cents per kWh for electricity fed
into the grid. These policies made PV systems
immediately cost effective. Renewed in 2004,
the programme has led to Germany’s position as
the largest PV market in the world.
The novelty of the systems being installed under
the Japanese and German programmes is that
they are not stand-alone PV systems of the type
that have been used effectively to power remote
applications for many years. Stand-alone systems
require both battery hardware to store daylight
electricity for use at night or during low-sun
periods, as well as a source of back-up power
in the event of a failure of the equipment. The
systems installed under the Japanese and German
programmes are ’grid-tied’: they correct for the
shortcomings of stand-alone systems by using
the grid itself for both standby power as well as
storage for excess daytime electricity, which can
Travis Bradford
be reclaimed when sufficient sun is unavailable.
Risks to the users are reduced, and the cost of
the system is minimised to include only the
PV panels, some wiring and an inverter which
converts the electricity to AC power. The AC
power in turn can be fed into the grid and
power standard household devices. It is this
grid-tied application that is driving the industry
today, allowing for a rapid reduction in costs of
electricity from these systems. While the overall
PV industry has grown 30% per annum in the last
15 years, the grid-tied segment has grown by over
50% per annum in that same period, and today
makes up the majority of the PV installations
worldwide.3 Through novel application, PV is
no longer primarily a niche market application.
It has finally gone mainstream.
What does it really cost?
It is not immediately obvious that the ability
to provide PV electricity on a cost-competitive
basis in Japan will mean that PV technology
can successfully compete in the larger world
energy industry. In the first place, the Japanese
residential market has some of the highest prices
of grid electricity in the world, an average of
20 cents per kWh.4 With most countries in
the OECD (Organisation for Economic Cooperation and Development) selling electricity
at less than half that price, PV may seem to
have a long way to go to become competitive
in global markets anytime soon. Understanding
the relative competitiveness of PV, however,
requires understanding exactly what determines
the cost of PV electricity and debunking a few
of the common misperceptions about its cost
structure.
PV’s natural disadvantage is that nearly all of
its costs are borne at the time of installation.
This is truer for PV than for any other source
of energy. With no fuel costs, and solid-state
panels and inverters with negligible maintenance
3
4
costs, over 90% of the lifetime cost of a system is
paid upfront. Imputing a cost for PV-generated
electricity requires knowing three variables
about a given installation: the cost of the system
installed, how the installation is financed and
the amount of sun available at the location to
be served. One of the great, underappreciated
advantages of PV energy is that it provides an
extraordinarily reliable estimate of lifetime
electricity costs, as each of these three factors is
known with certainty prior to an installation.
While each of these factors can be known for a
given installation, making broad generalisations
about them can be tricky, and using averages
can mislead a casual observer. The best cost for
an installed grid-tied system ranges from $6 per
watt for Japan and Germany to over $7 per watt
in the United States. The cost of the PV panels
themselves and the necessary supplemental
hardware (wiring, inverters, etc.) are relatively,
though not exactly, consistent across locations,
but the cost of the physical installation can vary
widely based on the competition and cumulative
experience in the local market. The financing, as
well, can vary, in both the term and the interest
rate available.
Commonly overlooked in calculating a true cost
of PV is the need to use a real interest rate, the
stated nominal rate of the financing less expected
inflation, in the calculation. Not doing so actually
builds in a declining real cost of electricity over
the life of a system and therefore overstates the
current cost of electricity. Depending on the
other variables, this correction alone can bring
down the imputed cost for solar energy by 20–
25% over many of the commonly quoted prices.
Calculating the real annual cost and dividing
through by the average annual sun in a given
location gives a cost of electricity as a cost per
kWh, which can range from 22 cents in Japan
to around 15 cents in the sunnier American
Southwest.
“2006 PV Energy Analysis, Trends and Risk Factors”, Prometheus Institute and PV Energy Systems, p. 60.
Key World Energy Statistics 2006, International Energy Agency, p. 43.
31
Once the cost of PV is determined, it is necessary
to look at the appropriate metric for comparing
it to alternative sources of electricity. In the
industry today, three economic metrics are
primarily used. First, many comparisons use a
cost per installed watt of peak capacity, which is
the correct metric if you are comparing among
nearly identical generation technologies, but it
fails when fuel costs differ significantly.
Deeper analyses try to correct this flaw by
calculating an imputed cost for electricity
generation including expected fuel and
maintenance costs over the life of the equipment.
This cost of generation is measured in cents
per kWh of electricity. This ‘generation cost’
analysis relies strongly on being able to predict
accurately the method and rates of financing, the
utilisation of the equipment and the reliability of
future energy prices. Much of the misperception
about comparative PV prices stems from an
inappropriate use of this metric. Typically, this
generation cost metric is employed to show
that the cost of PV is three to five times higher
than that of other technologies, with fossil fuel
technologies and hydropower as low as 3–7 cents
per kWh and even wind power at 4–7 cents per
kWh, implying that PV is not economically
competitive.
The problem with comparing energy sources
across generation costs derives from overlooking
the fact that PV power is almost universally
generated and used at the same place, obviating
the need for transmission and distribution to end
users. A person or business looking to install PV
on their home or building will not be comparing
its cost to the utility’s generation cost. They will
evaluate the cost of PV in comparison to the
electricity that it replaces, on a ‘delivered cost’
basis.
Delivered cost analysis includes not only the
cost of generation but the cost of transmission
and distribution as well. In fact, when viewed
in aggregate, it becomes irrelevant to compare
the cost of generating PV energy to any other
form of energy that is generated on an industrial
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European View
scale and transmitted through the electricity
grid. Since utilities necessarily sell power at an
average of their costs over all of their generation
plants, it is really only appropriate to compare
PV electricity to the aggregate cost of grid power
at the point of consumption.
The analysis so far has ignored the existence
of subsidies in comparing relative costs in
order to keep estimates conservative, because
fundamental economic comparisons (and PV
adoption over the long term) will require that
technologies compete on an unsubsidised
basis. Furthermore, government subsidies are
notoriously fickle and often temporary. But
subsidies do exist, and in many cases are already
dramatically altering the competitive cost of PV
relative to that of conventional grid power. Even
without subsidies, there are many places in the
world outside of Japan where solar is already
cost effective, particularly the isolated market
of Hawaii, other tropical island nations and
certain locations in the southern United States
and Europe.
Some of these markets have subsidies that reduce
the cost of a system by as much as half. Some
pay for the electricity output of the system at
rates substantially above the cost of generating
it, which makes PV electricity cheaper than the
grid alternative. The number and size of these
programmes grows every month, nowhere more
than in California where the 2006 Million Solar
Roofs Program has injected over $3 billion into
PV deployment and will require builders to offer
PV as an option for new homebuyers by the year
2012.
Could solar unravel grid economics?
Costs for solar electricity, unlike those of the
grid electricity it replaces, have been dropping
dramatically over the last decade, at a rate of five
to six percent each year. Today, solar electricity
costs half of what it did in the mid-1990s,
which has led to the economic opportunity the
technology is beginning to enjoy. As the industry
continues to grow in scale and sophistication,
Travis Bradford
costs to produce PV follow a predictable
trend of decline, calculated using the tool of
experience curves. Experience curves track the
rate of decline in the cost of technologies as a
function of the cumulative amount produced
of that technology, and are a reasonably reliable
forecasting tool for emerging technologies.
interim, rising prices and declining costs for
PV producers, and the resulting ballooning
profits, are stimulating considerable excitement
in capital markets and among investors around
the world. Billions of dollars of new capital
have been invested in expansion of production
capacity in the last year alone.
Looking at the rate of growth in the PV industry
and conservatively projecting out experience
curves shows that PV will grow over the next two
to three decades to become the cheapest solution
for electricity in the majority of applications
worldwide. Even using today’s technology and
processes, it is reasonable to expect the costs will
continue to drop, and the best systems will be
installed at around $3 per watt by 2015.
As PV deployment grows, electric utilities are
finding their competitive responses to the rapid
rate of PV adoption increasingly constrained.
Rising fuel costs and a growing need to upgrade
and maintain an aging electricity grid are causing
real grid electricity prices to rise in nearly all
industrialised markets. Even if utilities begin
immediately to deploy generation methods
with less volatile costs and prices, they will be
hampered for decades by their installed base of
fossil fuel generators and their long lead times
for siting and construction of new plants.
In the industrialised world, distributed PV
electricity at this price, efficiently installed and
appropriately financed, will become substantially
cheaper than the far greater percentage of grid
electricity. In the developing world, where
access to electricity is limited and grids are nonexistent and unreliable, low-cost PV will allow
millions users to harness this modern form of
energy, even without supplemental microfinance
programmes.
To be sure, obstacles exist. In the last year, market
prices have not continued to fall in line with
costs because of surging demand and insufficient
industry capacity. Even with ambitious growth
plans, many of the manufacturers have booked
production out for the next 18 months or more.
Also, the silicon ingots used in the production
process by nearly all of the PV manufacturers are
in short supply, and it may be a couple of years
before enough new capacity will be online to
resume the downward trend in pricing.
While these problems are important
considerations for forecasting short-term
industry dynamics, they do signify a market
with substantial untapped demand. In the
5
There exist no credible analyses which suggest
that real prices of electricity in the next two
to three decades can drop below their current
levels. Reports by the International Energy
Agency show that to meet global demand,
electric utilities will need to double their current
levels of capital spending.5 Therefore, utilities are
effectively trapped between their current capacity
constraints and the cost of new construction.
While the utilities struggle to maintain their
costs and prices, PV is becoming more and more
attractive. Within a decade it will represent a
cost-effective solution for hundreds of millions
of homes and businesses in industrialised nations
worldwide.
For a variety of reasons, the utilities may not
want to resist such a migration to PV electricity
generation. Due to the advantages of peak
demand shaving and new line extension offsets,
utilities are finding real economic advantages to
incorporating PV into their infrastructure. A few
already offer incentives above those supplied by
government. Others are looking at building large
World Energy Investment Outlook 2003, International Energy Agency.
33
central stations, with multi-megawatt plants
being announced every month. Ultimately,
electric utilities may find it very profitable to use
their existing infrastructure and access to capital
to accelerate PV adoption. If they do not, they
risk losing significant marginal revenue to this
competitive technology.
How should we accelerate this change?
In addition to PV’s economic characteristics, it
has other features that make it highly desirable
and should lead governments and advocates to
encourage its more rapid deployment. PV is
clean, emitting no harmful greenhouse gases or
toxic pollutants. Once installed, PV requires no
fuel and is therefore not subject to disruptions
of energy inputs or to wild swings in prices.
For many nations that are inherently energy
poor and reliant on foreign sources, permanent
energy security is a most attractive characteristic.
Furthermore, over half of the cost of a PV
system lies in the local installation. The mass
deployment of PV will create many good local
and technical jobs for designers, builders, and
tradecrafts such as electricians and roofers.
The long-term transition will create thousands of
companies, millions of jobs and trillions of dollars
of revenue. It will generate local sustainable
wealth on a massive scale for developing and
industrial economies. And it will provide energy
and electricity solutions that will help reshape
other industries including transportation
(through integration of hybrid electric and fuel
cell vehicles), water (through desalination and
purification) and food production (through
increased access to water and fertilisers).
In pursuit of these benefits, governments have
created a number of methods of stimulating
the growth of PV. Historically, government
programmes have targeted either technology
research or demand stimulation programmes such
as system rebates (Japan and the US) and feed-in
tariffs (Europe). But given the strong effective
demand for PV and its unique characteristics as
a distributed and capital-intensive technology,
34
European View
any programme designed to increase the use of
PV must attempt to solve the issues of providing
an increasing volume of PV at a declining cost
using appropriate customer financing.
In order to supply an increase in the volume
of PV available, supply-side programmes
would help to defray the cost of setting up new
factories, train workers and installers, provide tax
holidays, and reduce the cost of vital feedstock
and input materials. They would be designed
with the specific goal of allowing manufacturers
to maintain appropriate profit margins while
bringing down per-watt costs for customers.
Additional policy enhancements would ensure
that the systems were installed efficiently and
quickly through broad and simple interconnect
standards and product certifications. Also, access
to low-cost capital is vital for system producers
and customers. Ideally, a combination of
these policy measures would allow customers
to flatten their real electricity cost through
inflation-adjusted payments, thereby reducing
the perceived cost of PV.
Ultimately, the most effective method will
be to mandate inclusion of energy generation
technology (for which PV is probably the likely
solution, but which may vary by location)
in construction codes for new homes and
buildings. This would allow new construction to
capture not only the economic benefits of onsite generation but also optimal building design
incorporating elements to minimise energy use
and waste. Such ‘zero-energy homes’ and ‘zeroenergy buildings’ would be a very cost-efficient
way to solve energy supply and demand at the
point of construction and eliminate the need
to retrofit solutions to existing structures. They
would also utilise the cheapest form of financing
available, wrapping the system cost into the
mortgage. In this way, PV becomes an integral
part of the building process instead of an adjunct
source of energy, a transition involving a change
in thinking that will be essential in the years to
come.
Travis Bradford
When will expectations change behaviour?
The world 10 years from now will present a
radically different set of alternatives than it does
today. The price of PV electricity will be as low
as half the cost of grid electricity for hundreds
of millions of homes in the industrialised world,
from Japan to southern Europe to much of
the south-western United States, as well as
for billions of people in the tropical regions
of the world who today have little or limited
access to modern power. New PV-grade silicon
plants will be constructed. Interconnects and
installation will be standardised. Component
manufacturers will have another decade of
accumulated knowledge of production processes
and improved economies of scale.
The addition of millions of homes using PV each
year will eliminate many of the perceived risks of
using this technology. Existing PV technologies
integrated into building components such as
glass walls and roof tiles will continue to mature,
rendering the technology increasingly invisible.
Knowing that a clean, low-cost energy alternative
exists will make it easier for users to demand,
and governments to facilitate, its use.
Today, the predominant PV technology uses
silicon chips nearly identical to those of the
semiconductor industry. It is not accidental
that the semi-conductive properties of silicon
chips, which so radically changed information
and communication in our lifetimes, will be the
same for the energy industry.
Like the shift from mainframes to networks
and landlines to mobile phones, this next
silicon revolution will likewise alter energy
from a centralised monopoly architecture to a
distributed wireless one. It will provide cleaner,
safer, distributed energy directly to consumers.
To be sure, the world will always use many
sources of energy, and PV cannot meet all
energy needs in every application. But inevitably,
through economics and consumer choice, PV
will grow to be a necessary and dominant tool to
create a sustainable global energy future.
Travis Bradford is the President of Prometheus
Institute of Sustainable Development.
PV, deployed directly at the point of use,
will be a clearly better economic alternative,
even without consideration of the many nonpecuniary benefits it brings in terms of security,
stability and sustainability. These options and
choices will change people’s expectations and
hence, their decisions. At that point, a 50year investment in a nuclear power plant with
unforeseeable cleanup or security costs will be a
less desirable alternative.
Likewise, capital expenditures for upgrading the
grid infrastructure will have less certain returns
than will deploying PV on the houses that
upgrade was intended to benefit. Decisions will
have to be made based on expectations of the
future. And that future will by necessity include
widespread PV use.
35
Stavros Dimas
Future Trends in Environmental Policies
By Stavros Dimas
Delivering a “Europe
of Results” is a priority
for the Barroso Commission, and the EU’s
environment policy has
been one of the Union’s
success stories in terms of providing tangible
benefits for its citizens. EU legislation lies behind
some 80% of national environmental legislation.
It is responsible for dramatic improvements in
air and water quality as well as the elimination
of pollutants such as lead in petrol. It allows the
EU to take global leadership on questions such
as climate change.
Environmental issues are a major concern for the
European public. According to Eurobarometer,
72% of EU citizens believe that environmental
factors influence their quality of life “very
much” or “quite a lot”. Polls also show that
the environment is one of the areas with the
highest levels of support for action at the EU
level, since the public is perfectly aware that
pollution does not stop at national borders.
At the heart of the political philosophy of the
European People’s Party (EPP) is the recognition
that “the protection of the citizen and his or her
environment … needs to be put at the centre of
European policy.”
Job growth and the environment
There are a number of ways in which welldesigned environmental policies can actively
contribute to the Lisbon Agenda objectives
of jobs and growth. The need to improve
environmental performance triggers innovation.
A good example is wind energy, where the EU
is the world leader. Reducing pollution also
leads to more efficient industrial processes
and a better use of resources. A recent OECD
(Organisation for Economic Co-operation and
Development) study of 4,000 manufacturing
firms concluded that companies that improved
their environmental performance were more
likely to be profitable.Environmental policy is
also responsible for the booming environmental
technologies sector. EU eco-industries account
for about one third of the global market, and
exports are growing by around 8% each year.
Over two million people are directly employed
in Europe’s eco-industries, and a 2004 report
from the OECD concluded that environmental
regulation did not harm employment; if
anything, it was a net creator of new jobs.
The EU’s environmental standards contribute
to Europe’s prosperity by underpinning the
single market. Without common standards
we run the risk of national rules acting as
barriers to trade. This is why much of the EU’s
environmental legislation was based on single
market principles.
Finally, it is important to factor in the cost of
inaction, or not having environmental standards
in place, since a degraded environment affects
the economy’s bottom line just as much as it affects the quality of people’s lives. One example is
air pollution, which every year kills hundreds of
thousands of EU citizens and causes the loss of
200 million working days. The resulting medical
expenses and losses in productivity cost the EU
economy €14 billion.
The state of the environment
Public opinion demonstrates that we have a
popular mandate for a strong and dynamic
environmental policy. Environmental policies
can also contribute to the Lisbon Agenda. But to
design the environmental policies of the future,
the starting point needs to be science. We need
to know if the state of our environment is getting
37
better or getting worse. And in those areas where
the situation is worsening, we need to develop
new and ambitious policy responses.
At the end of last year the European Environment
Agency produced its five-year assessment of the
state of Europe’s environment. In one sense the
document is a cause for celebration, since it
demonstrates the many ways in which the EU’s
environmental policies have improved the quality
of life for its citizens. This is a success story that
we have every reason to be proud of. But despite
this progress the report also provides evidence
that fundamental challenges remain. Following
500 pages of analysis, the main finding is that
Europe is not yet on the path towards genuinely
sustainable development.
Climate change is happening. The scientific
debate on this question is over and the facts
speak for themselves. According to NASA, 2005
was the warmest year ever recorded—the five
warmest years have all occurred since 1997. The
Arctic is warming twice as fast as the rest of the
world and temperatures have risen by between
three and five degrees over the last 50 years. As
a result, the ice is thinning at an alarming rate.
The number of cold and frost days has decreased
in most parts of Europe, while the number and
intensity of heat waves has increased. Ocean
levels are rising and the temperature of the
oceans has increased.
Most worryingly, we are only just beginning to
understand that ‘feedback loops’, such as the
effect of disappearing ice or the methane released
from thawing permafrost, could take us to a
‘tipping point’ where we lose the possibility of
controlling the pace of change. Faced by these
facts, it is clear that greater efforts are needed—
by the EU and by the rest of the world—to
minimise the damage and to adapt to the
inevitable changes.
The impact of human activities on nature means
that species are disappearing at over 100 times
the planet’s natural extinction rate. An estimated
34,000 plant and 5,200 animal species face
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European View
extinction. Ecosystem services—food, fuel,
medicines and climate regulation—are the lifesupport system upon which our well-being
depends. We take these goods and services so
much for granted that we can see how important
they are only when they are gone. And yet two
thirds of these services are in decline.
Pollution hotspots still degrade our environment
and damage public health. Air pollution alone
results in the premature death of 370,000
Europeans—each and every year. Pollution
from fine particulates and ground-level ozone
is a particularly serious problem. Agricultural
pollution is expected to increase in the new
Member States as production intensifies. There
is evidence—such as the increasing prevalence
of allergies and rising cancer rates—linking
chemicals to harmful effects on human health.
Challenges for the future
To respond to the scientific reality, to deliver a
“Europe of Results” in an area where citizens are
demanding action and to provide sustainable
economic growth, the EU needs a forwardlooking and ambitious environmental policy. I
can identify six key challenges that need to be
addressed.
1. Stepping up the fight against climate change
Our understanding of the risks linked to climate
change has improved and our response must
change accordingly. For the EU there are three
main issues.
First, we have to get our own house in order
by cutting emissions of greenhouse gases.
With the Emissions Trading System (ETS)
we have the world’s most sophisticated and
cost-effective policy instrument for tackling
climate change. We have demonstrated that it
is possible for developed economies to reconcile
lower emissions with economic growth. This
is something that Europeans should be proud
of—but a lot of work is still needed to meet the
2012 target. Important next steps will be, first,
Stavros Dimas
widening the ETS to cover more sectors (such as
aviation) and more gases. We need to develop a
long-term strategy to substantially increase the
adoption of renewable energies. The EU should
increase research into new technologies such as
carbon sequestration and storage and secondgeneration biofuels. We also need to make major
improvements in energy efficiency. The EU is
more energy efficient than the United States
but we are well behind Japan. I would like to
see Europe setting itself the target of becoming
the most energy-efficient economy in the world.
This would be good for the climate, good for
security of energy supplies and ultimately good
for our economy.
But we need to be clear that Kyoto is only a
first step. If we are to limit climate change to
levels that are relatively manageable then much
greater reductions will be needed—both by the
EU and the rest of the world. This is why the
second challenge is ‘climate diplomacy’. The EU
is only responsible for 14% of global greenhouse
gas emissions—a figure that will decrease as
countries such as China and India continue to
develop. Climate change is a global problem and
any effective response will have to be global in
nature. This means convincing the United States
that it is in its own interests to be at the forefront
of the fight against climate change. It also means
finding a way to allow developing countries to
continue economic growth without increasing
emissions.
The example that the EU has given by reducing
its own emissions is an important step towards
a global response. We have also taken the lead
in international negotiations and are providing
financial assistance to developing countries to
invest in renewable energies. Perhaps the most
important contribution is the ETS, because in it
we have a mechanism that can be developed into
a global scheme for limiting emissions.
The third challenge is adaptation to climate
change. Patterns of agricultural production will
change with longer summers in the north but
increased droughts in southern Europe. The risk
of extreme weather such as heat waves, flooding
and forest fires will increase. Infrastructure will
have to be built to take into account rising
sea levels. The range of diseases will move as
temperatures change. We are only just beginning
to see the actual impacts of climate change, but
the need for adaptation must be built into all
relevant European and national policies. The
Commission will produce a Green Paper on this
in the coming months.
2. Stopping the loss of biodiversity
The EU has set the goal of halting the loss of
Europe’s biodiversity by 2010. In May of this
year the Commission published its strategy on
how to meet this objective. The main conclusion
is that the policy framework is already largely in
place, most importantly with the Natura 2000
network of protected areas. The priority for the
EU must be the full and effective implementation
of existing legislation.
Natura 2000 is the cornerstone of our policy
to protect Europe’s biodiversity. It establishes
a model for nature protection—science
driven, legally enforceable, and based upon
ecosystems as the basic unit. But it is also a
very flexible system, reflecting the fact that in
Europe’s countryside there has long been an
active relationship between man and nature.
Designation as a Natura site does not mean
an end to economic development; the network
consists of living landscapes. Farming, fishing,
forestry and hunting can all continue. Even
major development projects can be carried out
once certain safeguards have been respected—
and where appropriate compensatory measures
are put in place. Considering that we are dealing
with the most environmentally sensitive areas in
Europe, this level of protection is no more than
basic good practice.
Implementation is the key, but the strategy
also identifies areas where new policy initiatives
should be developed. For instance, to improve
our own decision-making we will need to find
a better way of evaluating the costs and benefits
39
related to natural capital and ecosystem services.
If natural resources are to be protected, it will
be much easier if they are given an economic
value.
The strategy also addresses the issue of global
biodiversity loss in areas where the rates of loss
are far more dramatic than in Europe. Most
importantly, a way has to be found to make it
economically attractive to protect biodiversity.
This will mean developed countries increasing the
amounts of development funding for biodiversity
projects. We should also be open to innovative
approaches: one possibility could be linking
carbon credits to the halt of deforestation (which
is responsible for almost 20% of greenhouse gas
emissions). If done correctly this could be a real
win-win approach.
3. Health and the environment
There are three key pieces of legislation that
form the foundation of the EU’s approach to
limiting environmental threats to human health:
the Water Framework Directive (adopted in
2000), the current proposals for an Air Quality
Framework Directive, and the Registration,
Evaluation and Authorisation of Chemicals
(REACH) initiative. This is a dossier where the
European Parliament’s input has been invaluable
in taking us towards a solution that delivers
improved standards without putting unnecessary
burdens on industry. I look forward to achieving
a final agreement on REACH before the end of
this year.
4. The sustainable use of natural resources
Spiralling commodity prices are an all-too-clear
signal that the supply of natural resources is finite.
The EU’s social and economic development
must take place within the carrying capacity
of ecosystems. Economic growth needs to be
decoupled from environmental degradation, and
to do this, the EU should set itself the target of
becoming the most resource-efficient economy
in the world. Not only does this make sense
at a time when the scarcity of raw materials is
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European View
becoming increasingly evident, but resource
efficiency will also contribute to our global
competitiveness and minimise the negative
impact that our resource use has on the global
environment.
An immediate priority will be implementing this
year’s strategy on the sustainable use of natural
resources, which should be complemented
by a number of specific targets and measures.
Next year the Commission will propose an
EU Sustainable Consumption and Production
Action Plan, which will aim at reversing
unsustainable consumption trends.
5. A new generation of environmental policies
Effective policy integration
The integration of environmental concerns into
other policy areas is one of the basic principles
of environmental policy. It is enshrined in
Article 6 of the EU Treaty, but progress has
been mixed. In the agricultural sector there has
been fundamental reform over the last 10 years,
and we have moved away from seeing farmers
as simply producers of food to seeing them as
stewards of nature. However, the integration
of environmental concerns into other areas has
been less successful. The Cardiff process—which
was set up in 1998 in order to institutionalise
this type of integration—has not lived up to
expectations.
Impact assessments are now a standard feature
of the policy-making process and there is scope
for greatly improving the assessment of the
environmental impact that other policies will
have. We should also look at extending ‘crosscompliance’ mechanisms—or in other words,
making EU funding conditional on meeting the
environmental acquis.
Addressing the implementation gap
Only by ensuring the correct implementation
of the acquis will it be possible to realise
environmental
objectives.
Effective
Stavros Dimas
implementation is also a key element of the
Better Regulation agenda; it is needed to avoid
distortions of competition and to keep the single
market running smoothly. This is a particularly
important challenge following enlargement—
with 10 new Member States having to digest
the acquis at once. However, the high number of
complaints and infringement proceedings are a
sign that the implementation of environmental
legislation remains far from satisfactory.
The responsibility for implementation lies with
the Member States, and the Commission’s task is
to act as guardian of the treaties. This is not an
‘us against them’ situation and the Commission
will work in partnership with Member States to
develop systems that actually work. But when there
are breaches of the law the Commission will not
hesitate to take the appropriate legal measures.
In order to address the implementation gap,
the Commission will draw up a new strategy
on the implementation and enforcement of EC
environmental law. This strategy will focus on
the systematic failures that have been identified
and will encourage the use of a mix of legal
and non-legal instruments. Following recent
judgements of the Court of Justice, and recent
incidents such as the lethal dumping of toxic
waste in the Ivory Coast, we should look to see
how the extension of criminal liability can be
used to prevent environmental crimes.
Using the market to deliver environmental results
Well-designed regulation is the foundation of
the EU’s environmental policies. But we can also
use market mechanisms to deliver environmental
objectives in a cost-effective manner. The ETS is
one example and the Commission will shortly
produce a Green Paper on extending the use of
market-based instruments. The most powerful
of these instruments is ‘green taxation’, and
there is a compelling argument for shifting the
tax burden away from areas we are trying to
promote, such as employment, and onto resource
and energy consumption and/or pollution.
Removing environmentally damaging subsidies
is another aspect of fiscal reform, and by 2008
the Commission will put forward a roadmap for
the reform, sector by sector, of these subsidies
with a view to eliminating them.
Using the market also means finding a mechanism
to put a correct valuation on environmental
goods and services. These are usually assumed to
be free of charge—but environmental costs are
all too real and these need to be incorporated
into the price-setting mechanism. The transport
sector is a good example, where the real costs
of pollution and damage to health need to be
factored into the price that users pay. Getting the
prices right is essential if we are going to be able to
use market forces to protect the environment.
We also need to improve the environmental
performance of products and processes, and
encourage their adoption by business and
consumers. The Commission will begin a
dialogue with business with a view to setting
environmental performance targets for products
and processes. The Commission will also take
the lead in a regular EU-wide benchmarking of
green public procurement performance.
Better ‘green’ regulation
Environmental policy has embraced the Better
Regulation Agenda. Better regulation means a
genuine consultation of all stakeholders, it means
a rigorous assessment of costs and benefits, it
means removing complexities wherever possible,
and it means acting in a strategic rather than an
ad hoc manner. Better and simpler legislation is
also one of the best ways of improving implementation. Where legislation is ineffective or
where it creates unnecessary problems, the Commission will review laws and if necessary amend
or repeal them. For example, the Commission is
currently working on a review of the IPPC (Integrated Pollution Prevention and Control) Directive and the Emissions Trading System to see if
they can be simplified or improved.
The Commission needs to work closely with
businesses, with civil society and with Member
41
States in order to identify problem areas—ideally
before the problems actually occur. We also need
improved monitoring of policy effectiveness
and a more structured dissemination of
good practices. Research from the European
Environment Agency has shown that some
Member States can implement environmental
legislation at half the cost that others can. By
turning best practices into standard practices we
will reduce compliance costs and increase the
environmental effectiveness of our policies.
A better approach to regulation also means
developing a better relationship with business—
which is ultimately responsible for implementing
the vast majority of environmental laws. One only
has to look at companies like Unilever, General
Electric and Toyota to see that industrial leaders
have genuinely bought into the environmental
agenda. It is therefore up to environmental
policy makers to enter into an active dialogue
with these industries.
We also need to do more to promote ecoinnovations and environmental technologies that
can help us reconcile environmental protection
with smart economic growth. The key to this will
be full implementation of the Environmental
Technologies Action Plan. We also need to
ensure that supporting eco-industries becomes a
key part of the EU’s industrial policy (and not
just a part of its environmental policy). Finally,
the Commission should build on its dialogue
with business, unions, and NGOs in order to
develop business responses which go beyond
existing minimum legal requirements.
There is plenty of scope for making our legislation more effective in terms of protecting the
environment—as well as easier to implement.
There are ways in which progressive environmental policies can actively contribute to the growth
and jobs agenda. But in the final assessment it is
environmental quality that must remain our core
concern. In some areas, such as climate change
and biodiversity, we are approaching the tipping
point, and win-win approaches do not always
exist. Here we will need to take tough political
42
European View
decisions on environmental grounds.
6. Taking international leadership
The international dimension of environmental
policy is increasingly important for a number
of interlinked reasons. Many of the most serious
environmental problems, such as climate change
and biodiversity loss, are global in nature and it
is not possible for the EU to tackle these on its
own. We are dependent on the environmental
resources of other countries and have a strong
interest in ensuring that these resources are used
in a sustainable manner. There is an increasingly
clear link between environment degradation and
global poverty. And encouraging other countries
to follow our lead will help the competitiveness
of our industries.
Taken together, these considerations mean that
Europe urgently needs to develop a strategic
framework for dealing with international
environmental issues. Key issues will include:
• Improving
the
mainstreaming
of
environmental considerations in all EU
external policies—not only our development
assistance but also the Common Foreign and
Security Policy and the lending activities of
the European Investment Bank.
• Effective ‘green diplomacy’ means that the
EU will need to link environmental objectives
with other international negotiations. We
need to use the full potential of trade and
cooperation agreements at regional or bilateral
levels. The EU should continue to promote
sustainable development in the context of
WTO negotiations. We also need to develop
closer links with organisations such as the
World Bank.
• To convince developing countries to address
global problems, a transfer of technology
and/or resources will need to be considered.
The EU should take the lead in promoting
this principle and in developing instruments
that can make it operational.
• Finally, we need to improve international
environmental governance. Most importantly,
Stavros Dimas
the current United Nations Environment
Programme needs to be substantially
upgraded and transformed into a United
Nations Environment Organisation. With
a strengthened mandate and adequate,
predictable financing, a UNEO would be
able to work on a par with organisations such
as the WTO and the WHO.
Conclusion
The EPP’s political manifesto concludes:
We only have one earth, so it must be managed
in such a way that it remains liveable for all
those who inhabit it now and in the future …
we aim to reconcile economics and ecology
in the concept of ‘sustainable development’
which we were amongst the first to use, and
which today is universally accepted.
Despite the progress made since the EU’s
environment policy was established in the 1970s
our development is not yet on a sustainable path.
But I believe that if we are firm in addressing the
challenges that I have outlined above, then this
remains a realistic objective.
Stavros Dimas is European Commissioner for the
Environment.
43
Peter V. Domenici
The United States and the Challenge of Energy
By Peter V. Domenici
The US philosophy
towards energy production and use has
evolved
in
recent
years.
While
we
continue to have deep
philosophical divisions over many issues, there is
a broad movement in America towards increased
domestic production and a preference for
cleaner energy and energy sustainability. I think
these trends, coupled with our heavy investment
in developing new energies, will one day reduce
our reliance on foreign oil.
I and many of my colleagues in Congress
are working hard on strategies to make this
happen. I think many European countries fail
to recognise the strides we have made in the last
few years. Let me outline some of our goals and
accomplishments and then explain the promise I
believe international global partnerships offer in
this new era of strong energy consumption.
Strategies to reduce dependence
First, let me explain our push to reduce our
dependence on foreign oil by increasing
domestic supply. Climbing oil and natural gas
prices over the last six years have prompted
energy producers to expand exploration in the
United States. As a result, the number of oil
and gas rigs in production in the United States
has been climbing over the last four years along
with the number of completed wells that have
been drilled. The number of completed wells is
expected to be 10% higher this year than last
year. Rig count is up almost 20%.
Partly as a result of our expanded production,
our reserves of oil and gas are up. Our natural
gas reserves increased by 6% last year. That’s the
largest annual increase in proven reserves since
1970. Our crude oil reserves increased for the
first time in three years, up 2% from 2004.
As our supplies have expanded, our prices have
begun to drop. Our natural gas prices today are
the lowest they’ve been in more than four years.
Our crude oil prices are 5% lower than they
were a year ago.
Congress is committed to continuing this
promising trend. I have passed a bill through
the Senate that would open up more than 8.3
million acres in the Gulf of Mexico for oil and
gas leasing. Our government estimates that this
area contains 1.26 billion barrels of oil and 5.8
trillion cubic feet of natural gas. Because this
region is near existing infrastructure, the oil and
gas could be brought to market in the next few
years. The House of Representatives also has
legislation to expand oil and gas development on
the Outer Continental Shelf. We are currently
negotiating a middle ground between the two
bills.
The importance of exploring for energy on
our Outer Continental Shelf was affirmed in
early September when two US oil companies,
Chevron and Devon, announced the discovery
of a new oil reserve in a part of the Gulf that
has been under exploration for some time. The
companies estimate this reserve to be as much as
15 billion barrels of oil. The United States has
established reserves of approximately 22 billion
barrels, so this discovery has the potential to
significantly boost US energy production in the
next several years.
Increasing renewable energies
Second, we are increasing our use of renewable
energies in the transportation sector to further
reduce our reliance on foreign energy. While we
45
enjoy growing support for producing more of
our own oil and gas, the support for renewable
energy is even stronger, particularly for renewable
energies that can replace imported oil, such as
ethanol from our own crops.
Congress last year passed a comprehensive
energy bill called the Energy Policy Act of
2005. It contained provisions that will expand
our production of ethanol to 7 billion gallons
annually by 2012. That is nearly double last
year’s production of almost 4 billion gallons.
We are seeing the increase already. This year, 1.4
billion gallons of new ethanol production will
come online. By 2012, our ethanol production
is expected to replace 2 billion barrels of foreign
oil.
The energy bill set into motion a tremendous
investment in ethanol crops, production plants
and infrastructure. Since the energy bill passed
last year, companies have broken ground on 42
new plants to refine ethanol. Nearly 1,000 E-85
pumps have been installed at fuelling stations
around the country. It will take years to build
the kind of ethanol infrastructure necessary
to facilitate broad use of E-85 fuels but we
are making a strong start. In the meantime,
Americans are turning to hybrid cars in growing
numbers. This year, auto manufacturers have sold
nearly 200,000 hybrid cars, partly because the
US government provides attractive tax credits to
auto manufacturers and consumers to encourage
the manufacturing and sale of these cars.
Our commitment to energy sustainability in
the transportation sector is revitalising rural
America. We expect the ethanol provisions in
the energy bill alone to help create 234,840 new
jobs, and boost American household incomes by
$43 billion in the next six years.
Third, we are making similar strides in using
more renewable energy for electricity generation.
Today, 23 states have laws requiring utilities to
get a certain percentage of their electricity from
renewable sources. The energy bill provided
tax incentives to encourage the production of
46
European View
energy from wind, solar and geothermal power.
This year, we have brought 2,000 megawatts
of new wind power online, enough to power
more than half a million homes and offset an
estimate 7.5 billion pounds of carbon emission.
Over the next three months, we expect to have
another 4,200 megawatts of wind power online,
powering more than 500,000 additional homes.
While our use of wind, solar and geothermal
power is expanding, hydropower continues
to supply the bulk of our renewable power,
accounting for 7% of our total electricity
production in America.
