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Issue 3 – Autumn 2012


INTERNATIONAL ENERGY AGENCY The International Energy Agency (IEA), an autonomous agency, was established in November 1974. Its primary mandate was – and is – two-fold: to promote energy security amongst its member countries through collective response to physical disruptions in oil supply, and provide authoritative research and analysis on ways to ensure reliable, affordable and clean energy for its 28 member countries and beyond. The IEA carries out a comprehensive programme of energy co-operation among its member countries, each of which is obliged to hold oil stocks equivalent to 90 days of its net imports. The Agency’s aims include the following objectives: n Secure member countries’ access to reliable and ample supplies of all forms of energy; in particular, through maintaining effective emergency response capabilities in case of oil supply disruptions. n Promote sustainable energy policies that spur economic growth and environmental protection in a global context – particularly in terms of reducing greenhouse-gas emissions that contribute to climate change. n Improve transparency of international markets through collection and analysis of energy data. n Support global collaboration on energy technology to secure future energy supplies and mitigate their environmental impact, including through improved energy efficiency and development and deployment of low-carbon technologies. n Find solutions to global energy challenges through engagement and dialogue with non-member countries, industry, international organisations and other stakeholders.

IEA member countries: Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Ireland Italy Japan Korea (Republic of) Luxembourg Netherlands New Zealand Norway Poland Portugal Slovak Republic © OECD/IEA, 2012 Spain International Energy Agency Sweden 9 rue de la Fédération Switzerland 75739 Paris Cedex 15, France Turkey United Kingdom United States Please note that this publication

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The European Commission also participates in the work of the IEA.



SINCE 1974, KEEPING A CLOSE EYE ON OIL ince the International Energy Agency was founded 38 years ago, its mandate has expanded beyond the initial focus on oil security. The IEA champions a broader form of energy security, its core concern, not just by guaranteeing oil reserves and other safeguards against supply disruptions but by working to reduce dependency on oil overall and oil imports in particular. From climate concerns to geopolitical risk, the best ways to build a secure and reliable future are to improve efficiency and to shift to a sustainable low-carbon energy system. But until we attain that goal, oil remains central to energy security. By providing authoritative data and analysis to member countries and the world at large, the IEA enhances market transparency as well as understanding among policy makers – both of which make the world’s oil supply more secure. At the same time, the Agency stands ready to respond to oil supply disruptions. Indeed, IEA coordination of emergency response among its member countries is a unique responsibility. The response system for oil supply emergencies includes a varied toolbox, and the processes for identifying disruptions and carrying out emergency actions are regularly practised and improved by Emergency Response Exercises. These steps are designed to mitigate the consequences of acute and severe oil supply shortages by making additional oil available to the global market. Emergency response measures include both increasing supply and reducing demand. Member countries’ emergency preparedness is peer-reviewed on a rotating cycle, and key recommendations are delivered to governments for consideration and implementation. The news media tend to focus on the power of member countries to tap their emergency stocks during a disruption – and while there have been only three IEA collective actions in the Agency’s history, governments stand ready to act when member countries collectively agree on such a course of action. But the IEA is continuously engaged to improve oil security, through its emphasis on diversification of energy sources and development and promotion of alternatives and through its emergency preparedness work and its expert oil market analysis – including the monthly Oil Market Report. This monitoring is one aspect of the Agency’s larger mission to promote energy security across the board. By encouraging the use of new and lower-carbon sources of electricity, by setting targets for energy efficiency, by encouraging research and policy to foster technologies from electric vehicles to carbon capture and storage, the IEA contributes to energy-supply security and reduces dependency on oil imports in general. The most secure barrel of oil will always be the one we don’t use. One vital way the IEA brings greater stability to energy markets is through international engagement. The Agency fosters ongoing dialogue and co-operation with oil producers, particularly in the context of the Producer-Consumer Dialogue with OPEC and participation in the International Energy Forum. But it also engages closely with major non-member consumers on issues of oil security and emergency response. India this year joined Thailand as the first non-members to host IEA Emergency Response Exercises tailored for their own needs. Such engagement can help prepare those partner countries to analyse national or regional emergencies and respond effectively, or possibly to take part in global collective actions on a voluntary basis. Both also participated in the 2010 joint Emergency Response Exercises in Paris for IEA members, together with Chile, China, Croatia, Estonia, Indonesia, the Philippines, Slovenia and South Africa. In order to continue to contribute effectively to market stability and energy security, the IEA itself must show flexibility and embrace change. By forging close international relationships, by expanding the concept of energy security and by confronting the intertwined challenge of energy sustainability, the IEA can provide dynamic solutions to protect its members and the global economy from energy insecurity.


Maria van der Hoeven: © OECD/IEA, 2009

By Maria van der Hoeven Maria van der Hoeven recently completed her first year as Executive Director of the International Energy Agency, where she has worked to promote the Agency’s effectiveness in global energy security. Before taking over the helm of the IEA in September 2011, she served as Minister of Economic Affairs for the Netherlands from February 2007 to October 2010, during which time she demonstrated leadership on energy policy at the national, regional and global levels.










As long as the world relies on oil, the IEA will be at the cutting edge of monitoring it • Ali Al-Naimi: To attain true energy security, the Saudi Oil Minister’s top priority is tackling energy poverty • Daniel Yergin: The author of The Prize and The Quest reflects on the evolution of energy security and the different challenges in this century Whither oil in 25 years? Have your say and win a free book



















The “Arab Spring” means different things in different countries: for oil analysts, it means a lot to keep track of. But not all change in the Middle East is about disruption The critical role oil plays in the ever-evolving IEA mandate to preserve energy security: a valedictory interview with Energy Markets and Security Director Didier Houssin A special look at just how important a role Iraq is beginning to play once again in oil production, and the very serious challenges it must first overcome After a decade at the Agency’s authoritative monthly short-term forecast, the outgoing editor looks back fondly at a pretty turbulent time Light tight oil’s opportunities and constraints: why shale oil won’t end US imports JODI, best known for its database on oil supply and demand, has shown how important data transparency is – and not just for energy markets Why oil analysts, including those at the IEA, count tankers and what it tells them • ExxonMobil’s CEO and chairman on how the company helps safeguard energy and what should be the proper role for government • Petrobras: The Brazilian national oil company’s president on making the leap from regional player to integrated global powerhouse








• Gas: A heavy reliance on Qatar puts the global LNG trade at risk • Nuclear: Lessons to take from Switzerland’s gradual phase-out • Renewables: New sources of financing emerge • Volatility: Speculation is often blamed for high oil prices and market volatility. But speculation can actually temper volatility while not affecting prices. • Technology Platform: An IEA initiative for decarbonisation worldwide helps galvanise biofuels and efficiency in Russia and solar power in Morocco

The Journal of the International Energy Agency

ISSUE 3 – AUTUMN 2012 11





From the birth of the IEA amid the 1970s oil shocks to the disruptions during the “Arab Spring”, the Middle East has been a focus for energy market analysts. IEA Energy and Agency experts look at the state of oil security there and worldwide.












Once-disdained buses are increasingly the silver bullet of urban mass transport How much of what greenhouse gases are there in the sky? Water is a critical element of energy security, so we need to monitor it carefully Novel financing programmes aim to get Britons to improve buildings’ energy efficiency China maps out its windy energy future








Snapshots from around the world of the IEA in action Four new books and two selected research papers from the IEA




Issue 3 - Autumn 2012 International Energy Agency Communication and Information Office 9 rue de la Fédération 75739 PARIS cedex 15 (France) Phone: +33 1 40 57 67 10 Email: © OECD/IEA, 2012. All Rights Reserved ISSN: 2225-6334 Cover photo: © GraphicObsession


Oil supply in terms of years remaining: not scraping the bottom of the barrel

Direction Amb. Richard Jones Executive Editor Rebecca Gaghen Managing Editor Robert Youngblood Production and Layout Angela Gosmann Cover design and graphics Bertrand Sadin Address advertising inquiries to Liam Murray of Daruma Applied Media SL at (liam.murray@ +34 962 066 142

The International Energy Agency (IEA) produces IEA Energy, but all analysis and views contained in the journal are those of individual authors and not necessarily those of the IEA Secretariat or IEA member countries, and are not to be construed as advice on any specific issue or situation. Read IEA Energy in PDF format at For such material in this journal indicated as being provided under the terms of the relevant Creative Commons public licence, the IEA does not impose any terms (restrictive or otherwise) in addition to, or replacement for, the terms of any such licence(s). Printed in Luxembourg by Imprimerie Centrale.


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PRIORITY IS ENDING ENERGY POVERTY audi Arabia is in the midst of a remarkable journey. The kingdom’s vast natural resources have powered unprecedented economic progress and development over the last 75 years, transforming the country from one of the world’s poorest to, today, a member of the Group of 20. Its infrastructure, medical and educational facilities, and standard of living are unrecognisable from 40 years ago. The wider world has also benefitted from these great resources, using them to fuel extraordinary improvements for the good of mankind. And as the global population continues to grow, it is this energy that will help further transform the lives of millions. Of course many energy challenges remain in the world, not least energy poverty and energy security. While some concern themselves with geopolitical tensions highlighted on the 24-hour news channels, for many millions of people in the world, energy security boils down to having enough gas to cook their family a meal or enough physical infrastructure to enable them to turn on a light. It is clear that the real issue is tackling poverty, to enable people in developing countries to access reliable energy supplies so that they can take advantage of the many things we regard as commonplace. These are day-to-day issues for individuals, but major challenges for societies, and it is incumbent on all nations and policy makers to work together to continue to boost economic growth. Great progress has been made, but there is much work to do. For its part, Saudi Arabia has been, and remains, a stable supplier of oil to the world – and this security of supply brings reassurance to world markets. Time and time again the kingdom has stepped up to offset any losses: during the Iraq war, post-Hurricane Katrina and more recently as a result of the revolution in Libya. This year it boosted production to levels not seen for 30 years, and it remains poised to supply the market whenever called upon. Let me be clear: Saudi Arabia is not happy with a high price for oil, particularly one which does not reflect market fundamentals, and in this regard, we have worked hard in recent months to do what we can to moderate prices. We highlighted how the market was, and is, fundamentally well-supplied and balanced, and backed up our rhetoric by meeting all customer requests for additional barrels. Saudi Arabia understands the vital role oil plays in economic growth and knows the value and progress which can be derived from energy resources – but the price must be reasonable. The future of energy will be a future characterised by an increasing mix. It is clear that oil and gas will remain pre-eminent but that other sources will be increasingly utilised, particularly wind and solar. Whatever the source, whatever the technology, the priority must be to provide reliable energy worldwide, especially to developing countries – to help improve the lives of men, women and children around the world. I am pleased that consuming and producing nations are increasingly working together, realising that their interests are aligned more often than not. This is exemplified by the increasingly important role of the International Energy Forum and other inter-governmental organisations, but it can also be seen in Saudi Arabia’s ever-expanding and deepening bilateral ties. It is vital that we continue to develop relationships, cooperation and trust.


Minister Al-Naimi: photo courtesy of Ministry of Petroleum and Mineral Resources, all rights reserved

By Ali I. Al-Naimi His Excellency Ali Ibrahim Al-Naimi has been Minister of Petroleum and Mineral Resources for the Kingdom of Saudi Arabia since 1995. He is a member of the Cabinet of the Council of Ministers, the Supreme Petroleum Committee and the Supreme Economic Council. Previously he was chairman of the national oil company, Saudi Aramco, as well as chairman of the Saudi Geological Society and of the King Abdullah University of Science and Technology.




NEW CHALLENGES TO ENERGY SECURITY ince the beginning of the 21st century, a periodically tight and volatile oil market, combined with sharply rising consumption in emerging-market countries, has renewed concerns about energy security. The tension over Iran’s nuclear programme and Tehran’s threat to disrupt Strait of Hormuz tanker traffic have put these concerns front and centre. Fortunately, there is an energy security system in place, underpinned by key operating principles. This was not the case when the energy crises and disruptions of the 1970s initiated the modern era of energy security. In writing The Quest, I was struck both by how much the energy security agenda has evolved in the years and by the new challenges ahead. The energy security focus has expanded to include the global natural gas trade, the reliability of electricity supply systems and the scale and concentration of energy infrastructure itself. This includes protecting infrastructure against terrorism and conflict. It also applies to natural disasters, as was demonstrated by the devastating impact of hurricanes Katrina and Rita on oil and gas supplies in the Gulf of Mexico in 2005 and by the Fukushima disaster in 2011. In fact, the 2005 hurricanes triggered what was only the second use ever of the IEA emergency release system. One can be sure that the founders of the IEA never contemplated that the system would be used to offset a disruption in the United States. One of the most significant changes is the dialogue and coordination between the IEA member countries and major producers, led by Saudi Arabia. That would have seemed highly unlikely at a time when “North” and “South” were thought to be in permanent confrontation. But this change reflects a recognition of common interests in stability and a well-functioning world economy, buttressed by geopolitical interests. The energy security system faces two big new challenges today. The first is to bring China, India and other major emerging markets into alignment with it. This simply reflects reality. At the beginning of the 1970s, the industrial countries accounted for 80% of world oil consumption. Today, they’re down to little more than 50%; and their share will continue to decline, as virtually all the growth in oil demand will be in the developing world. Already, China uses more total energy than the United States. The other challenge is to prepare for what the CEO of one major corporation called the “bad new world” of cyber-vulnerability. The infrastructure that produces and delivers our energy is at the top of the list of “critical infrastructures”, and the risks only grow as the world continues to digitise and the Internet becomes ever more pervasive. In The Quest, I identify key operating principles that have become clear over the years and that will help underpin the energy security system of the future. The first is diversification of supply. A second is to build resilience into the energy system by ensuring a “security margin” – additional capacities and capabilities – that provides a buffer against shocks and facilitates recovery. The IEA strategic oil stocks program is the best-known example. The third is the recognition of the integration of global energy markets. Fourth, experience has demonstrated the importance of high-quality information and data both for decision-making and public confidence. To this need, the IEA makes a major contribution. The fifth principle is that flexible and well-functioning energy markets contribute significantly to security, including the ability to adjust and rebalance quickly. Sometimes, during a time of turmoil, governments have to resist the popular call to “do something” when the “something” would aggravate rather than mitigate the situation. The dependence on energy systems, and their growing complexity and reach, all underline the need to understand the risks and requirements of energy security in the 21st century. Increasingly in a growing world economy, energy trade traverses national borders and ties nations together. That is why energy security is not just about countering the wide variety of risks and threats. It is also about relations among nations, how they interact with each other, how energy impacts their overall national security – and about cooperation and collaboration in the international community.


By Daniel Yergin Daniel Yergin is vice chairman of IHS and founder of IHS Cambridge Energy Research Associates. He chaired the US Department of Energy’s Task Force on Strategic Energy Research and Development and currently serves as a member of the US Secretary of Energy Advisory Board and a trustee of the Brookings Institution. His new book, The Quest, follows on The Prize, his Pulitzer Prize-winning examination of world oil.

The Journal of the International Energy Agency

Daniel Yergin and book cover: © Daniel Yergin, 2012




WHAT DO YOU THINK? Compared with today, how critical will oil be as an energy source in 25 years? One respondent chosen at random will win a free copy of the Medium-Term Oil Market Report 2012. Share your thoughts and submit your raffle entry by 30 November 2012 at:


What do you see as the biggest obstacle to wider use of renewable energy, and what can help renewables prosper?


35% 30%

DIRK V.E. | Brussels

25% 20%


asier access to micro finance for green projects and access to incubator set-ups for start-ups. More large-scale investment into research on low-cost nano technologies.

15% 10% 5%

FERGAL D. | Meath, Ireland

0% Tooexpensive

FossilͲfuel Notreliable infrastructure (intermittency)


irst: establishing Public-Private Partnership (PPP) Models to develop infrastructure. Second: government will have to factor in renewables in energy portfolios by introducing minimum renewables purchase obligations to all power plants. Third: promoting solar photovoltaic rooftops in rural areas.


Lackof government support

Notenough investment

ith a combination of increased government support for renewable energy and a relentless outreach and education campaign from NGOs, hopefully people will begin demanding clean energy, instead of feeling like it’s being forced down their throats.


CAMERON | Chevy Chase, United States


BIREN G. | Gandhinagar, India

ERIC | Singapore



TIMOTHY K. | Nairobi, Kenya

nclusive approach of governance wherein investors get government support and consumers pay a market-competitive electricity tariff.

KARAN C. | Wuppertal, Germany he use of renewable energy will not grow rapidly as long as there is no support from the government – especially in Indonesia. In addition, the fossil fuel price in Indonesia is low nowadays due to subsidies. Hence, it holds up investments for renewable energy. Therefore, governmental support in terms of regulation and incentives and the gradual removal of subsidies for fossil fuel will boost the use of renewable energy in Indonesia.


