Approaching International Energy Security
Michael Fallon’s speech for the launch of Columbia University’s Centre on Global Energy Policy.
Introduction
Thank you, Jason. I am very pleased to participate in this London launch event for Columbia University’s Centre on Global Energy Policy.
I could not imagine a better time to launch the Centre: the next two decades will see global energy consumption increase substantially, driven by the rapid expansion of Asian economies, bringing more competition for energy resources. Global supply is at the same time undergoing a quiet revolution as technological developments bring new resources on-stream and the map of global energy production becomes ever more diffuse. And alongside this we have the need to grow our energy systems in a way that is compatible with the challenges of climate change, driving a range of low carbon technologies to become ever more affordable.
There will certainly be no shortage of challenging issues on which the Centre can provide valuable support to the international energy community.
Today I want to talk about the UK’s strategy for working internationally to ensure domestic energy security. To ensure access to the energy imports we need at stable and affordable prices, and to ensure necessary investment in our energy sector.
UK dependence on international energy markets
The UK is committed to reducing its greenhouse gas emissions by 80% by 2050. Our energy policies need to lead the way, including through reducing energy demand and promoting low carbon energy sources – many of you will be familiar with our current work on Electricity Market Reform, the Green Deal, and Smart Meters to highlight a few examples.
But even with these efforts, UK oil and gas import dependency is set to rise due to declining North Sea oil and gas reserves – though I should stress at the same time the considerable investment opportunities that remain in the North Sea.
We became a net importer of oil in 2005. In 2012 our oil import dependence stood at 32%, up from 25% in 2011. By 2020, oil imports are expected to rise to 40%. And even with our 80% GHG reduction goals, we are likely to import more oil in 2050 than we do today. This is against a predicted slight decrease in UK oil demand to 2030.
For gas, we became a net importer in 2004; in 2012, our gas import dependency stood at 49%; and by 2020 it is likely to rise to 53%. While the longer-term picture for gas is harder to predict, it will remain an important element of our energy mix for decades to come. UK unconventional gas production is in its early stages, so its impact on import dependency is not yet clear.
Regardless of the precise level of imports, wholesale oil and gas prices in the UK will very largely be set by international markets. This in turn can have a significant impact on economic growth and bills.
We are also dependent on international markets for investment. It has been estimated that we need £110bn investment by 2020 in the electricity sector alone, both to replace outdated infrastructure and to diversify our system toward more low carbon sources. This brings great opportunities for businesses, jobs and economic growth.
Policy responses to the global energy outlook
Analysis of the global energy outlook and recent events continue to underscore the importance of our policy responses to the key risks to our energy imports and investment needs. These can be brigaded under five elements:
First, we need to promote low carbon technologies and energy efficiency to restrain rising oil and gas demand.
Based on its New Policies Scenario the International Energy Agency estimates a 35% increase in energy demand from 2010 to 2035. Low carbon energy sources will not expand sufficiently swiftly to displace fossil fuel growth, and oil demand is predicted to be 14% higher in 2035 and gas demand 50% higher. This has serious consequences for both energy security and climate change.
This scenario draws on policies which governments have committed to deliver, and there is of course time for more action to be taken. Restraining global energy demand will not only mitigate climate change, it will reduce the extent of price rises, just as domestic energy and transport policies can reduce our exposure to them. In both cases this would reduce risks to economic growth, and protect households and business from increasing energy bills.
Routes to achieving these ends include:
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securing policy commitments – for example seeking to remove fossil fuel subsidies which encourage wasteful consumption, through the G20. Market distorting fossil fuel subsidies that encourage excess consumption globally amounted to $523bn in 2011 – up almost 30% on 2010
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sharing expertise – for example working through the International Renewable Energy Agency (IRENA) and other international bodies to support developing countries moving to a sustainable low carbon energy system
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providing finance, including through the UK’s International Climate Fund.
Second, we need to encourage investment in oil and gas production. This is consistent with our climate change goals: even under IEA’s 450 Scenario the world will be consuming 79 million barrels of oil a day in 2035, compared to 87 million barrels a day in 2011.
Over the same time production from existing sources of conventional crude oil will have declined from around 65 million barrels a day to 26 million barrels a day, so new sources of oil will be needed to make up the difference. Global gas demand actually rises by 2035 even under the IEA’s 450 scenario.
However, we cannot assume the necessary investment will flow of its own accord. Many of the countries with the most significant fossil fuel resources have difficult investment climates and the uncertain economic environment is a further barrier.
In addition, further work is required on safe and sustainable exploitation of unconventional gas (and oil) to maximise global production. Unconventional is expected to account for almost 50% of the increase in global gas production between 2011 and 2035. Here, we can look to the US experience of the shale gas revolution for the key lessons to be learned
Third, we need to ensure reliable energy supplies, in particular encouraging greater liberalisation of energy markets and strengthened trading links and infrastructure. There has been progress on new supply routes, for example on the Southern Corridor, and better functioning of EU gas markets. Nevertheless, we remain a long way from a fully liberalised global energy market especially for gas, and events in North Africa and Iran remind us that even in the largely globalised oil market secure supplies are far from guaranteed.
Fourth, we need to work to enhance energy price stability. The last year has witnessed considerable energy price volatility, with oil prices fluctuating between US$89 and $127 and gas prices fluctuating between 51 and 99 pence per therm. The UK’s Office for Budget Responsibility suggests that for an annual 10% increase in oil prices GDP might reduce by around 0.1% in the first year of the oil price shock.
We should continue to promote our longer term supply-side levers, notably increased market transparency, shared analysis of energy and financial markets, and enhanced producer-consumer dialogue, including through the International Energy Forum. However, we must also recognise that all this work will only be effective if we also succeed in restraining demand.
Fifth, we must work to secure sufficient international inward investment in UK energy infrastructure. The prime challenge is to ensure that our policy design delivers sufficiently attractive terms for investors whilst remaining affordable for consumers. However this is made more difficult by the global economic climate and strong competition for financial resources. This in turn raises risks of undermining our energy security, restricting economic growth and missing our climate goals.
There is an important international dimension in ensuring that our very significant investment opportunities are known, understood and appreciated by potential investors. Our reforms to the electricity market will provide investors with greater revenue visibility combined with greater certainty on the returns that they can expect. We are also exploring ways to incentivise shale gas exploitation in the UK by looking at how we can reform the tax regime.
Conclusion
These priority policy responses are of course not ones we can deliver on our own. Our bilateral relationships are key as are our relationships with multilateral institutions. To take just a handful of examples:
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the G20 and G8 provide the top level political support and call on other bodies to act
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the International Energy Agency provide data and analysis and promote energy security and low carbon energy
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the International Energy Forum has a core function of facilitating dialogue between the energy producer and consumer clubs, OPEC and IEA, as well as the non-aligned countries
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and several organisations have their own niches in scaling up and accelerating low carbon deployment, including the Clean Energy Ministerial and the International Renewable Energy Agency.
We should also recognise the important role played by think tanks and academic institutions for their independent evidence and policy analysis which runs throughout all policy debates on how to ensure international energy security.
And I have no doubt that Columbia University’s Centre on Global Energy Policy will go on to make important contributions in this regard – and with this, I wish Jason and his colleagues all the very best.