Of course, many European countries set a world
standard for renewable energy. Denmark is
unquestionably the leading wind power nation in
the world, with more than 20% of its electricity
coming from wind power. Norway gets 99% of
its power from hydropower, while Iceland gets
more than 17% of its power from geothermal
sources and 82% from hydropower. These are
remarkable achievements.
The United States is tackling our energy
challenges through an unprecedented investment
in renewable energies and a growing commitment
to energy conservation. We are researching new
energies and new technologies for the production
and conservation of energy. We are determined
to produce more of our own energy and conserve
more of the energy we produce.
I think the EU will see us continue to make
notable progress in achieving our goals of
reducing our reliance on foreign energy and
developing more renewable energies and improve
energy technologies.
Nuclear energy
Fourth, let us look at the key role nuclear energy
plays in our US strategy for energy sustainability.
In this arena, too, many European countries have
led the way. France gets 76% of its electricity
from nuclear power, making it one of the most
self-reliant countries in Europe. Lithuania, Latvia
Peter V. Domenici
and Estonia last month signed an agreement
to jointly build a new nuclear power plant to
replace the Ignalina Nuclear Power Plant, which
is scheduled to be de-commissioned. Without
a power plant the magnitude of Ignalina, these
three countries would have to rely on other
countries within and outside of the EU for much
of their energy, a move that might harm their
emerging economies.
I applaud France’s independence and the
resolve by Lithuania, Latvia and Estonia to
retain their energy independence. I understand
that some members of the EU do not support
nuclear energy but I respectfully disagree with
that position. I consider myself the strongest
advocate for nuclear power in US Congress.
Nuclear power plays a central role in our strategy
for sustainable energy and for good reason. It is
clean, safe, reliable and affordable. It is one of the
most environmentally friendly energies we have.
Nuclear energy emits no airborne emissions.
I think nuclear power must play a key role in
any serious discussion about climate change. It
certainly plays a key role in our increasing efforts
to address climate change through innovative
technologies.
I am deeply committed to expanding the use of
nuclear power in the United States. I have stated
in recent years that I believed the United States
was on the verge of a nuclear power renaissance.
When I passed the energy bill last year, I was
committed to helping that renaissance happen.
I included in the bill incentives to encourage
the construction of new nuclear power plants.
Those include production tax credits for the first
half dozen plants as well as a new kind of loan
guarantee programme that will help get new
projects off the ground.
Today, the renaissance is under way. Over the
next 20 years, we anticipate the construction of
as many as 31 new nuclear power plants in the
United States. This is remarkable progress for a
country that went for 30 years without licensing
a new power plant design. Until last year, the
only federally approved nuclear plant designs
were 30 years old. France, England, Russia
and even China use advanced nuclear reactors
designed by American companies that we haven’t
built in America yet.
But our renaissance won’t stop there. We want
to participate in the responsible expansion of
nuclear energy around the world. Right now, the
world gets 17% of its electricity from nuclear
energy. I think we could bring prosperity and
hope to Third World countries whose citizens
can’t remember hope and don’t dare dream of
prosperity if we can first bring them electricity
from a clean, safe and reliable source like nuclear
power.
The promise of GNEP
As my final point, I would like to use nuclear
energy to illustrate the promise innovative energy
partnerships offer in a world where the growing
demand for traditional energies presents new
economic challenges for all of us.
Earlier this year, President Bush proposed the
creation of a Global Nuclear Energy Partnership
(GNEP) to ensure that the global spread of nuclear power is safe, responsible and resistant to
the proliferation of nuclear weapons. European
countries that use and recycle nuclear energy—
France, England and Russia—could play a key
role in this global partnership.
The idea behind GNEP is for nuclear energy
countries with advanced technologies to provide
fresh nuclear fuel to fuel users and then provide
services for recovering that fuel when it is spent.
The fuel suppliers would then recycle the fuel.
The exchange of fuels and the recycling of fuels
by fuel suppliers would be done using advanced
technologies that prevent proliferation and
reduce the volume of waste requiring permanent
geological disposal.
This programme, if we make it a reality,
would help nuclear nations bring prosperity to
struggling countries that might never know it
otherwise. We are in the early stages of launching
47
GNEP here in the United States. Shortly after
President Bush announced GNEP, he asked
for funding from Congress. Through my role
of appropriating money for energy in the US
Senate, I had been providing federal funding for
research into the recycling of spent nuclear fuel
since 2001.
But when President Bush asked for $250 million
to fund GNEP recycling research, I stepped
up my commitment to funding for spent fuel
research. This year, I provided $280 million to
the Senate Energy & Water appropriations bill.
Funding for this research will be critical over the
next three years. In 2008, under the President’s
proposal, the Secretary of Energy must decide
whether the United States will pursue GNEP
vigorously with a near-term result in mind or
instead, scale back the programme into a longterm R&D project.
I am optimistic that in two years, the Secretary
will announce plans to build a recycling facility
in the United States as early as 2018 and pursue
an international partnership with all our vigour
and expertise.
I think our plans for GNEP effectively illustrate
the intersection of energy and global politics.
I think the programme illustrates the kind of
sophisticated and visionary global partnerships
that are possible and, I believe, necessary if
we are going to lift emerging economies to
prosperity while protecting our environment
and our safety.
In a world where energy production and
transport is increasingly prey to political
turbulence and extremist philosophies, in a
world where the appetite for fossil fuels is
growing almost exponentially, advanced nations
built on democratic principles must find ways to
work together to meet the world’s energy needs
as safely and cleanly as possible.
We must demonstrate the daring and the
commitment in forging new energy partnerships
that we have, in the past, reserved for military
48
European View
alliances. I think GNEP is an early example of
the kinds of global energy partnerships that half
a century from now might be commonplace,
the kinds of energy partnerships that fuel global
prosperity while protecting the environment and
ensuring peace.
Because I firmly believe GNEP has this potential,
I have already begun legislative work in the US
Congress to integrate GNEP’s concepts into the
long-range US plans for the management of our
own spent nuclear fuel. I will do everything in my
political power during my tenure in the Senate
to lay the legislative groundwork and provide the
federal funding for this partnership. If GNEP
succeeds in bringing prosperity to countries now
hobbled by poverty, the US nuclear renaissance
will have reached a zenith.
Peter V. Domenici is United States Senator and
Chairman of the Senate Committee on Energy and
Natural Resources.
Oil and Gas in Mexico
By Manuel Espino Barrientos
Development
world
wide
has
always
depended
on
the
availability of energy.
In 2005, hydrocarbons,
mainly oil and natural
gas, represented 64% of international energy
consumption.
Projections for world energy consumption
point to continuous growth, as there is a direct
relationship between per capita consumption
and level of welfare. As countries move towards
development, they consume more energy. In
North America alone (Canada, the United
States and Mexico), energy consumption has
grown at an annual rate of 1.34% over the last
two decades.
However, the outlook for supply is not as clear.
The American scientist King Hubbert studied
oilfield patterns and concluded during the mid1950s that oil production, either for an oilfield
or for a country, followed over time a pattern
similar to a bell curve. Using his formula,
Hubbert predicted that the United States
would reach its highest level of production in
the 1970s, and the highest level on a global
scale would be reached in 2000. This has not
yet occurred, but experts discuss whether it will
happen in this decade or the next, although not
much later than that. According to Hubbert,
when world production reaches its highest peak
and then starts declining, the insufficient supply
to satisfy the demand will cause an excessive rise
in prices, inflation and recession, and possibly
wars to gain control of hydrocarbons. This will
happen even before oil reserves are exhausted,
when production starts declining or rising less
than the demand. Regardless of whether these
catastrophic predictions happen or not, it is clear
that a challenge for humans is to find alternative
sources of energy.
Global trends and Mexico
World oil production confirms Hubbert’s
forecast: in the United States, maximum oil
production was reached in 1970. From then on,
production in North America has been steady
and in 2003 accounted for 18.2% of world
production. Of the three countries, Canada and
Mexico have increased their production over
the last 20 years, but the United States, which
is the most important producer among the three
countries, has decreased its production over that
same period. The Middle East has increased its
production significantly; in 2003 it accounted
for 29.6% of the total world production.
As a consequence of a rise in consumption
accelerated by China’s economic growth
and by the growing expectations that the
shortfall between supply and demand would
increase, international prices have increased to
approximately $60 per barrel and it is probable
that this trend will continue. In the crisis of
the 1970s and 1980s, the cost of a barrel of
oil reached levels equivalent to $80 (in 2003
prices) and it is possible that growing political
instability or terrorism may cause the price to
rise, in the not-so-distant future, to more than
$100 per barrel.
In the case of natural gas there is a similar pattern,
but with a much more specific geographical
concentration. Middle East reserves account for
40.8% of world reserves, the reserves in Europe
and former Soviet Union account for 35.4%,
and North American reserves account for only
4.2%. There is the disadvantage that commercial
flows of gas are regional, because gas is usually
moved through pipelines that do not go very
far and do not cross oceans. As a result, North
America will have to be supplied mainly from
gas produced in the region, and this will mean
an increase in natural gas costs over the short and
49
medium term. This constitutes another challenge
for humans looking for new sources of energy.
annual demand will grow by 5.6% during the
period 2004–2012.
This especially affects Mexico, where the energy
industry plays a vital role in the economy due
to the economic value of its production and
the earnings it generates, and because it is a
determining factor in Mexico’s development.
Demand for electricity has increased by an
average of 4.9% every year, more than the rate
of economic growth. Due to improvement in
quality of life and the so-called demonstration
effect, the use of energy has increased with the
increasing availability of household appliances
such as radios, refrigerators, televisions, and so on
that are now common in low-income homes.
In 2004, hydrocarbons and electricity sales
accounted for 11% of the gross domestic product;
oil exports increased to $23,231 million and
accounted for 12% of the total exports of the
country. Almost one third of public expenditures
comes from taxes paid by PEMEX1. Altogether,
PEMEX and the two state-owned electrical
companies (CFE and LyFC) employ around
210,000 permanent workers.
There are two additional dimensions that
contribute to the importance of the industry:
first, the earnings generated by PEMEX, CFE,
and LyFC are invested in other industries,
construction, and public services; and second,
above all, the availability and supply of energy
plays a crucial role in the economic development
of the country.
With regard to the electricity industry, the
situation is similar. Demand for electricity is
growing at a higher rate than the economy and
this trend is continuing: between 1994 and
2004, growth in demand was 4.9% per year
on average, but moderate estimates are that the
An important consideration is that to
generate electricity, Mexico depends greatly
on hydrocarbons in contrast with the other
countries it competes against. In fact, in 2002,
65% of the electricity produced in Mexico was
obtained by burning hydrocarbons, while in
the United States this dependence was less than
20%, in Canada 9%, in Brazil 8%, and in China
4%. In times when oil prices and regional prices
for gas are high, this is an important competitive
disadvantage.
Within the category of hydrocarbons, it is
especially relevant that within a period of 10 years
the amount of electricity obtained by burning
gas has gone from 6.6% to 39.2%. If we take
into account that the generation of electricity
increased 51.7% during the same period, the
volume of gas used to generate electricity has
increased nine-fold; see the table below.
Sources of electricity generation
1994
2004
137,538 GWh
%
56.3
6.6
15.1
14.6
4.1
3.1
0.2
0.0
208,634 GWh
%
29.4
39.2
11.2
12.0
3.2
4.4
0.6
0.0
Fuel oil
Gas
Other carbons
Hydro
Geothermal
Nuclear
Diesel
Aeolian / Wind
Petróleos Mexicanos (PEMEX), the ninth largest Integrated Oil Company in the World (October 2006) (editor).
1
50
European View
In order to satisfy the demand for electricity in
the near term, there are investment requirements
of $15,000 million per year. It is expected that
private companies will fulfil this requirement as
they have done over the last 10 years.
Mexico and its future oil resources
It is necessary to get beyond the notion that
Mexico is a country rich in hydrocarbons. To get
a better picture of its oil resources, it is necessary
to make some comparisons. At its current rate
of production, Iraq has 234 years left before its
reserves are finished, Kuwait 118 years, United
Arab Emirates 106, Iran 93, Saudi Arabia
73, Russia 22 and Mexico 12 years. Another
comparison is proven reserves per population:
there are 48,465 barrels per inhabitant in
Kuwait, 41,716 in the United Arab Emirates,
12,216 in Saudi Arabia, 7,210 in Libya, 5,128
in Iraq, 2,276 in Norway and 160 in Mexico.
Compared to truly rich countries, Mexico is poor.
Even if we take only North America, Mexico’s
proven gas reserves are small. Of a total amount
of 7.31 trillion cubic metres of gas in the region,
71.6% belong to the United States, 22.7% to
Canada and 5.7% to Mexico. Regardless of these
percentages, it is clear that Mexico has a valuable
resource with which it can fund its development
and propel itself to levels that should allow
the country to maintain its growth once the
hydrocarbons run out or become too expensive
to extract.
The exhaustion of reserves may occur soon
if there is not enough investment. The real
problem is that PEMEX pays the treasury 113%
of its benefits so its investment represents a debt
in itself. Investment must be a priority as the
oil business involves long cycles. On average, it
takes 10 years from the time exploration begins
until oil and gas can be extracted. Development
and exploitation take another 10 years, and the
optimal declining stage 10 years more. Thus,
current problems are the result of decisions made
years ago and current decisions will have effects
many years later as well.
Following this pattern, Mexico’s production
curve is similar to Hubbert’s. Regarding costs, the
evolution is also similar. During the exploration
stage, there is an approximate investment of
$0.75 per barrel. With the necessary investment
in the development stage, barrels are obtained
for $4.30; with the optimisation of the declining
stage, barrels can be extracted for $7.03 to $8.82
at the end.
For PEMEX, the cost–price margin becomes
narrower because the oil generated for export
has a greater proportion of heavier crude oil
(of lower value) and generates less revenue than
high-value products. In fact, while in 2004
Brent crude oil, for example, generated 29% of
its volume as gasoline and an additional amount
as intermediate distillation, 35% of Mayan oil
produced 17% gasoline, 20% intermediate
distillation, and 63% oil fuel, which is low
value.
The situation is more difficult as reserves
have been diminishing because during the
past 15 years there has been no investment
in exploration. It was only during President
Zedillo´s administration (1994–2000) and, in
President Fox’s administration (2000–2006),
that there has been a reinvestment in order to
replenish reserves. Thanks to these investments,
the rate of decline has decreased, but it has not
been possible to restore 100% of the extracted
oil. The fall in reserves is shown in the following
chart (see next page). It must be noted that the
decrease in reserves from 2002 on is mainly due
to the reclassification required by the certifying
authorities.
51
Oil and Gas
Journal
1-1-2002
Saudi Arabia
261.8
261.8
Iraq
112.5
115.0
United Arab Emirates
97.8
62.8
Kuwait
96.5
98.9
Iran
89.7
99.1
Venezuela
77.7
50.2
Russia
48.6
53.2
Libya
29.5
30.0
MEXICO
22.9
23.1
Nigeria
24.0
30.0
China
24.0
29.5
United States
22.4
22.4
Country
World Oil
(bn barrels)
August 2002
Sources: Oil & Gas Journal Vol. 99, No. 52 (24 Dec. 2001); World Oil Vol. 223, No. 8
(August 2002).
Not only are Mexican reserves low in an international context (above), but they also show a worrying
and continuous trend downwards, as shown in the following chart:
Year
proven reserves
Production
reserve in years
1998
28,863
1,121
26
1999
24,700
1,061
23
2000
24,631
1,102
22
2001
23,660
1,141
21
2002
22,419
1,160
19
2003
15,124
1,123
14
2004
14,120
1,235
11
2005
12,882
1,217
11
2006*
11,813
1,218
10
(million barrels)
*estimate
Source: BDI. PEP
52
European View
It is necessary to note that proven reserves declined
in 2002, because according to the norms applied
by the Securities and Exchange Commission,
PEMEX had to reclassify 8,912 billion barrels
of its reserves in the region of Chicontepec from
proven to probable because such norms require
the reserves to have been exploited for at least
five years in order to be considered as proven.
Chicontepec was not exploited until late 2003,
as it consists of lenticular oilfields that exhaust
quickly and require many wells in order to be
properly exploited.
have avoided a negative scenario for the country,
both in oil and in gas production. If the initial
strategy of the 1988–2000 period had been
followed and there had been investments of
$6,500 million annually on average to exploit the
existing low-cost reserves and start development
in the Chicontepec oilfields, from 2008 on
the level of exports would start to decline with
devastating effects for the Mexican government
and economy. In this scenario, not only would
Mexico have stopped exporting by 2016, it
would have had to begin importing oil.
The continuous decrease of proven reserves in
period 1998–2006 is clear. It may be inferred
from the chart that if new reserves had not been
discovered in addition to the ones existing in
1998 and if the production level of that year
had kept steady, reserves would be exhausted by
2027.
With the strategy applied by the current
administration for the 2001–2006 period,
there have been annual investments of $10,000
million on average in order to replenish reserves
with intense exploration and to conclude the
development of the Chicontepec field. At
the pace of investment, the reserves are being
restored, the decline has been postponed, and
it is estimated that with the current trend of
demand, Mexico will be importing crude oil
in 2022. Although this is an improvement over
the other scenario, it is obviously not a proper
solution.
Similarly, if there are no extra reserves to add to the
existing ones in 2006 and production continues
at the same pace, it may be that Mexican oil
will finish by 2017, 10 years earlier than was
estimated in 1998. With these predictions, it
may seem paradoxical that PEMEX wants to
raise its production to record levels of 4,000
billion barrels in the next few years.
This may result in PEMEX entering the dangerous
territory of exhausting proven reserves, and even
if a great Canterell-style oilfield were discovered
today, its development would take five years.
It would not start producing until 2011, when
around 7,200 billion barrels would already have
been extracted from the oilfields, around half of
the current proven reserves.
Such levels of production in Mexican oilfields
are greater than recommended. If an oilfield is
over-exploited, even if re-injection techniques
of gas, nitrogen or water can be used, its total
yield is reduced compared with more rational
exploitation over a longer period of time.
The scenario does not seem promising; however,
thanks to the investments of recent years, we
There is a new growth strategy for the 2006–2018
period that includes the investment of $15,000
million annually for the discovery and partial
development of prospective resources. With this
amount of investment, there would be a longterm stable outlook with foreseeable exports for
the rest of the century.
A scenario to maximise value and fully develop
prospective resources would require the
investment of $25,000 million annually in the
2006–2018 period. This amount is not being
considered because long-term fluctuations
in international prices of crude oil cannot be
estimated.
The problem with the required investment of
$15,000 million per year is that the country
does not have the resources for this level of
investment. There are only three ways to obtain
these resources: contracting debt, which is not
53
the best option because of the amount of the
debt; giving PEMEX the same fiscal treatment
as other companies—but the taxes in other
industries would have to increase, which is
difficult because of the lack of solid tax reform;
or private investment, which is prohibited by law.
The lack of resources of PEMEX and its heavy
tax burden means that investment represents
more debt.
Moreover, the Mexican mix of exports consists
of more and more heavy crude oil because the
light oils that are more expensive have been
exhausted. On the other hand, investment in
exploration has led to the discovery of potential
oil in the Gulf of Mexico calculated to be 54,000
million barrels, more than the total reserves that
exist currently. The problem is that this oil is
2,000 or more metres under water. To extract it
would require capital and modern technology
that is available from private companies.
As a result of the current heavy investments,
Mexico has gone from restoring 41% of
production to the reserves in 2002 to 65% in
2005, on track to reach 100% in 2010. Thus, the
trend of declining reserves has been reversed.
The challenge of the gas market
In the case of gas, the problem is more urgent
than in the case of oil. There is already a deficit
of 1,200 million cubic feet per day. With the
level of investment mentioned earlier, $6,500
million per year, this deficit will increase rapidly
from 2007 on with terrible consequences for
the country. With an investment of $15,000
million per year, the deficit could be reduced
from 2012 on; only if the prospective resources
are developed fully with an annual investment
of $25,000 million would the country be selfsufficient in gas, but this level of investment is
not being suggested by anyone.
The situation becomes even more complex as
production begins to stabilise in North America,
even though Canada has raised its production
35% between 1986 and 2003. This is because the
54
European View
United States, the main producer in the region,
has not increased its production despite its
efforts in exploration and drilling and the signals
they send to the international market through
higher prices. As the demand in this region has
been growing faster than the supply, Canada, the
United States and Mexico have become the most
expensive regional market in the world.
In the face of this scenario, former President
Vicente Fox followed several strategies in order
to confront the depletion of reserves:
1. Increase investment in new oilfields
exploration in order to increase natural gas
production;
2. Make more efficient use of available gas;
3. Open the doors to gas imports from other
regions of the planet where this product is
abundant and cheap, by promoting liquefied
gas terminals.
The objective of the last point is to ensure the
supply of this source of energy with gas from
other markets and in this way to reduce direct
imports from the United States. Two projects are
already under way, one in Altamira and another
in Ensenada. Altamira will start receiving gas at
the end of 2006 and Ensenada in 2007 or 2008.
Moreover, there are more projects about to be
launched in Puerto Libertad, Manzanillo and
Lazaro Cardenas.
At present Mexico does not have a transportation
system in the Pacific region. For this reason, the
project to import natural gas will help to develop
the market in that region and will require
the construction of an alternative pipeline
infrastructure.
Another step taken by PEMEX in recent years has
been to dramatically decrease the amount of gas
that PEMEX releases into the atmosphere. The
advances made by the current administration in
this area can be seen in the following table:
Years
2000
2001
2002
2003
2004
2005
GAS RELEASED BY PEMEX INTO THE ATMOSPHERE
Millions of daily cubic feet
Volume
450
347
266
254
153
109
Other actions taken by PEMEX to solve the gas
problem may be listed briefly:
companies to ensure the best evolution for the
industry.
• work with policymakers in order to support
necessary reforms;
• promote projects to increase the production
of liquefied natural gas;
• thoroughly examine fuel policies for electricity
generation;
• change regulations that inhibit the use of
renewable and alternative energy sources;
• launch an energy saving program.
Manuel Espino Barrientos is the President of the
National Action Party (PAN) of Mexico.
Unfortunately, in this matter the lack of legal
reform limits what can be done. Until now, the
Mexican government, through PEMEX, has
been the sole owner of underground resources
and the only one authorised by law to explore,
extract, refine, sell and transform in basic
petrochemical processes the oil found in the
national territory, including oceans. Mexico
is probably the only country in the world that
prohibits the participation of private investment
in some or all parts of its oil industry.
PEMEX has had to contract debts to hire private
companies for the development and expansion
of its facilities. This is not convenient, as it must
pay fixed interest. It would be preferable to invite
the participation of private capital to share the
risk as well as the potential earnings or losses.
In this case, we are confident that the new
administration of President Felipe Calderón will
get the support of Congress for an energy reform
bill that will allow in some cases and under
certain conditions strategic alliances with private
Bibliography
Oil & Gas Journal, 99 (52) (24 December
2001).
World Oil, 223 (8) (August 2002).
Aceituno Levi, Elizabeth (2005). PEMEX vs.
Petrobrás. Revista Bien Común.
Barbosa, Fabio (2000). Exploración y reservas de
hidrocarburos en México. Universidad Autónoma
de México.
Barragán Elizondo, Fernando. Conferencia del
19-VI-2005
Call,
Steven
&
Holahan,
(1983). Microeconomía. Grupo
Iberoamericana.
William
editorial
PEMEX (1999). Las reservas de hidrocarburos de
México. (www.pemex.com).
Secretaría de Energia. Prontuario del sector de
energía: 1992–1997. Secretaría de Energia.
Dirección General de Política y Desarrollo
Energético.
INEGI. XV Censo industrial: minería y extracción
de petróleo. (www.inegi.gob.mx).
55
Yegor Gaidar
The Curse of Oil
By Yegor Gaidar
“All in all, I wish we had
discovered water!”
Sheikh Ahmed Zaki
Yamani, former Oil
Minister of Saudi Arabia
fluctuations in raw materials prices and see
how they influence the economies of exporter
countries.
In 1985–86, oil prices decreased a number of
times. Nevertheless, the USSR did not collapse
because of the reduction game in the oil
market.
Oil is an unusual article of trade. In the extraction
of other mineral resources, the difference between
the average cost in the resource-rich areas and
the price on world markets (economic rent)
is never as high and as stable as it is in the oil
industry.1 Normally, price dynamics and market
sales are shaped by the behaviour of participants
whose costs are maximum. Their decision to
increase production during periods of high
prices or decrease during low periods, when the
activity becomes a loss, sets the price level and
determines production.
The Soviet economic crises that led to the USSR’s
collapse, as well as when and how the collapse
was spelled out—all this was foreshadowed by
developments in the oil market. So why did it
happen, and what happened? At first, conspiracy
theory explanations appeared. However, I myself
was witness to what a surprise the USSR collapse
was to the US government and to how shocked
they were, and therefore I do not believe in the
reliability of those explanations.
Yet if we were to assume the theory of deliberate
intention was true, the implications would be
even worse. We would have to be talking about
the low intellectual level, irresponsibility and
betrayal of national interests on the part of a few
generations of Soviet authorities who made the
economy and the fate of the country dependent
on decisions taken in the United States (the
country viewed as our main potential enemy).
The USSR was neither the first nor the only
country rich in resources to face a deep crisis
related to hard-to-predict price changes in the
export of vital raw materials. To comprehend
what happened in the USSR from the end of
1980 to the beginning of 1990, it is important
to analyse the core problems connected to
The specific character of the oil market
The oil market is entirely different. Countries that
have had the lowest ongoing expenses during the
past decades play a decisive role, being ready to
decrease extraction in unfavourable conditions
and increase it in favourable conditions.2
The best of what this author has heard concerning
oil prices was stated by Professor A. Kruger,
based on his extensive experience and common
sense. Prof. Kruger believes that if most of the
market actors believe oil prices will remain high
for only during a short period of time, then that
will be so. If it is generally agreed to place prices
at a new stable level, it will not be long before
they will fall again. The prospect of a long period
of high prices stimulates the buyers to decrease
consumption. It then becomes profitable for
producers to build up capital formation and
production value. If oil prices are decreasing,
the picture is entirely the opposite. For the long-
J. Amuzegar, Managing the Oil Wealth: OPEC’s Windfalls and Pitfalls (London; New York: I.B. Tauris Publishers, 2001),
p. 12.
2
R. A. De Santis, “Crude Oil Price Fluctuations and Saudi Arabian Behaviour”, (Kiel Working Paper No 1014, October
2000), p. 6.
57
1
The Curse of Oil
term dynamics of oil prices in real terms, (see
Figure 1).
Figure 1
Price dynamics of crude oil
in the long-term historical prospective (1880–2004)
Expressed in stable prices of 2000. Here and later (if not marked otherwise), the conversation into
prices of 2000 is performed with a deflator of the US GDP.
Source: calculations from International Financial Statistics 2004, IMF; Energy Efficiency and
Renewable Energy Website, US Department of Energy (http://www.eere.energy.gov).
Regulation of the oil market in the twentieth
century
The oil market in the twentieth century was never
free nor severely regulated. The 1928 agreement
signed in the town of Achnacarry, Scotland, fixed
the division of the market among the major
international vertically-integrated companies
(Standard Oil of New Jersey, Texaco, Royal Dutch
Shell, Mobile Oil, Gulf Oil, British Petroleum,
and Francis and Petrol), companies that combined
the fields of exploration, extraction, processing
and sales. This agreement has shaped industry
game rules for decades.
The world of those times was still operating
according to laws typical of the first stages of
contemporary economic growth. ‘The rule of
the mighty’ and ‘gunboat diplomacy’ allowed for
securing access to the raw material resources of
less-developed countries that were weak in military
strength, imposing conditions of concessions that
were favourable to international companies.3
Vertically-integrated corporations were indifferent
to whether it was extraction, processing or sales
of oil products that would yield profit. They were
interested in increasing their share on the market
and did not worry too much about the amount
of royalties the governments of the oil countries
D. Yergin, The Prize: The Epic Quest for Oil, Money, and Power (New York: Simon and Schuster, 1992).
3
58
European View
Yegor Gaidar
would get. Their financial responsibilities towards
the countries from which they exported oil did not
depend on income generated during the stages of
oil processing and sales. Therefore, the incentives
were to keep the price of crude oil not very high,
with the major part of income coming from oil
processing and the sale of oil products.
One milestone along this way was the agreement
reached between authorities in Venezuela and oil
companies on a 50:50 distribution of income
between them. These conditions, about which
the Venezuelan government had informally
notified other oil-extraction countries, became
generally accepted in due time.5
In 1950–60, oil corporations were competing
to release (lower) their prices relative to the
agreed level and give the most favourable
discount conditions to customers. Here the
USSR entered the world oil market. It tried to
increase its percentage on the market with this
strategy while practising dumping. The contracts
for barter transactions of oil between the USSR
and Western Europe (first of all Italy) were, in
terms of 1960s oil prices, half the international
reference price. It is hard to tell from the
framework of those contracts whether the
difference in prices is explained by the support
of the communist regime or purely by dumping.
However, the international oil companies were
not very interested in any hidden motive. The
existence of the practice of dumping was itself a
factor which lowered oil prices.4
Countries with oil resources had to outline
a common view in their dialogue with
international corporations and compare
experiences with each other in order to evaluate
the current situation in oil extraction and on the
market. This is the background to the creation
of OPEC, organised to allow for extending
dialogue, institutionalising interactions and
coordinating operations. OPEC was established
in September 1960 by representatives from Iran,
Iraq, Kuwait, Saudi Arabia and Venezuela. Qatar
joined in 1961, Indonesia and Libya in 1962, the
United Arab Emirates in 1967, Algeria in 1969,
Nigeria in 1971, Ecuador in 1973 and Gabon
in 1974. During its first years, OPEC operated
as a consulting organisation and did not carry
out any negotiations with the oil-production
enterprises on its members’ behalf.
After the Second World War, the era of empires,
colonies and half-colonised countries, of ‘gunboat
diplomacy’, lay in the past. What had been agreed
to a century ago became impossible in a changed
world. The return of Iran’s oil resources to the
control of British Petroleum (which was obliged to
share the resources with the Americans) was only
a reflection of the past century. After the Franco–
English operation in Suez (1956), it became clear
that the threat of force towards oil countries
wishing to increase their share of income from
oil extraction and nationalise their production
was minimal. During the next 15 years, the role
of governments in oil countries increased in
everything connected with the industry. Starting
in the 1950s, they improved the conditions of
contracts with international corporations.
The agreements reached by the member countries
of OPEC, intended to improve contract
conditions, assumed that governments of oilproducing countries would agree to changes in
export prices along with extending the scale of
oil processing and creating national companies.6
In 1968, OPEC adopted its “Guiding principles
of oil policy”. The organisation demanded
national participation in the ownership of oilproducing companies, in the possibility of
conducting geological surveys and petroleum
production, and in controlling declared prices.
Measures adopted in 1970–73 targeting these
principles redistributed the balance in the oil
industry.7 Already by the end of the 1960s,
OPEC countries had secured agreements from
J. Amuzegar, Managing the Oil Wealth, p. 24.
6
I. Skeet, OPEC: Twenty-Five Years of Prices and Politics (Cambridge: Cambridge University Press, 1988); R. N. Andreasyan, Oil and Arab
Countries in 1973–1983: Economical and Social Analyses (Moscow: Science, 1990), p. 80.
7
E. Penrose, “Oil and the International Economy: Multinational Aspects, 1900–1973”. in R. W. Ferrier and A. Fursenko, eds., Oil in the
World Economy (London; New York: Routledge, 1989), p. 14.Countries in 1973–1983: Economical and Social Analyses (Moscow: Science,
1990), p. 80.
4
5
59
The Curse of Oil
the oil-producing companies not to decrease
oil prices compared to what had been officially
declared.8
The price levels of 1970, quite low due to these
measures, merely reflected the former balance
of power in the industry.9 At the beginning of
the 1970s, oil resources in the United States
decreased and the demand by the American
economy for imported oil increased. The United
States could not control the world oil market
any more. In March 1971, the United States was
using 100% of its production capacity for this
resource.10 Between 1967 and 1973, the import
share for the amount of oil used in the United
States increased from 19% to 36%.11 In April
1973, the US government abolished the quota
system on imports12. This transformation of the
United States into net importer strengthened
the position of oil-producing countries.13
The most important factor defining the
development of resource markets appears to
have been the weakening of US monetary policy.
In the 1960s, the country undertook enormous
obligations in social programmes and at the same
time had to finance Vietnam War expenditures.
This changed the world market—price growth
on raw material products began before the oil
price increases of 1973.14
On 17 October 1973, Arab oil-exporting
countries agreed to reduce their scope of
extraction and export. Saudi Arabia, the top
producer in the Arab world, announced a 10%
decrease in production and introduced an
embargo on oil delivery to the United States.
On 22 November 1973, the Saudi Arabian
government issued a warning: if the United
States did not withdraw its support of Israel, they
would be ready to decrease production by 80%,
and if the United States were to use force, oil
production spots would be detonated.15 Sudden
price increases in oil, compared to the anomalous
low levels of 1960 and the early 1970s, became
a fait accompli.
Between 1970 and 1974, OPEC countries’
income from oil exports increased by a factor of
11. As stated by one of the OPEC ministers of
finance, oil-producing countries received more
money during these years than they imagined in
their wildest dreams. Iraq’s export income from
oil increased from $1 billion in 1972 to $33
billion during the month before the Iran–Iraq
War (in yearly terms).16 The flow of oil income
into oil-exporting countries offered hope for a
steady growth in well-being and the belief that
national prosperity could be achieved. Leaders
of those countries presumed that they would
be able to finance other industries through oil
income.17
From 1869 the long-term average price of oil in 2004 was $8.59 (in prices of 2000, $18.43) a barrel. The oil price of 1958 at $16/barrel (in
dollars of 2004) was in 1970 less than $13 (in prices of 2000, $15 or $12 regularly) a barrel (see “Oil Price History and Analysis”, 2004.
http://www.wtrg.com/prices.htm)
10
D. Yergin, The Prize, p. 567.
11
J. Darmstadter and H.H. Landsberg, “The Economic Background”, in R. Vernon, ed., The Oil Crisis (New York: Norton, 1976) p. 31.
12
I. Skeet. OPEC: Twenty-Five Years of Prices and Politics, p. 86.
13
T.M. Rybczynski and G.F. Ray, “Historical Background to the World Energy Crisis”, in T.M. Rybczynski, ed., The Economics of the Oil Crisis (London: Macmillan Press for the Trade Policy Research Centre, 1976) p. 2.
14
R. B. Barsky and K. Lutz, “Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative” (NBER Working Paper
8389, July 2001), pp. 5, 14.
15
L.A. Sobel ed., Energy Crisis, Vol. 1. 1969–1973 (New York: Facts on File, Inc., 1974) p. 199–206.
16
E. Kanovsky, “Economic Implications for the Region and World Oil Market”, in E. Karsh, ed.,. The Iran-Iraq War: Impact and Implications
(London: Macmillan Press, 1989), p. 231.
17
Terry Lynn Karl, The Paradox of Plenty: Oil Booms and Petro-States, (Berkeley: University of California Press, 1997).
8
9
60
European View
Yegor Gaidar
Figure 2
Dynamics of average monthly oil prices on the world market in 1972–1974
The 1972 price of oil was equivalent to $8.08 in 2000 dollars.
Source: International Financial Statistics 2004, IMF.
The years 1973–81 were a key period of OPEC
influence. At that time, many analysts thought
that the possibility of controlling the volume of oil
extraction by organisation, unlimited prices and
price increases of hydrocarbons was inevitable.18
Oil-consuming countries faced extreme increases
in oil prices in 1973 (see Figure 2), which led to
the acceleration of inflation and reducing their
economic growth, they began to decrease power
intensity in industry and consumption (see
Table 1).
OPEC’s share in the world oil market was
decreasing. Price increases stimulated the
exploration of oil deposits in areas where
extraction was difficult. OPEC did not have any
real mechanisms allowing it to apply sanctions
to members whose oil extraction went over the
agreed maximum.
The slowing down of global development in
1981–82 cut back the demand for oil. This
clashed with the instability of speculative price
increases due to the beginning of Iran–Iraq War.
In 1973, OPEC was faced with a difficult choice
for the first time. If its members continued to
intensify oil extraction, prices would fall. To
support price levels, production volume would
have to be reduced. However, that would mean
reducing OPEC’s share on the world market.
Companies not connected with OPEC used the
cartel’s problem to increase their share on the
market (see Table 2). On 17 February 1983, the
British National Petroleum Company lowered
prices on oil extracted in the North Sea by $3
a barrel. Nigeria (a member of OPEC), whose
oil was competitive with that of the UK and
Norway, was obliged to follow. The USSR joined
the race to decrease prices.
The factors that provoked the 1985–86 price war
were the cessation of conflict between Iran and
Iraq and their mutual desire to recover the market
share they had possessed in the mid-1970s but
which had been reduced during the war period.
R.N. Andreasyan, Oil and Arab Countries in 1973–1983, pp. 124–130.
18
61
The Curse of Oil
Table 1
Oil consumption (in barrels/$1000)per one GDP unit in
Germany, Japan, France, and USA (1970-1985)
YEAR
FRANCE
GERMANY
JAPAN
UK
USA
1970
1975
1980
1985
1.15
1.13
0.97
0.69
…
1.03
0.91
0.74
0.77
0.75
0.65
0.50
1.06
0.87
0.72
0.61
1.44
1.39
1.21
0.96
Source: U.S. Energy Information Administration http://www.eia.doe.gov/emeu/international/
petroleu.html. WB WDI.
Table 2
OPEC member countries’ share in world oil production and sales in 1973-1985
YEAR
OPEC share in the world oil
production
OPEC share in the world’s oil
export
1973
1975
1980
1985
55.4%
50.5%
44.4%
28.5%
86.1%
83.3%
75.6%
51.2%
Source: OPEC Annual Statistical Bulletin 2004 (OPEC, 2005), pp. 22, 34.