LIES A. | Jakarta, Indonesia

y first enabling producers to get incentives from their government and then developing energy storage technologies to counterbalance intermittency of this means of production. Renewables’ development must be a target in all energy policies. GUILLAUME D. | Saint-Nazaire, France


The winner of the previous raffle for a copy of the Medium-Term Renewable Energy Market Report is Richard Carlson of London, Canada.

CARBON PRICING. F. J. | Canberra, Australia






Daily variations in electricity demand are increasing, and the continuous variations of growing shares of solar and wind power need to be balanced. Conventional power generation alone is not agile enough to respond to the new challenges. The highly efficient and flexible solution which enables power systems to deliver affordable, clean and reliable energy can be found at



OIL AND UPHEAVAL As “Arab Spring” turmoil affects oil output, analysts are scrambling. But they have many positive developments to consider, too. or the oil markets and industry, the Middle East is a perennial flashpoint. Given the region’s critical importance to world energy supply and its reputation for “instability”, news from there moves the market sometimes in knee-jerk fashion. But rarely has so much been going on across so much of the region as in the past two years. And rarely have developments there seemed so pregnant with consequences for energy markets. Keeping track of it all is enough to make oil analysts feel punch-drunk. The term “Arab Spring”, that catch-all journalistic shortcut, disregards the vast differences in cultural, demographic and political outlook among the North African and Middle East countries recently caught up in domestic turmoil or international discord. The energy profiles of those countries are just as varied as their populations and political arrangements.


Syria: photo by Bo Yaser,

Unrest affects output as well as regimes Tunisia doesn’t quite rank as an energy heavyweight, yet once calls for greater political participation began there in late 2010, the news gave rise to speculation about “contagion effects” in other countries, including the large oil producers on Tunisia’s borders. As unrest spread to Egypt, markets became concerned about potential tanker traffic disruptions in the Suez Canal. Problems with Egyptian gas exports notwithstanding, those fears proved largely unfounded. But the Libyan civil war did cause a major disruption in oil supply, eventually leading to an IEA stock release. Political turmoil has since taken a toll on oil production and exports from Yemen and Syria, while conflict between Sudan and the new state of South Sudan cut supply from there. None of those countries is a major producer; in aggregate, though, the disruptions have been substantial. But the potential fallout from the Syrian civil war far exceeds that country’s importance as an oil producer. The outcome could prove game-changing not only for the country itself but for the region as a whole and beyond.

Meanwhile, the tightening of international sanctions on Iran, the third-largest OPEC producer, has had a profound impact not only on Iranian exports but also on oil trade flows more generally. For analysts, this is not just a question of counting how many Iranian barrels the sanctions may in effect have removed from the market – however tricky that accounting exercise may be. The questions are many: which producers are picking up the slack left by the drop in Iranian supply, and where do their increases leave spare output capacity? How are refiners and importers coping with the Iranian shortfall and adjusting for changes in supply sources? What is the effect on the shipping industry? How is Iran adjusting to the sanctions, and how will a reduction in exports and potentially production affect its longer-term production capacity? How does this all look as seen from the oil trading floors, and how are market expectations shaping trading behaviour both in physical crude and product markets and in futures exchanges? And, inevitably, how is it affecting prices? Amid disruptions, positive developments Yet for all the concerns about unrest and conflict, it is important to keep in mind that current Middle East oil developments are not all about disruption risks. There are many success stories in Middle East production, and the region has a


By Antoine Halff Antoine Halff newly heads the IEA Oil Industry and Markets Division, where he worked as a demand analyst in 2001-05. In between, he was a US Energy Information Administration lead industry economist and an adjunct professor at Columbia University’s School of International and Public Affairs.

knack for defying expectations on the upside as well as the downside. Already Iraqi production has reached highs unseen not only since the first Gulf war but since the Iran-Iraq war of the 1980s. Given the size of Iraq’s endowment, the country’s potential to play a pivotal role in global oil supply is considerable. Libyan output has recovered from the 2011 civil war much faster than expected. Developments in Saudi Arabian production entail feats of cutting-edge technology that have helped the kingdom maintain substantial spare production capacity. Saudi Arabia has used that cushion on several occasions, including during the past two years, to make up for supply shortfalls elsewhere, a substantial contribution to global energy security. Last but not least, the region, long acknowledged as a major production centre, is emerging as a key demand centre in its own right – so much so that fast-growing domestic consumption is threatening to encroach on future export availability. Assessing, analysing and forecasting Middle East oil markets increasingly will entail not just measuring production and reserve levels but also monitoring regional efforts at fuel efficiency, demand control, de-subsidisation and fuel diversification. In addition it will require efforts by the region’s major producers to capture more of the oil and petrochemical value chain and use oil revenues to sustain a more diversified and balanced model of economic growth.

The fighting in Syria threatens to disrupt more than just the country’s modest oil output.







we are very dependent on Russia in terms of gas supply in Europe. Looking at electricity, there are also many examples: some of the blackouts that happened in Europe and the United States, even if they lasted just for a couple of hours, had an enormous impact on the economy and on the daily life of all citizens. Another example of course is the earthquake in Japan and the key problem that it has raised in terms of power supply, especially in the Tokyo area. So energy security is broader than just oil, but oil remains quite important. What are the greatest changes since 1974 in how the IEA monitors the oil situation? When the IEA was created, we had a market that was based on long-term contracts and a very stable relationship between suppliers and refiners: this has changed with the globalisation of the oil markets, the importance of the spot market and the development of real-time information through the internet. So the information flow is extremely rapid and requires that we be able to respond at the same speed and with the capacity to analyse very rapidly what is happening on the market. This has been one of the key changes on the oil market. Also now the bulk of the demand increase is in non-member countries. So we need to pay more attention to developments outside of the IEA countries and in the emerging world. As their share of the global economy shrinks, can IEA countries still use stockpile releases to respond effectively to a major disruption? The fast-increasing demand of emerging countries, particularly from China, has indeed

The Journal of the International Energy Agency

How is the IEA developing such co-operation? We started by building awareness, by providing training and by sharing IEA experience with these countries and their governments. Now we are going a little further in terms of having a framework to work with them in the case of an emergency. For instance, we have permanent contact points in the governments to be in touch when there is a disruption. We do Emergency Response Exercises with these countries. We’ve had several exercises in Paris, where we’ve invited more and more non-member countries. We had about ten non-member countries in our last global exercise. We’ve also embarked on a programme of having Emergency Response Exercises in these countries. We had one recently in India [see accompanying article]. Last year we also organised one with APEC and ASEAN countries that took place in Thailand. At a more political level, the Executive Director of the IEA signed a Memorandum of Understanding last October, on the sidelines of the last IEA Ministerial meeting, with India, where India agreed to make some commitments in terms of working closely with the IEA to be prepared in the case of an oil supply

Didier Houssin: © OECD/IEA, 2012

IEA Energy: Is oil still the IEA’s main concern? Didier Houssin: Oil remains the number one energy source at global levels, so it will remain very important. It is true that when the IEA was created, oil was more important than today; consequently the efforts that, in particular, IEA countries have made in terms of diversifying the energy mix have been quite successful. But while at the global level we are less dependent on oil, we continue to rely on it for the transportation sector, and this is true for every kind of transportation. In the global economy, where trade is so important, this means that the strategic impact of any oil supply disruption is maybe even more vital than was the case when the IEA was created. But looking at oil security, at energy security, clearly the role of the IEA has changed. When the Agency was created, the key concern was the first oil shock and the vulnerability of OECD countries towards any oil disruption, and that’s the reason the IEA was founded: to have a framework in which IEA countries could defend their interests as key oil consumers. This remains an important part of our activities, but our vision of energy security has broadened. It is not just about oil, it is also about gas and electricity. And we’ve seen over the recent years how vulnerable our economies can be to other sorts of disruptions. Remember the gas crisis between Russia and Ukraine, and how high on the agenda it was in 2006 and 2009? Even this year, when there was no clear conflict between Russia and Ukraine: when, during the cold spell in February, Gazprom cut exports to Europe, immediately it created a lot of concerns which came at a time when gas demand was very high in Europe – and it reminded us that

changed the global picture in terms of oil markets, but it doesn’t mean the Agency’s operational tool, Emergency Response, is no longer relevant. It means that we need to be prepared for the future. If we look at the energy outlook, we see these trends continuing over time, and the share of IEA countries in global energy demand shrinking gradually, and this is the reason why we have an outreach strategy and are working more and more with key partner countries in all sectors but particularly in oil security. One of the messages of the IEA over the last year has been to encourage these countries to think about their own oil security strategy. We’ve seen China and India looking very seriously at building up emergency stocks: the IEA has made great efforts over the last years to encourage them on that path. The next very important step for the IEA will be to strengthen our co-operation with these countries in the way we react to and respond to oil supply disruptions: we are all convinced that the oil market is global and if there is disruption, it would impact everyone. We have seen this scenario recently, when we had price spikes: they hit all countries and in particular the emerging countries that are even more reliant on oil than we are.


disruption and to respond and work together during such a disruption. What is the IEA’s relationship with OPEC? The relationship between the IEA and OPEC has completely changed since the creation of the IEA. We’ve moved from confrontation to cooperation, and we work very closely with our OPEC colleagues. We have a joint programme of work with OPEC and the International Energy Forum to address very sensitive issues such as, for instance, the role of financial markets in oil price formation. We fully recognise that when a supply disruption happens, one of the key tools that should be used is increased production by OPEC. This is what we requested from OPEC last year during the Libya disruption, and the same is true this year with potential loss of Iranian supply. So we work closely with OPEC. Of course sometimes we do not agree. They have their own constituency and their own objectives. But we are in close contact. If we look at the current oil market situation, OPEC has significantly increased its production, the market is much better supplied and this has been reflected in the evolution of prices. The IEA regularly stresses that oil prices are a key component in global economic activity, and at a time when there are wide concerns about economic recovery, too-high prices might jeopardise this recovery. And I think this is a message we’ve shared with some of the OPEC countries, in particular with Saudi Arabia.

India: © Ministry of Petroleum and Natural Gas in India

The IEA founding treaty requires each member country to hold oil stocks equivalent to 90 days of net imports in the prior year. Why? This is a commitment that any country takes when it joins the IEA: to be a member you need first to be a member of the OECD and second to be compliant with this obligation and able to participate in collective actions. This operational tool remains a key part of our role. If we look at the numbers, most countries actually go beyond their obligation. If we just look at IEA countries that are oil importers, the level of their stocks is 144 days of their net imports. In this context, Emergency Response Reviews are part of the tools we use vis-à-vis our own member countries to make sure that they are able to participate in collective actions and that their level of stocks is real. We also check the whole system of emergency preparedness in each country. Because if solidarity is to have meaning, every country must be able to participate. We carry out these checks on a regular basis, and to a large extent, it is a technical


UNIQUE IEA EXERCISE HELPS INDIA TEST ENERGY SECURITY In an IEA milestone of co-operation with partner countries, India assessed its emergency response readiness in the Agency’s second-ever exercise tailored to a specific country. The event highlighted New Delhi’s growing co-ordination with the IEA to safeguard against any major international energy supply disruption. The two-day Emergency Response Exercise (ERE), co-hosted by the IEA and the Ministry of Petroleum and Natural Gas near Delhi in May, focused on emergency response procedures in India and at the IEA as well as on the role of the news media during a supply crisis. Representatives of Indian industry and government worked together to develop strategies to respond to a pair of supplydisruption scenarios. Didier Houssin, Director of Energy Markets and Security at the IEA, said the Agency’s team was very impressed with the robust discussions that took place during the exercise. “India is a vital partner to the IEA, particularly as its oil demand is projected to more than double over the next quartercentury,” Houssin said. “With this exercise we have strengthened our links with India, and we look forward to continuing to work together closely in the years to come.” The event, which was preceded only by an ERE for Thailand in 2009, built on years of IEA collaboration with India on emergency security matters. Since 2004, India has taken part in all-membercountry EREs in Paris. But the biggest step forward came in October 2011 on the sidelines of the IEA Ministerial meeting, when the Indian ministry signed a Memorandum of Understanding on cooperation on oil and gas security, the IEA’s first such agreement with a partner country. Besides the ERE near Delhi, the memorandum qualifies India to participate as an ad-hoc observer on the Agency’s Standing Group on Emergency Questions (SEQ). SEQ representatives from Japan, Spain and the United States moderated the ERE in India, which involved about

The participants modelled two dire scenarios.

40 Indian participants, including general managers or executive directors of private and public oil companies as well as 13 government officials. Indian and IEA officials briefed the participants on national and global oil and gas market developments and emergency response procedures before the two simulation exercises were introduced by news-service-style video reports. To address the fictional disruptions, the participants, led by SEQ officials, broke into groups based on their professional responsibilities. Like the Agency’s usual EREs, the simulations aimed to help India test and review its national oil supply disruption response and refine its contingency plans – including the use of the media – for any disruption. Another purpose of the exercise was to identify and better understand India’s near-term oil security risks in a global context. Finally, the ERE had the specific goal of strengthening the ministry’s bilateral co-operation with the IEA in oil and gas security and emergency preparedness. “The ability to respond to energysupply emergencies is at the very heart of the IEA’s mission,” Houssin said, “but the effectiveness of any response hinges on the level of preparedness. That is why exercises like the one in India are so crucial: they enhance the ability to respond while also imparting valuable knowledge to all participants.” After the ERE, the two sides announced that next year the IEA would lead an Emergency Response Assessment (ERA) of India. ERAs are comprehensive reviews of a country’s preparedness for a major disruption to its oil and gas supplies that also recommend which best practices for security the country should undertake. Thailand last year was the first partner country to undergo an IEA ERA. – Dagmar Graczyk




process. We are talking to experts who are familiar with our procedures. We look at what has changed. And a lot of things are changing in all countries in terms of infrastructure, refining capacity, the role of oil in the energy mix. So we have a buffer which is very important and goes beyond the 90 days; it places us in a position to respond to a global crisis even without contributions by non-member countries.

Who actually decides to act? The decision is made by the IEA’s Governing Board, so it is by the member governments around the table. When we think a collective action is necessary, the Executive Director sends what we call an initial response to the member governments to propose a stock release. Why? Because we cannot spend hours on meetings with the pressure of the market and the


“All disruption doesn’t warrant reaction by the IEA.”

What can the IEA do about small disruptions? What is important is the potential impact of the disruption, and that depends on its degree but also on the underlying market conditions. In a tight market such as today’s, any small disruption can have a very significant impact. For example, last year the amount of lost production from Libya was only 1.6 million barrels a day. Compared with the global oil demand, you could consider it a small disruption, but if you compare it to the level of actual spare capacity, it is huge. So we look at the level of spare capacity and the trend in terms of other supply and versus demand and the economy. The IEA examines all these aspects before making a decision to recommend a release.


Keisuke Sadamori has worked with the IEA.

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It is striking that there have been just three stock releases since the IEA was created, more than 35 years ago. But it seems that the pace is accelerating. We had one last year, and as you know there was lots of discussion this year about a potential stock release to counter the loss of Iranian supply. This is not highly surprising because the level of spare capacity remains tight. If we look forward, in our World Energy Outlook forecast, we see that the underlying trend of increased demand from emerging countries continues and some tightness of supply. Of course the market will ebb and flow over time depending on the level of investment, but the potential for more frequent stock releases in the future is probably there. What was the most interesting experience during your time at the IEA? The oil market. We saw the price surging to USD 144 per barrel in 2008, within one year of when I arrived, amid the feeling that the price would skyrocket without any limit in the future – then the price dropped to less than USD 35. We have seen unprecedented events on the global economy that were reflected in the oil market. It has been a very, very vivid and active period of time. The experience of a stock release – as we had last year with Libya – was quite interesting from A to Z. The whole process of how to make a recommendation when the impact of the Libyan disruption was still uncertain; then when the decision was made and implemented, the relationship with the press; but also the assessment and the discussion with the member countries about how they implemented and how they assessed the whole action. It was extremely interesting and rewarding for me.

Keisuke Sadamori, Deputy Director General for Policy Co-ordination at the Japanese Ministry of Economy and Industry (METI), is succeeding Didier Houssin as IEA Director of Energy Markets and Security. In 1983, Sadamori joined what later became METI, rising to Deputy DirectorGeneral in 2009. In 2011, he was Executive Assistant to the Prime Minister. He was the chair of the International Partnership for Energy Efficiency Co-operation preparatory meetings that led to the IEA’s hosting of the partnership’s secretariat starting in 2009.