Saudi Arabia has the richest oil resources, and
the prime cost of extraction is low. In 1981–
85, when it became clear that the price levels
reached in 1979–81 were unstable, this country
became the main market operator. It was ready
to decrease its production in order to hold prices
and in that way compensate for the exceeding of
quotas by other OPEC members, the decrease in
world demand, and the increase of extraction in
non-OPEC countries.
Nevertheless, oil prices started to fall in the first
quarter of 1981. At first, this process was slow:
the price was $31.76 in 1982, $28.67 in 1983,
and in 1984–85 it dropped to $27 (in current
prices).19 In 1985, Saudi Arabia decreased
production to 2.5 million barrels a day. This was
almost four times lower than 1981 levels.20
In March 1983, OPEC decided to lower the official
price from $34 to $29 a barrel. The evaluation of
the real market price of oil in 1983–85 is hard
to follow, due to fluctuations in exchange rates.
In 1983, the price in the dollar value was falling;
however, European currencies remained stable.21
At the beginning of 1985, price decreases in oil
became evident, framing the development of the
global economy.
E.T. Dowling and F.G. Hilton, “Oil in the 1980s: An OECD Perspective”, in S. Shojai and B.S. Katz, eds., The Oil Market in the 1980s: A
Decade of Decline (New York: Praeger, 1992), p. 74.
20
Yousaf Hasan J. Mohammad, “OPEC Strategies for the Monopoly Oil Profits”, in S. Shojai and B.S. Katz, eds., The Oil Market in the
1980s, p. 37; P. Wickham, “Volatility of Oil Prices” (IMF Working Paper, 1996).
21
Se-Hark Park, “Falling Oil Prices and Exchange Rate Fluctuation”, in S. Shojai and B.S. Katz, eds,. The Oil Market in the 1980s, p. 6.
19
62
European View
Yegor Gaidar
On 13 September 1985, Sheikh Yamani, the
Oil Minister of Saudi Arabia, declared that his
country was not ready to decrease the extraction
of oil and would increase its production.22 The
increase of oil extraction in Saudi Arabia in
1985–86 radically changed the situation on the
market. Oil-producing countries competed to
be the first to lower their price in order to secure
their share on the market.
In 1986 prices fell to a very low level compared
to the previous decade, to less that $10 a barrel
for the current price.23 Between 1980 and 1986
the income from oil extraction (in real terms) fell
by 64.5% in Venezuela and 76.1% in Indonesia.
Oil-producing countries suddenly had to
decrease their state expenditures.24
At the end of 1986, OPEC member countries
understood that agreements to follow a discipline
of prices and levels of extraction were necessary
and that the alternative would be economic
bankruptcy. Partial order was restored on the
market. In December 1986, OPEC made a
decision to decrease oil extraction with the aim
of restoring prices. Production decreased to 15.8
million barrels a day,25 the lowest level in the
history of organisation. At the end of the 1980s,
oil prices came close to their historical average.
However, the height of OPEC’s influence, like the
earlier influence of international corporations,
was now over. From this point on, a structure
that could predict the future of the oil market
did not exist. The instability of prices was very
high (see Table 3).
Until 2000, sudden decreases and increases of
prices connected with political events (such as
the war in the Persian Gulf ) and financial shocks
(related to crises in South and East Asia) led
only to short-term departures from the average
historical level.
Table 3
World oil price dynamics in 1986-2005
Year
Average Price
(in USD/barrel*)
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
19.9
24.9
19.5
22.8
28.2
22.9
22.0
19.0
17.7
18.7
21.7
20.2
13.6
18.4
28.2
23.8
24.0
27.3
34.6
2005 (1st quarter)
41.6
2005 (2nd quarter)
45.5
* Expressed in prices of 2000.
Source: International Financial Statistics 2005,
IMF.
Searching for a way out: responding to threats
of unstable prices
The fact that the flow of resource products and
their prices are not a stable constant is well
known. Many resource-rich countries are trying
I. Skeet, OPEC: Twenty-Five Years of Prices and Politics, pp. 207, 208.
S. Shojai and B. S. Katz, eds., The Oil Market in the 1980s, p. XIII.
Terry Lynn Karl, The Paradox of Plenty, p. 32.
25
22
23
24
63
The Curse of Oil
to find a way out of this problem. Risk insurance
and forward contracts are possible solutions, but
while wise from an economic standpoint these
strategies can be politically risky. If the price
dynamics are not as favourable as agreed on in
the forward contracts, it will be hard to explain
to the public why there are budget losses. There
will always be those who want to prove that
such agreements are a priori bad for the national
economy.26
This does not mean that these problems are
unsolvable. The most common measure taken to
regulate problems regarding resource prices is to
form stabilising funds, which are supplemented
during favourable conditions and used when
prices are falling.27
At the end of the 1970s, Chile’s balance of
payment and state budget were very much
dependent on the price dynamics of copper. In
1976, copper income and exports were 50% of its
budget and in the 1980s this share was still very
high (around 40%). Until the beginning of the
1980s, payouts from the state copper company
were still 20% of its budget. Nevertheless,
Chile’s government refused to let go of large
investment projects targeting the diversification
of the national economy. Instead, it created an
institutionalised basis for competing productions
in industries not connected with copper, formed
a well-managed stabilising fund, did not allow
extreme strengthening of the national currency
rate, and secured conditions for unparalleled
economic growth in South America at the end of
the twentieth century.
The administration of stabilising funds in
Norway is followed as an example by many
resource-rich countries. The Alaska State
Fund, the Kuwait Reserve Fund, the Fund of
the Future Generation and the Oman State
Reserve Fund are all examples of such kinds of
institutions.28 The motivation for their creation
by governments that understand the scope and
reality of risks connected with the instability of
budget incomes in resource-rich countries are
obvious.
There are two types of such institutions: funds
aimed at protecting the economy of the country
from price changes on resources; and funds for
future generations, created as support during the
times when natural resources come to an end.
Sometimes they function according to a certain
economic formula, basing the range of allocation
on the price of export resources. In other cases,
the scope of income is framed during the yearly
budget approval. Experience shows this to be an
effective instrument of risk regulation connected
to the instability of resource prices. However, it
cannot be relied on too heavily.29
The political arguments connected with the
functioning of stabilising funds turn out to be
more critical than the financial ones. In nondemocratic countries (and there are many of
those rich in resources), risks are very high that
capital will be invested in ineffective projects
financed by the state. A major part is stolen. A
story about a Nigerian stabilising fund is a classic
example of such a development.30
Large financial resources of stabilising funds
in democratic countries inconvenience the
necessary limitation of budget liabilities under
conditions of unstable resources prices. The
competent and responsible Minister of Finance
of Venezuela said in October 1978: “The most
important weapon of a Finance Minister who
faces many budget inquiries is his ability to say:
‘no money’, but how could I say that with such
amounts of money available?”31 Explaining to
the authorities about the spending of budget
J.A.Daniel, “Hedging Government Oil Price Risk” (IMF Working Paper, 2001).
On reasons that push resource-rich countries to create stabilising funds, see P. Arrau and S. Claessens, “Commodity Stabilization Funds”
(IMF Working Paper WPS 835, January 1992).
28
U. Fasano, “Review of the Experience with Oil Stabilization and Savings Funds in Selected Countries”
(IMF Working Paper WP/00/112, 2000), p. 3.
29
On the problems of countries trying to create a stabilising fund, see J. A. Daniel, “Hedging Government Oil Price Risk”, p. 12.
30
S. Montenegro, “Macroeconomic Risk Management in Nigeria: Dealing with External Shocks”, in “Macroeconomic Risk Management
– Issue and Options” (Report No 11983, Western Africa Department, Washington, D.C.: World Bank, 1994).
31
Terry Lynn Karl, The Paradox of Plenty, p. 160.
26
27
64
European View
Yegor Gaidar
money, to political lobbies and parliamentarians
that the government cannot assign these or
other expenditures because it does not have the
money—this is a hard but possible task. It is much
harder to prove that spending is not possible
because the real currency rate will strengthen
and this will diminish the competitiveness of the
non-resource-based industries, creating budget
liabilities that make it impossible to perform in
market conditions.
Norway is a country that deals intelligently and
responsibly with its oil income. During the 20
years after the discovery of the North Sea oil
resources, it still maintained lower government
spending as a percentage of its GDP than
did Denmark, Finland and Sweden.32 The
Norwegian stabilising fund has a reputation of
being transparent and well administered, even
though from the time of its creation not a single
governing coalition has won an re-election.
Rhetoric about a government that sits on buckets
of money while refusing to solve important
public problems is a strong weapon in political
struggle. At the beginning of September 2005,
the United Nations named Norway the country
with the highest living standards. This did not
help the governing coalition win the re-election.
The main topics of the opposition’s election
campaign concerned how to spend the money in
conditions of high oil prices, and to what extent
and purpose it could be used to finance various
social programmes.
Competing political parties in Norway have many
years of history and are politically responsible.
When winning elections and forming the
government, they explain to their voters that they
have overestimated the possibility of stabilising
fund expenditures and did not take into account
the associated risks. The opposition can blame
them for not fulfilling their pre-election promises
and build their political platform based on those
claims. Under the conditions of a stable economy
and an effective democracy it is not that hard. It
is a pity, but not all resource-rich countries have
such political systems.
*
*
*
Contemporary economic growth is a process with
many historical examples but is hard to forecast.
Changes in the conditions of global development
bring new problems onto countries’ agendas,
demanding sufficient answers and the ability to
change social institutions and organised forms
of social life. In countries where the economy is
dependent on resource products, does predicting
their prices make the situation more complicated?
Dependent on the dynamics of prices is the level
of inflation, population income, and the payout
of foreign debt. It is a serious challenge. Not all
countries rich in resources are ready to respond
to this challenge. And this is one of the reasons
why the economic growth in these countries is
lower than in countries that do not possess these
resources. The experience in solving the problems
that occur due the instability of resource markets
does not yield simple prescriptions on how to
solve the problems connected with resource
wealth. However, what it demonstrates clearly is
the importance of a political leadership that is
ready to respond to changes in the world market
and that understands how this is connected to a
real threat to their country’s security.
In the second half of the twentieth to the
beginning of the twenty-first century, wars
became an exception rather than a rule. There
have been no military conflicts between the
large countries during the last 60 years. Even so,
a continuing nineteenth-century war tradition
demands what is called a ‘military plan of
action’—a developed programme in case of
intervention or the threat of intervention from
a potential enemy. The twentieth century has
shown that for resource-rich countries facing the
risk of unfavourable markets, it is important to
know beforehand what the government will do
T. Gylfason, “Natural Resources and Economic Growth: A Nordic Perspective on the Dutch Disease” (Paper presented for UNU/WIDER
research project on Resource Abundance and Economic Development: Improving the Performance of Resource-Rich Countries, 1999), p.
33. http://www.hi.is/~gylfason/pdf/unuwider13.pdf
32
65
The Curse of Oil
in case of price decreases, what effect this will
have on the budget, the balance of payment of
the consumption market, the management of
foreign debt and the stability of bank system,
and to know that a real programme of action has
been developed in the event of such a situation.
The USSR did not possess such a plan at the
beginning of the 1980s. The outcome is well
known.
Yegor Gaidar is Director of the Institute for the
Economy in Transition and former Prime Minister
of the Russian Federation 1992.
66
European View
Mikhail Kasyanov
Energy Security and Russia–EU Cooperation
By Mikhail Kasyanov
Spanning huge territories of the Eurasian continent, Russia has always
been an economic space
complementary to the
core European community, both as a readily available pool of natural
resources and high-quality products, and as a
vast market for European goods and services. For
centuries, our ancestors successfully capitalised
on these opportunities. Despite certain setbacks
occurring from time to time, until very recently
these commercial relations have generally developed quite well.
Energy supplies from Russia to other European
countries constitute an important part of this relationship. These supplies reached a record high
last year of almost 400 million metric tons of
oil equivalent hydrocarbons, or almost one third
of the oil and gas consumption in the enlarged
European Union comprising 25 countries. In
fact, Europe is by far the largest market for Russian energy. Moreover, new commercial plans
and projects targeted to further increase the energy supplied by Russia to Europe are being discussed. These will necessarily enhance the extent
of mutual cooperation and interdependence.
But as everyone knows, the picture of energy cooperation between Russia and the EU is far from
rosy today.
Dialogue stalled?
To provide for the stable development of this
key relationship, the Russia–EU Energy Dialogue was launched several years ago. The basic
idea was to make medium-term and long-term
forecasts of the demand dynamics in Europe
and, accordingly, to work out a plan for the
development of oil and gas fields in Russia and
neighbouring countries in order to provide for
appropriate capital investment and create the
necessary infrastructure capacity.
But at present this energy dialogue, to a large
extent, is frozen. The energy chapter of the
‘Road Map for the Common Economic Space’,
approved at the Russia–EU summit in Moscow
in May 2005, incorporates a list of general statements that hardly clarify where Russia and the
EU are going in the sphere of energy relations.
Regularly published progress reports on energy
dialogue now mainly describe quite a narrow
circle of specific activities, such as the TACISsponsored energy efficiency projects in several
Russian cities. These tactical projects are important indeed, but are much less productive in the
absence of a mutual understanding of a political
strategy that is part of the broader dialogue.
This is very sad, because together Russian and
European politicians can and actually should
contribute much more to establishing a reliable, mutually respectful, and environmentally
friendly common energy space in Eurasia. This
contribution requires targeted and determined
political action, which is simply not discussed
today.
All this creates a fertile ground for growing mutual tensions and concerns. Europeans are now
worried about the reliability of energy supplies
from Russia, which has never been a noticeable
issue of concern, even during the Cold War. In
turn, Russian authorities suspect that some politicians in Europe would like to artificially bias
the European market against Russian energy
supplies and legally block Russian corporations’
direct investments in the European energy industry. In addition, mutual trust in the energy
area has been severely damaged by the crises
in relations between Russia and energy transit
67
countries, which led to gas supply disruptions
from Russia to Belarus in January 2004 and to
Ukraine in January 2006, resulting in subsequent
gas supply disruptions to European customers.
Since the relations between Russia and transit
countries are still not settled transparently on a
long-term, solidly contractual basis, and unfortunately tend to be seriously affected by politics,
possible disruptions of energy supply to Europe
are quite likely in the future as well.
These newly emerging transit problems have
led to discussion of alternative infrastructure
projects, which frequently are grossly inefficient
by strict economic criteria. But policymakers
choose to pursue them, usually at the expense of
the taxpayers, in order to be insured against often-imaginary geopolitical risks of an eighteenthand nineteenth-century nature. In other words,
energy has begun to be considered a weapon
rather than a productive economic resource.
One can easily calculate the huge overall price of
mutual mistrust by adding up the extra costs of
such projects. But at the same time, almost nobody dares to discuss possible policy alternatives
associated with cooperative win-win solutions
and as a result, the idea of long-term international energy cooperation as such is dangerously
discredited. This is certainly not the right way to
build a sustainable energy relationship.
Obviously, there are some objective constraints
to the development of mutual energy ties. First
of all, the paths of development for energy markets in the EU and Russia are inherently different. The situation is further complicated by
growing mutual political misunderstanding and
uncertainty concerning the extension of the basic
Russia–EU Partnership and Cooperation Agreement, which expires at the end of the next year.
But there are also certain subjective factors, and
I am deeply convinced that both sides share responsibility for not managing to provide for sus-
tainable dialogue in the energy sphere.
Energy problems: the EU side
As is frankly admitted in Brussels, Europe has
yet to build a fully competitive internal energy
market.1 The corresponding rule making is subject to significant uncertainties: Will the liberalisation and integration of the European gas and
electricity markets be completed any time soon?
What will be the rules? Will there be a single
European regulator? And so on.
It is important that, as processes of liberalisation and the integration of the European gas
and electricity markets proceed, Russia be given
first-hand and accurate information about developments in this area. Moreover, as Russia is not
disinterested in the subject, it might be helpful if
it became an observer in the process of working
out a common European energy policy. I do not
believe this would result in a breach of European
sovereignty—it is ultimately in the EU’s interest
that its main supplier be aware of what is going on and how. This would also help to remove
certain sources of mistrust and lead to better understanding of the goals and logic of European
policymakers.
Unless Russian authorities and companies have
this understanding, they will be forced to give
priority to bilateral relationships with European
countries and national companies. This seriously
devalues the broader energy dialogue with the
European Union and puts it behind bilateral relationships, with potentially serious drawbacks
that threaten to undermine projects, as in the
North European pipeline case.
At times, a one-way street approach in energy
relations with Russia has prevailed in Europe, in
which any concerns that Russia might have had
were ignored, even the quite reasonable and legitimate. The so-called diversification of energy
supply is one of the most important examples of
See the European Commission’s Green Paper “A European Strategy for Sustainable, Competitive and Secure Energy”, March 2006.
1
68
European View
Mikhail Kasyanov
an issue that was never properly explained to the
Russian side. It was declared a political goal long
before current problems began to emerge, but
recently came to the forefront of the debate.
It is common knowledge that there are now EU
countries that are 100% dependent on Russian
energy. As the effort needed to diversify in these
countries is huge and wasteful, Russian experts
are worried that the political goal of diversification is aimed at minimising energy supplies from
Russia, which could lead to a serious loss of traditional Russian export markets.
Conventionally, diversification is a good instrument of supply-and-demand risk management.
Europe needs to minimise the risks of energy dependence as much as Russia needs to minimise
risks of the nearly 100% dependence of its oil and
gas exports on the European markets. President
Putin’s recent comments on the expected expansion of Russian energy exports to Asian countries
illustrate this natural fact. But a diversification
policy should be predictable and transparent to
trade partners; otherwise, it might become only
an expensive blackmailing tool.
It should also be mentioned that the European
approach to the international legal regime on energy transit and trade, incorporated into the Energy Charter process, has not been very helpful to
the development of relations in this sphere. Specifically, Article 20 of the Transit Protocol, the
EU regional clause, which had actually set up an
official legal exemption from the Transit Protocol
for EU member countries, completely devalued
the Transit Protocol and Energy Charter process
itself, leaving it a document regulating only the
regime of transit outside the EU territory. As a
result, the Energy Charter is now a source of endless wrangling between the parties and has been
fully discredited. In any event, in its current form
it is absolutely unacceptable to Russia.
Energy problems: Russia’s side
Unfortunately, Russia, for its part, has not
achieved much in developing its own internal
and external energy policy. Moreover, this policy
has lately deteriorated significantly and caused
several new problems and concerns.
The urgently needed transformations of the domestic energy markets in Russia, particularly
the electricity and gas markets, are not moving
forward. In 2000, my government had started
work on these reforms in order to make Russian
electricity and gas markets more transparent, efficient, open to private and international investment, and free from the burden of regulatory
risks.
This picture can be seen in the Russian oil sector, which to a large extent was liberalised and
privatised during the last decade and during
recent years has delivered impressive examples
of growth, efficiency and satisfying market demand. Having significantly improved corporate
governance, Russian private oil companies have
actively developed international partnerships,
introduced new environmentally friendly technologies, and made direct investments abroad.
But the violent showcase demolition of Yukos,
the biggest private oil company in the country
until recently, has impaired the business climate
and evidently reduced efficiency even in this sector. Property rights continue to be questioned,
and this, along with a draconian tax regime, has
brought the growth of oil production to a standstill.
In contrast to the oil industry, the Russian electricity and gas sectors remain largely unreformed.
Gas reform that would see the separation of gas
production and transportation has been banned.
The initial market-oriented ideology of power
sector reform has changed significantly and has
not demonstrated any material progress for two
years. As a result, instead of creating an environment for private investment in the production
of energy, government policy now adds to the
overall Soviet-type centralisation and monopolisation. There is less and less hope that private
investment will become a source of finance for
the development of these sectors. The Russian
electricity and gas markets will still remain mo-
69
nopolistic, vertically integrated, under direct
state control, and dependent on the state for an
uncertain but definitely long period of time.
The expansion of state controls is back in vogue
in the Russian energy industry. Of course, there is
nothing bad in principle in the operation of stateowned companies as such; there exist a few examples of quite efficient public entities in the energy
sphere. But in contrast to western publicly owned
companies, Russian ones are not accountable at
all and often drive government decision-making
rather than vice versa. This has become another
source of badly based policies.
The gas sector is a perfect example. Nowadays
Gazprom’s dominance in the domestic market is
only increasing through the aggressive acquisition
of much more efficient independent producers
who cannot export gas without Gazprom’s consent. But the vast majority of Gazprom’s investment is channelled to purchase non-core businesses; the development of the Yamal peninsula
projects, which promised to become the biggest
source of gas supplies by the end of this decade,
will not start for more than ten years. It is evident
to industry experts that only urgent action can
help to avoid a sharp decline in natural gas output in the immediate future. Domestic demand
in both Russia and the European Union is growing quickly, and the pan-European gas balance is
met only because of deliveries from Central Asian
countries. Indeed, Gazprom’s model of business
today constitutes the biggest threat to energy security in Europe as a whole.
At the same time, the liberalisation and deregulation of the European electricity and gas markets
is moving slowly, but still progressing. If only the
energy sector reforms in Russia had proceeded
successfully as planned, Russian and European
energy markets would have been moving towards
similar economic models by now, opening up and
providing compatible and clear market rules, a
market-based and competitive environment, reliable supplies, and better opportunities for investments. Unfortunately, the opposite process of divergence is taking place.
70
European View
Against this background, the recent trends of Russian policy towards foreign (including European)
investment are quite worrying. The policy slogan
of “restricted access to strategic sectors” has become a serious impediment to the realisation of
investment plans by foreign energy companies.
Some restrictions that are really defined by national strategic interest can be tolerated and are
not unknown in other places, but in any case such
restrictions should be imposed in a transparent,
clear, and legislative manner. Unfortunately, what
we currently see in Russia is exactly the reverse.
Foreign companies or investors who today face
unexpected tax or administrative claims already
know that even support from their national authorities does not give them a full guarantee
against arbitrary action in Russia. The most recent
problems with the terms of all the Production
Sharing Agreements currently in force in Russia
compellingly confirm this.
Economic nationalism—in both the trade and
the investment spheres—is an infectious disease.
It would be much easier to overcome if others abstained from it. Regrettably, such practices will,
without a doubt, face similar paroxysms in the
future. There is only one potentially efficient remedy: nations should together develop a collective
immunity against the shocks of this disease that
is currently aggravating countries worldwide and
limiting the productivity growth of global capital.
But the lack of direct foreign investment is much
more risky for Russia, since it badly needs capital
to be invested in the national energy sector to support the development, extraction, and production
of its vast resources. Hindering foreign investment
not only harms the national interests of Russia but
also undermines its global energy potential.
The loss of political will and direction in reforms, a growing xenophobia, chaotic domestic
policy actions, and an aggressive stance by the
state-owned energy companies—all these phenomena characterise current developments of
Russian energy policy. They are not coincidental
or accidental, being clearly associated with the
Mikhail Kasyanov
recent anti-democratic trends in the development of the country. Under these circumstances,
numerous problems appear unavoidable in the
future as well.
Is there a way forward?
Nevertheless, I firmly believe that the current
fluctuations in Russia’s development will be
short-lived and that soon, during the federal
elections of 2007–08, the country will reconfirm its democratic choice and return to a normal path of market-oriented progress. Then we
will be able to reinvigorate the building of a
joint Russia–EU strategy of economic cooperation, including a new common energy strategy.
In any case, we should prepare ourselves for the
next stages of the dialogue and start the necessary technical and political work.
It is high time to carefully review past experiences, learn from them, and in a sense turn the
page and take new steps in order to build a better common energy future. Following the lessons
from the past, Russia and the EU would start
to seek the solutions to their very severe shared
energy challenges on a mutually respectful and
beneficial basis.
The plan appears to be quite clear. In general, it
follows the lines of the G8 St Petersburg Summit resolution2 and could be the best practical
achievement of Russia’s 2006 chairmanship of
the Group.
diversification ideas, we need to focus on guaranteeing the stability of basic volumes of energy
deliveries from Russia to Europe as a critical
source of supply for central, eastern, and southern European countries. Russian and EU commitments on such guarantees would be critical.
Both Russia and Europe need the development
of a new, mutually beneficial, international legal framework to support the fair and non-discriminatory regime of supplies and transit of energy resources to European markets from Russia.
Such a framework might appear in the form of a
Eurasian energy-supply stability pact, the signatories of which would not only be Russia and the
EU, but also Central Asian, Caucasian, Mediterranean, and Balkan countries: Turkey, Ukraine,
Belarus, and Moldova.
It would be much better if, in its turn, the
European Union would publicly explain and
clarify its energy policies in order to avoid misinterpretations and irrational fears inside Russia of supply source diversification and market
liberalisation. It would be fair if the EU would
also abandon the one-way street approach and
double standards in energy relations with Russia
and other countries. This includes resolving the
long-standing issue of access to Russian fissile
materials by European markets.
First of all, there is a growing understanding that
it is no longer possible to hide behind the ‘small
step approach’ and very general statements. The
real tensions within mutual energy relations
should be brought back to the EU–Russia energy dialogue.
Russia needs to radically improve the climate for
international investment in its energy sectors,
make specific decisions on the terms and conditions of the liberalisation and deregulation of
its energy markets, and renounce barriers or at
least clearly set the conditions for foreign investors’ involvement in the energy sector. A much
more favourable environment for the integration
of the Russian and EU energy markets will be
achieved along these lines.
In particular, Russia and the EU need much
more straightforward dialogue on the issue of
energy supply diversification. Aside from supply
Russia and Europe also need to develop a joint
energy-investment support scheme in order to
promote direct European investments in the
G8 St Petersburg Summit communiqué “Global Energy Security”, 16 July 2006.
2
71
Russian energy production and transportation
sectors, and direct Russian investments in the
European downstream energy sector. This will
help to meet the growing investment needs of
the Russian oil, gas, and electricity production
sectors, and will establish a much more integrated, safe, and balanced energy space between
Russia and Europe, removing dangerous barriers
to investment that are rapidly being erected now
on both sides.
Strategic solutions in energy relations for Russia
and Europe lie in the direction of deeper market integration, mutual direct investments, and
the establishment of common market structures
and rules. Such an approach will make all parties interested in stability, reliability, efficiency of
markets, and security of energy supply.
If we do follow these principles, they will only
lead Russia and Europe to better energy security
and the benefits of mutual economic development. It is not too late, but we must act now to
ensure that such security and economic benefits
will be achieved in the future.
There is a long history of mutually beneficial
developments in relations between the peoples
of Russia and other European nations in many
spheres of life. This story is now being written
by Russia and the European Union, and I believe
that there exist all the conditions to put these
relations on a sounder basis. It is our common
current interest and common future we need to
build together.
Mikhail Kasyanov is former Prime Minister of the
Russian Federation (2000–04) and is currently
Chairman of the Russian People’s Democratic Union, an NGO.
72
European View
Malcolm Keay
Energy and Climate Change: Assessing What Works
By Malcolm Keay
We are all aware of the
importance of climate
change and the central
role of energy—both as
part of the problem and
potentially as part of
the solution. Every week, it seems, yet another
report is published investigating some aspect of
the issue. So why is the World Energy Council
engaged in a new study on Energy and Climate
Change? Can it really add usefully to the masses
of material already available? I believe so—but it
might be helpful to explain why. (As Director of
the study, I must declare an interest. I should also
explain that what follows are my own personal
views, rather than those of the World Energy
Council. The study is still under way and has
not yet reached definitive conclusions.)
First, a few words about the World Energy
Council (WEC) for those who are not familiar
with the organisation. It is probably the foremost
multi-energy organisation in the world, with
Member Committees in over 90 countries,
including most of the largest energy producing
and consuming nations. Each Committee
represents a range of energy-related interests,
providing a huge reservoir of practical expertise.
WEC covers all types of energy, including fossil
fuels, nuclear, hydro and renewable energy
sources. It is also independent—UN-accredited,
non-governmental, non-commercial and nonaligned. WEC’s mission is “To promote the
sustainable supply and use of energy for the
greatest benefit of all people.”
WEC is well known on the global energy
scene for its authoritative reports, analyses,
energy projections, and policy and strategy
recommendations. Its work has included such
familiar topics as market restructuring, energy
efficiency, and energy and the environment.
However, its particular strengths lie in its broad
global coverage and the perspective that flows
from this—WEC also addresses such issues
as energy poverty, ethics, the deployment and
transfer of new technologies, and energy issues
in transitional and developing countries.
This background is one key reason why I believe WEC can make a major contribution to
the debate—its global expertise and practical
knowledge can be brought to bear on an issue
on which informed and dispassionate comment
is often sadly lacking.
The second great strength of the WEC study lies
in its focus. We are not trying to assess the climate science or look at the architecture of international climate regimes. Our focus is practical,
matching our expertise—we are examining the
effect of climate change policies in the energy
sector to see what works and what doesn’t. This
is a surprisingly neglected area. Governments are
very ready to come up with impressive strategies,
full of detailed measures. Yet they are much less
willing to assess the impact of their measures in
any robust way—partly, no doubt (as discussed
below) because by and large their policies aren’t
working, and the results of any assessment could
be embarrassing.
A third distinctive aspect of the WEC approach
lies in the way in which we are making our assessments. Our overall aim, as set out in the mission statement above, is to promote sustainable
development. In relation to the energy sector,
WEC has articulated this aspiration in terms of
three goals: availability, accessibility and acceptability.
• Availability concerns the security and reliability of energy supplies, a key issue for all countries
today. Without energy, civilisation would grind
73
to a halt.
• Accessibility is about ensuring access to modern energy services. Development—not just
economic and social development but also basic
human development—depends on the provision
of affordable energy services. This is a key concern for the developing world but should not
be ignored even in the OECD (Organisation
for Economic Co-operation and Development).
Energy poverty remains a real issue, as does industrial competitiveness. WEC always leads in
any listing with accessibility goals because it has
always taken the view that addressing energy
poverty can kill two birds with one stone: the
growth and efficiency potential of commercial
electricity access for all households, as well as reduced emissions due to clean technologies and
consumer behaviour.
• Acceptability covers environmental and wider
public acceptability. To contribute effectively to
sustainable development, energy systems have to
meet ever-increasing expectations in these areas.
As with the three pillars of sustainable development (economic, social and environmental),
these goals are not alternatives. Energy policies
must be tested against all these goals together if
their impacts are to be properly assessed. This is
what the WEC study is attempting, drawing on
the global reach and expertise of its members to
produce informed judgements.
Analysis—the first stage
The starting point for the study has been an
analysis of the facts on CO2 emissions. One key
message, which runs through the whole study, is
that there are major differences between countries and regions—huge disparities in indicators
like emissions per head, emissions per unit of
output, emissions growth rates, etc. Given these
variations, it is clear that no single policy or
policy approach on its own is going to solve the
problem worldwide—all countries are going to
have to develop a range of measures reflecting
their own situations. This article focuses on Europe, but for many developing countries, where
nearly two billion people still lack access to electricity and modern energy, and where economic
development is a priority, rapidly growing energy demand is an inevitable fact of life. The aim
must be to make the provision of these muchneeded energy services as acceptable as possible
in environmental terms.
Two key sectors
The analysis highlights two sectors of key significance in combating climate change:
• The importance of electricity is often overlooked by comparison with end-user sectors
like transport and industry. Electricity generation is of course an intermediate or conversion
stage, so it is not always identified separately.
Yet considered in its own right, it is the largest
single source of CO2 emissions—nearly twice
as large as transport—and it continues to grow
faster than other sectors. It is certainly part of
the problem. On the other hand, it can also be
part of the solution. The carbon intensity of
electricity generation (the number of grams of
carbon emitted per kilowatt-hour produced)
varies hugely between countries, partly because
of their natural resource endowment but also
because of policy decisions they have made.
These can have a huge impact on national emissions, even in short timescales. For instance, national emissions in France fell by 100 million
tonnes (MT) CO2 (a reduction of around 25%)
between 1979 and 1987,1 mainly because of the
development of nuclear power; emissions in the
UK fell by 35 MT between 1990 and 1995 (a
reduction of 6%) primarily because of the ‘dash
to gas’ consequent on liberalisation. These are
significant, swift and comparatively low-cost reductions by any standard.
Emissions data are taken from the regular International Energy Agency publication CO2 Emissions from Fuel Combustion.
1
74
European View
Malcolm Keay
Table 1
Country
Energy use
per head
(toe/capita)
CO2
emissions
per head
(tonnes)
Emissions per
head from
electricity
Emissions per
head from
transport
Emissions per
head from
industry (inc.
energy)
Germany
4.21
10.35
4.24
1.96
1.89
France
4.41
6.33
0.75
2.25
1.61
UK
3.91
9.10
3.32
2.25
1.76
Sweden
5.75
5.98
1.2
2.50
1.46
• Transport is another key sector. As with electricity, transport emissions have been growing
steadily worldwide and are projected to go on
doing so—indeed, they are likely to accelerate
as many important developing countries pass
the income threshold where wider car ownership becomes common. Unlike electricity, however, transport carbon intensity varies comparatively little between countries because there is
little scope for fuel substitution—transport is
dominated by oil in all sectors (apart from rail
travel) and in all countries. In practice, therefore, policy interventions have yet to deliver significant results at national levels in this sector.
The following table illustrates these differences
for selected European countries (see Table 1).
It is apparent that there is comparatively little
difference in emissions per head from transport
(or other sectors) between the countries
concerned and that emissions differences are
not primarily driven by differences in energy
intensity. The main factor underlying the
variations in emissions between these countries
is the carbon intensity of their electricity
generation.
Bringing more countries into the analysis only
reinforces the picture. For instance, a particularly
striking comparison is that between two very
similar small Baltic States, Lithuania and Estonia.
Estonia’s emissions amount to 12.1 tonnes
per head (relatively high in European terms);
Lithuania’s are only 3.5 tonnes per head (very
low). The difference is almost entirely accounted
for by the difference in their electricity systems.
Estonia’s uses high-emissions fuels such as oil
shales; Lithuania’s is mainly dependent on the
huge Ignalina nuclear plant. Estonia’s emissions
per head from electricity at 8.3 tonnes per head
are several times higher than Lithuania’s (1.1
tonne per head) and account for nearly all the
difference in overall emissions between the two
countries. This picture can be replicated across
Europe—emissions levels are determined to a
significant extent not by such factors as prices,
energy efficiency, economic development,
consumer behaviour, etc., but by the capital
stock in the electricity industry.
Transport and electricity are therefore key target
areas for climate change policies. In the electricity sector, this means moving to low-carbon
forms of generation (including more efficient
fossil plants) as quickly as possible; in transport,
developing and deploying low-carbon alternatives to oil such as biomass and hybrid vehicles
(and in the long run, fuel cells). Ultimately
there could be a very strong synergy between
a low- or zero-emissions electricity sector and
electric vehicles (whether battery, hybrid or fuel
cells) in the creation of a genuinely low-emissions economy.
75
Good news—and bad
Taking the analysis further produces both good
news and bad. The good news is that in principle
it is possible to decouple economic development
from emissions growth. Examination of the differences in emissions between different countries
shows huge variations even between countries at
similar stages of development. While some of
these differences are not susceptible to policy
intervention (geography, climate, indigenous
resources), others are the result of policy decisions (such as those described above in relation
to electricity) and could in theory be replicated
more widely.
It is notable, however, that many of the policy
decisions that have reduced emissions levels have
not been climate change policies as such—for
instance, the construction of nuclear power
plants for security reasons, the promotion of
public transport to meet social objectives, and
high gasoline taxes introduced for revenue-raising purposes. Nonetheless, even if a significant
proportion of emissions reductions were in this
sense accidental by-products of policies introduced for other purposes, this could also be regarded as positive—it means that climate change
policies need not be incompatible with other
policy aims and may indeed support them. So
the good news is twofold: it is possible to reduce
emissions; furthermore, with appropriate policies, emissions reduction need not conflict with
other economic and social aims.
The bad news is that appropriate policies are
not being adopted. Emissions are rising worldwide and climate change policies have not made
much difference—they are getting lost in the
‘noise’. This is true even in Europe,2 despite the
fact that it is in the vanguard as regards commitment to the Kyoto process and has probably the
most well-developed climate change strategies in
the world.
The picture is often obscured by Kyoto definitions. The baseline of 1990 happens to favour
Europe, as significant CO2 emissions reductions
took place in the early 1990s for reasons unconnected with climate change policies, principally
the structural changes consequent on German
reunification and the ‘dash to gas’ in UK power
generation. Arguably, 1995 is a more appropriate reference point, because the UN Framework
Convention on Climate Change came into force
in 1994 and for the first time set a global objective of reining in the increase in greenhouse
emissions. With 1995 as a baseline, the picture
is clear: European emissions of energy-related
CO2 fell in the previous quarter century, from
1970–95; since 1995 they have risen. In other
words, whatever impact the policies introduced
to implement the UNFCCC have had, they
have been insufficient to outweigh other factors.
Even with the baseline of 1990, energy-related
CO2 emissions in the EU-153 have increased, not
decreased, though again the position is complicated by definitional issues, because emissions of
non-energy-related greenhouse gases (ghg) have
fallen significantly. These are included in overall ghg emissions (which have declined slightly
since 1990, though they are currently increasing). Furthermore, the fastest growing sources of
CO2 emissions—air and marine transport—are
omitted from the data, because they are not included in the UN target definitions. Yet they
have increased by over 40% since 1990 and,
though still a small proportion of the total, are
enough to outweigh any gains elsewhere.
This is important because any sustainable solution to the climate change problem will have to
come from the energy sector—energy-related
emissions account for some 85% of man-made
greenhouse gas emissions in the EU. The ‘slack’
available from the decline in other emissions will
soon run out. Future savings will therefore have
to be sought primarily in the energy sector, so
The WEC study does not go into detail on particular regions, so the analysis of the European situation which follows this reference is not
drawn directly from the study but is the author’s own expansion upon it.
The EU-15 are considered here because they were the group of countries that took on the collective burden-sharing commitment of an 8%
reduction under the Kyoto Protocol and are probably the world leaders in the introduction of climate change measures. Other countries with
Kyoto targets (such as Canada and Japan) are in general faring even worse than the EU. Data are drawn from the European Environment
Agency’s report Greenhouse Gas Emissions Trends and Projections in Europe 2005.
2
3
76
European View
Malcolm Keay
we need effective policies for that sector. Meanwhile, the question of definition is of course irrelevant to the environmental impact—air and
sea transport emissions have exactly the same
effect on the climate as any other sort of CO2
emission.
In short, despite the fact that the headline figures
in many ways present the most favourable version
of events possible (by using the 1990 baseline, including non-energy ghgs, and omitting air and
marine transport), they still cannot conceal the
poor record of the EU-15. Only two countries
in the group (Sweden and UK) are currently on
track to meet their targets. A number of others
still hope to meet their targets by the use of additional measures, and in some cases the Kyoto
mechanisms. (Given that existing measures have
not delivered the hoped-for savings and that we
are now three quarters of the way through the
Kyoto period, this could well represent the triumph of hope over experience.) Five Member
States do not expect to meet their targets under
any scenario. While emissions growth has been
lower than in many other regions of the world,
that is little comfort set against the historical
record of reducing emissions or the commitments Europe has taken on.
Even on the most favourable view, this is a policy
failure. The problem is not that no policies have
been introduced, but that the policies introduced
have been inadequate and that there has been a
failure to assess policies properly to identify what
works. For instance, there has not been sufficient
focus on the two sectors highlighted above.
In some sectors, the picture is not too discouraging. For example:
• In the manufacturing sector, energy-related
CO2 emissions fell by 11% between 1990 and
2003 (though, as the European Environment
Agency points out,4 most of this was achieved in
the early 1990s and was the result of structural
change in Germany after reunification—and the
relatively slow growth of the EU-15).
• In the residential sector, emissions have fluctuated. In 2003 they were about 5% above 1990
levels, but this was affected by cold weather in
the first quarter of 2003. In general, emissions
have been to a large extent decoupled from the
growth in households (of which the number has
increased by more than 12% over the period).
Even if substantial reductions are not yet being made, at least there is no underlying growth
trend.
However, in other sectors no progress is being
made:
• Transport emissions have increased by nearly
24% (and are projected to increase to over 30%
above 1990 levels by 2010). This reflects the
acknowledged difficulty of making progress in
this sector in the short term, but also underlines
the need to identify and implement effective
longer-term solutions. This need not, of course,
necessarily mean waiting for a technology breakthrough before any action is taken. Such imaginative approaches as the London congestion
charge and many other city schemes seem to
have been effective on a relatively small scale and
are capable of replication elsewhere. Biofuels are
also an alternative—though their sustainability
needs to be assessed carefully.
• Electricity emissions have increased by 6%
since 1990. At first sight this may seem reasonable, compared with an increase in electricity
output of 30% over the period. But in fact the
performance is very disappointing given the
scope for reduction in this sector. For one thing,
the trend is again obscured by the 1990 baseline.
Electricity-related emissions actually fell by 8%
in the 1990s, for reasons essentially unconnected
with climate change policies (i.e. the ‘dash to gas’
in the UK and restructuring in Germany). That
decrease has now gone into reverse and emis-
Ibid.
4
77
sions are increasing fast. Furthermore, although
the EU has elaborated policy goals in this sector,
it is making very little progress towards them.
Renewables, for instance, despite all the policy
attention, have showed virtual stagnation (in
the EU-15 the share of renewable energy grew
from 13.4% to 13.7% between 1990 and 2003),
and the EU is virtually certain not to meet its
target of 22% by 2010. Similarly with CHP
(Combined Heat and Power): although some
progress was made in the 1990s, recent figures
have shown a declining trend, with the share of
CHP generation in the EU-15 decreasing from
10% in 2000 to around 9% in 2002. Recognising this, the EU-15 indicative target of 18% by
2010 has not been confirmed in legislation and
is also very unlikely to be met.
Why policies are failing
In short, the EU is making little progress in reducing energy-related CO2 emissions and is failing to produce effective policies for the two key
sectors where improvement is critical. Why is it
proving so difficult to deliver savings? There are
many reasons, of course, but one of the main
factors is the failure to consider market dynamics, or the wider context in which policies are
being introduced. Rather, policy makers have
tended to take a blinkered approach, introducing particular policies, identifying savings on the
assumption that the policies will work in themselves and that otherwise business will proceed as
usual—and forgetting about the impact on the
real world.
Admittedly, policymaking is not easy. Take the
European Emissions Trading Scheme (EETS),
for instance. To have a real effect on emissions
trends, the scheme would have to have an influence on investment (otherwise all it does is to
help determine how already agreed reductions
are made by encouraging fuel switching within
the existing capital stock, the scope for which is
inevitably limited). Yet the EETS cannot on its
own give long-term signals—quite apart from
the volatility of permit prices, allocations for
78
European View
the period 2008–12 remain to be settled and
the subsequent position is inevitably open until a successor regime under the Kyoto process
is agreed. So at present there is no way of signalling the longer-term value of carbon emissions
reductions through the scheme. It simply creates
uncertainty—what will be the carbon value for
the years beyond 2010, and should it be factored
into investment decisions?—and that uncertainty tends to inhibit investment. Policy support
for renewables and the debate in many countries
over the future regime for nuclear energy only
add to the uncertain climate for investment. It is
not business as usual (or in any event, business is
not being conducted as it would have been without the policy uncertainty).
Similar arguments apply to other policy
measures—the effect of energy efficiency may
be offset by greater comfort levels or increased
production (the WEC study shows no clear
correlation between energy intensity and energy
consumption). New vehicle standards may rise,
but the effect on transport emissions is uncertain
since driving habits change, congestion tends to
increase, vehicle preference may alter, and so
on.
In short, as noted above, the impact of climate
change measures can get lost in the noise of wider
changes. A particularly pointed example of this
effect may be found in the recent UK Energy
Review. In a little-noticed couple of paragraphs,
the following acknowledgement was made:
In the 2003 Energy White Paper, projections
showed UK carbon emissions reaching
135 MtC in 2020. We said that in order
to demonstrate our leadership in tackling
climate change and make real progress
towards our 2050 carbon reduction goal we
would need to make a reduction in emissions
by 15–25 MtC to 110–120 MtC by 2020.
However, since 2003, emissions have risen
on the back of strong economic growth
and higher fossil fuel prices that have been
Malcolm Keay
favourable to coal-fired power generation.
New projections suggest that UK carbon
emissions will reach 146 MtC by 2020 on
the basis of current policies. So we would
now need to make bigger cuts in emissions
of around 25–35 MtC in order to reduce
emissions to 110–120 MtC by 2020.5
In other words, whatever impact the 2003
measures introduced by the UK government in its
2003 White Paper have had and are having, they
have been swamped by market developments,
even over a three-year time period.
Conclusion—the need for a holistic approach
The WEC study is still under way and is now
engaged in the detailed assessment of climate
change policies in the energy sector; nonetheless,
two broad messages are already clear:
• First, that energy is a dynamic and complex
system, not simply a static entity from which
parts can be isolated to be excised, adapted or
improved without effect on the broader picture.
An increase in consumption in one part of the
world affects the whole world through its impact
on prices and world markets; a change in demand
for one fuel will affect demand for other fuels;
short-term decisions may have long-term effects
in an industry where investments typically have
a lifetime of decades or more. Decision-making
for energy needs to take account of these wider
system effects—to look at individual policy
measures in isolation and assume that the rest
of the energy system will simply go on as before
is unrealistic. Yet this is largely what has been
happening. Climate change policies have been
introduced essentially as autonomous elements;
different policy strands—liberalisation, security
and environmental protection—have been
treated in isolation without any real consideration
of the overall effect. Perversely, perhaps, one of
the major impacts of climate change policies has
been to create uncertainty—and hence to inhibit
investment and thus undermine the achievement
of all energy goals.
• The second key factor is the need for energy. It
is true, as pointed out above, that in many ways
energy and climate change are opposite faces of
the same coin. Energy-related emissions make
up such a large proportion of anthropogenic
greenhouse gases that it is impossible to deal
with climate change without affecting energy
systems; equally, whatever happens with energy
systems will have an impact on climate change.
But although energy is about climate change,
it is not just about climate change—energy
meets a range of basic human needs and powers
economic development. While this is often
acutely apparent in developing countries, it
is equally true, if less obvious, of developed
countries. Again, this can be seen in the EETS.
Setting emissions caps for industry involves
not just environmental considerations but
also wider issues of competitiveness, welfare
and employment. In WEC terms, all three As
(Availability, Accessibility, Acceptability) have to
be taken into account. When this is not done,
policies will either be compromised from the
start or be ineffective, as they will go against the
grain of market and social dynamics.
WEC is currently engaged in an assessment
of climate change policy measures against this
background of the need for a holistic approach,
taking account of all three aspects of sustainable
energy. It is essential for the future of the planet
that we make a real effort to understand what
works and what doesn’t in combating climate
change, and WEC hopes to make a worthwhile
contribution.
Malcolm Keay is Director of the Energy and Climate
Change Study at the World Energy Council.
The Energy Challenge, HMSO July 2006.
5
79
Christian Koch
European Energy and Gulf Security
By Christian Koch
Recent developments in
world energy markets
have
once
again
heightened consciousness about and concerns
over energy security
issues, marking the return of energy supply
issues onto the policy agendas of most countries.
In part, this is due to the phenomenal rise in
oil prices, which have skyrocketed from an
average of $23.50 a barrel in 2002 to over $75
a barrel in July 2006. These price increases were
propelled in turn by rising demand, in particular
from Asia, and the declining spare capacity of
producing countries, as well as limited refinery
capacities. Pundits agree that the age of cheap
oil is over and that given present developments,
specifically in the volatile oil-producing regions
of the world, a price of over $100 a barrel can no
longer be considered unrealistic.
Energy supply concerns are, however, not
only related to the price of oil. What is often
missed in this equation is the fact that the issues
of regional security and political stability are
equally important factors for energy production
and supply. Political issues as a whole are
relevant as underlined by the crisis over Russian
gas deliveries to the Ukraine at the end of
2005, when it became blatantly obvious that
consumer nations could easily be subjected to a
virtual state of blackmail solely based on their
energy dependency. The crisis further showed
that politics can stop the flow of energy and
that even countries not directly involved in the
dispute can be affected. The Russian energy
conglomerate Gazprom, which was at the heart
of the dispute, subsequently went a step further
and stated that future supplies to Europe might
be in jeopardy if the European Union interfered
with the company’s expansion into the European
market. The relation between energy supply and
regional security and the interdependent nature
of both thus cannot be ignored. The basic fact is
that there is no production and no sustainable
supply without a relatively secure and stable
political-security environment. In addition, as
the bottom-line concern in consumer nations
is for both stable energy supplies and moderate
energy prices, there is also a direct relationship
between the security of an energy-intensive
region and its investment opportunities for
further exploration and production.
Against the backdrop of all these issues and
factors, this article will argue that the Gulf region
will gain importance and relevance for Europe,
thus necessitating a more sustained political and
strategic engagement by European states to assist
the Gulf in overcoming some of its inherent
security challenges.
No alternative to the Gulf Region
Security of supply is one of the core objectives
around which the current Green Paper of the
European Commission on a European energy
strategy is framed.1 Given current trends and
projections, there are concrete reasons for this
emphasis. For one, European dependence on
external sources of energy supplies is set to
increase as a result of declining production
in traditional areas such as the North Sea and
Norway. According to the 2006 Energy Review
report released by the UK Government, the
country will move “from a position of virtual
self-sufficiency to, by 2020, being 80-90%
reliant on imports.”2 For Europe as a whole,
“Fuelling our future: The European Commission sets out its vision for an energy strategy for Europe”, Brussels, Press Release IP/06/282, 8
March 2006, available at www.europa.eu.int/rapid.
UK Department of Trade and Industry, The Energy Challenge, Energy Review Report 2006, p. 77.
1
2
81
import dependence in terms of energy supplies
is set to increase from the current 50% to 70%
in the next 20 to 30 years.
Total EU oil production stood at 2.7 million
barrels per day (mb/d) in 2004, down from a
peak of 3.4 mb/d in 1999.3 In Europe, only
Norway and the United Kingdom continue to be
significant producers of crude oil. However, UK
production has already peaked and the country
is set to become a net importer of oil by 2010,
while North Sea oil production hit its peak in
1999. Whereas Norway supplied 24.13% of the
oil consumption of the 25-member European
Union in 2001, that share dropped to 20.02%
just three years later in 2004.4 Overall, present
oil production rates within the EU exceed the
proven economically recoverable reserves by 10%
annually. The European Commission’s working
document for the current Green Paper on energy
security, which is to be presented to the European
Parliament in early 2007, succinctly states:
Table 1
While energy consumption increases at a
rather low pace through 2030, there is a steep
decline in indigenous production, in particular
hydrocarbons … In 2030, current baseline
projections have oil production declining by
73%.5
Europe as a producer of oil is thus firmly within
its period of decline.
Given the fact that declining production is, in
the meantime, not offset by declining demand,
Europe will become increasingly dependent on
external sources of supply. Overall, net imports
of oil into Europe, which already account for
81% of present oil consumption in the EU25, are projected to nearly double by the year
2030 (see Table 1), while net imports of gas
will increase from the current 200 billion cubic
meters per year (bcm/y) approximately to over
600 bcm/y in 2030.
Oil and Gas in Europe 2000/2030
Production
Consumption
Net Imports
2000
2030
million barrels/day (mb/d)
6.7
2.5
14.1
16.4
7.4
13.9
2000
2030
% of consumption
48%
15%
100%
100%
52%
85%
GAS
billion cubic meters/day (bcm/d)
% of consumption
OIL
Production
Consumption
Net Imports
296
482
186
276
901
625
61%
100%
39%
31%
100%
69%
Source: International Energy Agency reproduced from Harks, SWP (footnote 6) citing Müller,
April 2004.
UK Department of Trade and Industry, The Energy Challenge, Energy Review Report 2006, p. 86.
The volumes and prices of EU crude oil imports are available from the website of the European Commission at http://ec.europa.eu/energy/
oil/crude/index_en.htm.
5
Commission Staff Working Document, Annex to the Green Paper, COM(2006) 105 final, available at http://ec.europa.eu/energy/greenpaper-energy/index_en.htm.
3
4
82
European View
Christian Koch
On the natural gas front, European production
is equally limited, and future demands will also
depend to a large degree on external deliveries.
Norway’s gas production remains important, and
there are hints of new discoveries to the north
of the Norwegian Sea. Yet even at this moment,
current Norwegian gas production exceeds the
pace of new discoveries, thereby indicating
an impending decline.6 Similarly, Russian gas
supplies to Europe are expected to decline as a
percentage of its present overall share from 67%
in 2000 to only 33% in 2020 as Russia faces
limited production increases, rising demand
from Asia and a growing domestic market.
region—represents the main source of supply of
hydrocarbon energy both at the present time and
for the foreseeable future. As Table 2 illustrates,
the Gulf today holds 61.7% of the world’s
proven reserves of oil and contributes 30.5% to
worldwide production. Of the current largest
producers of oil, five of the six countries are Gulf
States. In addition to oil reserves, Saudi Arabia,
Abu Dhabi and Kuwait account for around
50% of the production of the Organization
of Petroleum Exporting Countries (OPEC).
While OPEC currently accounts for 41.7% of
production, it also accounts for a whopping
75.2% of official worldwide reserves.7
Within the context of future supplies, the
Middle East—and in particular the Gulf
Table 2
Country
Saudi Arabia
Iran
Iraq
Kuwait
UAE
TOTAL
GULF STATES*
Venezuela
Russia
Norway
United Kingdom
Selected Oil Statistics 2005
Reserves
(bn barrels)
% of Total
World
Reserves
Production
(mb/d)
% Share
of 2005 Total
264.2
137.5
115.0
101.5
97.8
22.0
11.5
9.6
8.5
8.1
11.035
4.049
1.820
2.643
2.751
13.5
5.1
2.3
3.3
3.3
739.7
61.7
24.601
30.5
79.7
74.4
9.7
4.0
6.6
6.2
0.8
0.3
3.007
9.551
2.969
1.808
4.0
12.1
3.5
2.2
* Total includes the other Gulf States of Bahrain, Oman, Qatar and Yemen.
Source: BP Statistical Review of World Energy 2006.
The Gulf ’s relevance must also be seen within the context of overall worldwide growth in supply
Enno Harks, “Europe’s future oil and gas supply: North, east or south?”, Stiftung Wissenschaft und Politik, Working paper FG 8, November 2004, available at www.swp-berlin.org.
7
BP Statistical Review of World Energy 2006, available at www.bp.com.
6
83
and demand. The International Energy Agency
(IEA), for example, expects worldwide demand
for oil to rise 50%, from the current 82 mb/d
to 121 mb/d in 2030.8 This is accompanied by
an annual growth rate in oil consumption for
the period 2000 to 2030 that will range around
1.8%. To meet this demand, oil produced in the
Gulf will remain the preponderant factor.
While not as dominant, a similar development
can be seen in the global market for natural
gas, where the Gulf contains 40.1% of total
proven reserves. The Gulf ’s current share of gas
production is only 10.3% (see Table 3), but this
production share is bound to increase as the Gulf
Table 3
States begin to fully develop their gas industries
and integrate the potential into their broader
investment and production plans. Overall, the
Gulf gas industry is witnessing tremendous
investment as a means to increase production.
Iran is already a major player, being second
in reserves only to Russia. The tiny emirate of
Qatar has the third largest gas reserves in the
world but currently only contributes 1.3% to
world production. This share is set to increase
dramatically in the coming years as Qatar gas
grids continue to be developed.
Selected Gas Statistics 2005
Country
Reserves
(trillion
cubic meters)
% of Total
World
Reserves
Production
(billion cubic
meters)
% Share of
2005 Total
Iran
Qatar
Saudi Arabia
UAE
26.74
25.78
6.90
6.04
14.9
14.3
3.8
3.4
87.0
43.5
69.5
46.6
3.1
1.6
2.5
1.7
TOTAL
GULF STATES*
2533.2
40.1
323.8
10.3
Russia
United States
Nigeria
Algeria
Norway
Netherlands
47.82
5.45
5.23
4.58
2.41
1.41
26.6
3.0
2.9
2.5
1.3
0.8
598.0
525.7
21.8
87.8
85.0
23.5
21.6
19.0
0.8
3.2
3.1
0.9
* Total includes the other Gulf States of Bahrain, Oman, Qatar and Yemen.
Source: BP Statistical Review of World Energy 2006.
International Energy Agency, World Energy Outlook 2006 (Paris: IEA, 2006), p.34.
8
84
European View
Christian Koch
In light of these statistics, and especially as
these relate to Europe’s rising external energy
dependence, the current discussions naturally
emphasise the need for further energy
conservation methods as well as the development
of renewable energy sources. These efforts might
bear fruit in the future, but it should be clear that
at this stage alternative energy sources present
no substitute for hydrocarbon energy sources.
Not only do the latter remain the main source
of energy, fuelling civilisation and development,
but no major or sudden shift to other forms of
alternative energy is anticipated. What shift there
might be will only be gradual and long term and
require tremendous amounts of investment.
Equally, it is highly questionable whether regions
such as Russia and Central Asia will be able to
cope with the production increases of recent
years or how substantial and cost-efficient any
potential new ‘unconventional’ supplies (deep
sea oil, Canadian tar sands, Venezuelan heavy
oil, natural gas liquids) will be.
The bottom line is thus that the importance
of the Middle East and the Gulf region as the
main sources of imported energy will not be
undermined by developments in the oil industries
of other regions such as sub-Saharan Africa,
Central Asia and other potential geographical
regions, nor will it be threatened by the sudden
discoveries of alternative energy sources.
Efforts to promote energy efficiency or a more
determined and reinvigorated push towards the
development of renewable energy technologies
will not be sufficient to meet total demand. As a
result, and given its massive share of the world’s
oil and gas reserves, the Middle East, and more
specifically the Gulf region, will provide much of
the supplemental imports that the world requires
to satisfy its future energy needs.
Energy security is linked to regional Gulf
security
All of this would not be of great concern were
it not for the fact that the Gulf region is also
one of the most unstable regions of the world
from a geopolitical and geostrategic perspective.
Indeed, in the last two and a half decades, the
Gulf has witnessed no less than three major and
devastating wars (the Iran–Iraq war from 1980
to 1988, Iraq’s invasion of Kuwait in 1990 and
the subsequent liberation of Kuwait in 1991,
and the US-led invasion and occupation of Iraq
beginning in March 2003) and one revolution
(the Iranian Revolution of 1979) whose effects
continue to be felt even a quarter of a century
later. In each of these instances, energy has
played a key role in determining the involvement
of external powers in the region, with the United
States taking over the leading role.
The characterisation of the Gulf as a permanent
crisis region is further enhanced by the lack of
any effective regional security arrangement or
system, which has become a major feature of the
Gulf ’s strategic design. The absence of regional
security arrangements has not only resulted in
a breakdown of relations among the states that
make up the Gulf but has also led to the heavy and
ever-increasing dependence on external powers
and their direct involvement and intervention
in regional security issues. Great Britain played
a major role until its withdrawal from the areas
east of Suez in 1971, and since then the role
has been primarily taken over by the United
States. During the 1970s and 1980s, US–Soviet
rivalry was an important part of the equation.
And given the rising energy demands of Asia, as
outlined below, it is distinctly possible that in
the near future, a greater Asian involvement in
security matters could also emerge.
The degree to which energy supply and Gulf
regional security are interlinked becomes clear
when one considers that any interruption in Gulf
oil and gas supplies increasingly results in an
immediate rise in energy prices in world markets.
Given current circumstances, continued world
demand has reduced available spare capacities
to a minimum with only the Gulf (i.e. Saudi
Arabia) available to make up for shortfalls or
supply interruptions elsewhere.
In 2005, the world as a whole consumed 82.4
mb/d of oil while total production amounted to
85
81.1 mb/d. By itself this would not be alarming
were it not for the fact that the daily production
rate is also basically equal to the actual present
daily capacity rate. Except for Saudi Arabia,
every oil-producing state is at the moment
operating at full capacity. This contrasts sharply
with situations in the mid-1980s and late 1990s
when production capacity significantly exceeded
global demand. The result is that recent events
such as the August 2006 shutdown by British
Petroleum of the Prudhoe Bay oil pipeline in
Alaska, concerns over Iran’s nuclear program
in the same month and even the failed terrorist
attack on the Saudi Abqaiq oil facility in February
2006 were reflected almost instantaneously in
higher oil prices.
Such volatility will almost certainly be a defining
feature for the near term in world energy markets.
Moreover, any direct threat to the security of
the Gulf is bound to have an immediate and
devastating impact on energy supply and price.
The Saudi ambassador to the United States,
Prince Turki Bin Faisal Al-Saud, for example,
has warned that a military move against Iranian
nuclear installations could result in an oil price
above $200.9 A similar, albeit less dramatic,
reaction can be expected if terrorists launch a
successful attack against some of the larger oil
facilities in the region. From whatever angle one
approaches the topic, Gulf stability is therefore
a vital component of near-term prospects for
continued energy security and supply.
Implications for Europe
Europe’s current reliance on Gulf energy supplies
is limited, and imports from the region have
remained steady in recent years at approximately
22%. Yet, given its pre-programmed import
dependence and the fact that stable Gulf supplies
are essential for the maintenance of energy price
levels, Europe cannot afford to simply look past
and ignore the security challenges that confront
the Gulf region. For Europe, as well as for other
“Military move on Iran could triple oil price”, Reuters, 20 June 2006.
9
86
European View
parts of the world, the equation remains the
same in that the issue of the security of energy
supplies cannot be seen in isolation from the
issues and problems of general security facing
the Gulf. Europe’s energy policy thus has to
be incorporated within the larger dimension
of the external policies of the European Union
and within the context of the development of a
common foreign and security policy.
Such a line of argument does not suggest that
Europe needs to start mobilising its military
forces and to begin to make its way toward the
Gulf in order to directly protect oilfields and
supply lines. More important at the outset is
the recognition that the issue of Gulf security
cannot be narrowed down to a one-dimensional
military point of view, but that it involves a
variety of overlapping and interacting factors
and issues, concerning which Europe can
also play an effective role. For one, the Gulf
States are undergoing broad transformational
domestic changes due to a young population,
rising educational standards and a link to the
globalised community. Far from being just
static autocratic regimes, the Gulf States are
experiencing increasingly pronounced political
contests, which are ultimately likely to lead to
shifts within the existing ruling arrangements.
Such political change is not necessarily always
smooth, but the impact could be lessened through
the development of close links between Europe
and the Gulf on the economic, educational and
civil society fronts. Far from trying to impose a
certain European view of democratisation and
political liberalisation, such links could broaden
opportunities for Gulf youth while strengthening
the institutional development that is at the heart
of broader participatory mechanisms within the
Gulf States.
Second, Gulf governments are finding themselves
confronted by the threat of terrorism, which is
having a direct impact on their internal security.
In Saudi Arabia, more than 150 people including
Christian Koch
Saudi security forces have been killed since May
2003, when terrorists launched a first attack on
an expatriate housing compound. Terrorists have
also more than once attempted to disrupt the
regional energy infrastructure, as the February
2006 attack at Abqaiq and the May 2005 attacks
in Yanbu and Khobar in Saudi Arabia have
demonstrated. It is therefore a phenomenon that
not only threatens Western states but equally
confronts the legitimacy and stability of the Gulf
countries. Europe and the Gulf could, in this
context, cooperate on several fronts including
stronger coordination in intelligence contacts
as a means to prevent possible future attacks as
well as expanding the cultural dialogue with the
aim of bridging a dangerous gap that has been
growing between the Christian and Islamic
communities. The leading role that Europe is
taking in the peacekeeping and reconstruction
process in Lebanon suggests that it has the
necessary credibility to move such a process
forward.
Third, on a regional level, the Gulf is faced with
the continued instability in Iraq and the debate
over Iranian ambitions, especially on the nuclear
issue, as well as unresolved border issues among
individual countries. Each of these components
has the possibility of quickly escalating into a
regional crisis, especially considering the absence
of regional confidence-building processes, as
mentioned earlier. Given these circumstances, a
closer European engagement with the Gulf States
should be seen as both necessary and beneficial.
What the Gulf requires more than anything
else is a regular interactive process whereby the
regional states engage with one another.
The history and experience of Europe underline
the utility of multilateral national arrangements
and confirm that such action can serve as a force
multiplier in turning ideas into actual practice.
One example would be for Europe to encourage
the widening of institutional relations between
the EU, NATO and the OSCE on the one side
and the Gulf Cooperation Council (GCC) on
the other. Equally, informal networks that also
include Iran and Iraq should be seen as both
necessary and welcome. Europe’s suggestion of a
regional security arrangement, which it recently
offered to Iran as part of the EU-3 offer to halt
Iranian nuclear activities, is certainly a step in
the right direction.
Fourth, Europe needs to understand better that
all of the above factors are further complicated
by a dominant US military position in the Gulf,
which presents as many challenges to regional
security as it offers benefits. Since the US
emerged over 30 years ago as the most dominant
external power in the region following the
British withdrawal, the numerous strategies the
US has applied to promote greater stability—
from a twin-pillar policy that relied on Iran and
Saudi Arabia to maintain regional stability in the
1970s, supporting Iraq during the Iran-Iraq War
in the 1980s, implementing a dual containment
policy vis-à-vis both Iran and Iraq in the 1990s,
to taking security matters into its own hands
with the invasion of Iraq in 2003—have failed
to institute within the region a greater capacity
to manage conflict. Instead, the Gulf has simply
shifted from one conflict to the next.
For the moment, regional Arab states see no
practical or viable alternative to their basic
reliance on the US’s physical and diplomatic
power as the guarantor of stability and security. At
the same time, they are deeply worried about US
policy and behaviour in the region and beyond,
which undermines the credibility of such an
alliance and generates embarrassment to many
local governments facing pressure from internal
public opinion. Given the recent experiences in
Afghanistan, Iraq and Lebanon, it is also clear
that the US reliance on military means to control
developments stands in contrast to the long-term
vision and strategic reasoning that are necessary
to produce any type of regional stability.
The result is that the search for alternative
arrangements and future alliances within the
Gulf is well underway. Outside of the US and
Europe, Asia is quickly gaining status as a region
of rising importance for the Gulf, economically
as well as strategically. China alone will account
87
for 20% of world incremental energy demand
while India and China will import up to 90%
of their oil by 2030. Over 70% of Chinese
demand is being met by the Gulf with Saudi
Arabia already supplying 17% of total Chinese
imports. As Asia’s economic well-being becomes
increasingly tied to the region’s overall stability,
Asian countries will be looking at ways to secure
supply lines to the region outside of reliance on
the United States.10 While this in turn is likely
to broaden the competition between external
powers within the region, it also affords an
opportunity for Europe to strengthen its foreign
policy position in the region and offer itself as
an objective and balanced force that promotes
stability rather than pursuing hegemony.
The negotiations for a free trade agreement
between the Member States of the GCC
(Bahrain, Kuwait, Oman, Qatar, Saudi Arabia
and the United Arab Emirates) and the European
Union are a case in point given that negotiations
have nearly consumed 17 years without
producing a final agreement. With Asia as the
largest importer of Gulf oil and representing the
natural market for future Gulf energy exports,
GCC states have moved quickly to conclude free
trade accords with countries such as India, China
and Japan—and agreement is expected soon. In
each of these cases, negotiations have not been
sidetracked by broadening talks to include such
items as democracy, human rights and weapons
proliferation, as has been the case with the EU.
Thus, there is danger of the EU being outpaced
by its inability to bring free trade negotiations
to fruition, which would also ultimately be
reflected in a more disadvantageous position for
Europe as far as future energy ties are concerned.
Here, a renewed sense of urgency and the ability
to project a common foreign and security policy
could ultimately prove critical.
Conclusion
Without a doubt, stable energy supplies are
directly linked to the Gulf ’s position as the
world’s key energy region. To what degree the
world will benefit from affordable energy will, to
a large extent, also be determined by the amount
of investments that will be made in the Gulf ’s
oil and gas sectors in order to boost exploration
and improve production levels. Stability and
security here are prerequisites for any such major
undertaking.
Europe thus needs to recognise the geopolitical
dimensions of its energy policy and place the
relevant energy thinking squarely within its
security component. Unfortunately, at this stage,
neither the proposed Green Paper A European
Strategy for Sustainable, Competitive and Secure
Energy nor the June 2006 joint paper ‘An
external policy to serve Europe’s energy interests’
from the European Commission and the High
Representative for the Common Foreign and
Security Policy, Javier Solana, mention the Gulf
region in any detail when it comes to these
pertinent issues.11 The bottom line, however, is
that energy security plus energy supplies plus
energy prices are all directly related to the security
and stability of the Gulf. This is something that
Europe cannot afford to overlook.
Christian Koch is Director of International Studies
at the Gulf Research Center.
Flynt Leverett and Jeffery Bader, “Managing China-U.S. energy competition in the Middle East”, The Washington Quarterly 29:1 (Winter
2005–06), pp. 187–201. As they note: “Chinese energy companies have concluded or are pursuing deals on every continent, but no region
in the world compares to the Persian Gulf as a priority for Chinese energy planners.”
11
The European Commission’s Green Paper can be accessed at http://ec.europa.eu/energy/green-paper-energy/index_en.htm. The document
“An external policy to serve Europe’s energy interests” is available at http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressdata/EN/
reports/90082.pdf.
10
88
European View
Eija-Riitta Korhola
“The Times They Are A-Changin’”
By Eija-Riitta Korhola
Eija-Riitta Korhola reflects on the Kyoto Protocol—its birth, life and
current state of health
after almost 10 years of
global battering—and
asks, Just how right was Bob Dylan with his 1964
protest song?1
Though this protocol was born in Kyoto almost
10 years ago, it had a gestation period of a quarter
of a century. The very first Earth Summit was in
1972 in Sweden, where world leaders announced
their intention to hold a meeting every 10 years
to determine the health of the planet.
This was the same year that the United States
bombed
Hanoi at Christmas, the Black
September terrorists killed 11 Israeli athletes
at the Munich Olympics, the superpowers
signed treaties to limit nuclear and antiballistic missiles and email was invented. No
surprise then that the news media of the day
had little to say about the Earth Summit. Nor
was it a surprise that the planned second Earth
Summit took 20 years to happen, following
an abortive attempt in Nairobi in 1982.
Thankfully, however, in the intervening years
we saw two major factors in the run-up to the
birth of the Kyoto Protocol. First, in 1988
the United Nations created the International
Panel on Climate Change (IPCC); and second,
the Toronto Conference on the Changing
Atmosphere, also in 1988, brought world
attention to the global warming issue. At last a
political lead had been taken.
“Come senators, congressmen,
please heed the call
Don’t stand in the doorway,
don’t block up the hall.”
This first global scientific conference on climate
change was hosted by two prime ministers, Canada’s Brian Mulroney and Norway’s Gro Harlem
Bruntland. The conference consensus statement
called for a 20% cut to 1988 greenhouse gas
emissions by 2005 and called the potential effect of climate change, “second only to global
nuclear war.” Two years after its formation, the
IPCC released its first report. That report said
there was reason to believe that the planet was
warming and that human activity was causing it.
The creation of the IPCC and its initial reports
plus the conclusions in Toronto, more than anything else, added the needed seriousness to the
1992 second Earth Summit in Rio de Janeiro,
Brazil. That summit was the largest gathering
of world leaders ever and created the United
Nations Framework Convention on Climate
Change (UNFCC), also known as the Rio Convention, which called on the world to stabilise
1990 greenhouse gas emissions by 2000.
The United States signed and ratified this convention but, perhaps more importantly, former
US President George H.W. Bush negotiated an
agreement to allow developing nations to actually increase their emissions and that is why
they are not included in the Kyoto Protocol.
Parties to the Rio Convention have held a conference each year since 1995. As more and more
countries have signed the Convention, these
Headings and sub-headings are thanks to Bob Dylan.
1
89
Conferences of the Parties (COPs) have reviewed the adequacy of the Convention; it was
the third COP in 1997 in Kyoto that led to the
wholesale review of the targets and the Kyoto
Protocol was drafted and agreed to as a result.
As so often happens at these major global initiatives, delegates were apparently not content to
struggle with the 100-plus languages spoken by
the participants; it seemed necessary to invent a
whole new language to define what the protocol
was setting out to achieve.
“And don’t
understand”
criticize
what
you
can’t
The problem was not to invent a new word,
phrase or acronym—that is easy. The problem
was, and still is, to have almost 200 nations
agree on the definitions applicable to the new
language. One such definition, carbon sinks
(these are reservoirs that withdraw carbon from
the carbon cycle and thus bind CO2), almost
wrecked the process. The 2000 COP in The
Hague failed because delegates could not agree on
this definition. A subsequent emergency meeting
to resolve the problem, this time in Ottawa, also
failed. It took an early morning agreement at
a third meeting the following year in Bonn to
sort it out. In itself, this is not a big issue today,
but it is an illustration of how good intentions
can become entangled in vested interests.
One example in this context is the whole issue
of nuclear power. In the EU, about one third of
the electricity generated is nuclear. The carbon
emissions are virtually zero, yet nuclear power
is excluded from all benefits under the flexible
mechanisms that Kyoto encourages. This
rejection of an obvious source of energy that
emits almost no pollution must be the result
of political dogma but it continues even as the
effects of global climate change are more and
more alarming.
“Then you better start swimmin’ or you’ll sink
like a stone.”
90
European View
The Kyoto Protocol has dominated the climate
debate, but after seven years of non-ratification
by Russia and the United States, it was in danger
of losing its impact in practice. After a long
period of persuasion, Russia ratified the Kyoto
Protocol in November 2004, thus filling the
criteria for the protocol coming into force in
February 2005.
The stubborn refusal of the United States to
join and the role of the developing countries
in the Kyoto Protocol were the most important
reasons why delegates to the Climate Conference
in Buenos Aires in December 2004 went
headlong up a blind alley. The Protocol provides
binding emissions targets for the industrialised
countries for the period 2008 to 2012, but these
restrictions do not affect developing countries.
The rapidly increasing emissions of China are a
clear stumbling block to future action on climate
change. Even in the mildest of scenarios, China’s
emissions are estimated to double by the year
2030, which means an increase of 60% in the
global energy consumption from today’s level.
Two thirds of that increase in energy consumption
will take place in the developing countries.
The Montreal meeting one year later did not
make much progress either. The most important
topic of the Montreal meeting was to define the
post-Kyoto guidelines, which take effect after
2012. In public, the results have been described
as a success and as considerable progress, but in
the light of practical results, there is no reason to
celebrate. There was still no agreement on any
binding targets for developing countries and it is
hard to see why those growing economies would
say yes to the restrictions. Under Kyoto, only one
quarter of all emissions will be under control.
Therefore, since the emissions of the developing
countries account for half of the total emissions
and the United States is responsible for one
quarter, this means that three quarters of global
emissions are not within the scope of reduction
negotiations. This is clearly not good enough.
For the EU, it is politically important to stand
on the front lines and to show a good example,
Eija-Riitta Korhola
hoping that the others will follow sooner or later.