Didier Houssin: © OECD/IEA, 2012; Keisuke Sadamori: © OECD/IEA, 2009

What are the main triggers for IEA action? The main trigger is a physical disruption of oil supply or an imminent threat of supply disruption. If the threat of disruption is quite imminent and quite sure, then we ask ourselves, should we act or not? But there is a second criterion: this threat of disruption should have a severe economic impact that could not be compensated for by either increased supply by others or by lower demand. This explains why we need to look very carefully and on a case-by-case basis, under real market conditions. This is why there is a strong link between the team in charge of emergency preparedness and the team in charge of the oil market. And this is why, also, we expanded the Oil Market Report. It underlies our capacity to propose to our member countries a response to disruption if spare capacity is needed, depending on market circumstances. All disruption doesn’t warrant reaction by the IEA. But sometimes we need to act to prevent a price surge that could be very damaging to the global economy. Let me give you just one example. The second time the IEA used emergency stocks was in 2005 to respond to the disruption that happened in the United States because of hurricanes Katrina and Rita and against the backdrop of very tight markets. We had the same sort of event in 2008 with hurricanes Gustav and Ike. But at that time it was the end of 2008, when the global economic situation was deteriorating very rapidly and there was a much looser market: then there was no need for us to respond. We need to have a supply disruption and we need to have market circumstances that necessitate a response of the IEA.

pressure of the press. We need to be able to take action very rapidly and in a discreet manner. So that’s why the position of the Secretariat is quite important in the decision-making process.



IRAQI GROWTH FUELLED BY ENERGY raq’s improving stability and signs of economic progress provide the foundation for a major increase in oil production. But challenges remain to consolidate the gains made on economic and security issues, to resolve outstanding questions about the legal framework for hydrocarbon development at the national and regional levels, and to ensure that the necessary infrastructure for transportation, storage and export is in place. Thus far, Iraq’s oil production has grown from an average of 2.4 million barrels a day (b/d) in 2010 to more than 3 million b/d in mid-2012, the highest level in several decades, with oil exports rising to 2.5 million b/d. The country’s hydrocarbon potential is immense. Proven reserves amount to 143 billion barrels, but the total resource potential is much larger: Iraq remains one of the least-explored major hydrocarbon resource holders. The largest share of output growth is set to come from major oil projects in the south of Iraq, for which the national authorities and international oil companies have signed technical service contracts. The Kurdistan regional government has also awarded contracts for exploration and development of areas in the north of Iraq; Baghdad contests the legitimacy of these contracts, but activity is, in many cases, under way. Even conservative projections of Iraq’s production over the coming years imply profound effects on the Iraqi economy, as revenue from oil exports accounts for around 95% of government income and amounts to more than 70% of gross domestic product. Translating growth in oil receipts into tangible benefits for the Iraqi population will be crucial, with progress in resolving the continued and widespread shortages of electricity a particularly urgent task. Growing production of associated and non-associated natural gas, and a reduction in natural gas flaring, will provide a valuable source of fuel for power generation and, potentially, for export. This year we are preparing our first-ever in-depth energy outlook for Iraq as part of our annual flagship publication, the World Energy Outlook. This work has been greatly facilitated by the support and close co-operation of the government of Iraq led by the Deputy Prime Minister for Energy, Dr. Al-Shahristani. As part of this collaboration, we have had a small team of Iraqi nationals seconded to the IEA for the duration of the project. We have also held consultations with senior officials, industry representatives and experts from all over the world, including through an expert roundtable meeting in London in March and a high-level workshop held in Istanbul in May, as well as fact-finding missions to Baghdad, Erbil and Basra. Working on this project, including the experience gained during my visits to Iraq, has given me cause for hope, but also for concern. Hope because the timely development of the country’s hydrocarbon resources could fuel Iraq’s reconstruction and growth, but concern because in the absence of sustained higher levels of Iraqi output the global oil market could be headed for troubled waters. I trust that once the special report is released on 9 October it will improve global understanding of just how important a role Iraq could play, as well as the very serious challenges that first must be overcome.


By Fatih Birol Fatih Birol is the Chief Economist of the IEA and oversees the annual World Energy Outlook, the Agency’s flagship publication. He is also responsible for the IEA Energy Business Council, which provides policy makers with a business perspective on energy market issues. He joined the IEA in 1995 after six years in the Secretariat of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna.

Group photo: © OECD/IEA, 2012

Consultations for the WEO’s first-ever in-depth Iraq energy outlook included a high-level workshop in Istanbul.





EDITOR’S FINAL NOTE Oil Market Report Editor David Fyfe weathered a whirlwind of rising prices and geopolitical upheaval. Not that he minded a bit, as he reminisces here. aving had the privilege to be part of the Oil Market Report (OMR) team since October 2002, and of editing the monthly report since September 2008, I can say one thing for sure – it has never been dull. Surprise after surprise has buffeted the oil markets, where prices have risen sharply since 2002. The higher prices are one reflection of several forces that have come to bear on energy and commodity markets simultaneously in the past decade. The rise to prominence of the non-OECD markets is one of those factors. That has had profound impact, among other things, on the refining industry in the OECD countries. At the same time, development lead times for new production capacity have stretched and investment costs have spiralled. A tide of resource nationalism, alongside other geopolitical issues, has kept markets on edge and provided a floor for prices, even when economic activity has weakened.


More recently, however, the supply side of the equation has responded to sustained high prices, with new sources of supply from the Americas, suggesting that earlier prophesies of supply-side doom may have been premature. Finally, assessing oil price trends this last decade has necessitated keeping one eye on turbulent economic and financial markets, as the headwinds confronting the world economy have buffeted the entire commodity complex. Editing a crucial market resource The main role of the OMR is to provide a balanced, independent view of current physical market conditions (supply, demand, stocks, refining, trade and prices), along with an outlook for the next 12 to 18 months. Together with the associated Monthly Oil Data Service (MODS), the OMR is one of the main sources of IEA revenue. Readership includes upstream and downstream oil companies, financiers, investors, traders, consultants,


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The need to stay on top of the data Timely access to reliable and consistent data is essential for the OMR to retain its place as a benchmark publication for the oil market and its value to member countries in explaining complex market dynamics and highlighting prevailing and future market conditions. But at a time of squeezed national budgets, governments often turn a deaf ear to calls for more data gathering or more statisticians. And while programmes such as the Joint Organisations Data Initiative are welcome, providing a consistent framework for developing countries to submit more regular data, there is still much work to do to ensure that the data flow is as good as it can be. Aggregate national supply, demand, refining, trade and stocks data are all well and good, but in markets where product specifications diverge, where shifts in feedstock quality can dramatically change refinery operating regimes and outputs, and where non-conventional oil supplies are proliferating, data granularity is ever more important. Private data providers increasingly

David Fyfe at CNBC: © OECD/IEA, 2012

At CNBC’s Paris office, the news network interviews David Fyfe on the findings in August’s OMR.

researchers and analysts. But the primary audience remains the governments of IEA member countries. The report is a crucial tool to inform decision making in the event of an oil supply disruption, when government policy makers need to decide whether a coordinated release of IEA stocks might be warranted. The OMR’s foundation stone since its 1983 inception has of course been data. Many analysts use OMR and MODS historical data as the starting point for their own analysis and short-term forecasts. In the 1980s and 1990s, a clear view of evolving market fundamentals in the OECD markets provided key insights into what was driving global markets. But as both absolute levels of, and growth in, oil demand and supply become ever more concentrated in the emerging markets outside of the OECD, the importance of broader and deeper market data has become apparent. Both the statisticians of the IEA Energy Data Centre and the analysts in the Oil Industry and Markets Division, where I work, now must track and assess data from a much wider cross section of sources than they used to. That includes not only official government data, but also company reports, shipping and trade indicators, financial transaction data, third-party information and market intelligence.



David Fyfe at IEA: © OECD/IEA, 2012

are stepping in to fill gaps that governments, of investment in new capacity to meet the exhaustion is imminent is premature. Recent given budget constraints, are unable to fill. growth in oil demand expected in an “all other developments in Iraq and Libya and in North That is all to the good, but there are of course things being equal” set of economic and policy American light tight oil all suggest there may cost, accessibility and consistency issues that assumptions. be life in the old dog yet. the IEA and its fellow analysts have to confront The MTOMR also affords a chance to step But it is justified to question how aboveamid such a proliferation of non-official data back from short-term market noise and con- ground uncertainties and risks could impede sources. sider what is really driving investment in the investment in years to come and cause a reA further challenge for market analysts is industry, which factors truly influence prices newed cycle of higher prices. Where markets anticipating, or at least recognising, pivotal and where this may lead over a longer time can respond to higher prices by naturally rationmoments, when world events or structural frame. The success of the early medium-term ing demand, there the economic impact may changes within the industry cause be manageable. But in emerging seismic shifts in perception about markets, where end-user subsifuture market direction. Examples dies are rife, the economic pain include the rise to prominence of can be more intense. the national oil companies, deExamining why prices rise velopments in non-conventional High and volatile prices have oil supplies and the investment shone a spotlight on derivatives challenges posed by sudden remarkets and speculation. Some gime change in producer countries argue that if highly visible physical (Iraq, Libya). Predicting such major market fundamentals in the OECD changes is often impossible, but cannot wholly explain price trends, recognising that the rules of the then the shady hand of “speculagame may have shifted and adtors” must have underpinned the justing one’s outlook accordingly shift to higher prices. Over the last can also be difficult. Readers are five years, the OMR and MTOMR often wary or outright hostile to have both tried to explain the reprojections that change over time. lationships between physical and These can challenge conventional financial markets, the gaps in data thinking and call into question on non-OECD supply and demand, plans, policies and investments and the crucial role of risk manmade on the basis of the prevailagement tools in an increasingly ing, perceived reality. But analysts capital-intensive industry. We have should not be afraid of ripping up also noted that commodities are their view and starting again. Due inherently volatile by nature and either to momentous events, or that inelastic (unresponsive) supmore frequently to more mundane ply and demand in the short term revisions to baseline data, a foremean that prices will tend to move cast must evolve over time. That is a strength, not a weakness in As OMR editor, David Fyfe forecast the state of the oil market in 12 to 18 months. sharply, even in the event of minor unexpected shifts in demand or analytical terms. Since 2006, the Oil Industry and Markets oil outlooks encouraged the development this supply. Clearly, the debate goes on, although Division has also generated projections twice year of a whole series of IEA publications that arguably policy makers would do better to foa year that look further forward, for a five- to look at the medium-term horizon individually cus their efforts on creating markets where oil demand and supply are more price responsive, six-year forecast. These projections take cur- for oil, gas, coal and renewable energy. rather than simply seeking a single smoking rent investment plans for oil production and gun for higher prices. refining, adjust for likely levels of capacity clo- A decade of significant change So what have been some of the other I hope future OMR editors will have as sure or oilfield decline, and stack the result up against expected oil demand, given reasonable dominant events and trends seen in the last much fun in observing an ever-changing oil assumptions for economic growth, prices and decade? The shift towards higher prices had market as I have had. Oil remains by far the a backdrop of prevailing oil and energy poli- already begun in 2002, reflecting first and fore- most global of commodities, the most percies. The forecast, published in the Medium- most the challenge of ensuring rapid enough vasive and influential of energy forms and Term Oil Market Report (MTOMR), provides a investment for supply growth to keep pace one that is shepherded by an industry that is continually innovating to respond to changing hard analytical bridge between the very short- with burgeoning emerging market demand. Many ascribed rising prices to the phenom- physical, economic and political realities. Oil term focus of the OMR and the longer-term, policy-dependent forecasts contained in the enon of imminent peak oil production, based market analysis and oil supply security rightly World Energy Outlook. In short, MTOMR pro- on physical scarcity. Although oil is ultimately remain at the core of the IEA mission statement: jections test the adequacy of today’s stream a finite resource, the argument that resource long may that continue.





LIGHT TIGHT OIL Shale oil is generating talk that the United States can cease importing oil. But causes for caution range from pipeline constraints to prices. ive years ago no one would have been talking about the prospect of US energy independence. But this year, domestic crude oil production should rise by 10%, and within five years the United States is likely to break the record output high reached more than two decades ago, to flirt with the position of top world producer. The prospect of energy independence is very complex, though, and depends heavily on the types of crude oil that refiners consume, the composition and level of energy demand, infrastructure constraints and oil prices. The new volumes of production are coming mostly from shale reservoirs composed of low permeability, fine-grained rocks that formed from the compaction of silt and slightly larger sediment. The rapid increase in production from these so-called light tight oil plays has dramatic implications for world oil markets, geopolitics, the environment and the macroeconomy.


New tricks for old reservoirs The rapid increase in tight oil production occurred in part because in many cases companies were already familiar with the resource base from previous, conventional drilling for oil or from natural gas production. Horizontal drilling and hydraulic fracturing techniques, based on lessons learned from extracting shale gas, boosted oil recovery rates. Companies have been producing from the Williston Basin, including the newly prodigious Bakken fields in North Dakota, Montana and Saskatchewan, since the 1950s. The same phenomenon is true in some Oklahoma and Texas plays. This tight oil renaissance has wideranging implications. Rising oil production from the mid-continent is competing with other marginal oil prospects in North America, including the Canadian oil sands, and any sustainable price impacts will arguably have implications for OPEC output and capacity decisions. Increasing output is already

By Michael Cohen Michael Cohen oversees short- and medium-term non-OPEC supply forecasts and writes the monthly Oil Market Report’s supply section. Prior to joining the IEA in 2011, he worked in the US Energy Information Administration and Energy Department’s Policy and International Affairs office.

reducing Gulf Coast refineries’ demand for equivalent light sweet (lower-sulphur) crudes from Africa. Not all oil is the same But those predicting US energy independence often confuse the country’s total crude imports with the substitutable, light component of those imports. Gulf Coast refineries’ capacity to process heavier crudes is increasing, so imports of heavier crude are unlikely to fall in the future despite greater production of light oil. The tight oil renaissance has become a hot-button political issue. While North Dakota, epicentre of the Bakken shale, has the country’s lowest unemployment rate, companies report that one of the toughest aspects of drilling in the area is finding hotel rooms for employees. The state’s murder rate is rising, locals complain about horrendous traffic jams and there are long waiting lists for spots in day-care centres. Citizens are concerned


The Journal of the International Energy Agency

Grand Mesa: photo by Dsearls,

Shale around the Grand Mesa, in the US state of Colorado, is a source of the rapidly expanding production of light tight oil that is the shale-oil revolution.


about contamination of the water supply, and the World Bank reported this year that increased gas flaring in North Dakota lifted the United States to among the top five flaring countries in 2011. But the biggest reason the IEA and many other analysts urge caution is how takeaway capacity from areas of the Williston Basin in North Dakota and eastern Montana could constrain growth, increasing producer reliance on more expensive modes of transport and hurting the realised price for their oil. Light tight oil is swelling inventory levels at the Cushing storage site in Oklahoma, causing a structural disconnect between the benchmark West Texas Intermediate (WTI) oil price and that of other grades. Temporary transport bottlenecks have already caused drastic discounts of the price of oil offered for sale from the Permian Basin in Texas and the Bakken play. Although takeaway capacity in the Texas plays should be ample for rising output levels, short-term bottlenecks are likely, and producers must rely on truck and rail-based modes of transit.

Oil rig: photo by Lindsey Gee on Flickr,; Rig chart source: Baker Hughes; Price chart source: Rystad Energy

Texas has its advantages Production in the less constrained Eagle Ford shale area of Texas tripled over the course of 2010. In 2011 to early 2012, it more than doubled again to exceed 400 000 barrels a day. Producers there benefit from close proximity to the Gulf Coast refining centre, high gas liquids content and significant initial oil production rates. Takeaway constraints should disappear soon because of increasing processing plant capacity and new pipeline capacity. In fact, some analysts hint that the rapidly increasing Eagle Ford volumes will most directly reduce US light sweet imports, and challenge the economics of other light tight oil plays in the mid-continent. But while the majority of American tight oil production is economic at WTI prices even



A rig in North Dakota: the state’s jobless rate is the lowest in the country thanks to the boom in shale oil.

below USD 80 a barrel, new plays without ample infrastructure or where producers are less familiar with the geology are more expensive.

ANOTHER LIMITING FACTOR WILL BE THE EXTENT OF DRILLING THAT CAN OCCUR WITHOUT REDUCING THE PRESSURE IN THE BAKKEN FORMATION. Furthermore, tight oil production requires extensive infrastructure to collect small volumes from dispersed wells, and it experiences steep decline rates. Drilling and completion costs sometimes reach USD 10 million per well, largely due to constrained quantities of oilfield services in the Bakken and the need for longer horizontal laterals. Another limiting factor will be the extent of drilling that can occur without reducing the

pressure in the formation, with concomitant effects on already-producing wells. Much opportunity but also limits Analysts maintain that if the Bakken can support multiple wells, then future exploration and development would shift to new prospective areas such as Three Forks formation and could result in even higher output. The Eagle Ford and Bakken plays, along with shale plays in Colorado, New Mexico, California and the Midwest, are making the United States the single largest contributor to non-OPEC supply growth in 2012, and without a doubt, it will remain the top contributor for the next five years. Tight oil production growth will ease oil market fundamentals in the short and medium term, while spurring economic growth and reducing oil imports. But many constraints, current and future, will maintain US interdependency with world oil markets.