But the challenge lies in the effect one-sided
efforts have on the markets. In global markets
this means giving the competitive advantage to
the polluter, as the costs of the environmental
investments and emissions rights cannot be
included in the prices. We call it carbon leakage:
the international capital of global markets invests
where there are neither emissions restrictions,
nor environmental norms. A pollution shift, not
a pollution cut.
The high costs hit the energy-intensive
industries especially hard. This arrangement
threatens to change the principle of ‘polluter
pays’ into a ‘pay the polluter’ policy.
The EU has emphasised that future climate
policies must have wider effect: it is essential
that the United States, China, India and Brazil
be included in the reduction measures. In the
coming decades the 25 (or 27) EU countries’
share of emissions will drop to less than 10% of
all emissions at the same time as the developing
countries increase their contribution to half of
all emissions. Unless the front can be widened,
the EU’s efforts will be like taking a few drops
out of the ocean.
In their March 2005 summit meeting the
leaders of the EU Member States agreed to cut
15–30% of greenhouse gas emissions by the
year 2020 and as much as 60–80% by the year
2050. In the light of scientific evidence, the
decision was necessary and pressing. A 2004
research report of changes to the Arctic climate
confirmed the threat of climate change and that
the polar regions were particularly vulnerable.
The prospect of melting polar ice caps leading
to higher sea levels is both real and alarming.
Moreover, the recent drought in Europe as well
as record-breaking floods demand bold political
action to slow down global warming.
“Come gather ’round people wherever you
roam, And admit that the waters around you
have grown...”
In other words, the EU’s political decisions and
rhetoric are sound but their implementation is
becoming problematic. A decade of emission
reduction has ended and many Member States
find themselves facing an increase which they
cannot halt, now that the ‘low-hanging fruit’,
the easiest reduction measures, have been picked.
The European Commission has also noticed
that the emissions curves are now moving in
the wrong direction. The EU has corrected
the problem on paper and has straightened
the curve by offering ‘additional measures’
which, however, have not yet been sufficiently
defined. The truth is that unless something
radical is devised the EU will soon have to
admit that it cannot achieve its Kyoto goals.
Apart from being disastrous for the planet, this
would also be very embarrassing for the EU,
which has grown used to being able to chastise
the United States for its arrogant climate policies
and its refusal to sign on to the Kyoto protocol.
The EU’s own Emissions Trading Scheme,
aimed at meeting Kyoto commitments, simply
does not solve the problem. At long last, the
dawn of reality is shining on some of the
scheme’s distortions to competition regarding
quota trading. One problem is that the emission
allowances, leading to the trading of allowances,
do not depend on the country’s reduction
measures alone but on past emissions as well.
Allocations based on historical emissions, socalled grandfathering, do not create a genuine
incentive to reduce emissions to their minimum.
Now that the internal emissions trading
regime in Europe has been in effect for more
than a year and a half, most of the European
stakeholders in energy intensive industries
are remarkably unanimous about the whole
system being a mistake. In the beginning of
2006, the German steel industry demanded
that trading be interrupted. Many companies
have given rising costs, deriving from the
emissions trading, as the reason for closing down
factories and moving production elsewhere.
91
The biggest problem in emissions trading is
considered to be the effect on electricity prices.
Only listed companies producing electricity, like
the Finnish energy company Fortum, are satisfied,
since the emissions trading system guarantees
them a considerable profit from producing
electricity without emissions. They benefit
from the so-called windfall profit. Legislators
are slow to admit that they made a mistake.
Only last December in Montreal, the European
emissions trading system was introduced as a
fine example of the successful European climate
policy. We have been proud of our political
accomplishment in creating such a large-scale
climate-related enterprise in the first place.
In answer to criticism coming from industry,
it has been pleaded that it is too early to draw
conclusions after only one year of experience.
However, the signs are not promising. If
one of the measures for political success is
that plans are based on accurate predictions
instead of miscalculations, the Commission
can be considered to have failed. The most
critical mistake was made when calculating the
price of an emission ton; even the worst-case
scenarios did not consider the current price.
In my own career as a legislator, I have never before
seen a proposal for an EU directive so unfinished
and incomplete as the emissions trading directive
of 2001. The plan, which was to be the basis of the
whole European economy, its competition and
climate strategy, had huge gaps in it. Hardly any
theoretical studies had been carried out on the
impact of emissions trading yet Europe stepped
into this unknown in a tremendous hurry.
The proposal did not include estimates on the
impact of expansion, no guidelines for companies
on how to keep books on emissions trading,
no proposals for VAT taxation, no emergency
strategies in cases of serious market distortion
or speculation, no accurate information
concerning Member States’ emissions, nor any
suggestions for rights of appeal whatsoever.
The proposal did not take a stand on the
92
European View
competitiveness of companies that had reduced
their emissions at an early stage, no more than it
thought through what effect national limitations
caused by distributed allowances would have on
companies, or the factors distorting competition
between Member States. The relation between
emissions trading and governmental taxation
was left open, as was the impact of trading
on the open energy market. In addition, the
proposal seemed to confuse goals with measures,
national and private as well as market measures
and traditional control-driven administration.
Over two years we managed to improve and
complete the proposition in many respects,
yet were not able to fix the basic problems.
However, emissions trading is a brilliant idea,
at least in theory. It gives companies time
to adjust to large-scale change, in a context
where the atmosphere has a price tag just like
land. Emissions can be reduced where that
is the cheapest option, or if it is cheaper to
buy rights from others who have already cut
their emissions, that can be done too. At the
same time, the market mechanism encourages
environmentally friendly behaviour. In fact,
industry itself wanted a mechanism like this at
one point, but the result was a disappointment.
First of all, the one-sided climate measures
implemented by the EU were considered a
serious mistake. The cost of environmental
investments and emission allowances cannot
be included in prices in a global market; this
gives a competitive advantage to the producers
that pollute more. The second basic mistake was
connecting emissions trading to the emission
reduction targets defined for each Member State.
When a flexible market mechanism meets a strict
national limit, emissions trading becomes more
like a planned economy, directing resources into
the bureaucracy and rewarding, not those who
have done the most, but those who have the
most to do.
A good example of this is Finland, where
steel and paper production methods are the
cleanest in the world. Still, due to the high
Eija-Riitta Korhola
emission reduction target, and contrary to
all expectations, Finnish manufacturers are
in a difficult situation. In fact, we pay twice
for reducing emissions: first, in investments
in emission reduction, and again when we
purchase emission allowances. It has to be stated,
therefore, that the emissions trading system used
in Europe has more to do with structural politics
than with curbing greenhouse gas emissions.
“Your
sons
and
your
are
beyond
your
Your old road is rapidly agein’”
daughters
command
How can Europe make mistakes like these? One
reason lies in the former Commission’s addiction
to directives; they wanted to be in control, as if
they were parents of the European family. They
tried to achieve reductions in greenhouse gas
emissions by various legislative measures, such as
directives on the co-production of electricity and
heat, renewable energy sources, frameworks for
water policy, energy and electricity taxation, as
well as energy services and end-use efficiency.
All these measures have similar goals: reducing
emissions and increasing energy efficiency. The
problem is, however, that they pursue this goal
with methods that overlap with one another.
If the impact of each method on the other
methods is not taken into consideration, there
will be a double burden. A case in point is
emissions trading and energy taxation; the
purpose was to include the cost of emissions in
the end price. Another example is the fact that
the impact of emissions trading on combined
heat and power (CHP) was not considered.
Lack of coordination between the different
Directorates General seems to be playing an
increasingly significant, and embarrassing, role
in European legislation.
What do we have now?
The first trading period of the European Union
Emissions Trading Scheme (EU ETS) was to
provide a soft transition to the 2008–2012
period when the Kyoto protocol will set strict
targets for the EU. The cost of the cap-andtrade system in 2005–2007 was expected
to be reasonable, with significant sharing
of free allowances and limited application.
After one and a half years of experience, the EU
ETS is an immature and volatile market. Due
to its large influence on prices in the electricity
market, volatility in the electricity market is
now influenced by volatility in the carbon
market. The result of the EU ETS is a massive
redistribution of income from power intensive
industries to power generators. The price of
electricity increases because of the increased
marginal costs of producing power. For further
long-term energy investments, this kind of
market environment is difficult. There continues
to be uncertainty about how the market will
develop and how the problems will be fixed.
It is because of this that the EU’s energy selfsufficiency can be expected to weaken further.
At present the EU imports half its energy; by the
year 2025, it is estimated that its dependence on
imports will exceed 70%. In practice this means
being dependent on Russia’s natural gas, the
price of which remains unpredictable. The EU
competes with India and China for the available
energy while the joy of pricing it is left to Russia.
This great dependence is not just a problem of
uncertain supply: in the near future, it could
also affect the EU’s foreign policy, especially in
the area of human rights. Moreover, although
emissions from burning gas are about half as
much per kilowatt-hour as burning coal, they
are still emissions the planet cannot afford.
The UK prides itself on emission reductions
in the 1990s but that was simply because gas
largely replaced coal in the UK’s energy mix.
Not everyone is reducing the burning of
coal for electricity generation, however.
China is getting hungrier by the day in
terms of energy consumption; this year,
China is commissioning 1000 MW of coalburning energy generation every five days.
93
For the above-mentioned reasons, the interest
in emission-free energy sources, chiefly nuclear
power, is growing again. My home country,
Finland, is not alone in having discussions about
building additional plants. France, Great Britain,
Slovakia, Slovenia, Croatia, Poland, Bulgaria,
Romania, Italy and the Baltic countries are
also waking up. Belgium looks set to dismantle
its nuclear shutdown plans, which were only
formulated a few years ago. But these are only
a handful of countries; there are still others
that are winding down their nuclear power
programmes. And as demand continues to grow,
the consumption of fossil fuels is also continuing
to grow. The climate is not equipped with
ideological filters: it cannot tell the difference
between increased fossil fuel emissions caused
by so-called good reasons, i.e. shutting down
nuclear power, and those deriving from pure
ignorance. Experience has shown so far that a
decline in the use of nuclear energy means in
practice an increase in the use of fossil energy.
It is much easier politically to abandon nuclear
power than it is to find adequate alternatives.
Sweden has almost tripled its nuclear output
since having decided to give it up following a
1980s referendum. In Germany, the former
Social Democrat-Green coalition government
was, for reasons of sustainable development, set
to give up nuclear power, which produces almost
30% of the country’s electricity. Neither they
nor the current Grand Coalition government
is able to explain how they will replace nuclear
power with emission-free power generation;
wind power would cover only a small part of
the deficit. Germany has a lot of installed wind
capacity but it does not produce much electricity
because wind power has a short period of peak
output. All of Germany’s windmill capacity is
around 18,500 MW, which provides only 35
TWh a year, whereas Finland’s fifth nuclear
power station (1,600 MW) will alone produce
13 TWh a year. We can quote from another
great Bob Dylan song:
“The answer is (not entirely) blowin’ in the
wind”
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European View
Wind energy is by its very nature intermittent
and subject to chance—this means that a
backup supply that is not wind dependent has
to be available. In practice, this has to be existing
plants that are not already generating, which
means the least efficient and often, therefore,
the dirtiest. Such a practice means that for two
thirds of every day, wind power is replaced by
dirty, high-emission power.
The decision to build additional nuclear plants
should not be made, however, unless it is strongly
linked with a political commitment to reduce
emissions. Nuclear power alone will not solve
the problem of climate change—but I believe
that the problem cannot be solved without it.
What is needed is a holistic strategy based on
emissions-free, renewable and cost-effective
energy. In debates about energy, nuclear power
has often been set against various sources of
renewable energy. In the light of climate goals,
this juxtapositioning has to stop once and for all,
so that the necessary emission reductions can be
achieved in practice. Quite simply, we need as
much emissions-free energy as we can develop—
and still we will not have enough.
Of course, it is not only electricity production
that is responsible for harmful emissions. The
transport sector too carries the guilt of decades
in this respect. That sector does not have
the opportunity to use either wind, solar or
nuclear power to replace its gas-guzzling and
polluting engines. I hear and read a great deal
about the so-called electric car or bus but this
normally means vehicles powered by fuel cells
that combine hydrogen with oxygen to produce
electricity. The weakness of all the promotion
of fuel cell technology is simply that hydrogen,
as a fuel, does not exist. We have no hydrogen
mines or hydrogen wells—the hydrogen has
to be made. The most advanced processes do
this by electrolysis of water or methane. Those
processes are very energy hungry; therefore,
unless the primary fuel used for the electricity
consumed in the process is renewable or nuclear,
the end result is not a pollution reduction, but
rather a shift in the source of pollution from
the cars or buses in the towns to the fossil
Eija-Riitta Korhola
fuel power plants on the coast or in the rural
areas. Perhaps hydrogen production would
be a better use of the previously mentioned
intermittent operation of wind power plants.
The way out?
What should be done, then? I believe it is time
to face the weaknesses of the current Kyoto
protocol. For the post-Kyoto period, we will
need an international carbon economy, where
carbon emission has a price no matter where it is
emitted and that price is included in the costs for
every competitor in every market.
It was clear from the beginning that Kyoto alone
would not halt nor reduce climate warming. In
fact, the intention was to initiate a process that
would eventually lead to other more efficient
actions—Kyoto was only supposed to be the
first step. However, now it is reasonable to ask
whether Kyoto is a step in the right direction
for efficient action to reduce climate change.
Even though the ratification of the protocol is
important and welcome as a political symbol,
its impact in terms of climate change reduction
targets is uncertain.
It seems now that the starting point created
by Kyoto is unfortunate. Namely, countryspecific reduction targets have led the Member
States to fight for their own economic survival.
That cannot encourage meaningful emission
reductions. Instead, a global and binding carbon
economy is needed, which also takes into account
in a realistic way those states in which emissions
are threatening to increase.
Country-specific reductions should be replaced
by specific industrial-sector-specific examinations that would be based on efficiency or best
performance; in other words, defining the theoretical minimum emissions per ton of production. This would provide a genuine incentive for
real emission reductions everywhere and without
delay, as this system would reward the producer
with the lowest emissions. An emissions trading
scheme linked with this kind of a BAT-approach
(best available technology) would neither distort
the markets nor give a competitive advantage to
the polluter.
“For the loser now will be later to win
For the times they are a-changin’”
The main emphasis of the UN post-2012
framework model should be on energy savings
and eco-efficiency, low-emissions technology
and its development. Individual consumers
should be included in the emission reductions by
further developing the emissions trading scheme
in the traffic sector, which is the fastest growing
source of emissions. If it were widely known that
low emissions would also be the standard for the
developing countries in the next Kyoto period,
this would already affect the investments made
in those countries. Developing countries deserve
the opportunity to grow, but through clean
technology. Developed countries must be ready
to take the lead.
I will continue to beat the drum of pragmatism
for reducing emissions whilst retaining fair and
viable market conditions. Sometimes in the
past, I have felt a little lonely with my drum,
but I am gratified by the growing support from
like-minded politicians, scientists and others
as the seriousness of climate change hits closer
and closer to home. I finish with a palindrome
sub-heading of my choosing which makes sense
either way:
“Are we not drawn onward, we few, drawn
onward to new era?”
Eija-Riitta Korhola is Vice-Chair of Kokoomus
(Finnish National Coalition Party), EPP
Rapporteur on Energy Policy and Member of the
European Parliament.
95
James P. Leape
EU Competitiveness, Energy and the Environment:
The Challenge of Synergy
By James P. Leape
Climate change is the
most pervasive threat to
nature and people and
is posing a challenge, as
well as an opportunity,
in our quest for
sustainable development in the 21st century.
World leaders have recognised that in order to
remain economically competitive, governments
and businesses alike must act urgently to reduce
human-induced carbon emissions and reverse
climate-change trends through innovation and
economic transformation.
Mounting evidence
Thus, the European Union today is facing an
historic decision, one that will determine its
place in the world in the balance of this century.
Europe’s decision-makers have an enormous
opportunity to provide much-needed leadership
on developing alternative energy and globalwarming solutions and to profit from the new
sustainable economy that such leadership would
create, but they must act quickly. With mounting
evidence of climate change and its impacts being
recorded throughout Europe, governments’
response to this unprecedented challenge will
determine which nations are prepared for the
future and which are left behind.
It is clear now that many ecosystems are much
more sensitive even to small temperature changes
than the IPCC anticipated five years ago. Both
the Greenland glaciers and the West Antarctic
Ice Shield are experiencing much higher melting
rates than earlier predicted. And recent reports
indicate that the thermohaline marine circulation
in the North Atlantic (the so-called Gulf Stream)
may already be weakening.
The European Union has been the most
progressive of all developed nations and regional
groups—championing the UN Framework
Convention on Climate Change and promoting
the Kyoto Protocol’s implementation. Europe
is still responsible for about 15% of all global
greenhouse-gas emissions, however. And
although the European Union has thus far
managed to keep its CO2 emissions more or less
stable compared to 1990 levels, it risks falling
short of meeting its Kyoto target for reducing
carbon emissions by 8% by 2012. So Europe
must show leadership at home as well as in the
international arena.
The last report of the Intergovernmental Panel
of Climate Change (IPCC) in 2001, which
represents the most authoritative summary of
peer-reviewed science, established beyond any
reasonable doubt that the Earth’s climate was
warming and that human activities were to
blame. Since that report was issued, alarming
new evidence of the impacts of human-induced
CO2 emissions on climate and the serious
consequences of global warming has been
reported.
At the same time, unusual jumps in atmospheric
concentrations in the past few years indicate that
the Earth’s systems are beginning to find it more
difficult to buffer additional CO2 emissions.
Until now, natural systems—mainly the oceans
and vegetation—were able to absorb about half
of all human-induced CO2 emissions. It now
appears, however, that these biological carbon
‘sinks’, particularly forests, have become less
effective and are likely to absorb less CO2 in the
coming decades. Indeed, carbon ‘sinks’ could
turn into ‘sources’ faster than most scientists
anticipated, further adding to general climate
instability.
We can already see evidence of changes in the
climate. Temperatures are rising: 19 of the 20
warmest years since 1860 have all occurred since
1980, the 12 warmest all since 1990. Extreme
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EU Competitiveness, Energy and the Environment: The Challenge of Synergy
weather events are on the increase. The record
Atlantic hurricane season of 2005 imposed a
heavy burden on the region. Hurricane Katrina
alone caused damage estimated at $160 billion,
equivalent to the GDP of Denmark. Moreover,
in the past few years, droughts, forest fires and
heat waves in southern Europe have taken
their toll on agriculture, freshwater availability
and tourism, and contributed to the death of
thousands of people in 2003.
There is no time to lose
With this mounting evidence that dangerous
climate change is upon us, WWF strongly
endorses the conclusion of the EU Heads of
States Council, which said in spring 2005 that
global warming must be kept to less than 2°C
above pre-industrial temperatures. While even
the moderate warming we are now experiencing
is causing significant disruption to natural
systems, it is clear that warming of more than
2°C could have catastrophic consequences,
including sharp rises in infectious diseases and
freshwater shortages affecting as many as three
billion people worldwide.
Even if all emissions stopped tomorrow, the
planet’s atmosphere would still warm by more
than 1°C. The 2°C threshold is thus a challenging
goal. It requires that global emissions from all
gases and all sectors be cut by at least 50% by
mid-century. Taking into account the need
for less-developed countries to expand their
economies, achieving this target will require
industrialised countries to reduce emissions up
to 80%. Scientists agree that reductions of this
magnitude will only be possible if global CO2
emissions peak and begin to fall within the next
10 to 15 years. A recent meeting of 20 of the
world’s most polluting nations concluded that
by acting now governments can in fact save
money, while also mitigating impacts on people
and damage to the environment. This is good
news, but action must be bold and immediate.
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European View
Europe needs to take action at home
Europe has long been a leader in energy efficiency.
Europe’s energy consumption per capita is about
50% lower than in the United States, as are
CO2 emissions per capita and per unit of GDP.
In addition, many leading renewable-energy
and energy-efficiency companies are based in
Europe. This places the European Union in a
good starting position to lead the OECD in the
race towards a low-carbon future.
In the meantime, the European Union has
developed one of the most promising tools to
combat climate change, the European-wide
Emissions Trading Scheme (ETS). Originally,
the idea of cap and trade, pioneered in the
USA in the 1980s, was vehemently rejected in
Europe by governments and NGOs alike. Now,
with the emergence of a sound architecture for
ETS, including a strong compliance regime and
support from the European Commission, most
stakeholders have come to view it as a cornerstone
for EU compliance with Kyoto targets.
The ETS today covers about 12,000 large
emitters—individual installations in heavy
industry and the power sector that are
responsible for approximately 52% of all EU
CO2 emissions. Unfortunately, however, most
EU governments have over-allocated emissions
allowances for the current period, undermining
the environmental effectiveness of the ETS and
reducing incentives to invest in low-carbon
technology. This failure is most regrettable in the
case of the power sector, which with appropriate
government policies could well be carbon-free by
the middle of this century. In contrast to other
sectors such as housing, industry and transport,
the power sector has the largest opportunities
for renewable technologies, such as wind power,
sustainable biomass products, and geothermal
and solar power.
We need to take the lessons learned from
this initial phase of ETS and make it a more
harmonised and effective allocation system for
emissions allowances. Most experts agree that in
James P. Leape
order to reap the full benefits of this Europeanwide system, national autonomy in allocating
emission permits will need to be constrained
and the full auctioning of allowances should be
introduced.
Globally, the ETS is the single most important
economic mechanism to tackle climate change.
However, the EU must first strengthen its
allocations system if it wants to serve as an
international model and be linked to other
cap-and-trade systems outside of Europe. For
the EU to cut all greenhouse gas emissions by
30% by 2020, the sectors covered by the ETS
will need to contribute annual reductions of
3% on average. This sounds tough, but it is
entirely possible by realizing the large potential
for expansion of combined heat and power
(CHP), development of large-scale wind power,
co-generation of biomass in coal-fired power
stations and fuel switching from high-carbon
coal to lower-carbon natural gas. Establishing
new and ambitious legislation on minimum
energy-efficiency standards for a range of
electric appliances will bring power demand and
therefore emissions down as well.
Furthermore, Europe needs to implement strong
renewable-energy targets. Presently, the EU has
an ‘indicative’ target that 21% of all electricity
will be produced from renewable sources by
2010. Although this is a challenging target, the
world cannot afford for Europe to abandon this
goal.
WWF has shown that an overall target of
25% renewable energy for all primary energy
consumed by 2020 is achievable. Such a
target would include sectors such as heating,
cooling and transport. Importantly, it has the
support of the EU Parliament. Experience in
other countries demonstrates that a strong
governmental commitment to renewable energy
stimulates new commercial investments, spawns
high-quality jobs and drives technological
innovation—all of which help build synergy
for a sustainable economy and environment.
In Germany alone, feed-in tariffs for renewable
energies have created more than 100,000 jobs,
mainly in wind-power manufacturing. Setting
an aggressive 2020 renewables target is an
urgent priority, something the EU has so far
unfortunately failed to do. New research shows
that offshore wind power in the Atlantic—a
possible long band of wind farms from Ireland
to the south coast of Spain—has the potential to
deliver more than 30 GW capacity in the next
decade or so. Moreover, economists predict that
offshore wind power will become less expensive
than fossil fuel in less than 10 years, thanks to
rising fossil-energy prices, progress on the windpower technology ‘learning curve’ and economies
of scale.
Europe also urgently needs to establish legally
binding energy-efficiency targets for all the
energy-consuming sectors, including transport.
The European Union has missed this opportunity,
even though it has agreed that a strategy to save
20% of its primary energy by 2020 would,
depending on the oil and gas prices, save 60 to
150 billion euros per year from 2020 and create
about one million new jobs. Energy efficiency
measures display the largest potential—not only
in Europe but globally—to cut emissions quite
drastically while contributing to security of
supply and reducing costs. For Europe it has been
shown, for example, that phasing out inefficient
‘standby power’ in televisions, computers and
other electronic devices, and installing efficient
lighting systems in private buildings and offices
can eliminate the need for nearly one-quarter of
all electricity produced by burning coal.
In addition, Europe needs to embark in earnest
on the path of carbon capture and storage
(CCS). Even with the aggressive development
of renewables and energy efficiency, fossil-fuel
power stations will remain an important part
of Europe’s energy mix. Indeed, it is estimated
that between 30 and 60 GW of new fossil
power plant capacity will come online in the EU
between now and 2012, 25 GW of which will
be in Germany alone. Depending on the fuel
mix and load factors, these new fossil-fuel power
plants may emit between 100 and 400 Mt CO2
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EU Competitiveness, Energy and the Environment: The Challenge of Synergy
a year, or up to 8% of the EU’s entire greenhouse
gas emissions. Therefore, WWF is calling for
new EU legislation on CCS that requires all new
fossil-fuel power stations to be equipped with
‘capture-ready’ technology. Older plants must be
refurbished within a transition time of a decade
or so; and if they do not meet the same CO2
emission standards as new ones, they should be
closed.
Europe must work with developing countries
Internationally, the European Union needs to
work closely with developing countries. The
present EU–China negotiations are a good
example of the potential. China has set itself
substantive domestic targets on renewable energy
and energy efficiency, which are much more
ambitious than those of most OECD nations.
The European Union must be seen to be helping
China reach its domestic targets before asking
China eventually to take up commitments under
the Kyoto treaty. China’s own energy strategy
calls for 20% of its energy supply to come
from renewable sources by 2020 and for a 20%
improvement in efficiency by 2010.
China’s efforts could serve as a constructive model
for other rapidly industrializing developing
countries if it meets its voluntary targets. In
this context, we endorse a proactive approach to
furthering the dialogue with India, South Africa,
Mexico and Brazil.
Europe needs to show leadership in negotiating
the post-2012 regime
As those countries that have ratified the Kyoto
Protocol set out to negotiate a regime for the
post-2012 period, much depends on Europe’s
leadership. As the most progressive part of the
industrialised world, Europe must be, in this
process, a champion of urgent and strong action
to reduce emissions.
The European Union also needs to reengage
the United States in the Kyoto process. There
is reason to hope that the next President of the
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European View
United States, regardless of political party, will
rejoin the global negotiations for the climate
future soon after walking into the White House
in January 2009. Hearts and minds in Congress
are already changing, and legislation to create a
federal emissions cap-and-trade system for the
power sector, similar to the ETS, may emerge
in the next session. This could be a cornerstone
of the US carbon policy framework for the post2012 period. In the interim, Europe urgently
needs to explore the possibilities for linking
the ETS with emerging state programmes such
as the Regional Greenhouse Gas Initiative in
the north-eastern states and new initiatives in
California.
The next generation of CO2 reduction targets
should broaden the scope and ambition of the
global climate change regime. For this to happen,
the following needs to occur:
• First, industrialised countries need to
strengthen their absolute emissions reduction
commitments to about 30% below 1990
levels by 2020. Despite projected large
economic and emissions growth in rapidly
industrializing developing countries, the
OECD nations still will have much higher
per capita emissions than the poorer ones.
• Second, a ‘decarbonisation track’ should
be introduced that includes working with
carbon-intensive and high-emitting sectors
in developing countries to prepare for a
gradual and initially voluntary entry into the
global carbon market and, eventually, the
implementation of emission caps. For example,
this could be useful for the energy-intensive
industry and the power sector in rapidly
industrialising developing countries. Sectors
like these could develop voluntary targets that
would be compared to ‘reference’ emissions
projections. If the targets are achieved, these
sectors would be able to trade emissions
credits. If targets are not achieved, no penalties
should be imposed in order to encourage early
participation in a growing and global carbon
market. Access to the global climate regime
James P. Leape
must be seen as a benefit and not a threat to
clean and sustainable industrial development.
• Third, an adaptation track should be
implemented. Here, the least-developed
nations take part. Those countries would not
be asked to make any emission-reduction
commitments, binding or voluntary. Those
countries would, however, be most eligible
for adaptation funding from developed
countries.
Conclusion
The European Union is at a crossroads; it must
commit to taking the necessary steps to confront
the enormous challenge of climate change. The
EU should be visionary and seize the opportunity
at hand to build a more sustainable society, one
that benefits people and nature. By aggressively
pursuing a positive agenda of innovation and
enhanced competitiveness, we can combat global
warming. Europe would thus not only help limit
the potentially disastrous consequences, but it
would also re-establish itself as a global leader
in business, good governance and ingenuity. The
world needs a new energy paradigm, and Europe
is poised to take a leading role. The practical
steps required are clear. It has in the Emissions
Trading Scheme a mechanism in place to assist
with the migration to a more sustainable future.
Alternative technologies exist, but these require
government support and a welcoming regulatory
environment if they are to become mainstream.
Most importantly, Europe urgently needs strong
renewable energy and energy efficiency targets if
it wants to reach its own Kyoto goals to reduce
greenhouse gas emissions. But this is not an
altruistic venture. Adopting these solutions is
vital for Europe’s future competitiveness, energy
and environment, and for the well-being of our
planet.
References
Energy Information Agency (2006). http://www.
eia.doe.gov/emeu/international/carbondioxide.
html.
International Panel on Climate Change (2001).
http://www.ipcc.ch.
Lechtenböhmer, S., Grimm, V., Mitze,
D., Thomas, S. & Wissner, M. (2005).
Target 2020: Policies and measures to
reduce greenhouse gas emissions in the EU.
Wuppertal, Germany: Wuppertal Institut.
Meinshausen, M. (2006). What does a 2°C target
mean for greenhouse gas concentrations? In
Avoiding Dangerous Climate Change. Cambridge:
Cambridge University Press.
WWF. Scenarios for the power sector. http://
www.panda.org/about_wwf/what_we_do/
climate_change/solutions/energy_solutions/
energy_vision/powerswitch_reports/index.cfm.
WWF. 2° scenarios.
http://www.panda.org/about_wwf/what_
we_do/climate_change/problems/global_
warming/2_degrees/2_degree_scenarios/index.
cfm.
James P. Leape is Director General of World Wildlife
Fund (WWF) International.
101
Claude Mandil
Energy Technology Perspectives:
Scenarios and Strategies for a More Sustainable Energy Future
By Claude Mandil
The world is facing
daunting energy challenges: global demand
is surging, energy prices
approach unprecedented
levels, CO2 emissions
are more than 20% higher than in 1990 and 1.6
billion people worldwide still lack access to basic
energy services. US President George W. Bush,
in his State of the Union speech in February,
asserted, “America is addicted to oil” and must
develop technologies to address soaring gasoline
prices.
Secure, reliable and affordable energy supplies
are fundamental to economic stability and
development. The threat of disruptive climate
change, the erosion of energy security and the
growing energy needs of the developing world
all pose major challenges for energy decisionmakers. These challenges can only be met
through innovation, the adoption of new costeffective technologies and a better use of existing
energy-efficient technologies.
Many experts agree that energy technology holds
most of the answers. But how realistic is this
view? How much can technology contribute to
securing adequate and affordable energy supplies
and lower CO2 emissions?
The International Energy Agency (IEA), which
advises the governments of 26 industrialised
countries, has just completed a new study, Energy
Technology Perspectives: Scenarios and Strategies to
20501. Its groundbreaking conclusions show that
energy technologies can make a difference; that
innovation is our greatest resource to meet the
energy challenge; and that many technologies
needed for a sustainable energy future already
exist or are under development, provided we
accept paying up to $25 for each tonne of carbon
dioxide avoided. The book is a response to calls
from the G8 and from IEA energy ministers
to identify strategies and scenarios for a more
sustainable energy future and develops scenarios
on how energy technologies can change the
patterns of energy demand and supply to 2050.
The Accelerated Technology (ACT) scenarios—
which form the backbone of this study—
demonstrate that by employing technologies
that already exist or are under development,
the world could be brought onto a much more
sustainable energy path. The scenarios show how
energy-related CO2 emissions can be returned to
their current levels by 2050 and how the growth
in oil demand can be moderated. They also
show that by 2050, energy efficiency measures
can reduce electricity demand by a third below
business-as-usual levels. Savings from liquid fuels
would equal more than half of today’s global
oil consumption, offsetting about 56% of the
growth foreseen in oil demand.
No one technology has the potential to solve the
very real challenges facing the energy system. The
energy challenges are so huge, local conditions
so varied and energy systems so diffuse that
we will need to make full use of the diversity
of technology options available. However, the
outline of what is needed is clear: action needs
to be taken on the demand and supply sides
in order to ensure that promising existing
technologies and those under development fulfil
their potential.
The substantial changes demonstrated in the
Available at www.iea.org.
1
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Energy Technology Perspectives: Scenarios and Strategies for a More Sustainable Energy Future
ACT scenarios are grounded in:
•
•
•
strong energy efficiency gains in the
transport, industry and building sectors;
electricity supply becoming significantly
decarbonised as the power-generation mix
shifts towards nuclear power, renewables,
natural gas and coal with CO2 capture and
storage (CCS);
increased use of biofuels for road transport.
Nevertheless, even in the ACT scenarios, fossil
fuels still supply most of the world’s energy
in 2050. Demand for oil, coal (except in one
scenario) and natural gas are all greater in 2050
than they are today. Investment in conventional
energy sources will, therefore, remain essential.
The ACT scenarios
The study presents five ACT scenarios, and in all
five, the demand for energy services is assumed to
grow rapidly, especially in developing countries.
The scenarios do not imply that developing or
developed countries have to constrain their
growth in the demand for energy services. Rather
they show how this demand can be met more
efficiently and with lower CO2 emissions through
the implementation of a wide range of policies,
including increased research, development and
demonstration (RD&D) efforts and deployment
programmes, as well as economic incentives to
advance the uptake of low-carbon technologies.
The policies considered are the same across all
five ACT scenarios. What varies are assumptions
about how quickly energy efficiency gains can
be achieved; how quickly the cost of major
technologies such as CCS, renewables and
nuclear can be reduced; and how soon these
technologies can be made widely available. A sixth
scenario, TECH Plus, illustrates the implications
of making even more optimistic assumptions on
the rate of progress for renewables and nuclear
electricity generation technologies, as well as
for advanced biofuels and hydrogen fuel cells in
the transport sector. Under this scenario, CO2
emissions would be even lower in 2050 than
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European View
today, and more importantly, the beginning of
the decarbonisation of transport means they
would be set to decrease even further after
2050.
The costs of achieving a more sustainable
energy future in the ACT scenarios are not
disproportionate, but they will require substantial
effort and investment by both the public and
private sectors. None of the technologies required
are expected—when fully commercialised—to
have an incremental cost of more than $25 per
tonne of avoided CO2 emissions in all countries,
including developing countries. For comparison,
this cost is lower than the last twelve months’
average price for CO2 permits under the
European Emissions Trading scheme.
A price of $25 per tonne of CO2 would add
about $0.02 per kWh to the cost of coal-fired
electricity and about $0.07/litre ($0.28/gallon)
to the cost of gasoline. The average cost per
tonne of CO2 emissions reduction for the whole
technology portfolio, once all technologies are
fully commercialised, is less than $25. However,
there will be significant additional transitional
costs related to RD&D and deployment
programmes to commercialise many of the
technologies over the next couple of decades.
The import price of oil will be lower, as reduced
demand will put less pressure on more expensive
supply options. This cost reduction may not be
apparent to consumers, however, since most
of it will be balanced by the increased cost of
promoting low-carbon technologies. It goes
without saying that there are large uncertainties
when looking 50 years ahead.
The ACT scenarios illustrate a range of possible
outcomes, based on assumptions that are more
or less optimistic with regard to cost reductions
achieved by technologies such as renewables,
nuclear and CCS in power generation. Yet despite
all the uncertainties, two main conclusions from
the analysis seem robust. First, technologies do
exist that can make a difference over the next 10
to 50 years. Second, none of these technologies
can make a sufficient difference on its own.
Claude Mandil
Pursuing a portfolio of technologies will greatly
reduce the risk, and potentially the costs, if one
or more technologies fail to make the expected
progress.
Energy efficiency is a top priority
Improving energy efficiency is often the cheapest,
fastest and most environmentally friendly way to
meet the world’s energy needs. Improved energy
efficiency also reduces the need for investing
in energy supply. Many energy-efficiency
measures are already economic and will pay for
themselves over their lifetime through reduced
energy costs. But there are still major barriers
to overcome. Consumers are often ill informed.
Few are concerned with energy efficiency when
buying appliances, homes or cars. Even business
management tends to give energy efficiency
a low priority in decision-making. There are
also opportunities for energy efficiency that
consumers never see because the manufacturers
of refrigerators, televisions or cars do not always
take full advantage of the technologies that exist
to make their products more energy efficient. A
wide range of policy instruments are available,
including public information campaigns,
standards, binding and non-binding guidelines,
labels and targets, and fiscal and other financial
incentives. Governments should work to help
industry and consumers to adopt advanced
technologies that will deliver the same or better
services at lower costs.
With the best technologies for insulation, heating
and lighting, for washing clothes and dishes,
and for appliances and telecommunications, we
can make our homes and commercial buildings
70% more efficient than they are today. We
must exploit the huge potential for reducing
the energy needs of industry through more
efficient motors, pumps and boilers and by
implementing new process developments such
as advanced membranes, metal-casting methods
and bioprocesses. By capturing and storing
CO2 from highly efficient coal power stations,
by switching to renewables such as wind and
bioenergy, and through nuclear power, we must
largely decarbonise electricity generation. And
we must have lighter and more efficient vehicles
made with advanced materials and powered
by compact ultra-efficient engines burning an
increasing share of cost-effective biofuels. These
changes are applicable in all countries. Intense
international cooperation will be needed to help
developing countries move directly to the most
advanced and appropriate technologies.
Clean coal and CO2 capture and storage
technologies
CO2 capture and storage (CCS) technologies
can significantly reduce CO2 emissions from
power generation, industry and the production
of synthetic transport fuels. CCS could reduce
CO2 emissions from coal and natural gas use in
these sectors to near zero. The cost of CCS is
still high, but it could fall below $25 per tonne
of CO2 by 2030. When the captured CO2 can
be used for enhanced oil recovery (EOR), costs
could be lower and even negative in some cases.
However, the global long-term potential for
CO2 EOR is small relative to global emissions
from the power generation sector.
All the individual elements needed for CCS have
been demonstrated, but there is an urgent need
for an integrated full-scale demonstration plant.
Particularly when used with coal, it is important
that plants are highly efficient in order to limit
the cost increase of using CCS. More efficient
technologies for coal combustion are already
available or in an advanced stage of development.
These include high-temperature pulverised coal
plants and integrated coal gasification combined
cycle (IGCC) technology.
In the ACT scenarios, CCS technologies
contribute between 20% and 28% of total CO2
emission reductions below a business-as-usual
scenario by 2050. Clean coal technologies with
CCS offer a particularly important opportunity
to constrain emissions in rapidly growing
economies with large coal reserves, such as China
and India. CCS is indispensable for the role that
coal can play in providing low-cost electricity in
105
a CO2-constrained world. This is illustrated in a
scenario where CCS is not included as an option.
In this scenario, global coal demand is almost
30% lower than in the scenarios that include
CCS, and CO2 emissions are between 10% and
14% higher.
electricity generation in 2050. In a scenario
with more pessimistic prospects for nuclear, its
share of electricity generation drops to 6.7%.
In the more optimistic TECH Plus scenario,
nuclear power accounts for 22.2% of electricity
generation in 2050.
Electricity generation from natural gas
Electricity generation from renewables
The share of natural gas in electricity generation
remains relatively robust in all of the ACT
scenarios, ranging from 23% to 28% of total
generation in 2050. This is more than double
the gas-based electricity generation in 2003.
Ample reserves of gas exist to meet demand, but
many factors will affect its actual availability and
price. Natural gas emits only about half as much
CO2 as coal per kWh. The improved efficiency
of gas-fired electricity generating plants is one of
the success stories of modern power generation
technologies. The latest combined-cycle gas
plants reach efficiencies of around 60%. More
widespread use of this technology can reduce
emissions significantly.
By 2050, the increased use of renewables such
as hydropower, wind, solar and biomass in
power generation contributes between 9% and
16% of the CO2 emission reductions in the
ACT scenarios. The share of renewables in the
generation mix increases from 18% today to as
high as 34% by 2050. In a scenario with less
optimistic assumptions about cost reductions for
renewable technologies, their share of generation
is 23% in 2050. On the other hand, in the
TECH Plus scenario, which is more optimistic
for both renewable and nuclear technologies, the
share of renewables reaches more than 35% by
2050.
Electricity generation from nuclear power
Nuclear energy is an emission-free technology
that has progressed through several ‘generations’.
Generation III was developed in the 1990s, with
a number of advances in safety and economics,
including ‘passive safety’ features. Eleven
countries, including those OECD countries with
the largest nuclear power sectors, have joined
together to develop Generation IV nuclear
power plants. Three key issues present major
obstacles to nuclear energy’s further exploitation:
the large capital cost of power plants, public
opposition due to the perceived threats of
radioactive waste and nuclear accidents, and the
possible proliferation of nuclear weapons. The
development of Generation IV reactors aims to
address these issues.
Assuming that these concerns are met, increased
use of nuclear power can provide substantial
CO2 emission reductions. In the ACT scenarios,
nuclear accounts for 16% to 19% of global
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European View
Hydropower is already widely deployed and is, in
many areas, the cheapest source of power. There is
considerable potential for expansion, particularly
for small hydro plants. Hydropower remains the
largest source of renewable generation in all the
ACT scenarios.
The costs of onshore and offshore wind have
declined sharply in recent years through mass
deployment, the use of larger blades and more
sophisticated controls. Costs depend on location.
The best onshore sites, which can produce power
for about $0.04 per kWh, are already competitive
with other power sources. Offshore installations
are more costly, especially in deep water, but
are expected to be commercial after 2030. In
situations where wind will have a very high share
of generation, it will need to be complemented
by sophisticated networks, backup systems or
storage to accommodate its intermittency. In
the ACT scenarios, power generation from wind
turbines is set to increase rapidly. In most of the
scenarios, wind is second to hydropower as the
most important renewable source.
Claude Mandil
The combustion of biomass for power generation
is a well-proven technology. It is commercially
attractive where quality fuel is available and
affordable. Co-firing a coal-fired power plant
with a small proportion of biomass requires
no major plant modifications, can be highly
economic and can also contribute to reducing
CO2 emissions.
The costs of high-temperature geothermal
resources for power generation have dropped
substantially since the 1970s. Geothermal’s
potential is enormous, but it is a site-specific
resource that can only be accessed for power
generation in certain parts of the world. Lowertemperature geothermal resources for direct
uses like district heating and ground-source
heat pumps are more widespread. RD&D can
further reduce the costs and increase the scope
of geothermal power. Solar photovoltaic (PV)
technology is playing a rapidly growing role in
niche applications. Costs have dropped with
increased deployment and continuing research
and development (R&D). Concentrating solar
power (CSP) also has promising prospects. By
2050, however, solar’s share (PV and CSP) in
global power generation will still be below 2%
in all the ACT scenarios.
Biofuels and hydrogen fuel cells in road
transport
Finding carbon-free alternatives in the transport
sector has proven to be a greater challenge than
in power generation. Ethanol derived from
plant material is an attractive fuel with good
combustion qualities. It has most commonly
been blended with gasoline (10% ethanol
and 90% gasoline), but Brazil has successfully
introduced much higher blends with only minor
vehicle modifications. Ethanol from sugar cane
is produced in large volumes in Brazil, and it
is fully competitive with gasoline at current
oil prices. Today’s ethanol production uses
predominately starch or sugar crops, limiting the
available feedstock, but new technology could
enable lignocellulosic biomass feedstocks to be
used as well. This is currently one of the cutting-
edge areas of energy technology research.
The use of hydrogen from low-carbon or
zero-carbon sources in fuel-cell vehicles could
practically decarbonise transport in the long
run. But a switch to hydrogen will require
huge infrastructure investments. In addition,
although recent advances in hydrogen fuel-cell
technologies have been impressive, they are still
very expensive.
The increased use of biofuels in transport
accounts for around 6% of the CO2 emission
reductions in all the ACT scenarios, while the
contribution from hydrogen is very modest. In
the TECH Plus scenario, however, hydrogen
consumption grows to more than 300 Million
tonnes of oil equivalent (Mtoe) per year in
2050. Hydrogen and biofuels provide 35% of
total final transport energy demand in 2050
in the TECH Plus scenario, up from 3% in
the Baseline scenario. This returns primary oil
demand in 2050 back to about today’s level.
Policy implications of the ACT scenarios
Well-focused R&D programmes are essential
There is an acute need to stabilise declining
budgets for energy-related R&D and then
increase them if the results of the ACT scenarios
are to be realised. More R&D in the private sector
is critical. Some forward-looking companies are
increasing their commitments, but this trend
needs to continue and broaden. For technologies
that are already commercial, the private sector is
best placed to tailor ongoing R&D to the market’s
needs. Nevertheless, government-funded R&D
will remain essential, especially for promising
technologies that are not yet commercial. Some
of the areas with the greatest potential include
advanced biofuels, hydrogen and fuel cells,
energy storage and advanced renewables. There
are also some interesting areas of basic science—
especially biotechnologies, nanotechnologies
and materials—that could have far-reaching
implications for energy in the long term.
107
The transition from R&D to technology
deployment is critical
The deployment phase can require considerably
more resources than the R&D phase. Several
new technologies that are already on the
market need government backing if they are
to be mass deployed. Many renewable energy
technologies are in this position. The ‘valley of
death’ that new technologies face on the way
to full commercialisation must be bridged.
Experience shows that new technologies benefit
from cost reductions through ‘technology
learning’ as deployment increases. Governmental
deployment programmes can also activate R&D
in private industry by creating expectations of
future markets for the new technology.
There is a particularly urgent need to
commercialise advanced coal-fired power plants
with CO2 capture and storage. If this is done,
coal can continue to play a major role in the
energy mix to 2050, significantly reducing the
costs of shifting to a more sustainable energy
future. To accelerate the introduction of CCS,
at least 10 full-scale integrated coal-fired power
plants with CCS are needed by 2015 for
demonstration. These plants will cost between
$500 million and 1 billion each. The projects can
only be accomplished if governments strengthen
their commitment to CCS development and
deployment and work closely with the private
sector. Involvement of developing countries
with large coal reserves, such as China, will be
crucial in this process. Similar initiatives will be
needed to commercialise Generation IV nuclear
technology.
Governments need to create a stable policy
environment that promotes low-carbon energy
options
New energy technologies may be more expensive,
even after full commercialisation, than those
they are designed to replace. For example, CCS
technologies will not make a significant impact
unless lasting economic incentives to reduce CO2
emissions are put in place. Incentives are needed
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European View
in developed as well as in developing countries.
Incentives for energy-intensive industries will
have to be internationally coordinated to avoid
the risk that factories might relocate to lightly
regulated regimes, thereby actually increasing
global CO2 emissions. There are a range of other
barriers that can delay or prevent innovation and
market deployment of new energy technologies.
These barriers can take many forms, including
planning and licensing rules, lack of information
and education, health and safety regulations, and
lack of coordination across different sectors. All
these need attention if the potential of promising
technologies is to be realised.
Collaboration between developed
developing countries will be needed
and
By 2050, most of the world’s energy will be
consumed in developing countries, many of
which are experiencing rapid growth in all energyconsuming sectors. Developing countries will
therefore also need to consider energy security
and CO2 abatement policies. A significant
transformation of the global energy economy
is required to meet the legitimate aspirations of
developing countries’ citizens for energy services,
to secure supplies and to ensure sustainability.
Developed countries have an important role
to play in helping developing economies to
leapfrog the technology development process
and to employ efficient equipment and practices
through technology transfer, capacity building
and collaborative RD&D efforts. Fast-growing
developing countries offer opportunities to
accelerate technology learning and bring down
the costs of technologies, such as energy-efficient
equipment.
A sustainable energy system beyond 2050?
The ACT scenarios demonstrate a path whereby
global CO2 emissions in 2050 can be returned
back to their present levels and the growth
in oil demand can be halved—reducing oil
consumption by that time by more than 50%
of what it is today. Achieving the results of the
ACT scenarios will not be easy, and urgent
Claude Mandil
action is required if we are not to lock in a new
generation of inefficient energy infrastructure
and capital stock.
transport technologies and fuels will already have
a big impact by 2050. In any case, they must be
on our agenda for the longer term.
Timing is important. Some of these policies, in
particular, those related to energy efficiency, are
available with existing technologies and can be
implemented immediately. These opportunities
can allow us to moderate the growth in CO2
emissions in the short term and bring forward the
point when CO2 emissions peak. However, some
other technologies need additional research and
development efforts to obtain cost reductions,
in particular in renewables, before they can be
cost-effective. Deploying prematurely high-cost
renewables technologies is putting the cart ahead
of the horse.
How can we get onto this more sustainable
pathway that we have outlined? The chief agents
of change will need to be far-sighted businesses
and well-informed consumers acting in
competitive markets. But the role of governments
is indispensable. Governments can set the
framework, create the necessary incentives, help
overcome the resistance to change that all new
technologies face, and promote R&D as well as
demonstration and deployment, information
and regulation. The package of incentives used
could take many forms, but they will need to
make competitive all the solutions that do not
cost more than $25 per tonne of CO2 emissions
avoided, which means that developing the leastcost solutions is of key importance. And these
incentives will be needed in developing as well
as developed countries because by 2050, it is in
developing countries that most of the world’s
energy will be consumed.
The ACT scenarios represent a huge
transformation, but it is not, perhaps, a revolution.
Even assuming that all this is achieved, fossil
fuels will still supply most of the world’s energy
in 2050. In almost all scenarios, the demand for
oil, coal and natural gas is greater then than it is
today. Investment will still be needed in these
conventional energy sources.
By taking these steps, could we say that we
would be on a sustainable pathway? Not exactly,
because we will have only harvested the lowhanging fruit—primarily in the electricity sector.
More will need to be done. The key remaining
challenges would then be in transport. Without
breakthroughs in this sector, the risk is that
carbon emissions will increase again during the
second half of the century. This is not sustainable
as we have to remember that CO2 has a long life
in the atmosphere. Stabilising carbon-dioxide
concentrations in the atmosphere at any level
will require that we must eventually reduce CO2
emissions to near zero. To sustain the decline
through the second half of the century, we will
need to decarbonise transport substantially
through some combination of electric vehicles,
biofuels and hydrogen fuel cells, while continuing
to reduce the remaining emissions from the
other end-use sectors and electricity generation.
In our most optimistic scenario, these advanced
All this adds up to a demanding and
comprehensive programme of change with
global reach. It is what we think is needed for
a more sustainable energy future. The benefits
are great, and I do not believe that the costs are
disproportionate. We are certainly not on track
at the moment. The need for action is urgent.
Claude Mandil is Executive Director of the
International Energy Agency.
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Angela Merkel
Commentary: EU Energy Strategy - The German Perspective
By Angela Merkel
In the coming years,
the European Union
will face major energy
challenges. Demand is
increasing worldwide;
this is the result of global
population growth, and, more importantly, the
rising energy needs of populous countries such
as China and India. Fossil fuels, like oil and
natural gas, are still abundant, but resources
are concentrated in a few regions, frequently
plagued by political and economic instability.
The strong demand for scarce energy stocks
creates a problem for industrial countries with
few resources of their own; that includes Europe.
European dependence on imports of fuels such
as oil, natural gas and coal will continue to
increase.
The spectacular rise in energy prices reflects these
increasingly tense conditions. It causes hardship
for household consumers, of course, but it also
hinders industry’s ability to compete. The goal
of energy policy is to ensure that manufacturing,
the economy and the private sector have reliable,
secure access to affordable energy, the sine qua
non for prosperity and growth.
The security of supplies is therefore of
immense importance, in Germany and Europe.
Recognising the need for Member State action at
the European level, the European Commission
issued a Green paper, in March of this year,
on a common energy policy for Europe. The
priorities it identified—security, sustainability
and competition—are all equally important;
none of them can be viewed in isolation. In
assuming the presidency of the European Union
and the G8 next year, Germany will have a
unique opportunity to help shape European and
international policy accordingly, for assured,
sustainable energy supplies. We intend to seize
this opportunity. The challenge for Europe,
faced with rising global energy demands and
the resulting increasingly fierce competition for
access to energy sources, is to devise a balanced
strategy for the future.
With a common European energy market, it
will be increasingly important to define and
pursue common European objectives. If we
wish to strengthen Europe’s position in terms of
energy and economic strength, we must work to
integrate national and European energy policy
more closely, to harmonise the conditions of
doing business, and to bring about a marketoriented policy. At the level of the Member
States, a competition-driven energy mix is called
for. To minimise risks associated with security of
provisions and prices, energy supply needs to be
diversified: more sellers, more suppliers, more
energy sources.
Developments on the energy markets make it
necessary for the European Union to take a more
decisive and coherent stance in the international
arena on energy questions. Our intention is to
foster more, and closer, political and economic
ties with countries that provide us with energy
or transit routes for energy shipments.
Another major task will be to strive to achieve
functioning competition in the energy sector,
with the goal of limiting price growth. European
markets for electricity and natural gas are growing
together, and we have seen dynamic development
since the start of market liberalisation. However,
further efforts are indispensable. Barriers to
competition must be removed and access to
the infrastructure made as open as possible,
within the European regulatory framework, and
networks must be integrated; these are important
steps on the road to an economically revitalised
Europe.
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Commentary: EU Energy Strategy - The German Perspective
Energy-related research and development is a core
element of Europe’s energy policy. Research has
strategic importance, determining the directions
in which our energy policy will move. To reduce
our dependence on energy imports, we need
evolutionary, broad-based and open R&D, to
develop all known and available energy sources
and technologies and rationalise our use of the
resources. The broad field of advanced products
and power-saving technologies represents a
major opportunity for economic growth and
new jobs.
Using energy more efficiently and expanding
the place of domestic renewable energies
could significantly improve the energy security
situation and help to protect the global climate.
During our forthcoming presidency of the
European Union, we will work to ensure that
the EU meets its goals for increased reliance on
renewable energies by 2010, and try to reach
agreement on ambitious goals for 2020. Our
aim is to improve the international conditions
for energy investment, building on the prospects
for more efficient energy use and recourse to
renewable energy.
To avoid distortions of competition and be
effective in protecting the global climate, we
must engage the United States and major
countries with economies in transition, such as
China and India, in the post-Kyoto process. We
want to expand the “flexible mechanisms” of the
Kyoto Protocol, such as the clean development
mechanism and joint implementation, and
create a global market for emissions trading.
Germany will continue to play a strong role in
climate protection and meet its Kyoto target of
reducing harmful greenhouse gas emissions by
21 percent by the year 2012.
Faced with rising greenhouse gas emissions on
the one hand and increasingly scarce resources
on the other, it is absolutely vital that our energy
policy minimise waste and disruption to the
Photo: Laurence Chaperon
1
112
European View
environment. Globalisation means that problems
like climate change and increased consumption
of resources transcend national boundaries.
These are problems that we can only solve by
working together. Our energy policy has to be
positioned in its European and global context.
Angela Merkel is the Chancellor of Germany.1
Andris Piebalgs
A New Energy Policy for Europe
By Andris Piebalgs
On 24 March 2006, the
Member States of the
EU, after hearing the
opinion of the European
Parliament, gave a new
impetus to the EU’s
energy policy. This event marks an important
change in direction and signals a new awareness
that energy has truly become a global issue. The
global energy challenges that we face today can
only be solved at the global, and thus firstly at
the European Community level. The event also
recognises that the world is facing a whole new
set of energy challenges. First, global demand for oil and gas is increasing
rapidly. Oil demand has risen by as much as 2.5
million barrels per day in recent years. This is
inevitably putting pressure on supply, which,
along with the current instability in some oilproducing countries, is leading to volatility and
high prices.
Second, the EU is becoming increasingly
dependent on imported hydrocarbons. Current
trends indicate that the EU will import 70% of
its energy in 2030 compared to 50% today.
Third, massive investments are needed
throughout the global energy system in order to
meet future energy demand. In Europe alone,
this could mean as much as one trillion euros
over the next 20 years.
Finally, global warming is not just happening, it is
accelerating. According to the Intergovernmental
Panel on Climate Change, greenhouse gas
emissions have already made the world 0.6
degrees hotter, and if no action is taken this
will increase up to 5.8 degrees by the end of the
century. If the EU is to make its contribution to
stabilising global climate change, it must reduce
its CO2 emissions by at least 50% over the next
decades. However, other countries will also have
to play their part.
Need for a global response
This energy challenge requires a global
response: a new energy system based on
effective collaboration between producers and
consumers, greater efforts to increase energy
efficiency worldwide and a quantum leap in the
production of renewable and low-carbon energy.
The EU is in a unique position to lead this
response: it leads the world in terms of efforts
to produce competitive renewables and energy
efficiency and has established effective energy
dialogues with both producers and consumers.
However, European energy policy has so far
been fragmented and less focused than it could
be, which has certainly reduced its impact on the
global scene. If Europe could agree upon clearly
identified energy goals and priorities and pursue
them rigorously with a single voice, it could
lead the new global energy agenda instead of
following it. This is the fundamental reason why
Europe needs a common energy policy.
The Green Paper adopted by the European
Commission on 8 March 2006 at the request of
the Member States has put forward a basis for
such a common EU energy policy. It is based
on the idea that our energy policy should have
three core objectives: sustainable development,
competitiveness and security of supply. These
are not mutually exclusive goals; they are
complementary. Each aspect of our energy
policy needs to contribute to all three goals, and
taken together, they have to represent a coherent
package for achieving them.
The Green Paper identifies six priority areas for
action.
113
The first concerns the development of fully
competitive internal energy markets in Europe.
At the beginning of next year, the Commission
will reach a definitive conclusion on the situation
of the internal markets for gas and electricity,
but it is clear that today there remain too many
barriers to competition and too many differences
between the rules of the game in the different
Member States. Markets remain national in scope
and there is no level playing field. Half-finished
liberalisation in these sectors will not bring all
the benefits to EU citizens and industry that we
have set out to achieve, and the Commission is
deeply committed to resolving this.
Security of supply
The second priority area identified in the Green
Paper concerns security of supply within these
internal markets. This is often referred to in terms
of solidarity between Member States in the event
of a crisis. The Green Paper outlines a series of
measures aimed at dealing with internal energy
crises, as well as preventing them from taking
place. The most important of these include:
• the establishment of a European Energy
Supply Observatory that can identify the
likely shortfalls in infrastructure and supply
at an early stage;
• improved network security through increased
collaboration and exchange of information
between transmission system operators;
• a new crisis mechanism to prepare for and
ensure rapid solidarity with and possible
assistance to a country facing difficulties
following damage to its essential physical
infrastructure, as well as possible common
standards or measures that might be taken to
protect infrastructure;
• a more coordinated Community response
in the event of a decision to release stocks—
in particular, the publication on a more
regular and transparent basis of the state of
Community oil stocks; and
• the re-examination of the existing directives
on gas and electricity security of supply to
ensure they can deal with potential supply
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European View
disruptions. This is likely to include a new
legislative proposal concerning gas stocks
to ensure that the EU can react to shorterterm emergency gas supply disruptions in
a manner that ensures solidarity between
Member States.
Energy mix
The third priority identified in the Green Paper
goes to the heart of a European energy policy: the
EU’s energy mix. A European approach to the
EU’s energy mix is vital, but must nonetheless
respect subsidiarity. This can be first achieved
through transparency. On a regular basis,
therefore, the Commission suggests that it put
forward a comprehensive Strategic EU Energy
Review, covering all aspects of energy policy.
The first one will be submitted to the European
Council at the beginning of next year.
Furthermore, the results of this review could
suggest that Europe move towards a concrete
agreement on an overall ‘Strategic European
Energy objective’ at Community level. This
target would provide a benchmark on the basis
of which the EU’s developing energy mix could
be judged. It would combine the freedom of
Member States to choose between different
energy sources and the need for the EU as a
whole to have an energy mix that, overall, meets
its three core energy objectives.
Climate change goals
The fourth priority area identified in the Green
Paper follows from the energy mix discussion
and addresses the question of how Europe
should address its climate change goals in an
integrated manner, or in other words, in a way
that positively contributes to its competitiveness
and security of supply. This is becoming an
increasingly important question. If the EU is to
reduce its CO2 emissions by 50% or more in the
coming decades, it will need a series of actions,
including for example clean coal and carbon
sequestration. In any event, it will require a
major increase in carbon-free energy sources.
Andris Piebalgs
The Commission proposed at the end of
September an Action Plan on Energy Efficiency
with concrete measures to reach a target of
reducing the EU’s energy use on a businessas-usual scenario by 20% by 2020. Energy
efficiency is the only ‘no-brainer’ in energy
policy. An effective energy-efficiency policy
based on implementing cost-effective measures
is the only measure that contributes to all
three objectives of sustainable development,
competitiveness and security of supply. This is
why it has been my highest priority since taking
office and will remain so at least until the end of
this Commission. Although the Action Plan is a
work-in-progress, it will cover at least:
• long-term
targeted
energy-efficiency
campaigns;
• new financial instruments to catalyse
investments by commercial banks;
• mechanisms to stimulate investment in
energy-efficiency projects and energy-services
companies; and
• a major effort to improve energy efficiency
in the transport sector and in particular to
rapidly improve urban public transport in
Europe’s major cities.
Energy efficiency needs to become a global
priority. The Action Plan should serve as a ‘launch
pad’ to catalyse similar action worldwide, in close
collaboration with the IEA (International Energy
Agency) and the World Bank. In particular, the
EU should propose and promote an international
agreement on energy efficiency, involving both
developed and developing countries.
In addition to energy efficiency, it is clear that
the EU will have to take a quantum leap in terms
of its use of renewable energy and undertake
a major drive to make it competitive with
traditional energy sources. This is necessary not
only for reasons of climate change. We have to
lay the foundations today so that we can find
a solution when oil supply can no longer cope
with demand. This is an obligation that we
have to future generations of European citizens,
quite possibly our own children. The Green
Paper provides the opportunity for the EU to
take the next step in this respect, confirming its
world leadership in the use and development of
renewable energy technologies that represent a
rapidly growing global market. As a part of the
Strategic EU Energy Review, the Commission
will also bring forward a Renewable Energy
Road Map.
This will cover key issues for an effective EU
policy on renewables such as:
• an active program with specific measures to
ensure that existing targets are met;
• consideration of which targets or objectives
for 2020 are necessary, and the nature of
such targets, in order to provide long-term
certainty for industry and investors, as well as
the active programs and measures needed to
make this a reality;
• a new Community directive on heating and
cooling, complementing the Community’s
energy-saving framework;
• a detailed short-, medium- and long-term
plan to stabilise and gradually reduce the
EU’s dependence on imported oil; and
• research, demonstration and market
replication initiatives to bring clean and
renewable energy sources closer to markets.
Energy and research
The fifth priority area for action identified in
the Green Paper concerns the wider aspects of
energy and research. The EU is the only area
in the world that is effectively putting a price
on carbon, encouraging not only research into
low- or neutral-carbon technologies, but also
their implementation on the ground. These
technologies
represent
multi-billion-euro
global markets of the future. Anyone who pays
careful attention to the emerging research on
global warming knows that a climate wake-up
call is only a question of time and that others
will follow Europe’s lead, hopefully sooner
rather than later. We need to make sure that
Europe turns this determination to act into
a competitive advantage in research terms.
115
This means focusing the money spent at both
the national and Community level towards
programmes that are coordinated, focused and
result-oriented. The Commission will therefore
put forward a strategic energy-technology plan
for consideration by the European Council and
Parliament in the near future.
External energy policy
The final priority area of the Green Paper is
one of the most important. It concerns external
energy policy. It is in this area, together with
the energy mix, that major changes have been
proposed in order to deal with the global energy
challenges that I outlined earlier. Put simply,
Europe needs to use its economic and political
weight on the world stage to a much greater
degree than has been the case in the past. It
needs to clearly define its goals and aspirations
regarding its energy partners—both suppliers
and consumers—and then speak with one voice
to proactively promote these interests. Last June,
the Commission and the High Representative
for the Common Foreign and Security Policy
presented to the European Council the guiding
principles of this external energy policy in a
paper entitled An External Policy to Serve Europe’s
Energy Interests. I would like to highlight some
elements that will be essential in this area.
(i) A clear and proactive policy on securing and
diversifying energy—and in particular gas—
supplies
The EU needs an active, not a laissez-faire approach
to the infrastructure that serves its markets. This
has not happened in the past. The Commission
should therefore propose clearly identified
European priorities for new gas pipelines and
liquefied natural gas (LNG) terminals as well as
the concrete political, financial and regulatory
measures needed at the European and national
level to actively support business in completing
them. Examples mentioned in the Green Paper
include independent gas pipeline supplies from
the Caspian region and North Africa to the heart
of the EU and the new LNG terminals, serving
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European View
markets that are presently characterised by a lack
of competition between gas suppliers.
(ii) More effective energy partnerships
Furthermore, the definition of clear external
energy priorities for the EU will enable better
use of its energy dialogues. In particular, it will
enable real focus on the question regarding how
to develop a more effective energy partnership
with Russia. This partnership is one that would
be, for example, comparable to the model
relationship of the EU with Norway: based on
the recognition of inter-dependence, secure
investment conditions and reciprocity in terms
of access to markets and infrastructure. At the
same time we need to seize the impetus of the
G8 and push for rapid ratification of the Energy
Charter and the Transit Protocol. Where Norway
is concerned, the EU needs to take tangible steps
to support the country’s efforts to open the
high north of Europe to energy development
in an environmentally responsible way. This
will represent an important element of the EU’s
future security of energy supply and merits our
strong backing.
(iii) Developing a pan-European Energy
Community
The South-East Europe Energy Community is
a major success. It represents a first step in the
creation of a ‘common regulatory space’ around
Europe, progressively developing common
trade, transit and environmental rules, market
harmonisation and integration. This creates a
predictable and transparent market to stimulate
investment and growth, as well as security of supply
for the EU and its neighbours. Expanding this will
be a priority for the EU’s Common Energy Policy
in order to progressively create a pan-European
Energy Community, one that would include for
example Turkey and Ukraine, as well as Norway.
A similar model is being pursued regarding the
Euro-Med, and needs to develop further. Finally,
priority needs to be given to developing real energy
partnerships with the Caspian countries.
Andris Piebalgs
(iv) Reacting effectively to external crisis
situations
Any European energy policy needs to focus on
how best to react to external energy crises. Recent
experiences with respect to both oil and gas have
shown the need for the Community to be able to
react quickly and in a fully coordinated manner
to such events.
Conclusion: A need for an integrated
approach
Finally, it should be underlined that a European
Energy Policy needs to take an integrated
approach, involving all the aspects of the
Commission’s and the European Union’s work.
This goes for tax policy, agriculture, trade and
environment, to name but a few. However, I
would like to single out development policy,
because I think that an intelligent energy
approach to the EU’s assistance programmes
could bring profound benefits. Sub-Saharan
Africa, for example, has the lowest access in the
world to modern energy services. On the other
hand, it has enormous resources, particularly in
terms of local and renewable energy—only 7%
of Africa’s hydropower potential is tapped and
its solar potential is practically unlimited. The
achievement of a truly integrated approach in
this area must be one of the key outputs of the
follow-up to the Green Paper.
The Green Paper sets out the new energy
realities facing Europe in a world of global
interdependence, yet energy policy necessarily
has a European dimension. The challenge now
is to take the issues and options outlined in the
Green Paper and engage in a real and widespread
debate across Europe. On this basis, we need to
reach conclusions and move to concrete action
without further ado.
Andris Piebalgs is European Commissioner for
Energy.
117
Martin Roman
Nuclear Energy, European Energy Resources
and Sustainable Development
By Martin Roman
From the energy point
of view, the nineteenth
century was the era of
coal, while the twentieth
century was the age of oil
and natural gas. At the
beginning of the twenty-first century, we stand
at the crossroads once again. We must choose the
direction we will take carefully, with due regard
to many variables and unknowns. Whatever the
choices we make, nuclear power should have an
assured place in the energy industry, in Europe
and around the world. This conviction is based
on certain developments that I shall attempt to
explain in the following pages.
Historical background
Since the 1970s, the European nuclear energy
industry has been progressively marginalised.
There were several reasons for this. The rapid
development of science and technology through
the 1950s, emblematised for many by nuclear
power stations, was not capable of realising the
utopian desires for equality, affluence and peace
that were, perhaps naively, pinned on technology. Inevitable disillusionment coincided with
the revolutionary climate of the 1960s, in which
society gave vent to its weariness with the technocratic, centralised management of the state,
with a seemingly endless succession of armed
conflicts, and with the widening gulf between
the poor and the rich. At the same time, increasing affluence in the Western world gave the
middle classes the leisure to stand back from the
struggle for daily existence and direct their attention to other values, such as the ethical implications of their lifestyle and the protection of the
environment. These new stirrings in society gave
rise to associations and political alliances whose
programmes were directed towards these values.
Nuclear energy was a welcome scapegoat for
many groups seeking to capture a corner of the
market of democratic ideas. Nuclear power’s
ill-fated connection with the horrors of war, its
centralised production method and its close link
to the state all became targets of criticism. Nuclear radiation was successfully used as a taboo
for the emotional blackmailing of the public.
Two major accidents, Three Mile Island in 1979
and the Chernobyl disaster in 1986, appeared to
seal the fate of nuclear energy. Some European
countries (such as Austria) rejected nuclear energy outright; others (such as Germany, Sweden
and Spain) made plans to let their nuclear power
plants run until the end of their service life and
then retire them without replacement. Open
support for nuclear energy was equivalent to political suicide in most countries, with the possible
exception of France. Ecological pressure groups
solemnly rang the death knell for the atom.
Nuclear phoenix
Notwithstanding those grim prospects, the nuclear energy industry managed to rise from the
ashes. It is possible that the situation was never
as desperate as the opponents of the nuclear energy industry, blinded by ideology, made it out
to be. As early as the end of the 1990s, it had become clear that advances in scientific knowledge
on the one hand, and geopolitical developments
on the other, were bringing nuclear energy back
into the mainstream. I mean, of course, the two
major problems facing us today: global climate
change caused by emissions of greenhouse gases
into the atmosphere, and the instability of those
parts of the world where the largest reserves of oil
and natural gas are found. For the third millennium, we should also add two other issues: the
rapid economic growth of China (and, to a lesser
extent, India), which drives up the demand for
mineral resources and energy and, consequently,
their price; and the interconnection of financial,
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Nuclear Energy, European Energy Resources and Sustainable Development
industrial, and information markets and their
sensitivity to the slightest impulses emanating
from anywhere on the globe.
The European ministers responsible for energy
face the task of reconciling seemingly contradictory requirements: ensuring reliable supplies of
energy for their countries at a reasonable price
without exacerbating their dependence on imports, and, at the same time, meeting the obligations of the Kyoto Protocol on reducing
emissions. In this situation, it is not surprising
that Europe is starting to re-evaluate its attitude
towards nuclear energy.
The debate on tighter integration of nuclear
energy into the energy strategies of several key
countries was re-opened in 2001. The sceptics
who oppose this renaissance of atomic power
are essentially from the ecological activist
movement. The reality today is that nuclear
energy programmes are being revived in many
countries. Finland and France have already
started new developments, while other countries
are actively considering their own revivals. Great
Britain is one of the latter. The nuclear energy
industry in this country operates 23 power
plants, of which the oldest has already been in
service for over 40 years. The Blair government
not only promotes reconstruction of old facilities,
but also plans the replacement of some of those
approaching the end of their service life. The
government’s decision constitutes a challenge
for the industry and companies involved in the
nuclear energy sector.
Development of new power plants is typically
accepted for two reasons: it brings profitable
orders for local suppliers, and it creates new
job opportunities for the local population. The
progress that Central European countries have
made in nuclear development is also worthy
of note. The energy company ENEL, majority
owner of Slovenske elektrarne, is examining the
option of finishing the third and fourth blocks
of the Mochovce nuclear power station in the
coming years. At the same time, a modernisation
programme is being scheduled for the first two
blocks of the Mochovce power plant and the
Bohunice power plant.
In addition, the reconstruction of the nuclear
energy industry in the United States demonstrates
the renewed interest in nuclear energy throughout
the Western world. The United States operates
more nuclear power plants than any other
country, with 103 reactors in total.1 The number
of power stations is to increase further, with a
planned enlargement of the American industry’s
capacity by 24 additional power plants. The
federal government has devised a programme
to attract investors capable of financing the
development of nuclear power plants. Those
companies developing the first six new power
stations in the next 30 years will benefit from a
total of $2 billion from the government in the
form of state insurance against all risks. To revive
the domestic industry, licences will be extended
for operating, modernising and upgrading
existing power plants.
The service life of nuclear power plants built
in the 1970s is approximately 40 years. The
industry is thus entering a crucial period, with
resources approaching the end of their service
life. A one-for-one replacement could not ensure
supplies of sufficient energy, so there is a need
to continue developing new resources. Nuclear
power stations are subject to the same serious
considerations as all the other alternatives.
Whereas the global proportion of nuclear energy
is approximately 16%, in Europe it represents
about one third of capacity (see Graph 1).
Thus, merely to replace the existing nuclear
capacity with any other source of energy would
be a daunting task. Nevertheless, the demand
for energy, specifically for electricity, is still
increasing in Europe. In 2005, the demand
for electricity in the EU countries increased
by 1.1%.2 Nuclear energy offers a solution for
1
According to data published by the World Nuclear Association (WNA), September 2006
(http://www.world-nuclear.org/info/reactors.htm).
2
Statistics for 2006 from The Union of the Electric Industry–Eurelectric
(http://public.eurelectric.org/Content/Default.asp?PageID=460).
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European View
Martin Roman
dealing with these issues without imperilling the
already demanding Kyoto commitments.
Statements made by a number of prominent
ecology advocates show that this is more than
a political fad. News of an unexpected aboutface on the part of strident adversaries of nuclear
power in the light of the latest knowledge
on global warming has surfaced in both the
European and the American press in recent
months. In reality, this is frequently a matter of
long-time but quiet supporters who have finally
been able to express their opinions without fear of
hysterical reactions from their fellow ecologists.
Such is the case of James Lovelock, the respected
author of the Gaia theory, which portrays the
planet Earth as a single giant organism. Another
is Bruno Comby, French scientist and advocate
of healthy living. However, Patrick Moore, the
founder of the Greenpeace organisation, who
only recently rejected ecological extremism and
moved towards the promotion of sustainable
development, surely belongs among the real
‘converts’.
Graph 1
World Electricity Generation
Coal
39%
Hydro
19%
Oil
10%
Nuclear
16%
Gas
15%
The example of the Czech Republic
The European Union Member States govern
their own energy policy, and accordingly it is
difficult to generalise about the present situation. Thus, I shall focus on the Czech Republic
in what follows, although its example is in many
ways typical and serves to illustrate the current
European debate on nuclear energy.
The Czech Republic is literally situated on the line
dividing the proponents of nuclear power and
its adversaries. On one side, it borders Germany
and Austria, where the attitude towards nuclear
energy is dictated by the Greens, who wield
great influence with the larger political parties.