Permian Delaware PermianDelaware Bakkenshale








Niobrarashale AlbertaBakken

300 0 1991



1999 Gas

2003 2007 Oil


The number of US rigs shot up in recent years.

Utica shale Uticashale 0









Tight oil break-even prices in dollars per barrel: cost will help decide the fate of the production renaissance.




HAVE YOU MET JODI? t the end of the 1990s, the oil market experienced high volatility in terms of oil prices, and analysts pointed to the poor quality of oil data as one reason for the volatility. The six main organisations dealing with oil statistics met in Paris in November 2000 to assess the situation on monthly oil reporting. Some collected statistics through well established systems; others collected oil data only on an annual basis. Moreover, definitions on flows and products differed from organisation to organisation, as did units and methodologies used to collect the data. The six organisations – the Asia Pacific Economic Cooperation (APEC) forum, Eurostat, the IEA, the Latin American Energy Organization (OLADE), the Organization of Petroleum Exporting Countries (OPEC) and the United Nations Statistics Division (UNSD) – then held a major conference in May 2001 in Bangkok. All the main producer and consumer nations participated, together with many international and national oil companies. It was decided to launch a six-month exercise: each organisation would collect monthly statistics using a standardised questionnaire. Within the six months more than 50 countries were participating; the exercise was extended by another six months, and participation increased to 70 countries; after an additional six months it rose to 90 countries, covering almost 95% of global oil demand and supply. Countries and organisations then decided to make the exercise a permanent compulsory reporting system: the Joint Oil Data Initiative (JODI) was born. In 2005, the newly established International Energy Forum (IEF) took over the coordination of the initiative, and one of the first achievements was to assemble all the monthly data collected from the six organisations into a world database. On 19 November 2005, King Abdullah of Saudi Arabia launched the JODI database live on the Internet with energy ministers of more than 70 producer and consumer countries. The database, which contains detailed information on production, stocks, trade, refining and demand of crude and products, is updated every month. More and more users access the freely available database every month, with a peak on the day of the update.


By Jean-Yves Garnier Jean-Yves Garnier joined the IEA in 1995 and heads the Energy Statistics Division. Before coming to the IEA, his career spanned over five years in Indonesia, three years in Ivory Coast, two years in Djibouti, two years in Berkeley and the rest in Paris, where he was in charge of National Energy Plans, energy-efficiency policy and building energy information systems.

More information at The JODI database can be accessed at or using this QR code.

Recent expansion of JODI With the growing success of JODI, policy makers asked the six organisations and the IEF to expand the initiative to natural gas, and possibly to reserves and planned infrastructure capacities. In 2010, the groups started to collect monthly data on natural gas. At the 2nd Conference on Natural Gas Transparency, held in Doha in May 2012, countries and organisations decided to build a joint world natural gas database, similar to the JODI database. This database is to be made available progressively, first to participating countries and then to other users through 2013. As JODI was expanding, what originally was the Joint Oil Data Initiative became the Joint Organisations Data Initiative.


Apr2011 May2011 Jun2011 Jul2011 Aug2011 Sep2011 Oct2011 Nov2011 Dec2011 Jan2012 Feb2012 Mar2012 Apr2012 May2012 Jun2012

Country Total Top 30 Demand


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The top entries on the page listing the leading oil consumers in the August update of the JODI database.


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JODI launch: © Joint Organisations Data Initiative, courtesy of the International Energy Forum

JODI is much more than a database When countries and organisations embarked on JODI, the aim was simply not to build a global database but to raise the importance of data transparency for effective functioning of the oil market.



Policy makers now better understand the critical nature of timely and detailed statistics for any sound energy policy, leading to major improvements to energy statistics and balances of many countries observed over the past years. The importance of exchanging data to enhance the transparency of global energy commodity markets has been recognised as being beneficial to energy security and in the interest of producers and consumers alike. By helping to mitigate some of the uncertainties that may be detrimental to market functioning, JODI aims to moderate undue price volatility, thereby increasing investor confidence and contributing to greater stability in energy markets worldwide. A second impact of JODI is the advancement which has been made in terms of international cooperation among organisations. The seven JODI partner organisations – including the IEF – meet three or four times a year to monitor progress and give new impetus when needed; they de facto constitute a think tank for developing energy statistics beyond JODI. They paved the way for the InterEnerStat (International Energy Statistics) initiative which includes, besides the seven JODI partner organisations, 15 bodies that either collect (e.g. the African Energy Commission) or use (e.g. the International Monetary Fund and the World Bank) energy statistics. After five years of discussion and negotiation, InterEnerStat led to an international harmonisation of definitions of all energy flows and products used by the participating organisations. In February 2011, the United Nations Statistical Commission adopted those definitions as the basis for all collection of energy statistics data. Moreover, the JODI questionnaire on monthly oil statistics paved the way to a harmonisation among a variety of organisations of annual questionnaires for all energy forms. First, the IEA, Eurostat and the United Nations Economic Commission for Europe harmonised questionnaires; three years ago, APEC adopted similar questionnaires for its member economies; and UNSD is redesigning its annual questionnaire along the lines of those four organisations. The more the questionnaires are harmonised, the less work countries will have to do and the better the data should be. A major step towards more transparency and better data, but … JODI has certainly paved the way for better coverage and more timely and higher quality data about oil as well as all energy forms. The effect extends beyond energy: other organisations have adopted the JODI concept, including the United Nations Food and Agricultural Organization’s global initiative on cereals. JODI has also raised the profile of statistics and statisticians. Tribute should be paid to the JODI partner organisations, statisticians and policy makers all around the world. However, the current economic crisis is having an impact on the resources allocated to statistics: for instance, in many countries surveys have stopped and departing statisticians are not being replaced. There are already signs of deterioration in quality. This is true for energy statistics in general but for JODI data in particular. All of the JODI partner organisations are committed to increasing the coverage and the usefulness of the JODI database; however, transparency will happen only if all countries and companies are fully transparent. Moreover, success will require sufficient resources and universal commitment. The IEA will continue to act with other organisations to offer analysts more and better statistics but this cannot be done without the participation of all. – Mieke Reece of the IEA Energy Data Centre co-wrote this column.

Screenshot: © Joint Organisations Data Initiative

King Abdullah of Saudi Arabia launching the JODI World Database in Riyadh in 2005.





TRACKING TANKERS With official data often tardy, the IEA counts oil tankers for an up-to-date assessment of trade flows. Right now, the focus is on Iranian shipments.


as Saudi Arabia, but must be combined with pipeline and rail shipment volumes for countries such as Russia that also dispatch a significant portion of their oil overland. Cat-and-mouse tracking of Iran’s cargoes Tanker data also aid in monitoring specific events such as the threat that political upheaval in Egypt posed to the Suez Canal, supply outages in the North Sea and the civil war in Libya. Presently, the IEA Oil Industry and Markets Division is closely monitoring how much oil Iran is exporting and who is buying that oil. Official customs data from many OECD and non-OECD customers of Iranian oil are available only after a lag of a couple of months, so tanker shipments are invaluable for a timely determination of which countries are buying how much Iranian oil. Vessel monitoring, when combined with information supplied by shipbrokers, also provides insight into floating storage: oil that is stored at sea and does not yet have a buyer. Iran has limited land-based storage and is storing crude oil on vessels owned by the national carrier, National Iranian Tanker Corporation (NITC). Monitoring exports and floating storage permits

At any given moment, tankers are shipping upwards of 500 million barrels of oil across the world’s waters.


Andrew Wilson joined the IEA in 2006 to work on monthly oil data in the Energy Statistics Division. He became the freight and trade analyst in the Oil Industry and Markets Division in 2010, contributing to the benchmark monthly and medium-term oil market reports.

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IEA analysis confirms a traffic shift favouring the East.

an estimate of Iranian crude production that can establish the effect of sanctions on the Iranian oil industry. Iran has ordered NITC tankers to deactivate their automatic identification system beacons routinely and to re-flag and rename many vessels. Because ships are required to activate their beacons when in port and when transiting certain maritime regions such as the Middle East Gulf, these attempts to hinder the monitoring of carriers have succeeded only in adding an extra layer of complexity to the data. But the actions have raised the prospect of covert ship-to-ship transfers at sea to disguise cargoes’ origins, though without firm evidence it is impossible to establish whether such manoeuvres have taken place. Data detail a shift towards the East Oil Industry and Markets Division analysis sees increasing seaborne-transported oil volumes over the coming years and a rebalancing of the trade in crude oil towards the East. The rapid development of non-OECD Asian economies, notably China and India, with their seemingly unquenchable thirst for oil, is taking more and more Middle Eastern and African grades Eastwards, while the mature regions of Europe and North America slowly reduce their seaborne imports. As customs data from non-OECD countries are generally not as precise or timely as those from OECD members, tanker tracking will become ever more valuable to oil market analysts.

Polar Adventure:photo by Johan Wieland on Flickr,; Grey and red tanker: photo by MD111 on Flickr,

onger than three football pitches, weighing more than 200 000 tonnes when fully laden and travelling at speeds of up to 15 knots, oil tankers inspire awe. Besides being important cogs in the global oil supply system, transporting as much as 500 million barrels of crude oil by sea at any time, these modern-day leviathans and their movements provide insights into the workings of the global oil market. In contrast to the difficulty of tracking pipeline shipments, especially when official data are unavailable or delayed, monitoring tanker voyages gives an up-to-date view of developments in oil trade flows. The IEA benchmark monthly Oil Market Report employs tanker data on an ongoing basis not only for trade analysis but also to build fundamental supply and demand estimates. Vessel movements routinely feed into the report’s monthly estimations of OPEC crude supply. Current official data are often unavailable at the time of publication, but tanker information is up-to-date and includes cargoes still en route, permitting as close to a real-time determination of a country’s exports as possible. Tanker data are especially useful for monitoring countries that deliver most of their oil by sea, such

By Andrew Wilson




REX W. TILLERSON ExxonMobil’s chairman and CEO details how the firm finds and recovers the resources critical to energy security, and how government can help. n meeting the world’s increased need for energy to fuel economic growth, all of us have a role to play. ExxonMobil’s primary contribution to meeting this challenge is in developing and applying new technologies and proven techniques to safely, effectively and responsibly produce and deliver reliable and affordable supplies from the world’s vast endowment of oil and natural gas. In today’s energy industry, technology is as important as ever, since significant portions of the world’s oil and gas resources are found in challenging environments, including deepwater, dense shale formations and Arctic areas. Innovative tools, techniques and minds are needed to conquer these energy frontiers. One such innovation is horizontal drilling. ExxonMobil and others in our industry can now drill not only vertically but also horizontally for extended lengths and with amazing precision. This lets us develop large resource areas from a single location. In Russia’s Far East, for example, we have been using directional horizontal drilling technology on Sakhalin Island to safely reach oil and gas reserves 11 kilometres (km) offshore. Another example was in Southern California, where we completed the world’s longest extended-reach well, at nearly 9 km, drilled from an existing offshore fixed platform. Four decades ago, ExxonMobil pioneered an exploration technology called 3-D seismic, which uses sound waves to form sharp threedimensional images of underground formations, facilitating the location of oil and gas deposits. Now, 3-D seismic is standard throughout the energy industry. Four-dimensional seismic technology, which compares 3-D seismic surveys from the same field at different times of depletion, is extending our ability to recover resources. One particularly promising area is our research into subsurface imaging. We’ve begun to move under salt into tougher areas of imaging. So we are working on an extensive effort in developing proprietary capacities around computational capabilities that will, we think, fundamentally change the way we are able to image the subsurface.


Rex W. Tillerson: photo courtesy of Exxon Mobil Corporation, all rights reserved

Cutting-edge techniques for gas as well ExxonMobil has also integrated and refined technology for the production of cleanerburning natural gas. Our shale gas development and production activities are guided by proven methods and high standards of operational integrity. Hydraulic fracturing – a process our industry has safely and successfully applied for nearly four decades – is now being used in combination with horizontal drilling to enable us to unlock enormous amounts of natural gas previously trapped in dense shale and tight-oil rock formations many hundreds of metres beneath the earth’s surface. In addition, ExxonMobil is a world leader in the production of liquefied natural gas (LNG), working with partners such as Qatar Petroleum to bring affordable supplies of previously stranded resources to market on a great scale. We are also developing an LNG project in Papua New Guinea and are a major participant in the Gorgon LNG project in Australia. In addition to corporate-level research, technology groups specific to each business line support their technology investment. For example, our upstream research affiliate ExxonMobil Research Qatar is developing a remote gas detection system that pairs infrared camera technology with a sophisticated algorithm that detects hydrocarbons. When deployed, remote gas detection will improve process safety and reduce hydrocarbon emissions by identifying leaks quickly and automatically. Our Downstream Research & Engineering Company works continually on process enhancements to reduce flaring and associated emissions. We also invest in new technologies to improve energy efficiency. In working to help satisfy the world’s growing energy needs, we take on all these technology challenges with an unwavering commitment to safety and risk management. ExxonMobil analyses every significant operation we undertake using our Operations Integrity Management System (OIMS). Applying OIMS requires us to identify potential safety, environmental and

social impacts and to implement procedures and processes to mitigate risks. The roles of industry and government Our industry’s greatest strength is developing and deploying advanced technologies and techniques in a safe, economic and environmentally sound manner to promote prosperity and better living standards while maximising the value of energy resources. The private sector has an incentive to find and deploy game-changing technologies and projects – and we do it every day. But to be successful, government and business must understand our respective roles and responsibilities in spurring technology gains. Business must engage in long-term planning, sustained investment and risk management to ensure we develop energy and petrochemicals in a safe, secure and responsible way. Government has a role to play in creating a climate that encourages investment, innovation and long-term partnerships that allow for new applications of technology. It can also facilitate information sharing and the use of practical performance standards based on sound science, cost/benefit analyses, economic impact assessments and effective consideration of risks and rewards posed by various options. Policy makers are in a unique position to encourage the fundamental academic research that companies typically do not undertake themselves. Governments can best fulfil this role when they allow markets to operate freely and openly. Sound energy policies do not pick winners and losers, whether through subsidies, mandates, punitive tax policy or arbitrary and discriminatory regulatory approaches. Policies that are designed to encourage competition will drive innovation and new developments. They allow




In Russia’s Far East, ExxonMobil uses directional horizontal drilling technology to reach oil and gas reserves located undersea 11 km off Sakhalin Island.

The means to meet global challenges As we consider the global economic challenges at hand, there are reasons for optimism – reasons rooted in a clear view of the long-term outlook for economic development and progress. From ExxonMobil’s perspective, we see an encouraging story of long-term economic growth coming in the decades ahead. Significant population growth, new technologies and transformative economic opportunities – particularly in the developing world – will combine to drive economic expansion and


rising standards of living. We project that by 2040, global economic output will double and global population will increase by a quarter to 8.7 billion men, women and children who need access to energy, and this will mean global energy demand in 2040 will be about 30% greater than today. This need for energy is not a reason for concern but rather a recognition of the role energy plays in enabling progress for all. This clear recognition of the growth ahead gives us insights into the nature of the energy challenges confronting leaders in both politics and business. In developed economies, we project essentially stable overall energy use even as these countries achieve economic growth and higher standards of living. This outlook highlights the critical role ongoing energy efficiency gains play in supporting stable economies. By contrast, energy demand from developing economies will grow by close to 60% even considering efficiency gains. For those economies, therefore, the delivery of new and growing supplies of energy will be the bridge to a better future – providing hospitals, schools, better sanitation, cleaner water, technological advancement and improved infrastructure for transportation and trade. Keeping this in mind leads us to another fundamental insight: The world will need to invest in

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and pursue all economically competitive sources of energy if we are to meet projected demand. Where ExxonMobil is finding more oil ExxonMobil has interests around the world and believes there are opportunities in a number of new areas. An obvious example is North America, where the industry is crossing new energy frontiers in the safe and responsible production of shale gas, tight oil and oil sands, and is developing ultra-deepwater resources in the Gulf of Mexico. We see encouraging results – results that can be achieved elsewhere with the application of innovative technologies, proven techniques and rigorous operational standards. In Canada, we are developing oil sands that are providing access to one of the world’s largest known reserves of energy – approximately 170 billion recoverable barrels, or the energy equivalent to fuelling North America’s truck fleet for 140 years at current demand levels. The energy industry’s innovative techniques and technologies are allowing us to develop these resources in safe and environmentally responsible ways. Also in North America, but with applicability in other parts of the world, we continue advances in deepwater exploration and production. In

Sakhalin Island: photo courtesy of Exxon Mobil Corporation, all rights reserved

companies to invest today and over the long term in the innovations that will give them a competitive edge for delivering energy more safely, more securely or more efficiently. We have seen the positive impact of government support for basic research in the past. In the United States, for example, the internet and the semiconductor were facilitated by government support for ground-breaking researchers who were re-thinking science and technology at the most fundamental level. Many of our technologies were built on their research. These successes are reminders that government is most effective when it acts as a research catalyst on broad-based, pre-commercial opportunities, not as a venture capitalist.