On the other side, geography and history tie
the country to Slovakia, where the majority of
the population is pro-nuclear (the situation here
is similar to an earlier one where we obtained
nuclear technology as part of our relationship to
the Soviet Union).
Finally, it cannot be overlooked that another of
the Czech Republic’s neighbours is Poland: a
country that in the past relied heavily on its rich
deposits of coal, but is now increasingly turning
its attention to other energy sources, including
nuclear, as a result of strict European Union
environmental regulations.
Although the Czech Republic operates six nuclear
reactors, and most Czechs are in favour of nuclear
energy, the pressure from neighbouring Austria
to abandon this method of energy production
is very strong. The relationship between the two
countries reached a low during negotiations on
the Czech Republic’s accession to the EU. Austria
even threatened to block the admission of the
country to the Union unless work on completing
the Temelin nuclear power plant, situated near
the Austrian border, was immediately stopped.
Austria also plays a strong political anti-nuclear
role within the European community.
As mentioned, the Czech Republic’s nuclear
power plants were developed as part of industrial cooperation with the Soviet Union. With the
completion of the two new blocks of the Temelin
nuclear power station in 2002, the proportion
of nuclear energy in the total energy mix passed
the figure of 40%. The largest share remains coal
(more than half ), while renewable resources follow far behind (3%). Nuclear energy has been
an integral part of the Czech energy mix for 20
years; calls to switch to other sources of power
are simply not realistic. Let me try to explain in
the following sections why this is so.
121
Like the other European states, the Czech
Republic is interested in maintaining its energy
diversity, while at the same time fostering a
gradual and economically acceptable increase in
the use of alternative resources, as older power
stations approach the end of their service life
and the country’s brown coal-burning power
plants grow old. Although some will undergo
significant modernisation, the development of
two completely new blocks is being considered.
However, some will need to be put out of service
just as forecasts indicate an increase in energy
consumption in the future.
After years of stagnation, the economy has
become greatly revitalised, and energy-hungry
industrial production is picking up. Moreover,
as the standard of living rises, the use of electrical
appliances by Czech consumers has increased.
Finally, the recent increase in extreme weather
conditions, with unusually cold winters and
heat waves in the summer, has also played a
role, increasing the consumption of energy for
heating and air-conditioning. The reminder
of global warming, which is thought to be
behind these weather extremes, brings us back
to the issue of emissions from coal-burning
power plants. Modernisation of older plants
and the development of advanced coal-burning
technology will indeed decrease emissions, but it
will never eliminate them completely.
This means, quite simply, that replacing nuclear
power with coal is not an option. Even if Kyoto
commitments are put aside, there remains the
problem of the environmental impact of mining
for coal. In 1991, the Czech Government
decided to refrain from expanding mining in the
north of the country, despite the huge reserves of
high-quality coal in the region. The main reason
was the sad legacy of the Communist era, when
villages were razed and thousands of people
displaced without adequate compensation, in
order to get at the coal. With scant resources
allocated to the reclamation of mined-out areas
at the time, the ghastly landscapes that remain
at the sites of the former strip mines make
the Czech public highly sensitive to this issue,
despite the considerable progress that has been
made since then.
Neither is it realistic to replace nuclear energy
with other types of fossil fuel, such as oil and
natural gas. The Czech Republic lacks any
significant domestic deposits, and is therefore
heavily dependent on imports. Thus, natural gas
is imported mainly from Russia (and partly from
Norway). However, two arguments stand against
increasing import dependence. First, there is the
steadily increasing price of oil (to which the
price of natural gas is closely tied). In 2004 and
2005, the price of a barrel of oil increased year
on year by 36%; compared to last year’s price, we
are now paying almost one third more3.
Given that not a single major oil refinery has
been developed in the Western world in the last
30 years, massive investment would be needed
not only for prospecting new fields, but also for
transportation and processing infrastructure.
Secondly, it is necessary to take the political
situation into account. Although the region is
not unstable in the same way as the Persian Gulf,
the crisis surrounding the supply of natural gas
from Russia to Ukraine earlier this year made it
clear that the government of President Putin is
prepared to use these exports as a foreign policy
tool. The historical experience of our country
makes this an extraordinarily sensitive issue for
the Czech Republic. Moreover, what is true
for coal also holds for gas: although modern
power plants may reduce emissions, they cannot
eliminate them.
That leaves renewable energy. In recent years, it
has become the focus of sometimes unrealistic
hopes for solving all the planet’s energy problems. Thus, ecological associations and Greens
sometimes promote renewable energy at any
cost, and often suggest it as a replacement for
EIA: Short term energy outlook, 2006 (http://www.eia.doe.gov/emeu/steo/pub/contents.html).
3
122
European View
Martin Roman
nuclear energy. Despite the inherent logical flaws
in the argument (why replace one emission-free
energy source with another?), this suggestion deserves an honest assessment. In this respect, the
Czech Republic is not in an enviable situation:
its location and geography are far from ideal for
renewable resources. Unlike mountainous Austria, the Czech Republic does not have enough
river capacity to increase the number of existing
hydroelectric power stations.
The vast areas needed for growing biomass cannot
be found either, the national territory being relatively small and heavily inhabited. Neither does
the Czech Republic have the flat landscape that
creates favourable conditions for wind power, although a few wind farms have been built, mostly
in protected areas, national parks or aesthetically
valuable landscapes. The uplands climate, for
its part, does not offer abundant rates of annual
sunshine, and the country has no geothermal
resources. This is not to discourage the efforts
being made to increase the proportion of renewable energy. On the contrary, these are laudable
efforts that deserve our support; however, it is
necessary to remain realistic, taking into account
conditions in the Czech Republic, considering
the impact on utilisation of electrical grid capacity, carefully analysing financial aspects, and not
least, respecting the wishes of the public. The
prospect of using alternative resources to replace
our nuclear energy production within a short
time thus becomes a very unlikely scenario.
Not ‘yes’ or ‘no’ to nuclear energy, but ‘nuclear
energy under what circumstances?’
The development of the nuclear power industry
is not possible without the consent of the
population. Studies show that myths and
misconceptions about nuclear power continue to
persist. Opponents of nuclear power successfully
use this to pass off their flawed arguments. The
best way to deal with this situation is to engage
in an open debate on the pros and cons of
nuclear energy utilisation. The company ČEZ
a.s. is making efforts to provide long-term public
education, starting with the younger generation:
a programme of lectures on nuclear power, aimed
at secondary school students, has met with great
success, confirming the interest of the public.
Some of the more common preconceptions
about nuclear energy that we have encountered
are listed below, along with the explanations:
Anti-nuclear claims
True or not?
Investment costs are high, and the return on
investment is low.
It is true that compared to other energy sources
(coal, gas, etc.), nuclear power appears to be
at a disadvantage due to the high investment
costs. However, this drawback is amply
compensated for in the long term by its low
operating costs. Nuclear power thus exercises
a long-term stabilising effect on prices.
Furthermore, nuclear power electricity prices
are not vulnerable to inflationary pressures,
as are other sources such as oil and gas.
123
Fissile material could fall into the hands of
terrorists. Power plants are a danger to the
surrounding population, because of the risk
of accidents and terrorist attacks.
An attack is highly unlikely, given the protection
accorded to the airspace above power plants, the
excellent security arrangements, the design of
the physical structure of the reactor building and
strict access control.
(The level of security against events in nuclear
power stations is actually very high; thus, the
security coefficient of the probability that damage
to the active zone of the Dukovany nuclear power
station might occur is just 1.7 * 10-5).
Standards and practices for handling fissile
material are inadequate and not rigorously
applied.
In fact, there is a very strict regulatory framework
in place, and compliance is monitored at the
national (SUJB) and international (MAAE)
level.
There are plenty of other resources in the
world; there is no need to invest in nuclear
energy.
Electricity production by nuclear power makes
it possible to avoid producing as much as 2.5
billion tonnes of carbon dioxide globally each
year.4
The remaining uranium reserves are
too limited to cover the nuclear energy
industry’s needs in the future.
OECD figures show that known uranium reserves, based on current mining prices, are 4.7
million tonnes, sufficient for at least 85 years
at current consumption levels. However, actual
global reserves of uranium and other fissile elements (such as thorium) are much higher,
enough for hundreds of years.
There are problems with the processing of
spent fuel and radioactive material.
The opposite is true. One of the big advantages of nuclear energy is that it generates so little waste, compared to other types of energy.
The technology of waste repositories is technically perfect. Advanced research continues on
recycling spent fuel. Unexpended fuel is completely isolated from the surroundings, being housed in special receptacles (containers).
Power stations disfigure the natural character
of the landscape (cooling towers are
unwelcome and oppressive elements).
In fact, nuclear power plants and their associated
educational centres are surprisingly popular
among tourists. Of course, any infrastructure
changes the character of a landscape; but this
is just as true of high-voltage transmission lines
and wind-turbine farms.
4
Statistical data of The Union of the Electric Industry–Eurelectric for 2005, published in September 2006
(http://public.eurelectric.org/Content/Default.asp?PageID=460).
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European View
Martin Roman
Why enlarge the nuclear infrastructure—
wouldn’t it be better to save energy instead?
The forecasts are for global electricity consumption to increase by 2.8% by the end of
2010, and this dramatic trend will continue (in
developing countries in particular).
Nuclear power plants are extremely centralised Nuclear power represents a stable, high-capacand are overly elaborate in their design.
ity, inexpensive and clean energy resource. For
this reason it fits well with the existing distribution grid, providing reliable, around-the-clock
power to homes and industry.
None of this is, of course, to say that nuclear
energy should replace all other energy sources.
As with renewable energy, it is necessary to
act carefully and thoughtfully. All aspects of
the question have to be considered: economic,
political, social and ecological. Thus, security
and safety should clearly have absolute priority
over other considerations, including profits. In
this regard, the standing of the nuclear power
plants in the Czech Republic is a source of
national pride: they have repeatedly achieved
excellent results in international evaluations,
and belong in the top third of the best and safest
power stations.
New trends in nuclear technologies
Like the other branches of the energy industry,
the nuclear power industry produces waste.
Processing the spent nuclear fuel has represented
a serious problem, leading to the rejection of this
resource by some countries when considering the
integration of nuclear energy into their energy
plans. However, research indicates that this will
not necessarily be the case in the future.
The possibility of reprocessing spent fuel promises
to make use of what is a valuable raw material
and reduce the burden on the environment
that is represented by waste deposits. Spent
nuclear fuel still contains about 95% of unspent
uranium. Presently, several facilities engaged in
reprocessing are in operation around the world:
The Hague, Netherlands; Marcoule, France;
Sellafield, Great Britain; and another facility
located on Russian territory. Approximately
10% of the global production of spent nuclear
fuel is currently reprocessed. The so-called
transmutation technologies are also of interest;
these use a combination of chemical reprocessing
and subsequent nuclear transmutation. However,
this method of reprocessing radioactive material
requires a new type of reactor, different from
those currently used in the world’s power
plants.
The Czech Republic is also involved in research
on modern nuclear technologies; however, for
the time being our country continues to rely on
temporary storage. This involves primary deposits
of spent fuel in basins located near the reactor and
in fuel cassettes in special containers; these are
subsequently relocated to a dry repository. They
are designed to be stored there for 60 years, long
enough for the above-mentioned technologies to
reach maturity so that utilisation of the stored
material becomes an option.
The reactors of the so-called third generation
(the first blocks are already in operation) and
the fourth generation (construction is to begin
in 2030) represent a significant new trend in the
nuclear power industry. More safety systems, optimised utilisation of nuclear fuel and higher performance are just some of their advantages. The
emerging new generation of reactors is to replace
all the ageing existing types. For the third generation, this means highly efficient reactors with a
125
high degree of passive safety. For the fourth generation, this means quick gas-cooled reactors,
quick liquid sodium-cooled reactors, quick liquid lead-cooled reactors, quick liquid salt-cooled
reactors, high-temperature water-cooled reactors or high-temperature helium-cooled reactors
could soon bring power to the electricity grids of
Europe and the rest of the world. Some of these
will surely be a part of the new energy production system based on a hydrogen economy.
To complete this survey of new methods in
the nuclear sector, mention must be made of
thermonuclear fusion. While the term may
evoke thoughts of the distant future for some
people, others recognise its potential as a source
of inexhaustible energy, capable of solving
humanity’s worries about how to provide for
its ever-growing demand for energy, thousands
of years into the future. A programme is under
way to put the world’s largest thermonuclear
reactor, ITER, into operation around 2032,
at the Nuclear Research Centre in Cadarache,
France. The European Union, Japan, the United
States, Russia, China, India and South Korea are
all participants in the project.
Appendix:
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European View
Epilogue
We tend to take the technical achievements of
modern civilisation for granted: we flick a switch
and the lights go on; we turn a dial and the
room gets warm; we pick up the remote control
and the TV set turns on. Although each of us
individually can reduce energy consumption to
some extent and thus help the environment, few
of us are prepared to dramatically change our
lifestyle. This is why we need a stable, efficient
and safe source of energy. Electrical energy
is an extraordinarily clean alternative, with a
minimum impact on the environment and users.
Our needs will continue to grow on a global
basis, as people in other countries deserve the
same levels of comfort that we enjoy. If we do
not want to suffocate the planet with greenhouse
gases, we must make use of all the available
ways of producing emission-free energy. We
have neither the time nor the space to indulge
in ideologies; debate must be based on rational
reasoning. Using nuclear power now to save the
Earth is not just an interesting option; from a
pragmatic point of view, it is an indispensable
part of the solution.
Martin Roman is the Chairman of the Board of
Directors and the Chief Executive Officer of ČEZ.
Environment, Development and Africa:
Europe’s Last Great Opportunity?
By David Rothbard and Craig Rucker
As European nations
adjust their internal and
external policies regarding the environment,
energy and economic
development to accommodate the needs and desires of the new
European Union, there is a great opportunity to
ensure that the new policies will be beneficial to
the developing world, and in particular to African
nations that were once European colonies.
Clearly, most Africans have not benefited much
from the worldwide economic boom that
has lifted many in the Pacific Rim and other
formerly poor nations out of poverty and into
the middle class. Indeed, Africa today has about
13% of the world’s people but accounts for only
2% of world gross domestic product—and the
trend is downward, not upward. Reversing this
trend will be good news for worldwide economic
growth and for the environment. By playing a
significant role in turning Africa around, Europe
could likewise reap significant benefits.
EU economic and environmental policies can
lift millions out of poverty
The answer to Africa’s needs, however, is not
more handouts or even aid forgiveness, as was
recommended at the June 2005 G8 summit in
Gleneagles, Scotland. Rather, it is in creating
a new class of entrepreneurs from among the
poorest Africans and in affirming the value of
market principles, relying on sound science and
re-committing to a balanced Judeo-Christian
understanding of environmental stewardship.
This article will show that despite what are often
good intentions on the part of the West, Africans
are increasingly uncomfortable with the vestiges
of a European colonialist mentality, whether it
be environmental mandates or restrictions on
economic development (sometimes the two
are intertwined). These holdover policies and
practices are hurting economic growth—and thus
the development of indigenous environmental
movements—all across Africa.
Unless Europeans undertake a major change
in course, there is evidence that Africa may be
seduced by new, possibly less scrupulous, trading
partners. Fortunately, there is a path that fits
in with the stated desires of many Africans—a
new approach to development that focuses
on people-to-people rather than governmentto-government relationships. By taking this
path, Europe can greatly expand economic
and political freedom in many African nations
and also regain prestige and respect among
African people themselves—while also realising
significant financial benefits for individual
European investors.
Self-determination for Europe—but not for
Africa?
As Europeans turn towards creating a common
approach to major policy issues, the temptation
is to be Eurocentric, especially when addressing
issues such as energy, economic development
and environmental policy. Meanwhile, African
nations today are beset with major obstacles to
achieving the kind of political and economic
freedom upon which good societies are built.
Among these problems are low savings and
investment rates, unstable economic and political
institutions, limited quantity and quality of
infrastructure and human capital, the prevalence
of disease, and negative perceptions on the part
of international investors.1
U.S. Energy Information Administration, International Energy Outlook for 2006, Chapter 1: “World Energy and Economic Outlook”
(rept. DOE/EIA-0484, June 2006).
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Environment, Development and Africa: Europe’s Last Great Opportunity?
History shows that rather than advancing
freedom, a prerequisite for truly constructive
development,
the demands of Western
institutions when addressing these issues have
typically downplayed the role of the individual
and have instead pressured (or allowed)
governments to institute policies that further
limit individual rights. As a result, the West
has become to Africa like the overprotective
mother who refuses to let her children grow
up and then blames them for not exhibiting all
the characteristics of maturity. Worse, Western
policies have often left Africans enslaved once
again by locally grown dictators (of the sort that
first sold their brothers and sisters into slavery).
According to economist William Easterly, a
major reason for Africa’s failure to prosper has
been that planners at the World Bank, the United
Nations and other Western institutions of power
have never motivated people on the ground
to carry out the good intentions formulated
in their ‘marvellous plans’.2 Easterly’s insights
belie the premise laid down by Nobel laureate
Amartya Sen that “the expansion of freedom is...
both the primary end and the principal means of
development”.3
Indeed, many Africans today recognise that the
West’s good intentions have had negative results.
They see the root cause of these misfires in the
failure, both yesterday and today, of the West to
listen to the voice of freedom-seeking Africans.
Instead, the West has sought to impose its own
priorities upon Africa.
Afonso Dhalakama, President of Centrist
Democrat International Africa, notes that most
of the economic development in sub-Saharan
Africa during the colonial period focused on
meeting the needs of colonial powers. In the
push towards independence that followed
World War II, the departing Europeans typically
(and blindly) turned over power to communist
movements or to parties that continued to stifle
the cries of most Africans for both political and
economic freedom.4
Today, there are new threats to Africans’ dreams
of freedom, none more daunting than that
posed by China, whose president has stated that
“Chinese cooperation [with Africa] does not
depend on good governance and democracy in
African countries.”5 Dhalakama’s great fear is
that Europeans, by insisting that Africans do
everything Europe’s way, are opening the door
wide for the Chinese to exploit Africa’s resources
in order to fuel China’s development and further
frustrate the advance of democracy in Africa.
Dhalakama urges Europeans today to assist
Africans in developing political parties that will
be responsive to the will and the needs of their
own people, and to support Africa’s growing
economies by undergirding and strengthening
national polities. Europe will benefit from
providing such assistance, but could lose heavily
by failing to strengthen indigenous and free
African institutions.
Expressing a similar viewpoint, former Eritrean
finance minister Gebreselassie Tesfamichael
responded to the June 2005 Live 8 campaign
(and the nearby G8 Summit in Gleneagles) with
these highly charged words:
The fundamental problem in Africa is not
lack of resources, but the failure of political
leadership. The modern African state is a
colonial creation, extractive in its design.
Its mission was not to serve the people,
but to dominate and exploit them. Despite
independence, and despite improvements
brought by numerous democratic elections,
the nature of that state remains intact.6
William Easterly, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good (New York: The
Penguin Press, 2006).
3
Amartya Sen, Development as Freedom. (New York: Anchor Books, 1999).
4
Afonso Dhalakama, “Political Parties in Africa as Instruments for Democracy”, European View, Spring 2006.
5
Dhalakama, op. cit.
6
Gebreselassie Tesfamichael, “In Africa, Just Help Us To Help Ourselves”, Washington Post, 24 July 2005.
2
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European View
Tesfamichael also expressed his frustration
that the international aid community insisted
on imposing its own guidelines for Africa to
follow in pursuing development. “We wanted
something different. We wanted a partnership
rather than a donor–client relationship”, and so
Eritrea refused to follow guidelines mandated
by the International Monetary Fund. Instead
of micro-management from thousands of miles
away, Eritrea conducted reforms dictated by the
realities on the ground, and its economy grew
by seven percent a year during the period 1992–
97.7
Cameroonian journalist Jean-Claude Shanda
Tonme likewise wondered how Live 8’s
supporters had so clearly failed to understand
that “Africa’s real problem is the lack of freedom
of expression, the usurpation of power, the brutal
oppression”, and that none of these problems
can be solved with debt relief, food aid or an
invasion of experts.8
Meeting needs for energy, food and health
World energy statistics bear out the perception
that Africa’s resources are being exploited today
nearly as much as in the colonial era. World
Energy Council Deputy Secretary General Jan
Murray reported in 2001 that two thirds of all
energy consumption in Africa came from highpolluting and disease-causing ‘appropriate’
technologies—wood, charcoal, dung and crop
residue—that Europe now disdains. Moreover,
Africa’s per capita energy consumption was
very low, and most of the commercial energy
the continent produces was being consumed
elsewhere.9 In short, little of Africa’s commercial
energy was being used to advance freedom on
the continent.
Europeans clearly understand the value of
energy resources. EU Energy Commissioner
Andris Piebalgs said in the inaugural issue of the
European View, “Without reliable, affordable and
safe energy, our economy would simply come to
a halt. In other words, we depend on energy for
our prosperity.”10 But European policies towards
Africa have ignored (or rejected) the potential
for building prosperity in Africa based on such
a model. Africa has huge reserves of oil and gas
and coal, as well as the potential for hydropower
and even nuclear power to provide locally usable
energy, yet Europe has balked at helping Africans
develop these resources.
The West has also taken a peculiarly jejune yet
pharisaic attitude towards Africa’s manifold
health problems. For example, malaria was
virtually eradicated in Europe and the United
States through the use of the pesticide DDT,
but for decades the West has imposed a virtual
ban on DDT use for any purpose. Meanwhile,
malaria attacks 400 million Africans a year,
killing well over a million and leaving countless
others debilitated for life.
Semi-annual indoor residual spraying of small
amounts of DDT is a proven weapon that
dramatically reduces the incidence and severity of
malaria without harming the environment, but
Western financial institutions, in collaboration
with environmentalists, have long insisted that
Africans rely solely on bed nets and expensive
after-infection treatments to fight this killer.
It has taken a worldwide campaign, led by Nobel
laureates Archbishop Desmond Tutu and Dr.
Norman Borlaug, Greenpeace cofounder Patrick
Moore, American civil rights pioneer Roy Innis
and others—sparked by African voices—to
effectuate a major change in policy in the United
States (in May 2006) on the use of DDT to
fight malaria. The World Health Organization
has also switched sides on DDT, but the battle
continues. Many African nations still fear
Tesfamichael, Op. cit.
Jean-Claude Shanda Tonme, “All Rock, No Action”, New York Times, 15 July 2005; a version of the article first appeared in French in the
Cameroonian daily, Le Messager.
9
Jan Murray, “Appropriate Energy Mix for Africa”, presented at the Workshop of the Nigerian Institute of Engineers, Lagos, 22 March 2001.
10
Andris Piebalgs, “The Lisbon Strategy and Energy: Making the Connection”, European View, Spring 2005.
7
8
129
that the World Bank or individual European
nations will not renege on past promises to ban
agricultural imports from nations using DDT to
protect human lives.11
Africans are also at odds with the West over
agricultural issues ranging from protectionist
tariffs and farm subsidies (in Africa as well
as the West) that leave African farm goods
uncompetitive in Western markets, to the
angst over biotech foods. Neither the EU nor
the United States budged an inch at the recent
World Trade Organization talks in Geneva,
though changes have been discussed for years.
Economist Thomas R. DeGregori has been a
major voice supporting green biotechnology as a
way to help Africa raise yields and protect plants
from disease.12 DeGregori argues that media-led
opposition to the use of green biotechnology
in Africa has deep roots in misguided beliefs
about science, agriculture and food production
that go back two centuries. Kenyan biotech
advocate Florence Wambugu likewise contends
that Africa must pursue biotechnology both
to feed its growing populations and to solve
its environmental problems.13 Africans, she
insists, “must [be allowed to] participate as
stakeholders” in biotechnology and other
emerging technologies so that they can have
some control over their development and use.
Africa desperately needs to increase its food
supply: malnutrition rates are falling worldwide
but are rising dramatically in sub-Saharan Africa.
Whether biotech is or is not the way to go,
actions to suppress agricultural biotechnology in
Africa provide yet another example of how nonAfricans are making decisions that affect the very
survival of Africans.
On yet another front, the highly acclaimed
Equator Principles, which require Western
financial institutions to meet the social and
environmental policies of the World Bank, may
well be discouraging much-needed economic
development in Africa’s undercapitalised nations.
The Chinese, of course, have not adopted these
principles—nor have many rogue nations with
which they are gaining influence.14
Changing perspectives on how we view the
poor
Thanks in part to the almost universal access to
cellular telephones and the Internet, Africa is
maturing politically and economically, even in
countries where oppression is widespread. As
Africans, even those in remote locations, gain
ready access to real-world information (from
war news to stock quotes), the old American
pop song becomes applicable: “How you gonna
keep ’em on the farm after they’ve seen Paree?”
European influence in Africa is thus at a true
turning point as many Africans are tired of 400
years of colonialism and its ongoing vestiges in
the post-colonial era.
Europe stands to benefit greatly by supporting
increased political and economic freedom
in African nations. A major reason is that
for centuries Africans have been educated in
European academic institutions, have learned
European customs and languages and interacted
daily with European businesses, governments
and non-governmental organisations. There is
tremendous untapped potential.
Nevertheless, bringing to an end or even
greatly shrinking African poverty is a daunting
proposition. It requires changing the way Europe
and the West look at and deal with Africa’s poor.
This means major changes in perspective and
philosophy—beginning with a re-assessment of
the nature of the individual and of the state.
Helpful here might be lessons from the American
Revolution, which was largely influenced by
Brian Handwerk, “DDT to Return as Weapon Against Malaria, Experts Say”, National Geographic News, 1 August 2006.
Thomas R. DeGregori, “The Green Revolution and Green Biotechnology in Africa: Missed One Revolution, Don’t Make It Two!” presented
at CORDIA, the EuropaBio convention, Vienna, Austria, 2–4 December 2003.
13
Florence Wambugu, “Why Africa Needs Agricultural Biotech”, Nature 400 (1 July 1999).
14
Thomas Borelli, “Equator Principles: Bad for Business and Freedom”, TownHall.com, 27 May 2006.
11
12
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European View
the writings of Europeans such as John Locke,
whose political philosophy promoted individual
rights and limited constitutional government
as the basis of freedom and economic security.
Building on Locke’s vision, Thomas Jefferson
penned these immortal words, found in the US
Declaration of Independence:
We hold these truths to be self-evident,
that all men are created equal, that they
are endowed by their Creator with certain
inalienable rights, that among these are life,
liberty and the pursuit of happiness—that
to secure these rights, governments are
instituted among men, deriving their just
powers from the consent of the governed.
Nearly a century later, Jean-Jacques Rousseau,
believing Locke’s worldview would divide
humanity by focusing on self-interest, individual
rights and property, set forth his own “Social
Contract” in which the “General Will” of the
people is embodied in the power of the state. Thus
the state can both create rights and distribute
them to whom it pleases—and is in effect the
ultimate authority. In defending the American
vision, James Madison agreed that the hearts of
men cannot be trusted, but believed that in a free
society the evil machinations of various factions
would be cancelled out through the political
process, leaving the good to triumph.
Recently, the ideals of Locke, Jefferson and
Madison were incorporated in the Cornwall
Declaration on Environmental Stewardship, an
eloquent document that encapsulates a JudeoChristian view of environment and development,
but whose principles are applicable well beyond
the faith community. The Cornwall Declaration
states that many people mistakenly view humans
as principally consumers and polluters rather
than as producers and stewards, and so ignore the
human potential to add to the Earth’s abundance.
Thus, many oppose economic progress in the
name of environmental stewardship, failing
to recognise the simple truth that the more
prosperous a society, the more likely it is to make
environmental protection a high priority.
Cornwall further asserts that free and prosperous
(and informed) citizens have the potential for very
beneficial management of the Earth’s resources,
and that nature does not fully ‘know best’. This
recognition, after all, forms the very basis for
holding any faith in beneficial environmental
stewardship. Locke and his modern-day disciple,
Peruvian economist Hernando de Soto, would
hold that the private ownership of property is
a key motivator for sound stewardship of land,
water and other resources. Common sense and
empirical data both show that people take better
care of property when they have an ownership
interest.
Finally, Cornwall argues that some environmental
concerns are without foundation or greatly
exaggerated, while other critical environmental
issues are ignored or downplayed. A major
reason for this (for example, eschewing DDT’s
benefits in combating malaria) is the failure—
whether conscious or unconscious—to consider
the environmental impacts on specific human
populations in setting environmental policies.
Thus, based upon Cornwall’s prudent
perspectives, perhaps the most vital thing that
westerners can do today in Africa is to humbly
embrace the observations of well-known
economist and author C. K. Prahalad, who
argues that we must stop thinking of the poor
as victims or as a burden and start recognising
them as “resilient and creative entrepreneurs and
value-conscious consumers” from whom we can
learn much and gain much.15 Westerners need
to stop dictating and start listening to the hopes
and aspirations and plans of these thoughtful and
energetic human beings who yearn for freedom
to realise their own visions for tomorrow. This
C. K. Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits (Upper Saddle River, New Jersey: Wharton
School Publishing, 2006).
15
131
means Europe and the West must move from a
Rousseauian to a Lockean mindset—one that
seeks to address the needs of individuals rather
than one that pursues political policies and
agendas to impose on them.
The stakes are high. African nations could
simply allow the Chinese and other like-minded
entrepreneurial neo-colonialist states access to
their markets, generating economic development
but without any commitment to expanding
human freedom or protecting the environment.
One thing is certain: Africans will not long
remain under the heavy thumb of European
‘parents’ who deny them the freedom to make
their own decisions about things that matter.
A new approach to African development
Europeans might take a serious look at the new
Millennium Challenge Corporation (MCC),
a creation of the US State Department. Under
this new programme, the United States has set
guidelines for aid eligibility that require nations
to meet standards for ruling justly, investing in
individual people and encouraging economic
and political freedom (including freedom
for women). The rules require nationwide
stakeholder meetings to identify in-country
barriers to development, ensure the participation
of civil society and make public the intended
uses for aid dollars. These reforms should foster
greater accountability for those in charge of aidfunded projects.
In Madagascar, the MCC approved a
$110,000,000 grant to help formalise that nation’s
land tenure system, modernise its land registry,
expand land title services to rural citizens, and
improve the national banking system. The grant
will also help establish a body that identifies
investment opportunities for rural citizens to
reach markets, and train farmers and other
entrepreneurs in production, management and
marketing techniques. These are all institutional
reforms that address abovementioned problems
of low savings and investment rates, unstable
economic and political institutions, and the
limited quantity and quality of infrastructure and
human capital. If implemented, these reforms,
which require accountability at every step in
the process, should increase the confidence of
individual investors that their profits will not
be stolen, and thus expedite investment and
business development.
The Committee for a Constructive Tomorrow, an
international NGO which works in the United
States, Europe and other nations on issues of
environment and development, is also pursuing
a programme that utilises Lockean principles in
a constructive manner. CFACT is developing a
new international development programme that
is modelled in large part on work done on a very
small scale by faith-based and other charitable
organisations in developing nations, and in
part on activities reported by Prahalad and
others. The programme begins with encouraging
people in local communities to devise their own
plans for economic growth and environmental
protection and then joins with them as partners
and advisors to help them achieve success.
This Social Entrepreneurship and Free-Market
Environmentalism Demonstration (SEFED)
programme builds on the time-honoured
principle that unless people who live in
developing nations take ownership of their
economies and their environment, the next
fifty years of foreign ‘assistance’ is likely to be
no more successful than the last half century’s
efforts. SEFED’s initial efforts have confirmed
that de Soto was right when he stated:
Hernando de Soto, The Mystery of Capital. (New York: Basic Books, 2000).
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132
European View
The cities of the Third World and the former
communist countries are teeming with
entrepreneurs.... The inhabitants of these
countries possess talent, enthusiasm, and
an astonishing ability to wring a profit out
of practically nothing.... Most of the poor
already possess the assets they need to make
a success of capitalism.16
The SEFED programme provides an avenue
by which westerners all too accustomed to
dealing with the poor from a charitable,
paternalistic viewpoint (or worse, from the old
opportunistic exploitation viewpoint) can learn
to interact with intelligent, motivated, yet still
poor entrepreneurs and community builders as
equal partners, supporting projects conceived
of and being developed principally by people
whose lifestyles have not included the myriad of
amenities most westerners are accustomed.17
Time to forge a new partnership
In sum, all that is really needed for Europe to
reverse four centuries of unfruitful mentoring
of African economic, political and societal
development is a change of heart and of
attitude—and the actions that naturally should
follow such a rebirth of vision. People who can
plead for species preservation on grounds that
even the least impressive (from our viewpoint)
species may hold the key to significant benefits
for humankind and the planet should be able to
see the same potential in every human being.
There is so much to be gained, both personally
and economically, from expanding our horizons
and partnering with people who previously
may have been overlooked (or looked down
upon), and Europeans are in a particularly
advantageous position to take full advantage of
these opportunities. The time has come and is
indeed near past when Europeans (and others
in the West) can begin to ask themselves: what
do Africans really want, and how can we work
together for mutual benefit to ensure that they
get what they truly need?
as full partners in economic development
and environmental protection. But a new
engagement with Africans at the ground level
will enable them to make their own economic
and environmental decisions—decisions that,
given Africa’s long history with Europe and the
recognition that all humanity wants a healthier,
wealthier future and a cleaner world, could foster
real change for the better.
The keys, then, are first, the humility to listen to
the ideas and visions of the poor; and second, the
willingness to visualise and assist in bringing to
fruition the economic growth and the increased
political and social freedom that will help the
poor achieve their goals. The rewards from such
an approach can be great—for Africa and for
Europe, too.
David Rothbard and Craig Rucker serve
respectively as president and executive director
of the Washington, D.C.-based Committee for a
Constructive Tomorrow (CFACT), a non-profit
public-interest organisation they co-founded in
1985 that focuses on issues of environment and
development.
The alternatives to this approach all forebode
trouble. Inaction or continued (hard-headed)
paternalism will surely allow unscrupulous
developers to enter Africa, further despoil the
environment and further frustrate the desire
of many Africans for freedom and respect
For more information on CFACT and its SEFED program, go to www.cfact.org.
17
133
European Strategy for Sustainable, Competitive and
Secure Energy: The Way Forward
By Ernest-Antoine Seillière
The media debate that
has developed in recent
months has acted as
a salutary reminder
that Europe needs to
take hold of its energy
future. Events surrounding gas imports into the
European Union at the start of this year coupled
with soaring oil prices and the radically new
nature of challenges linked to climate protection
are all factors that have contributed to this
salutary increase in awareness.
That said, a fair number of European citizens
feel powerless given the seemingly irreconcilable
nature of some of the issues. For instance, they
have the impression that the solutions required
by certain economic challenges, such as meeting
Europe’s growing energy needs, are bound to
have negative effects in terms of finding solutions
to other challenges, such as controlling CO2
emissions.
In my view, the energy challenge is not insoluble.
I am convinced that, with an intensification
of existing EU cooperative actions and an
improvement in their coherence, it will be
possible to reach the following three basic
objectives of EU energy policy:
• enable consumers to have wide access to
a spectrum of energy sources that are as
diversified as possible in terms of both
geography and technology (with a view to
ensuring a high level of energy supply security)
and reflective of the need to reduce the carbon
intensity of the energy supply;
• establish dynamic competition (within and
between sectors) between sources of energy,
enabling consumers to benefit from the most
competitive prices possible;
• address the environmental impact of energy
production and use.
The key to achieving harmonious progress
towards these three objectives is to keep in
mind the fundamental principles of sustainable
development. Protecting the competitiveness of
European industry is essential to generate the
prosperity needed to underpin a high level of
environmental investments and innovations. The
Commission has expressed this requirement very
well: “The competitiveness of manufacturing
industry is a cornerstone of the EU’s sustainable
development strategy.”
The following reflections present UNICE’s1
opinion on a broad spectrum of themes
comprised in energy policy. Some of them tackle
environmental issues directly, whereas others
comment on questions of a more political or
economic nature which UNICE believes need to
be solved so that issues linked to the environment
can be managed more effectively.
Role of national and European public
authorities
UNICE accepts that governments retain
some responsibility for the determination of
conditions governing the exploitation of their
energy resources and the structure of their supply.
However, the opening of energy markets makes
it imperative for there to be more transparency in
national decisions concerning energy policy on
issues that will affect the common energy market.
Furthermore, the Commission should foster
the emergence of a genuinely pan-European
Union of Industrial and Employers’ Confederations of Europe.
1
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European Strategy for Sustainable, Competitive and Secure Energy: The Way Forward
perspective on the energy/competitiveness/
environment issues, with a view, inter alia, to
facilitating management of these government
responsibilities.
Where market mechanisms have been left to
function efficiently, they long ago proved their
worth in terms of:
• quantitative development of resources;
• geographical
and
technological
diversification of resources;
• maintenance of production costs and
selling prices at the lowest possible level.
It is therefore essential that the European Union
and Member States, each in its own fields of
competence, ensure that appropriate basic
conditions are established to allow the market to
play this role of engine.
At a secondary level, it is up to the public
authorities to carry out certain actions to
complement and/or amplify the results produced
by market forces. Well-designed and effectively
implemented market-based policy instruments
can make an important contribution in this
context. However, they should be used with
caution and only after a thorough assessment of
impacts on EU competitiveness has been made.
The following sections set out both the issues on
which companies call for a strengthening of EU
cooperation and the approaches to be deployed
to that end.