just over a generation, our industry has taken the concept of deepwater drilling from drawing board to execution – building some of the most complex engineering marvels in human history. In the process, we opened up a new frontier for energy production that has spread around the world. By 2040, we can expect global deepwater production to double. Another emerging area is Russia, where ExxonMobil recently reached an agreement with Rosneft to undertake a USD 3.2 billion exploration programme in the largely unexplored Kara Sea in the Arctic and in the Russian sector of Black Sea. Both of these offshore areas have a high potential for liquids and natural gas. Also in Russia, ExxonMobil and Rosneft signed an agreement for a pilot exploration programme to advance the development of hardto-produce tight oil in the Western Siberia basin, one of the most prolific conventional oil basins in the world. The region is thought to have potential for unconventional development using directional drilling and multiple-stage hydraulic fracturing. There are many other areas of the world – Africa, the Middle East and throughout the Asia-Pacific region – with potential new production enabled by continuous technology advancements in safety and environmentally responsible production of the energy that’s necessary to enable economic progress. The ExxonMobil energy outlook for 2040 Oil and natural gas will continue to play a central role in meeting the world’s energy needs, by virtue of their availability, versatility and affordability. In 2040, oil and natural gas will continue to supply some 60% of global energy needs. Over this period we will likely see the continuation of an important trend already transforming energy markets: the rise of global trade in natural gas. As nations develop, the global economy will continue to need increasing amounts of electric power. By 2040, demand for electricity worldwide is expected to be 80% higher. This will create a growing need for fuel for power generation. Natural gas has proven itself to be safe and reliable for meeting this need. With this successful track record and the availability of abundant economic supplies, we expect natural gas will grow to provide 30% of the world’s electricity-generation needs by 2040 – up from just over 20% today. Natural gas will be increasingly attractive for another reason. It is cleaner-burning than coal when used for electricity generation, which will help meet our shared goals for reliable

and affordable energy, reduced emissions and environmental stewardship. National oil firms as partners Our industry has an important role to play in unlocking and delivering new supplies of energy in a safe, secure and environmentally responsible way. In fulfilling this role, we practice effective risk management. We engage in long-term planning and investment despite the ups and downs of regional and global economic performance. We invest with discipline and ingenuity. And we focus relentlessly on operational integrity and best practices – to protect our employees and the communities where we operate. Fortunately, our track record as an industry shows that not only can we fulfil these responsibilities, but we can do so in a manner that generates new economic opportunities for host nations and maximises value for consumers and shareholders, always mindful of where and how we operate. One of the most effective ways we do this is by building international partnerships that leverage our strengths. For instance, over the years, national oil companies (NOCs) have demonstrated a wide range of capabilities as strong partners in energy development, including secure access to resources, detailed experience operating in specific environments and a firsthand understanding of the local and national governments’ regulations and requirements. These strengths are augmented by the educational and cultural leadership that NOCs bring to their people as they pass on new skills and create employment opportunities. Our industry is further strengthened by the contributions of the international oil companies (IOCs). IOCs have an unparalleled breadth and depth of experience in taking on energy challenges around the world, developing, across a wide range of conditions, new approaches and best practices that can be brought to new partnerships and countries. We invest in large-scale capital projects, develop technologies and use our global perspective to maximise value along the entire energy value chain. As we look at the energy needs in the decades ahead, it will take our entire industry combining these strengths to meet growing energy demand. We will need access and knowledge, technology and expertise, project excellence and operational integrity, to deliver reliable and affordable energy to the billions of people who need it. ExxonMobil and the energy industry, in partnership with national oil companies and with the support of governments, can help meet this global energy challenge.


HOW TO LIMIT GHG EMISSIONS Technology is the key to meeting our shared aspirations for expanding access to reliable, affordable energy supplies, increasing efficiency and reducing emissions. At ExxonMobil, we believe that we must manage the risks associated with rising greenhouse-gas (GHG) emissions. A comprehensive approach is required to meet the world’s growing energy needs over the coming decades. Effective strategies must include putting policies in place that start the world on a path to reduce emissions while recognising that addressing GHG emissions is one among other important world priorities, such as economic development, poverty eradication and public health. As we pursue the long-term objective to minimise risks, near-term objectives should include the following: • promoting energy efficiency; • deploying existing technologies that reduce GHG emissions cost-effectively; • supporting research and development of new low-emissions technologies; and • supporting climate research to help inform the ongoing policy response. Throughout the world, national and regional policy makers are considering a variety of legislative and regulatory options to mitigate GHG emissions. In our view, assessing these options requires an understanding of their likely effectiveness, scale and cost, as well as their implications for economic growth and quality of life. Within ExxonMobil, we analyse and compare the policy options by evaluating the degree to which they meet these principles: • ensure that any cost of carbon is uniform and predictable across the economy; • let market prices drive the selection of solutions; • promote global participation by considering priorities of the developing world and recognising the impacts of imbalances among national policies; • minimise complexity to reduce administrative costs; • maximise transparency to companies and consumers; and • adjust to future developments in climate science and economic impacts of climate policies.


WORLD ENERGY OUTLOOK 2012 RELEASE: 12 NOVEMBER 2012 Industry and government decision makers and others with a stake in the energy sector all need WEO-2012. It presents authoritative projections of energy trends through to 2035 and insights into what they mean for energy security, environmental sustainability and economic development. Oil, coal, natural gas, renewables and nuclear power are all covered, including the outlook for unconventional gas, building on the recent WEO special report on the Golden Rules for a Golden Age of Gas. Global energy demand, production, trade, investment and carbon dioxide emissions are broken down by region or country, by fuel and by sector. Special strategic analyses cover: „„ the Iraqi energy sector, examining its role both in satisfying the country’s internal needs and in meeting global oil demand; „„

 hat unlocking the potential for energy efficiency could do, country by country and sector by w sector, for oil security, the climate and the economy;


the cost of delaying action on climate change, as more and more carbon-emitting facilities are built;


the water-energy nexus, as water resources become increasingly stressed and access more contentious;


measures of progress towards providing universal access to modern energy services; and


recent developments in subsidies for fossil fuels and renewable energy.

No one can be sure today how the future energy system might evolve, but many decisions cannot wait. The insights of WEO-2012 are invaluable to those who must make them. For more information, please visit our website:




MARIA DAS GRAÇAS SILVA FOSTER The president of Petrobras describes the Brazilian national oil company’s development from regional player to an integrated global powerhouse. he best strategy for dealing with uncertainties and changes in the energy industry is to become a true energy company. In the Petrobras 2020 Strategic Plan, we expanded our vision from being a leader in Latin America to being one of the largest integrated energy companies in the world. To achieve this goal, we are promoting excellence in management, human resources and technology, with attention to issues of sustainability and climate change. Also, energy diversification is a great instrument for dealing with changes in consumer preferences. Although we cannot know the exact trajectory of new technologies, integrated energy companies can take advantage of “game changer” technologies. As an integrated and diversified energy company Petrobras aims to offer more highquality products and services to our customers, in an efficient and sustainable way. The pre-salt discoveries off the Brazilian coast – huge oil deposits deep beneath the


sea and salt deposits – raise us to a new level of reserves and production, ranking us in a prominent position among the major energy companies. E&P as the core of Petrobras Petrobras remains focused on Exploration and Production (E&P). In our current Business and Management Plan, considering the total investments under implementation during the 2012-16 period (USD 209 billion), almost 66% are for E&P projects and 25% for Refineries, Transport and Marketing. Considering all approved investments, including projects under evaluation, the E&P share is 60%. The total investment in downstream projects will be USD 71.6 billion, of which 44% will be spent on refining capacity expansion, 21% on quality and conversion and 17% on operational upgrading. The main reason behind the investment in refining is our competitive advantage: the Brazilian market for oil products, which

is located just kilometres away from the Petrobras pre-salt reserves and which is growing faster than the global average, at more than 8% on average over the past two years, with the prospect of an average annual growth above 4% until 2016. Currently Brazil is a net importer of oil products. The expanding market brings great opportunities in this segment to Petrobras. In addition to new refining capacity, we need to anticipate changes in product specifications, adding complexity to the system, resulting in an oil-product mix output of higher added value. How Petrobras will increase output The Petrobras target for 2016 worldwide production of oil, natural gas liquids (NGLs) and natural gas is 3.3 million barrels of oil equivalent (boe) a day, of which 3.0 million boe/day will be produced in Brazil.


All photos: © Agência Petrobras

Petrobras is always open to collaborating with the International Energy Agency. We have deepened our co-operation with the IEA through information exchange, setting up technical meetings and as a reviewer of World Energy Outlook (WEO) documents and forecasts. We have worked as a Peer Reviewer of the WEO, and currently have an economist from our staff working with the IEA team to prepare WEO 2012. It has been rewarding for Petrobras to move forward with this partnership, assisting IEA in the building of the WEO as well as Medium-Term Market Reports for oil, gas and renewable energy. Petrobras has developed its deepwater drilling expertise off the Brazilian coast and in the Gulf of Mexico.




Oil and NGL production in Brazil is expected to reach 2.5 million barrels per day (b/d) in 2016. Most of the production growth should occur from 2014 onwards, with an estimated increase of 5% to 6% per annum for the period 2014 to 2016. For 2012 and 2013, the company expects to maintain its 2011 level of production, plus or minus 2%. The new production curve is based on the review of the efficiency of systems in operation in the Campos Basin and on the scheduled start-up of new units during the course of our Business and Management Plan. We are implementing the Campos Basin Operational Efficiency Improvement Programme, with a greater contribution to production as of 2016 when several new units in the pre-salt Santos Basin and in the Transfer of Rights area begin operation. By 2015, 12 new production units already under construction will go on-stream, representing an increase of 1.2 million b/d in capacity. In addition, from 2016 to 2018, seven new systems per year will add a further 2.3 million b/d in capacity.

Long term, the Petrobras target for 2020 is to produce a total of 5.2 million boe/day of oil and natural gas in Brazil. The commitment of the Petrobras workforce to achieve the Business and Management Plan targets will be incorporated into individual performance metrics. The annual employee performance evaluation process will be based on targets that are aligned to the achievement of those 2012-16 objectives. Experience in offshore activities Experience in E&P in deep and ultradeep waters has allowed Petrobras to find the technological solutions for the production development in the pre-salt layer, and the initial challenges related to the distance, depth and extensive layer salt are being overcome. So far, we are producing about 180 000 boe/day of oil and gas. As far as a new oil province, composed of heterogeneous and unusual carbonate reservoirs, is concerned, there are of


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EXPERIENCE IN E&P IN DEEP AND ULTRA-DEEP WATERS HAS ALLOWED PETROBRAS TO FIND THE TECHNOLOGICAL SOLUTIONS FOR THE PRODUCTION DEVELOPMENT IN THE PRE-SALT LAYER. Moreover, the existing challenges are those inherent to the implementation of projects on schedule, i.e. the delivery capacity of suppliers of goods and services, in Brazil and abroad; human resources training; management of local content; cost optimisation and operational efficiency. To mitigate these risks, Petrobras is implementing a comprehensive integrated portfolio management and performance system, focused on meeting the physical and financial goals of each project. For instance, in the construction of wells, the use of new techniques and procedures already has allowed a gradual reduction in the time frame and cost of operations. Petrobras will increase the local content of goods and services. The first 12 rigs for the definitive systems of pre-salt Santos Basin production are already under construction in national shipyards. Finally, a great challenge for the industry is the construction and supply of production systems on time and within the cost limits of the projects. Offshore, pursuing safety as well as oil Petrobras, as the world’s largest deepwater operator, is recognised as a reference in excellence in this area, with modern technical and technological knowledge and always having safety as its main goal. The company follows strict operating procedures, complying with both domestic and international safety rules. It undertakes risk analyses for offshore drilling projects, and the equipment that is used − both in the pre-salt area and at other sites off the

Pre-salt deposits: © Agência Petrobras

Petrobras is expanding its oil output by drilling deep beneath the sea and salt deposits to reach pre-salt reserves.

course challenges in optimising development, such as the improvement of the geological characterisation of the deposits, the implementation of methods to increase the ultimate recovery of hydrocarbons and the reduction of production-system costs, particularly in the construction of wells and subsea systems.



All photos: © Agência Petrobras

The Petrobras fleet of 200 ships is available for emergencies as well as setting up and servicing well operations.

Rising Brazilian demand drives growth at Petrobras.

Brazilian coast − meets the requirements of the industry’s most advanced safety standards, incorporating Brazilian and international experience accumulated over the years in well-drilling operations. All offshore drilling rigs are equipped with detection systems that ensure immediate and automatic well closure in case of an emergency, keeping the situation from spinning out of control. There are gas detectors installed in several places on the platform and alarms that signal pressure or volume increases inside the well, in addition to systems to prepare and inject fluids into the well, which also serve as safety barriers. Controlling rock formation stability while drilling oil wells is essential and a part of all Petrobras well projects. The pre-salt wells are drilled using synthetic fluid designed to inhibit the dilution of the salt rock. Internal well-safety training has been provided since 1971. The workers on the platforms have International Association of Drilling Contractors-accredited certification and participate in weekly accident drills.

our goal is the continuous improvement of projects, initiatives, programmes and actions aimed at the company’s sustainable development; • interaction among public authorities, academia, the third sector, suppliers, research and development institutions, and national and international companies by forming partnerships and networks that consider the main environmental themes: water resources, effluents, climate, wastes, environmental licensing and biodiversity; and • dissemination of information about sustainable development. This strategy helps us to address the challenges of climate change by supplying low-carbon fuels. As a leading energy company, Petrobras has identified opportunities and returns on investments in renewable energies, particularly biofuels. We seek to diversify our portfolio to meet the new global sustainability agenda, at the same time aligned with the renewable vocation of the national Brazilian Energy Mix programme. In the Petrobras Business and Management Plan, the company allocates investments of USD 3.8 billion for the biofuels segment, of which USD 1.9 billion are for implementing new projects and for acquisitions, especially regarding ethanol.

Emergency plans and resources in place There are emergency plans in place for oil spills in all Brazilian oil basins, over and

above local plans specific to each drilling and production unit in operation. To ensure both maximum protection for Petrobras operations and fast responses, Environmental Defense Centres − located at strategic points of operation − keep collector boats, ferries, chemical dispersants, bio-remediation agents and up to 20 000 linear metres of containment and oil absorption barriers constantly available. Petrobras has 14 large ships dedicated solely to responding to environmental emergencies, and if necessary, these vessels can get support from other resources among the company’s fleet of more than 80 aircraft and 200 ships. The emergency plan response capacity was designed taking worst-case incident scenarios into account and to cover all areas where Petrobras operates, including the pre-salt cluster. Committed to sustainable development The Petrobras environmental strategy aims at sustainable development and contributing to improvement of the industry’s environmental responsibility. The strategy is underpinned by three pillars: • business and investment management taking environmental issues into account:


20 12

& Data and analyses

Coming soon



FOCUS F OR LNG, A W EB OF VUL NER A B ILIT Y By Anne-Sophie Corbeau Anne-Sophie Corbeau is an IEA Senior Gas Analyst. She previously worked at Cambridge Energy Research Associates, focusing on European gas markets, and in PSA Peugeot-Citroën’s fuel cell and hydrogen department. She studied engineering in France and Germany.

oncerns about a gas supply crisis usually focus on pipeline disruptions, but large parts of the world depend on liquefied natural gas (LNG). Japan, South Korea, Chinese Taipei and India rely entirely on LNG for their gas imports, helping LNG represent a total of 9% of global gas demand. Those economies’ dependency brings critical and specific vulnerabilities, especially since any disruption to LNG supply would have global implications. LNG can be redirected fairly easily, and the liquefaction trade has increased significantly since 2009. But that growth hides the fact that global LNG trade is very dependent on one gas producer: Qatar, which provided 30% of the 2011 LNG trade and sent almost half of that supply to just those four most dependent economies. Any event significantly reducing Qatari LNG supplies could have severe effects on energy security.


The Qatari skyline: the Gulf state supplies about a third of the global trade in liquefied natural gas.

Qatari skyline: photo by Larry Johnson on Flickr,; tankers: photo by Nicolas Lannuzel on Flickr; Flickr,

Not only would the LNG importers suffer, but so would other gas importers, with prices potentially rising sharply as economies dependent on LNG diverted supply from other markets. There is currently little spare LNG output capacity in the world, as LNG producers tend to produce as much as they can. Therefore, other options would have to be used: primarily increased domestic output, notably in the Americas and possibly China, and fuel switching in the power sector. In such a crisis, the United States could reroute all the non-Qatari LNG it receives, thanks to its surging domestic production from unconventional gas drilling and by switching back to coal from gas in power generation. But as North America does not yet have an LNG export infrastructure, it cannot add to LNG supply, limiting its adjustment contribution to just reducing imports.