Strengthen competition on electricity and gas
markets
While initial positive steps have been made
towards liberalisation, progress towards the
creation of a truly open EU market for gas and
electricity is insufficient. UNICE calls on the
Commission to consider all the powers, legislative
competences and co-regulation instruments at its
disposal for developing initiatives that ensure:
• existing legislative texts are applied by
136
European View
•
•
•
•
•
•
Member States not only in letter but also in
spirit. In particular, effective implementation
of current EU legislation is essential in the
area of unbundling the production and
transport of gas and electricity. Furthermore,
it is essential that national energy regulators be
independent (particularly from governmental
authority) and endowed with sufficient
powers to effectively enforce competition
rules at national level. More and better
coordination among national regulators
would also be a positive step forward;
players operating on the market have equal
access to the basic information they need
to plan their service offers and investments
efficiently;
increased transparency, in particular in the
price formation mechanisms;
obstacles to investments in cross-border
connections and the smooth day-to-day
operation of cross-border trade are dealt with
effectively;
more commitment from and cooperation
between national transmission system
operators are developed with a view to
creating a truly integrated European network
for transporting electricity and gas;
transmission system operators are encouraged
to cooperate with a view to facilitating the
integration of electricity based on renewable
energy in the network;
new market players are stimulated to enter
the gas and electricity market.
All these actions need to be taken urgently,
given that insufficient market liberalisation and
integration have very negative impacts on powerintensive industries, leading, in some sectors, to
a virtual standstill in investments on European
territory.
Develop a more active external policy in the
area of energy
Europe should coordinate as much as possible
the European Member States’ positions in
international forums and vis‑à-vis non-EU energy
suppliers. The development of the external energy
policy should include a strengthening of the
existing dialogues with producer countries and
the launch of new partnerships. The European
Commission should secure ratification of the
Energy Charter by Russia and rapidly conclude
negotiations of the Energy Charter Transit
Protocol with Central and Eastern Europe, the
CIS, Russia, Turkey, Japan and Australia. UNICE
also supports proposals to replace the EU-Russia
Partnership and Cooperation Agreement with a
full free trade arrangement that covers a broad
range of issues including cross-border energy
trade and investment.
A large reduction in the number of emission
allowances allocated in ETS Phase II would
exert upward pressure on the price of emission
allowances. With competition insufficiently
developed in the electricity market, it can be
anticipated that these high allowance prices
would result in markedly higher electricity
selling prices than would be the case in a highly
competitive electricity market, with a negative
economic impact for European industry. This
demonstrates the vital importance of enhancing
competition in electricity markets if the
functioning of ETS is to be improved.
The European Union can only develop a more
active external energy policy if its competences
for foreign policy are significantly widened.
I urge policy makers to move forward on this
issue.
Emission allowances should not be auctioned,
since that would only bring higher costs without
additional environmental benefits. Hence,
revision of the ETS directive should not increase
the possibilities open to Member States in this
area.
EU climate change policy
Genuine global cooperation involving all
countries and regions of the world in tackling
climate change is indispensable. In particular,
it is vital that highly efficient energy and other
technologies are deployed in rapidly growing
countries like China and India. It is essential
that Europe’s contribution to climate protection
be made in such a global framework and
that it make wide use of the instruments for
international cooperation which already exist,
such as the Joint Implementation and Clean
Development Mechanism, or which will be
developed in the future.
Development of climate policy post-2012
Climate protection calls for a truly global solution.
The task is therefore to devise a new architecture
for international cooperation in which all
countries and all regions of the world will be
willing to make a contribution on the principle
of common but differentiated responsibilities.
Review of the EU Emissions Trading Scheme (ETS)
and preparation for the second trading period
(2008-2012)
It must be recognised that not all players have
similar ideas about what methodologies should
be adopted to organise this international
cooperation. The EU advocates the adoption
of quantitative emission reduction objectives
whereas the US approach assigns a central role to
innovation and international partnerships. There
should be a comparative evaluation of these two
approaches.
Future emission reductions must be split in a
fair manner between industry and other sectors
of society. Industry has already made substantial
emission reductions and any further reductions
come at substantially higher costs. UNICE
therefore requests that the number of emission
allowances is not dramatically tightened in the
second trading period (2008-2012).
EU climate diplomacy needs to be revised and to
demonstrate an openness to defining innovative
approaches for combating climate change, rather
than continuing to advocate the adoption of
objectives and timetables for emission reductions
by countries which have made it clear that they
want to consider other methods for meeting the
climate challenge.
137
European Strategy for Sustainable, Competitive and Secure Energy: The Way Forward
Supply of low-carbon
technologies
or
zero-carbon
Large-scale investment in low-carbon energies,
zero-carbon energies, e.g. renewables and
nuclear, and technologies that capture and
sequester carbon can only be realised if the
framework conditions in which companies
operate are substantially improved. The
continual development of new environmental
legislation with constantly moving targets
should give way to an environmental policy that
is better at setting priorities and integrating with
other policy areas in order to release the expertise
present in companies to enable acceleration in
technological innovation.
Support for research and innovation constitutes
the most effective long-term approach
for promoting the development of energy
technologies with low carbon intensity. EU
programmes in this area should be substantially
strengthened, with a good balance being
maintained between research and exploitation of
research results.
In the short to medium term, UNICE believes
that support at the level of production or
consumption is still required in order to meet
the indicative 2010 targets, which were based
on political criteria,2 for use of renewable energy
sources (RESs) to produce electricity.
A well functioning internal electricity market
requires a unified, community-wide and costefficient market-based support framework for
the use of renewables in electricity generation.
A level playing field for European generators
of renewable-based electricity as well as for
consumers should be installed. The Commission
should start thinking about a process that could
lead, in the medium term, to a well-designed
EU-harmonised framework for the support
of renewables. Such a framework would yield
efficiency benefits compared to the existing 25
different national support schemes.
In the long term, EU-harmonised support
schemes for RESs should lead to an independent
market existence without any further support.
Renewable energy policy has to be based on
in-depth economic, social and environmental
impact assessments, and implemented in a
way that neither weakens nor hampers the
competitiveness of the European industry.
Nuclear energy
Nuclear energy is among the solutions available
for meeting both economic challenges (the
security and competitiveness of the electricity
supply) and environmental challenges (the
reduction of greenhouse gas emissions). In this
context, it is important that national debates
on energy policy evaluate the nuclear option
on the basis of objective and well-documented
elements. Progress is being made in this area, but
this varies very sharply from country to country:
there is no debate on nuclear energy in seven
EU countries while it is only just starting in
four others. By contrast, the debate is now well
under way in fourteen EU countries, with indepth studies being carried out. Three countries
recently decided to increase their recourse to
nuclear energy.
Europe is currently the world leader in nuclear
technologies. It is important to maintain this
position, in particular given that construction of
nuclear power stations is gaining momentum in
the rest of the world.
Energy efficiency
Energy efficiency promotes competitiveness,
protection of the climate and security of supply.
There is potential for further improvements in
energy efficiency in the industrial sector, but as
energy forms a core part of input costs, most
energy-intensives have already made exemplary
improvements. Further efficiency gains in
The EU target is that 21% of the electricity produced in 2010 will come from renewables.
2
138
European View
energy-intensive sectors will come at significantly
greater cost.
The key to promoting energy efficiency in
industry is to cultivate a sound climate for
business investment. This consideration should
greatly inspire the future EU Energy Efficiency
Action Plan, which will need to be based on
an in-depth assessment of the impacts of the
initiatives proposed on the economy, the energy
supply and the environment.
priorities. UNICE is willing to talk about the
content of this action plan with policy-makers.
Ernest-Antoine Seillière is the President of
UNICE.
Significant potential for improving energy
efficiency remains in the household/residential
and commercial sectors. It is essential to harness
this potential with a view to addressing climate
change. It is of vital importance to avoid the risk
that, without sufficient consumer involvement,
EU and national governments continue seeking
increasingly difficult-to-achieve improvements
in energy efficiency from the industrial and
energy sectors.
The opportunities linked to energy efficiency
should be seized by identifying barriers
to development and by strengthening the
implementation of already-approved directives.
New initiatives should only be developed if they
fully meet the cost-effectiveness criteria.
Conclusions
We can no longer talk about Europe’s future
without having a strategic debate on energy at
EU level. Similarly, the future of mankind cannot
be envisaged without a solid debate on and a
political commitment to climate protection.
These major challenges require a discussion
of many specific questions. UNICE and its
members are working actively on these questions,
which are currently at the top of the agenda.
UNICE is therefore very pleased that the March
2006 European Council decided to start work
on a new energy policy for Europe, which is
due to be debated in the March 2007 European
Council, on the basis of an action plan with clear
139
Erna Solberg
Europe and the Challenge of Energy: What Must Europe Do?
By Erna Solberg
A modern society is
dependent on a secure
supply of energy. Energy
is a necessity for most of
what we do during our
daily life: heating our
houses, cooking our food, using our appliances,
transportation, and the production of goods and
services.
The world is facing a demand for more energy,
both in the short and long run. In recent years
we have experienced the largest growth in
global energy demand in many years. Together
with political turmoil and a lack of available
production capacity, this has caused energy
prices to rise to levels we have not experienced
in many years.
The International Energy Agency (IEA) expects
an increase in global energy demand of 60% by
the year 2030. Of this, an estimated 80% may
have to be covered by fossil fuels. Two thirds
of the growth in overall energy demand will
take place in the developing world. This is a
consequence of population growth, urbanisation
and better economic living conditions. Access to
energy is an important key to development and a
better life for billions of people in the developing
world, just as access to energy has been a key to
development in Europe since the first industrial
revolution. One billion of the world’s people
live today in industrialised countries, while
5.5 billion live in developing countries. Today
the industrialised countries and the developing
countries consume about the same amount of
energy, approximately 100 million oil equivalents
per day. But with the economic growth in highly
populated developing countries, this picture will
change in the coming years. China and India
currently represent more than one third of the
world’s population, but account for less than one
seventh of global energy consumption. About
two billion people have to manage without
electricity. If the developing world is to achieve
development and economic growth, a supply of
energy is fundamental.
The security of energy supply has also been high
on the political agenda in Europe in recent years.
We were reminded about the vulnerability of
Europe’s energy supplies during the Russian–
Ukrainian dispute over gas delivery last January,
when Europe’s gas supplies seemed threatened
for a while. This added to the pre-existing
vulnerability owing to the dependence on the
turbulent Middle East and Persian Gulf area for
oil supplies.
Norway—a major energy supplier
Where does this leave Norway, the largest
energy producer in Western Europe? As a major
producer of oil and gas, we do not have to worry
about our security of supply. However, meeting
the increasing global need for energy is also our
responsibility. Total Norwegian oil production
(including NGL/condensate) was about 3.2
million barrels per day in 2004 and the net
export of oil was around 3.0 million barrels per
day. This makes Norway the seventh-largest oil
producer in the world, and the third-largest net
oil exporter. Norway is also the world’s thirdlargest exporter of natural gas.
Norway is part of the internal energy market in
the EU through the EEA (European Economic
Area) Agreement and cooperates with the EU
on several energy policy issues. A total of 80%
of Norwegian oil production is sold in the
EEA market, and almost all Norwegian gas
production is delivered through five pipelines
to continental Europe. Norway covers around
15% of oil and gas consumption in the EU, and
141
we have more than 50% of the remaining oil
and gas reserves in the EEA area. In the coming
years, the focus of Norwegian production of oil
and gas will shift further north, to the Barents
Sea and the northern part of the Norwegian
Sea. The US Geological Survey estimates that
approximately 25% of the world’s undiscovered
petroleum resources may be north of the Arctic
Circle. Although the major part of this will be in
the Russian sector, we hope to make substantial
discoveries of oil and gas in the Norwegian sector
of the Barents Sea, as well as in the northern
areas of the Norwegian Sea.
In 2002 the centre-right government of Kjell
Magne Bondevik, of which Høyre was the
largest party, opened the Snøhvit (Snow-white)
gas field in the Barents Sea for production. This
gas field will start production in 2007. Gas will
be extracted through a subsea installation and
transported ashore to Melkøya, outside the city
of Hammerfest, where the gas will be converted
to liquefied natural gas (LNG) and shipped to
customers in the United States and Spain.
The opening of Snøhvit was followed in 2005
by a general opening for oil and gas activities in
the Barents Sea by the Bondevik government
through the 19th licensing round. In December
of last year, a major oil discovery was made by
the multinational company Eni on the Goliat
field, close to Snøhvit. This discovery is expected
to make oil production on Goliat viable.
The expansion of oil and gas activities into Arctic
areas is, however, not undisputed. These waters
present many challenges, including a vulnerable
environment, changing ice conditions, darkness
and long distances to markets. The potential
rewards are also large. The Barents Sea could
represent the new petroleum province of
Europe. Further development of the Barents
Sea will enable the oil companies to explore and
develop new areas. I believe that the cuttingedge technology and innovative skills needed
to do this will also be key in developing other
Arctic areas.
142
European View
We share the Barents Sea with our Russian
neighbours. The relationship between Norway
and Russia is therefore an important part of our
policies concerning this region. A main point is
that the challenges in the north must be solved
in the best possible manner in close cooperation
between our two countries.
The Barents Sea is described by many as the
cleanest ocean in the world. This must be
preserved. Value creation here must therefore take
place in such a manner as to ensure the healthy
coexistence between the different users of the sea
and the environment. The Barents Sea, as well
as the northern part of the Norwegian Sea, is an
important breeding ground for many valuable
fish stocks. Fishing is the traditional source of
income for a large part of the population in
northern Norway. Høyre believes there are good
possibilities for coexistence between the interests
of fishing, the environment, and the oil and gas
industry.
Norway has adopted some of the world’s
strictest conditions for petroleum exploration
and production in the Barents Sea. We have a
policy of zero discharge to sea from operations. I
believe that these measures are necessary in order
to ensure the sustainability of our operations. I
might also add that these targets are an important
part of securing public acceptance for operations
in these areas. The oil industry has met these
demands by developing some of the world’s most
sophisticated technology. There is no doubt that
the tough environmental standards have been a
key element in the technological development
of the oil and gas industry, something we hope
will also give Norwegian oil and gas companies
a strong competitive position when they seek
opportunities in other parts of the world.
Norway already has approximately 35 years of
experience as an oil and gas producer in the
North Sea and around 20 years of experience
in the Norwegian Sea without any major
environmental disasters. In fact, there has so far
been no evidence of any negative impact on the
environment in the North Sea or the Norwegian
Erna Solberg
Sea caused by oil and gas activities. Environmental
concerns and the need for coexistence between
fisheries and the oil and gas industry has led to
the development of an Integrated Management
Plan for the Barents Sea and the sea areas off
Lofoten. The plan was initiated by the Bondevik
government but concluded in March 2006 by
the present left-wing ‘Red–Green’ Stoltenberg
government, which came to power in October
2005. The Integrated Management Plan accepted
the opening of the Barents Sea by the Bondevik
government for oil and gas activities, except for
a zone along the coastline. However, further west
it closed off the sea areas outside and north of
Lofoten to any future oil and gas exploration
activities until 2010.
Høyre is critical of this concession to the anti-oil
fringe in the Socialist Left Party, one of the three
parties in the Red–Green alliance. Prime Minister
Jens Stoltenberg’s Labour Party, the main party
in the Red–Green government, promised in the
campaign leading up to last autumn’s parliament
elections that the Labour Party would not close off
the area outside Lofoten for petroleum activities.
By breaking this promise, as a concession to the
Socialist Left Party, the government has closed
off one of the most promising petroleum regions
outside Norway to oil and gas production for at
least 10 years, as it will take several years from
the time exploration begins until oil and gas
production can eventually begin. This has been
done at a time when the world is hungry for
more energy supplies. Høyre’s position is that
environmental concerns should be met through
tough environmental standards, not by closing
off valuable areas completely.
Further south, the development of the giant
Ormen Lange gas field outside central Norway
will be completed next year. Ormen Lange is
the second-largest gas field on the Norwegian
continental shelf. In October 2003, the
Norwegian and UK ministers of energy signed
an agreement that provides a firm basis for
investment in cross-boundary projects, most
notably the Britpipe pipeline from the Sleipner
field to Easington in the UK. Starting in October
this year, Britpipe will bring an estimated 20 bcm
pa of dry gas from Norway to the UK, meeting
20% of the UK’s demand for natural gas in the
coming years. The gas will first be provided by
the Sleipner field, and beginning in 2007 from
the Ormen Lange field.
Hopefully, we will add to the contribution from
Snøhvit and Ormen Lange with more oil and gas
from the areas further north in the coming years.
This will depend on the oil and gas companies
finding new reserves in the Barents Sea and the
political authorities giving them the opportunity
to search for petroleum reserves in promising
new areas such as the sea areas off Lofoten.
Improvements
necessary
in
energy
efficiency
are
Adding new sources of energy supply from fossil
sources is important, but not enough on its own.
In the end, fossil fuels are not renewable, and
they contribute to global warming through the
emission of greenhouse gases. Along with taking
a long-run perspective on energy policy and
facing the large expected increase in demand
in the coming years, we also need to focus on
energy efficiency and supplementing traditional
fossil fuels with renewable energy sources. An
important part of Norwegian energy policy is
therefore promoting energy efficiency, renewable
energy sources, and new energy technologies.
Cooperation at the European level is vital,
giving an important impulse to the formulation
and implementation of domestic policies and
contributing to the dissemination of policy
instruments and energy technologies.
In Norway we have read the EU’s 2005 Green
Paper on energy efficiency (Doing More with
Less) with great interest. This Green Paper
identifies the potential for a reduction of at least
20% in the EU’s present energy consumption in
a cost-effective manner. Such an improvement is
an ambitious goal. However, if it is achieved, it
will reduce the energy bill for both households
and industry, and therefore improve the
competitiveness of European industry as well
143
as the living standard of EU citizens. The
Green Paper states that such savings in energy
consumption will reduce the EU’s energy costs
by €60 billion per year, equivalent to the present
energy consumption of Germany and Finland.
An average EU household could save between
€200 and €1000 per year in a cost-effective
manner.
would bring down prices, improve security of
supply, and boost competitiveness. It would also
help the environment, as companies would react
to competition by closing inefficient plants. This
is a view that Høyre shares. Pushing through
the full completion of the internal European
electricity and gas markets should be high on the
agenda for Europe’s centre-right parties.
Increased energy efficiency is also necessary to
meet the obligations of the Kyoto agreement for
more sustainable energy use. Saving energy is the
quickest, most effective, and most cost-effective
manner for reducing greenhouse gas emissions as
well as improving air quality. Energy saved is the
most environmentally friendly ‘energy source’.
Increased energy efficiency will also reduce
Europe’s dependence on energy imports.
Progress has been made. In July 2007, with very
few exceptions, every EU consumer will have
the legal right to purchase electricity and gas
from any supplier in the EU. This offers a major
opportunity for Europe. Also, the opening of
markets in Europe so far has reduced electricity
prices. For large industrial users the prices have
fallen in real terms by an average of 10%–15%
between 1995 and 2005.
Liberalising European energy markets
However, while much has been done to create a
competitive market, more remains to be done to
ensure real and effective competition in all areas
of the EU. Many markets remain largely national
and are dominated by a few companies. Many
differences remain between Member States’
approaches to market opening, preventing the
development of a truly competitive European
market. I have noted the EU Commission’s worries
about lack of progress on this matter. The EU’s
Commissioner for Competition, Neelie Kroes,
warned recently about protectionist tendencies
in European energy markets, especially national
resistance towards cross-border mergers. “Crossborder mergers tend to be better for consumers
… than mergers between national players that
would otherwise compete in the same national
markets”, she explained. This is a field where
the Commission should continue to keep up its
pressure on Member States.
An important element in achieving a more
efficient use of energy is open energy markets,
both for electricity and gas. Liberalised energy
markets will benefit both consumers and
industry in Europe. Therefore, progress should
be made in the present process towards more
liberalisation of electricity and gas markets in
Europe. The Green Paper on energy efficiency
clearly says that opening the markets has had a
positive effect on energy efficiency. Competitive
pressures have driven electricity companies to
produce in the most effective way, particularly
through technology investments such as
combined-cycle gas turbines, which replace
many old and inefficient plants. This is further
underlined in this year’s Green Paper on energy
security, A European Strategy for Sustainable,
Competitive and Secure Energy. The Green Paper
emphasises that sustainable, competitive, and
secure energy will not be achieved without
open and competitive energy markets, based
on competition between companies looking to
become European-wide competitors rather than
dominant national players. Open markets, not
protectionism, will strengthen Europe and allow
it to tackle its problems. A truly competitive
single European electricity and gas market
144
European View
In the Nordic countries, we have enjoyed a
liberalised electricity market since the early
1990s. Contracts for delivery of electricity are
traded at the Nordic power exchange (NordPool)
in Oslo, established by Norwegian and Swedish
system operators. High-voltage transmission
and subsea connections have integrated the
Norwegian electricity market with those of the
Erna Solberg
other Nordic countries. Electricity generation
in Norway in a normal year is now calculated
to be about 119 TWh. However, there are large
fluctuations in production from year to year due
to variation in precipitation, as the Norwegian
production of electricity is almost exclusively
(99%) dominated by hydropower plants.
The liberalisation of the Nordic electricity
markets has been a success. The liberalised
Nordic electricity market provides an effective
coordination of generation from hydropower,
nuclear power, and coal within the production
capacity of the Nordic countries. It gives adequate
market signals to sustain a necessary level of
investments in generation capacity, and secures
well-functioning transmission capacity within
Norway and between the Nordic countries. In
Norway, electricity prices to consumers during
most years in the period after liberalisation have
been significantly lower than they were before.
The main challenge in the Nordic electricity
market is its dependence on hydropower.
Hydropower has many advantages as a renewable
and environmentally friendly source of energy,
without emissions of greenhouse gases. However,
it has the disadvantage of making us dependent
on precipitation. In the Nordic electricity market,
both Norway and Sweden have based most of
their electricity production on hydropower from
rivers and waterfalls, even though Sweden also
has a significant capacity in nuclear power and
bioenergy. This lack of diversification makes
us vulnerable to weather conditions. One
important benefit in a European integrated
electricity market is a larger diversification of
energy supply, where Scandinavian hydropower
can be efficiently combined with thermal and
nuclear power from other European countries.
This combination of hydropower with thermal
and nuclear power has a great advantage as
production in hydropower plants is flexible and
can, in contrast to nuclear and thermo power,
be easily adjusted. Electricity from hydropower
plants can therefore handle peak loads in demand,
while nuclear and thermal plants handle the base
load. By combining different sources of energy
in an integrated market, we can benefit from the
strength of each energy source in an efficient way.
This interaction makes efficient use of different
energy sources.
Consumers need a single European grid for a
real European electricity market to develop. This
can only be done by ensuring common rules and
standards on issues that affect cross-border trade.
More investment is needed in interconnections
between the EEA Member States. Høyre
therefore fully supports the building of NorNed,
a new electricity cable between southern Norway
and the Netherlands, which will be completed in
2008. The NorNed cable will have a capacity of
600 MW and will increase the capacity of power
exchange between Norway and other European
countries by 20%. NorNed is important in
integrating the continental European electricity
network with Scandinavia. Better connections
and increased integration between the electricity
grid in Scandinavia and continental Europe will
create a foundation for a better and more efficient
utilisation of energy resources in Europe, and
will improve the security of supply.
Energy demand and the environment
What effect will the growth in global energy
demand have on the environment? Fossil fuels
account for 85% of global energy consumption
today. IEA expects the same sources of energy to
cover most of the global energy demand in the
coming 30 years. This will eventually cause a large
increase in emissions of greenhouse gases. This
is in conflict with the Intergovernmental Panel
on Climate Change (IPCC) recommendations
that the world has to reduce emissions of
greenhouse gases if we are to avoid serious
climate changes. To reduce emissions of CO2
at the same time as global demand for energy is
rising sharply is one of the major challenges the
global community is facing. Market prices for
energy have to include the full environmental
costs connected with energy production. Høyre
believes in the principle of making the polluter
pay, and this principle should also be used in
145
the energy sector. Energy is the source of four
fifths of total greenhouse gas emissions in the
EU. Through the quota system outlined in the
Kyoto Protocol, a price is put on emissions of
greenhouse gases. In the Kyoto Protocol, all
European countries have committed themselves
to reductions in emissions of greenhouse gases.
The Kyoto commitments have to be reached
in a cost-effective way, without increasing the
general level of taxes. One such cost-effective
way is international trade in emission quotas, as
outlined in the Kyoto Protocol.
Both Norway and the EU have implemented
an early trading scheme for greenhouse gas
quotas in advance of an international trading
scheme that will be put in place in 2008. The
EU Emissions Trading Scheme (ETS) and the
similar trading scheme in Norway will have
given us valuable experience when the broader
international trading scheme starts up in one
and a half years. Høyre believes in market-based
solutions to solve environmental challenges.
Our opinion is that a system with international
trade in greenhouse gas quotas is a cost-effective
way to reach the goals outlined in the Kyoto
Protocol, despite the start-up problems the ETS
experienced during the last year. The widening of
the market, both in the number of participating
countries and in the number of sectors included
in the trading scheme, will hopefully solve those
initial problems and provide more stable quota
prices.
Conclusion
Securing Europe’s energy supply at a time of
rising global energy demand will be a major
political challenge in the coming years. Increasing
energy supply at the same time as we need to
reduce emission of greenhouse gases makes the
challenge even greater. Keeping production
levels of Norwegian oil and gas high to provide
stable deliveries to our European neighbours,
especially through moving into new oil and gas
regions off the country’s northern coasts, is high
on Høyre’s political agenda. At the same time,
both Norway and the EU should work towards
146
European View
using our energy more efficiently. The opening of
markets for electricity and gas, along with other
measures for a higher level of energy efficiency,
as presented in the EU’s Green Paper on energy
efficiency, are important factors in this matter.
Erna Solberg is Party Leader of Høyre.
Bibliography
European Commission (June 2005). Green paper
on energy efficiency or Doing more with less.
European Commission (March 2006). A
European strategy for sustainable, competitive and
secure energy (Green Paper).
Kroes warns against protectionism in EU energy
markets (4 September 2006). EurActiv.com.
Norwegian Ministry of Petroleum and Energy
(May 2004). Stortingsmelding nr 38 (2003–
2004) Om petroleumsvirksomheten (White
Paper to the Norwegian Storting no 38 [2003–
2004] on Petroleum Activity).
Norwegian Ministry of Foreign Affairs (May
2004). Stortingsmelding nr 30 (2004–2005)
Muligheter og utfordringer i nord (White Paper
to the Norwegian Storting no 30 [2004–2005]
on Possibilities and challenges in the north).
Norwegian Ministry of Environment (March
2006). Stortingsmelding nr 8 (2005–2006)
Helhetlig forvaltning av det marine miljø i
Barentshavet og havområdene utenfor Lofoten
(White Paper to the Norwegian Storting no.
8 [2005–2006] on Integrated management
plan for the Barents Sea and the sea areas off
Lofoten).
Borys Tarasyuk
By Borys Tarasyuk
At the beginning of the
twenty-first century, the
world economy faces
the most acute problem
affecting the future of
global development:
reliable and safe energy supply. Turmoil in the
oil and gas markets has happened before, but the
present situation differs from the energy crisis
of 1973–74 or the sharp increases in oil prices
in the 1980s (during the Iran–Iraq war) and 90s
(the Iraqi invasion of Kuwait). In addition to
the unfortunately usual negative factor of the
Middle East, several rather unexpected issues
must be taken into account today, namely
the rise of new world-class consumers on the
market—the fast-growing economies of China
and India—and the practice of cutting off
energy to achieve political goals. Less than a
year ago, Georgia, Ukraine, Moldova, Turkey,
Italy, Germany and other European states had
suffered from this, and that was an important
lesson.
Increasing oil and gas consumption in Asia and
the United States, the decreasing availability
of resources in Europe and the Middle East,
renewed attempts to use energy supply as a
political lever by several important players,
terrorism-related disruptions— all these factors
have made energy security a top priority for
Europe, Asia and the United States. Ukraine
is an integral and indispensable part of the
world energy infrastructure; what is happening
elsewhere affects our economy and—for obvious
geopolitical reasons—our policy.
When speaking of today’s geopolitical
uncertainties, it is important to single out
several factors. Oil and gas-producing regions
are unstable and the world market is very
volatile. War in Iraq, terrorist attacks in Saudi
Arabia, pipeline sabotage in Nigeria, labour
strikes in Venezuela, and growing uncertainties
around Iran’s nuclear programme are just some
of the potential problems strongly affecting the
world market. One natural disaster in the Gulf
of Mexico or a terrorist attack on a tanker in
the Strait of Hormuz can throw the market into
a spiral.
Natural depletion is a fact; to sustain the same
capacity, producing countries need to replace
declining resources. Some regions use improved
technologies to prolong the life of existing fields,
some invest in exploration and development. But
some use political mechanisms to monopolise
markets and transit routes for land-locked
producers, rather than investing in their own
fields, thus making a true market approach to
the energy sector impossible. The world cannot
afford this and therefore energy security was
at the top of the agenda of the G8 Summit in
Saint Petersburg earlier this year. Experience has
taught us that market transparency, openness,
cooperation and price stability are the best ways
to achieve this goal.
It is a reality that major producers and consumers
are situated mostly on different continents. For
both post-industrial and developing countries,
increasing dependence on imports from
unstable regions and unpredictable suppliers
presents a serious risk. And yet according to
expert projections consumption of energy in
China, India and the rest of Asia will nearly
triple by 2025; Eastern Europe, Africa and
the Middle East will increase by 60%; and the
United States will increase by almost 40%.
To meet this demand, a stable increase of
hydrocarbon production and the development
of transit routes must be provided. At this stage,
the principle of maximum diversification comes
into play and that is the key point not only for
147
consumers but for producers as well. History
proves that the more the market is diversified,
the less expensive energy is and the more
stability is guaranteed.
underground storage facilities, able to hold
more than 20 billion cubic metres of natural
gas, making Ukraine an extremely important
part of the European energy landscape.
Ukraine—the EU’s strategic partner
Therefore, it is no wonder that Ukraine is
mentioned as an essential strategic partner in
the EU Green Paper A European Strategy for
Sustainable, Competitive and Secure Energy,
adopted this year by the European Commission.
This important document, on which a future
common European energy strategy is being built,
urges the facilitation of Caspian oil supplies to
the EU through Ukraine. It recognises that the
EU and its energy partners are interdependent;
this is reflected with respect to Ukraine in a
bilateral Memorandum of Understanding on
cooperation in the field of energy between
Ukraine and the European Union signed on
1 December 2005. The EU has encouraged
Ukraine, together with Turkey, to join the South
East European Energy Community Treaty,
transforming it into a truly pan-European
energy community. Ukraine started this process
in July this year and will continue the necessary
efforts to join the treaty.
The Ukrainian energy sector is strategic not
only for the economic and social development
of Ukraine, but for all of Europe. It includes
oil and gas extraction, transportation and
processing infrastructure, huge coal reserves,
robust hydroelectric power facilities and
15 reactors at four nuclear power plants. In
cumulative power generation, Ukraine occupies
the 12th place in the world. We have 0.6% of
the world’s proven gas reserves (almost as much
as Azerbaijan) and produce 0.7% of world gas
(more then Azerbaijan and almost as much as
Kazakhstan). At the same time, the Ukrainian
economy represents 2.6% of the world’s gas
consumption—more than that of France,
twice that of the Netherlands and as much
as that of Italy. Oil presents a similar picture.
Therefore, Ukraine does not have enough oil
and gas reserves to satisfy its own needs and has
to import up to 60% of the necessary volume
from Russia, with relatively small inputs from
Kazakhstan, Azerbaijan and Turkmenistan.
Taking into account that Russia is the only
producer of nuclear fuel for Soviet nuclear
power plants, it is only fair to recognise that
the Ukrainian energy sector is not profoundly
diversified in terms of importing resources. But
what makes Ukraine outstanding is its transit
capacity, which is practically unmatched in the
world.
Ukraine is a key transit country for hydrocarbon
supplies to the EU, with 40% of the EU’s import
of natural gas passing through the Ukraine
network. We are talking about more than 130
billion cubic metres of natural gas and about 50
million tonnes of oil per year going from Russia
and Central Asia to European consumers. The
total length of Ukraine’s gas transit pipelines
is 37,800 km. In addition, there are 13
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European View
It is also very important that a formal,
targeted instrument be created to deal with
emergency external supply events, no matter
who the particular supplier or consumer is.
In particular, this might involve a complex of
legal frameworks and technological monitoring
mechanisms to provide early warning and
enhance response capabilities (including the
provision for emergency oil and gas reserves) in
the event of an external energy crisis.
The Energy Charter treaty, which emphasises
market access and transparency, is a laudable
effort. But it has proved insufficient in
moments of crisis, as happened in December
2005–January 2006. At present, we are not well
enough equipped to deal with unforeseen supply
disruptions, such as those caused by natural
disasters or politically motivated decisions. It
is very important to ensure that the Energy
Charter will be ratified by all major partners in
Borys Tarasyuk
order to guarantee open access to development
of resources and fair transit tariffs. Nobody
questions the legitimate right of individual
countries to pursue their own external efforts
in ensuring security of energy supplies and
choosing their internal energy mix. But at the
political level, a common European energy
policy must be elaborated that focuses on:
•
•
•
promoting a market approach to energy
supply and distribution;
removing monopolies wherever possible;
and
imposing political, economic and legal
preconditions for transparent and fair
relations among governments and
businesses of European and Eurasian
countries involved in supply, transport and
consumption.
The eastern border of the future European
common energy policy must coincide with the
eastern border of Ukraine.
Europe and the world need reliable, affordable
and sustainable flows of energy. Improving the
balance between energy supply and demand is
a key element for economic development. It
is difficult to dispute the obvious correlation
between energy security, sustainability and
competitiveness. Natural gas is probably the
most vulnerable commodity when it comes
to supply disruptions. Expensive, fixed and
interconnected pipelines lock producers and
consumers into a near-exclusive embrace. Thus,
diversifying natural-gas sources and keeping
the infrastructure in good technological health
is a long-term, multinational project that
requires enormous investments and political
commitment.
Other ways to reduce supply dependency
include expanding gas storage capacities,
increasing consumption efficiency and the
domestic production of both oil and gas, and
developing alternative energy supplies such as
coalbed methane. Additionally, a market in
tradable liquefied natural gas is rapidly growing,
making it more feasible to gradually diversify
the supply chain by importing gas from distant
producers. Yet still more is required.
New projects for energy transportation
Ukraine is naturally situated to serve as a transit
bridge between the Caspian basin and Central
Asia, with their growing production of hydrocarbons, and Europe. And quite naturally Ukraine
would like to play its role in major transportation projects in this region. The truly remarkable
Baku-Tbilisi-Ceyhan (BTC) pipeline, which officially opened this summer, is a huge step forward towards real diversification of export routes
from the land-locked Caspian states to the world
market. Commercial success of the BTC pipeline is guaranteed now that Kazakhstan joined
the supply chain earlier this year.
Even before the BTC completion, an
international Caspian Pipeline Consortium,
which includes Kazakhstan’s participation,
brought light crude oil to the Black Sea.
Ukraine considers this project an important
step towards the development of the OdessaBrody Pipeline, initially intended to deliver
high-quality Caspian oil to European refineries.
Unfortunately, due to a number of obstacles,
this pipeline now operates in the opposite
direction, bringing Russian oil southwards and
therefore increasing tension in the overcrowded
Bosporus. But Ukraine, working primarily with
Poland, will continue efforts to complete this
important transit route connecting the Black
and Baltic Seas. It is very important that these
efforts are being supported by the European
Commission and a number of European
governments.
Another diversification project that will bring
alternative gas to consumers in Balkan and
Central European countries is the Nabucco
pipeline. Recently the European Commission
named this project as one of the few strategic
ones for the EU. It is expected that numerous
countries will contribute resources, among
them Azerbaijan, Iraq, Egypt, and probably
149
Iran; an even longer list of countries will build
a transit route, including Georgia, Turkey,
Romania, Bulgaria, Hungary and Austria. For
the stable balance of gas supply and demand
in the Nabucco project, it is very important to
bring Turkmenistan and Kazakhstan on board.
Ukraine can contribute its pipes, equipment
and construction experience to the joint efforts
and also hope to diversify its sources of gas
through Nabucco.
Conclusion
Whatever we do on the energy side, it is
important to remember that oil and gas alone
cannot bring prosperity and security. There is
probably only one exception to this rule, namely
Norway; other major producers and exporting
countries can hardly be recognised as stable and
democratic. The Gulf economies continue to be
highly dependent on oil and without exception,
the Gulf countries lack a vibrant private sector.
It looks like other producers are following suit.
Russia now shares the lead place with Saudi
Arabia in terms of oil export. But if you compare
absolute figures of oil production in Russia
versus its population, it is clear that oil dollars
bring almost nothing to the average Russian,
nor do they contribute to the technological
renaissance of Russia’s industry or to its social
infrastructure.
For the last five years, West Africa has shown
the highest rate of exploration in the world,
mostly in the Gulf of Guinea, with the majority
of the growth coming from Nigeria and Angola.
But ethnic clashes within those countries
have caused enough insecurity for some oil
companies to withdraw their operations from
Africa. Venezuela is far from being the most
prosperous country in South America, in spite
of enormous potential reserves. Maintaining
a healthy energy infrastructure requires
investment and technology. Those two factors
are strongly connected with political stability
and the development of a vibrant private
business infrastructure in all countries of the
energy market. Only through cooperation,
150
European View
dialogue, real partnership and mutual efforts can
we achieve the goals of sustainable development
in Europe and elsewhere. Ukraine is ready to
contribute its part.
Borys Tarasyuk is the Minister for Foreign Affairs
of Ukraine.
151
European View
c/o VZW Europese Volkspartij
10, rue du Commerce
1000 Brussels
Phone: +32 2 285 41 49
Fax. +32 2 285 41 41
European View web version:
Url: www.epp.eu/europeanview
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