Tanker deliveries in Singapore: the four economies that rely entirely on LNG imports for gas are in Asia.

Unfortunately, increasing domestic production and re-routing from the United States would not suffice to replace missing LNG to the four most dependent economies. Besides, both Japan and India currently operate their electricity systems at near capacity, limiting fuel switching. Additional diversions would be needed, mostly from Europe. Since incremental gas supplies from other suppliers, particularly in North Africa, are limited, Europe would have to increase reliance on Russian pipeline gas. With the Nord Stream pipeline operational, there is enough excess capacity to get the gas from Russia to Europe, but Russia’s ability to ramp up production quickly would be a constraining factor. European countries could also switch to coal, especially if gas prices indeed surged, although a significant switch could result in bottlenecks in coal production and transport. Timing defines the knock-on effects A disruption of a week, a month or more would have varied consequences on global gas markets, calling for different types of responses. Timing, too, matters. In late January to early February, storage is relatively empty and demand in Asia and Europe is traditionally higher. A disruption then would affect storage deliverability, which decreases with the volume of gas left in facilities. A disruption of a couple of months in the second or third quarter of the year would hit Japanese power demand, which peaks in summer. In Europe, a disruption then would affect the refilling of underground gas storage facilities, so there would be problems in the next Northern Hemisphere winter for residential users, the one customer group that cannot change fuels.




A GRADUAL SWISS DENUCLEARISATION By Alexey Lokhov Alexey Lokhov is an analyst in the Nuclear Development Division at the OECD Nuclear Energy Agency who focuses on small reactors and the economics of the fuel cycle’s back end and power plants’ long-term operation. He recently served on the IEA review team for Swiss energy policies.

n the post-Fukushima Daiichi era, many countries have had second thoughts about nuclear power, and some – notably Germany – have firmly turned their backs on the industry, ordering shutdowns of plants. Switzerland, where several referendums on nuclear energy over the years have shown guarded support, has taken a middle path: dropping all plans for new plants but allowing existing plants to keep operating so long as the government regulator validates their safety. Switzerland has five operating nuclear power reactors, ranging in age from 28 to 43 years old. They generated two-fifths of the country’s electricity needs in 2010, with most of the rest coming from hydropower. The Swiss Energy Strategy 2050 initiative is working out the policy implications of the decision to build no new plants.


When hesitation turned into opposition Switzerland, thus, offers one roadmap for dealing with nuclear power amid

opposition born of the nuclear crisis that followed the tsunami that hit Fukushima Prefecture, Japan, in March 2011. The decision not to permit construction of any new nuclear power plants essentially means that Switzerland will phase out nuclear energy, but gradually and slowly. Sudden policy changes bring uncertainty to industry and make it hard to attract and maintain a skilled workforce. Knowing well in advance when nuclear power plants will mostly likely end operations permanently is critical to ensure staffing and funding for safe operation and then decommissioning. Those resources are also necessary to continue associated research and development. How to solidify the public’s trust Rebuilding public confidence in nuclear power requires clear messages and more information on long-term operation of plants. The International Energy Agency and the Nuclear Energy Agency urge governments to engage with the industry to ensure wellplanned implementation policies. The public and stakeholders also need to be informed in detail about intended and ongoing refurbishment programmes and other activities related to long-term operation of plants so that they have ever-greater confidence in the safety of the existing plants. At a general level, the public should be informed in an objective and transparent manner of the benefits and challenges of using nuclear power. This will enhance confidence in the plants and support regulatory activities.


The Journal of the International Energy Agency

THE PUBLIC SHOULD BE INFORMED IN AN OBJECTIVE AND TRANSPARENT MANNER OF THE BENEFITS AND CHALLENGES OF USING NUCLEAR POWER, IN ORDER TO ENHANCE CONFIDENCE. After the Fukushima Daiichi accident, ENSI re-examined safety levels at Swiss nuclear plants, focusing on plant design in respect to earthquakes, external flooding and any combination of those two events, as well as safety and auxiliary systems’ coolant supply and cooling of pools for spent fuel. It ordered some immediate rectifications such as establishing external storage facilities for emergency equipment and reinforcing the cooling of the spent fuel pools. ENSI also required that operators of all the Swiss plants participate in stress tests that were mandated by the European Union, even though Switzerland is not a member state. After the batteries of tests, ENSI reported that the plants in the country were highly resistant to the effects of all natural hazards, including earthquakes and flooding, as well as able to withstand electrical power failures and extended station blackout events.

Protest: photo by twicepix on Flickr,

A Swiss anti-nuclear rally. Opposition to the energy source grew after the 2011 Fukushima Daiichi incident.

Switzerland demonstrates useful steps towards strengthening that confidence, some of which it undertook before the Fukushima Daiichi accident. Most importantly, the Swiss Federal Nuclear Safety Inspectorate (ENSI) was detached from the Swiss Federal Office of Energy in 2009 and established as a fully independent body under the ENSI Board, which is elected by the Federal Council and reports directly to the council. ENSI not only closely monitors safety and security at the power stations, but it also oversees the interim storage facility for radioactive waste and all nuclear research facilities. ENSI supervises the transport of radioactive materials to and from nuclear facilities (Switzerland does not have a nuclear fuel-cycle industry and imports all its nuclear fuel) and is involved in the siting of deep geological repositories for radioactive waste.



WH O’S INVES T IN G IN RENEWAB LES By Michael Waldron Michael Waldron, a senior market analyst in the IEA Renewable Energy Division, is one of the lead authors of the Medium-Term Renewable Energy Market Report. Prior to joining the IEA, he worked as a senior energy market analyst at Lehman Brothers.

s the economy stumbles along in some areas of the world, the cost and availability of financing is a growing source of uncertainty for renewable energy deployment. Global investment levels in the sector fell during the first half of 2012 versus a year earlier, market data suggested, amid an increasingly cautious macroeconomic and policy outlook, particularly in Europe and the United States. Meanwhile, two traditional sources of financing for the sector – European bank project finance and utilities – look increasingly at risk. But emerging markets, particularly Brazil, China and India, are now driving renewable investment. Banks, institutional investors and corporations in Asia are taking larger roles in the financing of projects at home and abroad. For example, Chinese power companies, which have access to significant amounts of low-cost finance, have recently invested in renewablelinked companies and projects in Portugal and Australia. And compared with European lenders that have relatively weak capital positions, Asian banks are expected to be constrained less by Basel III, new global regulations set to take effect starting in 2013 that aim to strengthen the banking sector against economic shocks. Development banks and export credit agencies are also taking on larger roles, often providing loans at better rates than private sources can offer. Multilateral institutions such as the European Investment Bank and country-level entities such as the Brazilian Development Bank and Germany’s KfW have significantly increased their activity in recent years. Others are emerging, including the United Kingdom’s new Green Investment Bank and its potential pool of GBP 3 billion for investments in offshore wind, energy efficiency and power generation from waste. Institutional and non-traditional corporate investors represent another potentially large source of renewable financing. Private pension


Google has invested more than USD 900 million in renewable energy, like the solar panels at its headquarters.

funds, with USD 28 trillion under management in 2009 (in OECD countries), seek steady, longterm returns such as those provided by renewable projects with power purchase agreements. So far, such funds have engaged carefully, needing to invest in financial instruments that minimise exposure to construction risk. But pension fund financing has already emerged for wind projects in Denmark, for example.

Google campus: © Google; Osórlo wind farm: photo by Paulo rsmenezes,

INFORMATION TECHNOLOGY COMPANIES ARE LIKELY TO PROVIDE MORE CORPORATE INVESTMENT TO HELP MEET THEIR RISING ELECTRICITY NEEDS. Sovereign wealth funds, insurance funds and non-utility corporations are also expected to play larger roles. Allianz, the biggest European insurer, already has a wind portfolio of 658 MW (roughly equivalent to the annual consumption of 400 000 OECD households). American companies, largely banks, have provided tax

equity financing, using the renewable energy tax credits associated with projects to offset their own tax burdens. While there is uncertainty over this funding going forward, information technology companies are likely to provide more corporate investment to help hedge against electricity utility price increases and meet rapidly rising electricity needs for data servers and overall growth in global internet usage. Google has already invested more than USD 900 million in 1.8 GW of renewable generation capacity; in 2010, the company used 2 260 GWh of electricity for its operations worldwide. A smaller but potentially more important development is the growth of programmes to finance new distributed capacity. For example, some American residential and commercial entities are deploying solar photovoltaic (PV) panels via third-party leasing programmes, defraying the upfront costs associated with project financing. Another emerging idea to enable financing is securitisation of small-scale solar PV – the pooling of assets to sell as financial securities on secondary markets – though to date its uptake has been slow.

The Brazilian Development Bank has financed the majority of the Osório wind farm in Rio Grande do Sul.





By Bahattin Buyuksahin

VIRTUOUS VOLATILITY Speculation is often blamed for high prices and volatility in oil markets. But speculation can actually temper volatility while not affecting long-term prices. n recent years, the oil market has been characterised by rising, and at times, rapidly fluctuating price levels. From April 2012 to June 2012 alone, Brent crude oil prices gyrated between USD 125 and USD 89 per barrel. Higher volatility adversely affects oilexporting countries’ fiscal revenues and investment, reducing confidence in the economy, while it worsens inflation and growth prospects for oil importers. In 2011, the Group of 20 (G20) nations called for policy options to combat increased volatility in commodity markets in general, and in oil markets in particular. In response, a G20 experts group emphasised the importance of improving data transparency in both financial and physical markets as well as phasing out inefficient fossil fuel subsidies. The experts group also urged the use of country-specific monetary and fiscal responses to support inclusive growth in order to mitigate the impacts of excessive price volatility. However, it is important to note that volatility itself is not the main problem. Instead, the main challenge would be elevated price levels combined with higher volatility.


Volatility is nothing new for oil Oil prices, like those of many other commodities, are inherently volatile, and volatility itself varies over time. Because of inelastic supply and demand curves, at least in the short run, any shock to demand or supply will lead to large changes in oil prices. Much recent

attention focused on how annualised average volatility peaked in January 2009 at 92%, followed by a rapid decline to relatively low levels. However, the historical peak for volatility was in January 1991, at an average annualised 116%. In 2012, average annualised volatility was relatively stable at about 23% until mid-March. Note that from January to mid-March, oil prices increased from USD 110 per barrel to USD 128 per barrel. Volatility in Brent prices surged especially in June 2012, reaching an annualised rate of more than 34% – at the same time that the price level declined by more than USD 15 per barrel. This pattern – volatility increasing as oil prices decline and volatility declining as oil prices increase – is consistent with the empirical evidence for stock markets. Increased volatility when oil prices decline can be explained by the fact that falling oil prices often accompany deteriorating global activity and resulting uncertainties for global oil demand, such as the collapse in demand observed immediately after the demise of the investment bank Lehman Brothers in September 2008. On the other hand, increasing oil prices imply improving economic activity and greater stability. Thus, oil shows smaller daily price fluctuations, i.e. lower volatility. Although policy makers and market participants generally point to peak oil prices in 2008, the average Brent oil price for all of 2008 was USD 96.94 per barrel, peaking at USD 144 per



160 140


120 8



80 60


40 2 0 1987

20 0 1991


1999 Volatility (GARCH(1,1))




Brent price

Daily volatility and price for Brent oil: in recent years, high volatility coincided with falling prices, and vice-versa.


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barrel only on 3 July 2008. Moreover, oil prices were above the USD 100 threshold level for only 128 days of the year. Brent oil prices averaged USD 61 per barrel after that September, when the worst financial crisis since the Great Depression hit the global economy. By contrast, from mid-February 2011 to June 2012, oil prices averaged more than USD 100 per barrel. Given the fragile state of the global economic recovery, the impact of high oil prices on growth, especially in importing countries, is potentially more severe now than in 2008. High oil prices already threaten to aggravate the economic slowdown by widening global imbalances, reducing household and business income and boosting inflation. Blaming the speculators In the meantime, high oil prices have once again brought attention to the role of speculators in oil markets. Producers, consumers and policy makers increasingly blame speculators for fluctuations in commodity prices, particularly for energy, even though a futures market lacking speculators to place counter-investments against the price-hedging transactions of physical market players would arguably be much more volatile. Perhaps inadvertently, some commentators even associate speculative activity with manipulation. Speculation and speculators have become so unpopular that some proposals seek an outright ban on speculation in commodity exchanges, especially oil markets. But just what constitutes speculation? In general economic terms, buying or selling any asset in the anticipation of a price change constitutes speculation. In this sense, the distinction between hedging and speculating in futures markets is not so clear. Traditionally, traders with a commercial interest in, or an exposure to, a physical commodity have been called hedgers, while those without an underlying exposure to offset have been called speculators. However, hedgers may also “take a view” on the price of a commodity or may not

Chart source: US Energy Information Administration


Bahattin Buyuksahin, senior analyst for price formation in the IEA Oil Industry and Markets Division, has more than seven years of experience in oil and energy finance, covering the spectrum of energy derivatives markets, from the financialisation of commodities to the evolving regulatory framework.


hedge in the futures market despite having an exposure to the commodity, choices that could be considered speculative. In this broader view of speculation, motorists who tank up their cars in anticipation of higher prices amid fear of future oil supply disruption can be considered speculators. If their prediction is correct, though, the motorists actually are smoothing out supply availability between the present and the future, thereby reducing price volatility by putting upward pressure on prices when oil is abundant, while putting downward pressure on oil prices when oil is scarce. The same principle applies to other speculators. If speculation is stabilising oil prices, why do politicians seem so worried about the impact of speculators? For example, as part of initiatives to strengthen oversight of energy markets, US President Barack Obama declared in April, “Rising gas prices mean a rough ride for a lot of families. We can’t afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage and driving prices higher, only to flip the oil for a quick profit.” He was arguably referring to speculation by financial institutions, such as hedge funds and commodity index traders. The increased participation of traditional speculators as well as other financial institutions in commodity derivatives markets has led to claims that the trading activities of these speculators destabilise markets.

Oil trading: © BP plc

Primer on speculative-stabilising theory It is obvious that there is a tight link between physical and financial oil markets. If speculators anticipate higher demand for oil in the future based on information coming from physical markets, then futures prices will increase. In turn, spot prices will rise because some oil will be pulled off the market today due to the anticipation of higher prices in the future; however, that oil comes back to the market again in a future period of relative scarcity, leading to a lower future spot price than what would have otherwise occurred without inventory accumulation. The connection between inventory level and price level tends to moderate the volatility unless speculators are wrong. If they are wrong, they incur a loss, so they have every incentive to be right in their anticipation. This is why speculators would normally be expected to reduce volatility, without having any effect on the long-run price level, which is determined by supply and demand. In other words, traditional speculative-stabilising theory suggests


Oil traders in Houston: leaders of the Group of 20 nations back efforts to limit volatility in commodity markets.

that profitable speculation must involve buying when the price is low and selling when the price is high, and therefore irrational speculators or “noise traders” acting on irrelevant information will not survive in the marketplace. No smoking gun But some theoretical models find some reasons for concerns about hedge fund and index trading activities, in which noise traders, speculative bubbles or herding can drive prices away from fundamental values and destabilise markets. Ultimately the question of whether these speculative groups destabilise markets or simply supply needed liquidity becomes an empirical issue.

SPECULATORS SHOULD NOT BE VIEWED AS DISTORTING PRICES. RATHER, THEY ARE ESSENTIAL PARTICIPANTS FOR THE PROPER FUNCTIONING OF COMMODITY DERIVATIVES MARKETS. Recent research indicates that increased participation of commodity swap dealers and hedge funds has improved linkages between crude oil futures prices at different maturities, providing long-term hedging opportunities that would not otherwise have been possible. Furthermore, ample research shows that volatility in the crude market is reduced by the activity of speculators in general, and hedge funds and commodity swap dealers in particular.

Of course, these traders might attempt to move prices and increase volatility over short intervals of time. However, research using state-of-the-art econometrics finds no systematic evidence that speculative activity leads to movements in oil prices. In a 2012 paper, The role of speculation in oil markets: What have we learned so far?, that reviewed the existing literature on the impact of speculation in oil markets, the economists Lutz Kilian, Bassam Fattouh and Lavan Mahadeva concluded that “the existing evidence is not supportive of an important role of speculation in driving the spot price of oil after 2003. Instead, there is strong evidence that the co-movement between spot and futures prices reflects common economic fundamentals rather than the financialisation of oil futures markets.” Speculators should not be viewed as distorting prices. Rather, they are essential participants for the proper functioning of commodity derivatives markets who provide necessary liquidity, thereby reducing market volatility. Recent regulatory measures, such as speculative position limits, aimed at limiting the participation and reducing the risk-bearing capacity of speculators, will potentially have adverse consequences, such as reducing liquidity, raising hedging costs and amplifying volatility in energy markets. Michael Dunn, a Commissioner of the Commodities Futures Trading Commission in the United States until last year, perhaps best summed up the debate on position limits when he said in October 2011 that “my fear is that position limits are, at best, a cure for a disease that does not exist or a placebo for one that does. At worst, position limits may harm the very markets they are intended to protect.”





PLATFORM OF ACTION IEA Technology Platform champions low-carbon advances worldwide, including North African solar power and Russian efficiency and bioenergy. ecarbonising energy systems is a huge challenge, but the IEA Technology Platform catalyses deployment of lowcarbon technology around the world. Besides activities with IEA members, the initiative works on country-specific and regional initiatives with emerging economies and developing countries, and it collaborates with various stakeholders from the private sector and other international organisations. Formally known as the International Low-Carbon Energy Technology Platform, the Technology Platform identifies shortcomings in the development of low-carbon technologies, and then develops strategies, including roadmaps, to foster innovation, implementation and best practice for these technologies. In its two years, the Technology Platform has developed 20-plus projects covering more than ten different clean energy technologies and systems, including hydropower, smart grids, energy efficiency, solar technologies and bioenergy.


Working with Morocco on solar power Morocco has some of the world’s best resources for renewable energy, and its government plans for 14% of electricity, or about 5% of total national energy demand, to come from solar power by 2020. But despite impressive recent advances worldwide in solar energy technology, for Morocco to meet its target, the country will need to adopt not just the latest technology but also “best practice available” in policy. The Technology Platform seeks to help Morocco decarbonise and also set a regional example that can be replicated with other national as well as local governments around the Mediterranean Basin. Existing infrastructure links to neighbouring countries in North Africa and Europe will help Morocco share power in the region, fuelling a low-carbon energy transformation not just at home but across North Africa. This increased supply should encourage greater energy trade with both Europe and sub-Saharan Africa. In support of King Mohammed VI’s decision to designate Morocco Oriental as a


The Journal of the International Energy Agency

Marie-Laetitia Gourdin joined the IEA in 2010 and is now an Energy Analyst on the International LowCarbon Energy Technology Platform. Before, while studying at La Sorbonne and Assas universities in Paris, she worked at the French Prime Minister’s Office for European Affairs.

pilot region for the development and deployment of renewable energy technologies, the IEA is collaborating with R20 Regions of Climate Action, an organisation of subnational governments co-operating with the United Nations, and Morocco Oriental authorities. The Agency organised a training workshop in March 2012 that addressed policy, technology and planning for roadmap development and led to a pilot project for the creation of a local solar technologies roadmap that can be expanded to regional and national levels. Spreading across North Africa and the sea The Technology Platform subsequently facilitated IEA participation in the 5th Middle East and North Africa Renewable Energy Conference, held in early May in Marrakech. The event focused on the prospects and challenges for sustainable regional socioeconomic development through renewable energy. In October, the Technology Platform will join forces with the IEA Renewable Energy Working Party to organise a workshop in Rome on deploying renewable energy in the Mediterranean area. Other partners are Italy and Res4Med, an industry association created in 2011 by Italian power-sector companies, including Enel Green Power. The Technology Platform’s increasing activities in the Mediterranean will help the IEA multiply its interactions with countries of the region, in particular Morocco but also potentially Libya and Egypt. Embracing efficiency in Russia The Technology Platform is also working with Russia on energy efficiency and bioenergy, two areas which can help Russia reduce its carbon emissions and increase energy security. According to the IEA World Energy Outlook 2011, if Russia had used energy as efficiently as comparable OECD countries in each sector of its economy in 2008, it could

Ain Beni Mathar plant: © OECD/IEA, 2011

A combined gas-concentrated solar power plant in Morocco Oriental, a pilot region for deploying renewables.

By Marie-Laetitia Gourdin


have saved more than 200 million tonnes of oil equivalent, equal to 30% of its consumption that year. Russia has particularly great potential for energy efficiency in power generation. Following then-Prime Minister Vladimir Putin’s April 2011 decision to create a series of national technology platforms focused on modernisation and innovation of the Russian economy, the IEA Technology Platform has worked closely with the Ministry of Education and Science and the utility Inter RAO UES of Russia. Those organisations and the Technology Platform jointly sponsored a September 2011 conference where international experts advised on the project series, with a particular focus on thermal power, renewable energy and smart grids. The Technology Platform then organised two events in June 2012: a conference on bioenergy and a training workshop on roadmap development at the national level that focused on Russian priorities for efficient thermal power and bioenergy use.

Russian hay field: photo by akk_rus on Flickr,; Moscow: photo by koraxdc on Flickr,

Next steps as Russia takes on G20 role In 2013, while Moscow holds the presidency of the Group of 20 (G20) nations forum, the Technology Platform will work with Russia on bioenergy. In June 2012, the IEA signed an agreement to cooperate on the development of a How2Guide for Bioenergy publication with the Russian Biotechnology Society, which acted on behalf of the Russian Bioenergy Technology Platform. The How2Guide, as part of a wider IEA series, will provide guidance on policy and methods for technology-specific roadmaps at the national level. Collaborating with the IEA on this project while developing its own national roadmap for bioenergy may help Russia become a higher-profile bioenergy player in the global market. In parallel, following Moscow’s stated priorities and previous Technology Platform efforts, the IEA plans to help Russia develop a roadmap on clean and efficient thermal power. Technology Platform around the world The Technology Platform was created under mandates from the Group of Eight leading industrialised countries and IEA members to address the rapidly closing window for reducing carbon emissions in time


The Technology Platform works with Russia to galvanise the use of bioenergy in the agriculturally rich nation.

If efficiency in Moscow and all Russia were at the comparable OECD average, energy use could fall by 30%.

to minimise global temperature increase. The initiative is ready to pursue activities in a wide range of nations, including all 28 IEA member countries plus Chile and Estonia, which are pursuing IEA membership, as well as Brazil, China, India, Indonesia, Mexico, Morocco, Russia, South Africa, Vietnam and the United Arab Emirates. The Technology Platform is preparing its first annual report, which will detail its progress towards its three aims: catalyse

partnerships and support activities to accelerate deployment of low-carbon technologies; facilitate the sharing of best practice in policy; and identify and remedy gaps in international cooperation on low-carbon energy policy. More Information about Technology Platform activities is available at





A QUIET REVOLUTION Bus rapid transit – a mix of efficient service and land-use policies – provides a low-cost, energy-efficient solution to urban transport woes. ight budgets and a rapidly warming world have governments scrambling for technology solutions that meet the energy demand of a larger and more urban population. Many cities around the world have found an answer in buses, as an innovative re-imagination of a low-tech mass transit option, to ease the modern problems of increased congestion and pollution. From South America and now dramatically in China, the quiet revolution of bus rapid transit (BRT) reconfigures traditional bus systems and combines them with innovative land-use policies to fashion an integrated, cost-effective and highly efficient mode of transportation. BRT systems combine speedy, articulated buses with rapid boarding and dedicated lanes to create very efficient transport systems with high load factors. Besides fast operational speeds, BRT systems have good frequencies of service (a bus shows up



Tali Trigg became an IEA Energy Analyst in 2010. He specialises in transportation technology policy, with an emphasis on smart growth, electric vehicles (spearheading the Agency’s work on the Electric Vehicles Initiative) and bus-centred rapid transit.

The frontline of the BRT revolution may be shifting to China, but Latin America continues to innovate. Bogotá is looking at battery electric buses from BYD Corporation of China, while Argentina just started its first system, in Buenos Aires. Mexico is looking to expand its BRT success in Mexico City to several other cities. And Brazil is specifically focusing on BRT for the 2014 FIFA World Cup and the 2016 Olympics. Not just a South-to-South export This innovation is not merely a Southto-South expansion, but also has taken hold in cities from Cleveland, Ohio – where it raised ridership by 60% in four years – to Caen, France. One of the earliest “Northern” adopters of BRT was Ottawa, Ontario, whose BRT system started in 1983 and today serves 10 000 pphpd. Other star performers in North America include Chicago, Illinois; Las Vegas, Nevada; Nashville, Tennessee; Pittsburgh, Pennsylvania; Cincinnati, Ohio; and Montgomery Country, Maryland, a suburban area near Washington, DC. All of these regions plan to expand and enhance their BRT systems. The innovativeness of BRT is shown by not only the rate of its adoption, but also the geographic diversity of its implementation. From Rio de Janeiro to Eugene, Oregon, and

More Information at

One way BRT systems speed service is levelised boarding, in which the platform and the bus door line up evenly.


The Journal of the International Energy Agency

Levelised bus entry: photo by EMBARQ Brasil on Flickr,

The International Energy Agency developed the first global BRT database with EMBARQ, compiling data on all completed systems worldwide, as well as those in the planning stage. EMBARQ is a programme of the World Resources Institute and a member of the BRT-ALC Center of Excellence. The IEA also recognised the extensive potential of BRT systems in its biennial report Energy Technology Perspectives 2012. IEA senior transport analyst Lew Fulton said during the flagship technology book’s launch in June, “In the 2012 edition, the IEA calls for a doubling of the world’s BRT systems by 2020.”

almost every 30 seconds in Mexico City and Bogotá, Colombia). The accompanying unique marketing identity has been shown to increase ridership by 10% to 15%. They are budget-friendly and usually politically feasible, unlike many other major infrastructure projects, which are expensive and often disrupt the urban sphere. BRT systems were developed in Curitiba, Brazil, in the mid-1970s and then won bigger international attention with a successful implementation in 2000 in Bogotá that resulted in nearly half of commuters there taking the bus, compared with less than 10% just ten years before the programme was launched. There are more than 140 BRT systems operating worldwide today, up from about 20 in 2000 and nearly 100 by the end of 2010. The recent surge comes as the original Latin American locus of BRT shifts to China. There are 13 systems already in operation in China, with 16 more under development. The two-year-old system in Guangzhou is already considered to be one of the most efficient in the world, outperforming many metro, or urban underground rail, systems in moving passengers per hour per direction (pphpd), the common term of measurement for bus and metro passenger flows.

By Tali Trigg


from Jakarta to Ahmadabad, India, the concept and reinvigoration of public transit is walletfriendly, pollution-reducing, and easy and comfortable enough to tantalise new riders to adopt it. Finally, it can be planned, budgeted and implemented within one political term, a powerful alchemy for a transit innovation trying to make a name for itself. Europe has a different approach altogether, developing an alternative, Buses with High Level of Service (BHLS), which adopted some of the features of BRT, including a system focus as well as a high level of comfort and good performance. Due to the higher urban density of European cities and the existing proliferation of metros and tramways, BRT was rarely imported wholecloth (Ankara, Turkey, being a possible exception); instead, ideas from BRT were incorporated into existing systems, and the idea of BHLS was born. Old-style vehicle’s high-tech makeover BRT’s efficiencies include levelised boarding – avoiding steps by making the platform the same height as the bus, much like many metro trains – to speed the exit and entrance of passengers. Another example is the use of an intelligent transport system (ITS) that counts passengers, tracks vehicles and gives signal priority to BRT vehicles. An ITS allows for better analysis of the system performance, which translates into better service and better real-time information for the passenger. BRT systems are not the only recent change in bus transit. More intercity coaches feature Wi-Fi and other amenities that make them more comfortable. In fact, intercity buses have been the fastest-growing transportation mode in the United States

for three years running. A 2010 study from DePaul University in Chicago shows that the overall rate of US growth for curbside bus services from 2009 to 2010 was at least 33%. Governments are realising that light rail and metro systems are not always their best option, and such projects are being scaled back around the world because of relatively high costs and the global financial crisis. In their place, urban buses are increasingly attractive, as BRT and other technological developments help bus transit spread more widely than ever before.

BRT EFFICIENCIES RANGE FROM LAND-USE POLICIES TO COMPUTER TRACKING OF VEHICLES TO ELIMINATING STEPS AT BUS STOPS TO SPEED LOADING. Finally, minibuses continue to provide a flexible transport solution in much of the Southern Hemisphere. Efficient use of land and technology Land use is the component that fundamentally ties in the system efficiencies and ends up making BRT so efficient. But what does system efficiency look like? Think of Japan’s high-speed rail system. When policy makers were considering how to make the trains go faster, they approached the question with a systems framework and realised that the limiting factor was not the trains but the tracks. The Japanese then set out to level ground where possible, avoid any crossings and


lay as much uninterrupted straight track as possible. More than the world-renowned bullet trains themselves, this broader approach led to the system efficiencies associated with the service. In that same fashion, BRT systems harness whole systems thinking to deliver a mobility solution that can actually benefit from urban density. BRT can symbiotically integrate into the city and evolve along with a changing city. As the number of BRT systems worldwide increases, so do the urban corridors they serve. For example, Leeds, England, and Beijing are two cities adding capacity as their BRT systems mature. The key trend running in parallel to BRT system uptake is the increased urbanisation of the world. According to United Nations estimates, about 50% of the world lives in cities today, and that share should rise to 75% in 2050 – a demographic revolution. Increased urbanisation very likely will exacerbate congestion and pollution, unless cities make sustainable and long-term decisions that address this demographic shift. Urbanisation is paramount for transportation since public transit systems are viable only with density and the resulting high ridership potential. BRT could become part and parcel of an increasingly appealing path towards efficient and sustainable cities, transporting citizens safely, comfortably and speedily. What not long ago was the most maligned urban transit solution, bus systems may come to redefine the spaces of hundreds of cities clamouring for a solution against increasingly urbanised space and concomitant pollution and congestion. Watch this space for a low-tech path towards sustainability.

Guangzhou bus traffic: photos by Karl Fjellstrom, ITDP, all rights reserved

Buses-only lanes and other BRT efficiencies (right) in Guangzhou, China, cleared past congestion. China now has 13 BRT systems, with 16 more under development.





STORING UP TROUBLE Humanity’s increasing impact on the Earth’s climate system involves more than just the emission of a trillion-plus tonnes of CO2 since 1750. ach day, the Earth receives on the order of 15 billion terajoules (TJ) of solar radiation. Approximately 30% of this is immediately reflected, refracted or scattered back into space, while the planet’s surface or atmosphere absorbs the remainder before reemitting it. Viewed from space and based on the absorption rate, the theoretical average temperature on the Earth should be -18°C, not the 14°C that was the 1951 to 1980 annual global mean. What keeps the bulk of the planet’s surface above freezing is the greenhouse effect. The vast majority of gases in the Earth’s atmosphere are transparent to electromagnetic radiation at the frequency distributions emitted by the Sun and the Earth. But other, trace gases are responsible for the retention of heat: these greenhouse gases (GHGs) are essential for life as we know it.


CO2 and other long-life GHGs The IEA publication CO2 Emissions from Fuel Combustion (2012) calculated global CO2 emissions from fossil fuel combustion to be more

than 30.5 gigatonnes (Gt) in 2010, equivalent to atmospheric concentrations of 3.9 parts per million (ppm). The United States Department of Energy’s Carbon Dioxide Information Analysis Center has data extrapolated back to 1750 showing that of the 1 337 Gt of CO2 emitted from use of fossil fuels in the 261 years since the dawn of the steam age, 24% occurred in the 11 years from 2000 through 2010. Oceans and other carbon sinks absorb some of that extra CO2, decreasing the ocean’s natural alkalinity in the process. But most of it remains in the atmosphere, increasing CO2 concentrations from 280 ppm in 1750 to 391 ppm in 2011. Other GHGs also play significant roles. Besides CO2, the 1997 Kyoto Protocol covers methane, nitrous oxide, sulphur hexafluoride and various groups of fluorocarbons. The 1987 Montreal Protocol addresses ozone-depleting GHGs like chlorofluorocarbons. The efficacy and atmospheric longevity of all these gases can be calculated in terms of an equivalent amount of CO2 (generally based on a 100-year period). Some have a global warming potential thousands of times more per

Julian Smith Julian Smith, who studied science at the University of Queensland in Australia, joined the IEA Energy Data Centre in 2008, focusing on electricity, solid fossil fuels and carbon capture and storage. He is a collaborator on the IEA Coal Information book and assists the CCS Technology unit.

molecule than CO2 at current concentrations, but they are not as large a by-product of human activities. The 391 ppm CO2 figure comes from the US National Oceanic and Atmospheric Administration’s annual greenhouse gas index. But, using some estimates, all Kyoto GHGs totalled 446 ±6 ppm CO2-equivalent (CO2-eq). All long-life GHGs, which include chlorofluorocarbons, were 474 ±8 ppm CO2-eq. What other GHGs are there? Ozone is not a long-life GHG, but it is a GHG. A naturally occurring gas in the stratosphere, it absorbs electromagnetic radiation (EMR) emitted by the Earth very effectively in a window of frequencies where very few other gases do. Human-caused emissions of ozone-depleting gases have decreased ozone concentrations in the stratosphere, creating a small cooling effect, or a negative radiative forcing (RF; see sidebar). But a significant increase in tropospheric ozone production (caused by the release of other pollutants) ensures a solid overall warming effect even though ozone survives only a brief three weeks in the troposphere. The


Argentina’s Perito Moreno glacier: terrain changes affect albedo (reflectivity), altering the Earth’s energy absorption.


The Journal of the International Energy Agency

Perito Moreno: photo by S. Rossi,

EMR intensity depends upon the temperature of the object emitting it. EMR absorbed by the Earth and the total EMR that the Earth emits must be equivalent for the planet to neither gain nor lose energy. Altered factors (such as an increase in greenhouse gas concentrations) that change this radiative balance are known as “forcings”, as they demand a reaction. They are usually calculated showing their effect at the tropopause (see map of atmosphere on last page of article), and are measured from a start time (e.g. 1750). As potential flows of energy, they tend to be expressed in Watts per square metre.



human effect on ozone concentrations currently results in an RF of about 0.31 Watts/m2 (W/m2), equivalent to approximately 23 ppm CO2-eq. Water vapour is the most prevalent GHG, and the main contributor to the naturally occurring greenhouse effect. With concentrations tending to range between 1% and 4% of the atmosphere at sea level, water constitutes about 0.4%, or 4 000 ppm, of the atmosphere as a whole. It, too, is not a long-lasting GHG, as the hydrological cycle – via clouds and precipitation – ensures that water vapour lasts for just days in the troposphere. Anthropogenic hydrological warming effects include higher tropospheric concentrations of water vapour resulting from the effects of irrigation (which are still being quantified). In the stratosphere, concentrations have been changing of late for several reasons, including the decomposition of methane, increasing the greenhouse effect. The mixed impact of aerosols Made up of many components, aerosols have both the largest negative impact on RF and the largest uncertainty range. Like water vapour and ozone, they are naturally occurring phenomena in our environment, but human activities alter the type, pervasiveness and persistence of aerosols’ concentrations. Their effects can be classified as direct (i.e. the scattering and absorption of radiation) and indirect (providing nucleation that forms more clouds or clouds with different properties, increasing their albedo, or reflectivity). Currently, the anthropogenic indirect effect from aerosol particles contributes about 1% to the overall cloud albedo effect. Direct effects from other sources (such as mineral dust from mining) are also often minor


Sun: photo courtesy of NASA

Atmospheric parts per million (ppm) are a concentration based on evenly distributed volume, not mass, so all gases are equivalent, regardless of molecular weight. The Earth’s atmosphere weighs 5.14 million billion tonnes excluding water vapour. Based on its constituents (N2 78.08%, O2 20.95%, Ar2 0.93%, etc.), it has a mean mass of 28.97 grams per mole. This means 1 ppm in the atmosphere contains more than 177 trillion moles. In terms of CO2, every ppm has a mass of approximately 7.81 Gt.

The Sun emits 385 x 1018 MW of bolometric luminosity, sending Earth 15 billion TJ of radiation daily.

The global picture The combination of all these variables and many more result in a change in RF from

1750 to 2011 of 2.07 W/m2, or 409.4 ppm CO2-eq, up from 406.4 ppm CO2-eq in 2010. The other factors include anthropogenic forcings like the effects of deforestation and small natural changes in how much radiation the Earth receives from the Sun. But not all anthropogenic effects are currently counted, as they are still being quantified; exclusions include effects from aviation. There is a considerable delay between changes in RF and the climate system’s

That sum is equivalent to the weight of iron you would need to construct more than 1 069 000 Eiffel Towers. Standing upright, side-by-side, those towers would cover an area almost the size of Kuwait. One ppm of CO2 equals the displacement of 75 000 Nimitz-class aircraft carriers. The weight is six times the capacity of the world’s entire merchant fleet, or heavier than all the road vehicles with an internal combustion engine that humanity has ever made. At standard temperature and pressure, one millionth of the atmosphere would occupy about 4 trillion cubic metres, which

would cover the entirety of the United States to a depth of 40 centimetres. One ppm is equivalent to all Russian natural gas exports from 1991 through 2010, or 122% of the global consumption of natural gas in 2010. CO2 emissions from fossil fuel combustion totalled 3.9 ppm in 2010, up from 1.1 ppm in 1959. In 1909 they were less than 0.4 ppm (from the use of about 1.5 billion tonnes of coal). Some of these annual emissions will be removed from the atmosphere as a part of the carbon cycle. Nevertheless, CO2 concentrations in the atmosphere are increasing at an exponential rate.

fractions of natural equivalents. Exceptions stem from combustion of fossil fuels: black carbon particles provide a notable heating influence when airborne, and anthropogenic sulphate emissions are several times larger than the amount of airborne dimethyl sulphide produced by phytoplankton.






Temperature an nd pressure vs altitude


Thermosphere 100 90




70 60 50


40 30

Stratosphere 20

Troposphere 0 (oC) -100 -80 -60 -40 -20



20 40 60 80

Pressure (atm m) Temperature (oC)

100% %

absorbing sufficient heat to respond fully. Studies show that the oceans have taken up more than 90% of the extra heat absorbed to date – well over 200 billion TJ from 1955 through 2003. By contrast, the total heat generated from combusting fossil fuels (not only useful heat but waste, too) was 11.5 billion TJ over those 49 years. James Hansen was the lead author of a 2005 study that used data through 2003 to quantify the Earth’s thermal imbalance at 0.85 ±0.15 W/m2. That means that the planet was absorbing somewhere between 360 TJ and 510 TJ more every second around 2003 than it would normally re-emit. The implication is that the Earth’s climate must heat up by 0.6°C to address this imbalance, based on a climate sensitivity assumption of 0.75°C per W/m2. But that temperature change will take decades – during which time the RF imbalance most likely will increase further. The ramifications of this imbalance Average annual GHG emissions have increased substantially since 2003, with atmospheric CO2 concentrations alone rising by more than 2 ppm per year at present. Adding 1 ppm of CO2-eq to the atmosphere effectively contributes about 7 TW of heating – approximately twice the capacity of the world’s collective fossil-fuel electricity generation systems.


As the amount of GHGs in the atmosphere rose, the 20 hottest years since 1880 were all in the past 24 years.

Globally, according to data collected by the Goddard Institute of Space Studies in the United States, the 20 hottest years since 1880 have all occurred in the 24 years dating back to 1988, and the hottest decade on record (2001-10) was 0.23°C warmer than the second-hottest decade (1991-2000) and 0.55°C hotter than the 1951-80 benchmark.

ADDING 1 PPM OF CO2-EQ IN EFFECT CONTRIBUTES 7 TW OF HEATING – TWICE THE CAPACITY OF THE WORLD’S COLLECTIVE FOSSIL-FUEL ELECTRICITY GENERATION SYSTEMS. Other feedback mechanisms including terrain changes such as the thawing of permafrost and albedo changes from melting ice will exacerbate the warming of the Earth and, in turn, increase the concentration of GHGs, setting up further warming. Some measures to reduce emissions can have unwanted side effects. In the early 1970s, concerns over aerosol-induced global dimming, acid rain and other health and environmental problems led countries to use engineering measures to reduce particulate emissions. Germany, for example, cut its sulphur pollution by more than 90% in 30 years. But according

The Journal of the International Energy Agency

to the Intergovernmental Panel on Climate Change’s Fourth Assessment Report, anthropogenic aerosols could still be providing -1.2 W/m2 of forcing – that is, a cooling effect – about three-quarters of which can be attributed to sulphates. Given the short lifespan of tropospheric aerosols (hours to weeks), halving this concentration, while necessary, would be the equivalent of adding an extra 50 ppm CO2-eq to the atmosphere in a short time frame. Some sobering implications During the last great climate-change event, the Paleocene-Eocene Thermal Maximum, some 55 million years ago, the Earth heated up about 6°C over 20 000 years and then took 200 000 years to return to near pre-perturbed conditions. The planet underwent significant changes during this period; ocean acidification accompanied mass extinctions on land and in the sea. The sedimentary rocks that formed before and after this event are so different that they were divided into separate geological epochs long before scientists discovered what had caused the split. For a great many species, adaptation was simply not possible, even over many thousands of generations. Business-as-usual scenarios using current emission trajectories suggest that a similar degree of climate change is likely, but over less than 1/100th the amount of time.

Chart: adapted from under Creative Commons licence Desertification: photo by pizzodisevo on Flickr,





THIRSTY ENERGY nergy and water underpin human prosperity and are, to a large extent, interdependent. Water is ubiquitous in energy production; in power generation; in the extraction, transport and processing of fossil fuels; and, increasingly, in irrigation for crops used to produce biofuels. Similarly, energy is vital to the provision of water, needed to power the systems that collect, transport, distribute and treat it. Energy systems are vulnerable to constraints on water resources that affect the reliability and cost of energy projects. In August, water shortages in India from a delayed monsoon concurrently raised electricity demand (largely for groundwater pumping) and lowered electricity supply from hydropower, contributing to a power outage that lasted several days and affected more than 600 million people. In the United States and Europe, droughts and heat waves have affected operations at nuclear and fossil-fuelled power plants – which rely on water for cooling and other processes – forcing reductions in electricity output and, in some cases, imposing additional costs for importing electricity and/or investing in adaptive measures. In Iraq, sustained increases in oil production hinge on the availability of water for injection to maintain pressure in the country’s southern fields, with vital implications for Iraq’s future prosperity and global oil markets. Water availability in parts of China, which is estimated to have the world’s largest shale gas resources, will strongly influence the pace of development. Water-related energy security and economic risks are heightened in regions where water availability is limited, but energy production can face detrimental impacts from water shortages even in regions with seemingly ample resources. Supplies can be seasonal, and their distribution uneven or affected by unexpected climatic events. In addition to constraints on availability, risks to water quality by some types of energy production can require additional safeguards at added cost. Looking ahead, pressures on both energy and water are set to increase. Economic growth and expanding populations, particularly in emerging economies, will drive greater demand for energy and water. Moreover, climate change portends a more water-constrained future: besides higher air and water temperatures, its expected impacts include decreasing average surface water flows; a reduction of snowpack and change in the timing of the snowmelt season; sea level rise, which will contaminate freshwater supplies; and droughts, heat waves and floods that are more frequent and more severe. Such prospects have prompted us to spotlight the relationship between energy and water in the forthcoming World Energy Outlook 2012, which will be released on 12 November. We will include a stand-alone chapter that addresses present and future energy sector vulnerabilities to water and that estimates, for the first time, water needs by scenario, energy source and region through 2035. Our aim is to present readers with a picture of trade-offs between energy and water, and I hope that it will encourage decision makers to better integrate energy and water policies.


By Fatih Birol Fatih Birol, Chief Economist of the IEA, has been named by Forbes Magazine as one of the world’s most powerful people in terms of influence on the global energy scene, and is the Chairman of the World Economic Forum’s Energy Advisory Board. He was awarded the Order of Merit of the Italian Republic in 2012. In 2009, alongside awards from the Dutch and Polish governments, he received the German Federal Cross of Merit. He was awarded the Golden Honour Medal of Austria in 2007 and was made a Chevalier dans l’Ordre des Palmes Académiques by France in 2006.

Cooling tower: photo by erix! on Flickr,

Nuclear and fossil-fuelled power plants are critically reliant on water for cooling and other processes.





EFFICIENCY IN THE UK The United Kingdom offers loans for energy-efficiency improvements that are repaid from the savings in the property’s unchanged utility bill. rom Windsor Castle to the Tower of London, the United Kingdom revels in its older buildings. But it is not just historical monuments that are built to last there: in 2050, at least two-thirds of homes in the country will be ones already in place now, many of them constructed before much thought was given to energy efficiency. This preservation comes at a price: existing homes in the country now already use twice as much energy per square metre as the average new one. The government is adopting a variety of policies and measures to buff up older buildings’ energy efficiency, as a result of European Union regulations and some national ones.


IF THE BUILDING IS SOLD OR THE TENANT MOVES, THE BENEFITS AND PAYMENTS FROM THE GREEN DEAL FINANCING ARE PASSED ON TO THE NEW OWNER OR TENANT. carbon. But the lion’s share of houses in the United Kingdom then will have been built before 2010, never mind 2016, and thus never subject to zero-carbon requirement. So to save fuel and improve energy security, the emphasis in the country is

The Green Deal and other programmes encourage UK building owners to insulate lofts, among other efficiencies.


The Journal of the International Energy Agency

Yamina Saheb, with 13 years of experience in buildings and appliances efficiency, joined the IEA’s Energy Efficiency and Environment Division in February 2011 and heads the Sustainable Buildings Centre. Before, she was an energy efficiency analyst at IFRI (Institut français des relations internationales).

on insulating existing homes today and making them efficient for tomorrow. Insulation against energy waste What are the best improvements for immediate efficiency? The main focus has been insulation of walls and under roofs to cut loss from space heating, which the Department of Energy and Climate Change (DECC) estimates accounted in 2011 for 60% of final energy consumption in the domestic sector and 45% in the services sector. As a result of new construction and retrofitting of existing houses, the number of homes with cavity wall insulation increased by 34% from April 2007 to April 2012, to 11.4 million of the possible 19 million homes. DECC’s latest estimates are that the number of remaining homes with the potential for cavity wall insulation will have fallen by January 2013 to 5.8 million. The figures on loft insulation are even more significant: DECC estimates that just 1% of homes will lack any loft insulation in January 2013. Still, about 5.7 million homes will have insulation of less than 125 millimetres (mm), the DECC threshold for “full insulation”, though agencies’ minimum thicknesses can range from 100 mm to the UK Energy Savings Trust’s 270 mm for lofts. Investing the future savings To complement the regulatory framework, the government has developed, under the national Energy Act 2011, a market framework called “the Green Deal”, which will be starting in October 2012. The Green Deal aims to enable privatesector companies to offer owners or tenants of homes, businesses or public buildings a loan for energy-efficiency improvements at no up-front cost. The initial financing will come from a provider specialising in Green Deal loans. The contractor receives payment right away from the provider, but the energy bill customer pays off the loan in instalments

Insulation installation: photo by mjtmail (tiggy) on Flickr,

Rules for old and new buildings One of those EU directives requires an energy-efficiency rating for any building when it undergoes a transaction, either a sale or new rental. From “A” (the most efficient buildings) to “G” (the least efficient ones), the ratings appear on Building Energy Certificates required for all transactions. Not only does each building get a rating when sold or rented, but its certificate

comes with recommendations and advice for cost-effective actions to improve energy efficiency. Another result of the EU directive is strengthened regulations for new homes’ energy performance. These building rules apply across the European Union; the United Kingdom’s implementing legislation took effect in 2010 and will get progressively tougher every three years through 2016, at which time all new homes should be zero-

By Yamina Saheb


on an unchanged energy bill. Energy and Climate Change Secretary Ed Davey said that “in addition to creating huge opportunities for Green Deal providers and businesses along with thousands of new jobs, this new market in energy efficiency will deliver the very best deal for consumers”. Green Deal financing applies only when the package of insulation and other energy-efficiency measures can pay for itself through savings on the energy bill over the lifetime of the Green Deal, making the net cost under the programme zero. The Green Deal stays with the property: if the building is sold or the tenant moves, the benefits and payments from the Green Deal financing are passed on to the new owner or tenant, potentially increasing the property’s value because the new buyer or tenant will receive an energy efficient and more comfortable building whose energy bill will be no larger than the energy costs would have been without the improvements. “The UK Green Deal scheme is innovative in overcoming several of the major barriers to energy retrofitting of residential buildings,” said Lisa Ryan, Energy Economist at the IEA. “It provides easy access to finance with no upfront cost to the resident; ties finance repayments to the building rather than the resident to encourage longer-term finance and deeper retrofits; and through the Green Deal provider creates a one-stop shop for customers to finance and arrange energy-efficiency measures that makes it easy to translate interest into action.” Building site: photo by Denna Jones on Flickr,; Energy monitor: photo by tirstanf on Flickr,

Extending the savings to rentals In addition to introducing the Green Deal, the Energy Act 2011 will require private landlords as of 2016 to make reasonable energy-efficiency improvements requested by tenants. In addition, by 2018 landlords must improve least-efficient properties to a minimum energy performance standard or, if able to use the Green Deal, to the maximum efficiency rating financed under the programme. To protect consumers, the government has set in place a framework that will require contractors to have a quality certification, register with the body that oversees the Green Deal and adhere to a code of practice. Consumers can get information from an impartial energy savings help line that is funded by the government, and a Green Deal ombudsman will deal with complaints.


Retrofitting an old home in England. In 2050, just a third of UK houses will be less than 40 years old.

“We anticipate that strong quality assurance and government promotion of the scheme will be key to success,” Ryan said. “Innovative financial and operational mechanisms like the Green Deal will be key to scaling up energy performance of buildings.” Extra funding for needy households As not every property can be improved in a cost-effective enough manner to qualify for the Green Deal, the new Energy Company Obligation (ECO) makes available extra funding, particularly for the poorest and most vulnerable households. The ECO complements existing fuel poverty policies such as the Warm Home Discount, which provides direct support for the payment of energy bills. England’s Warm Front programme provides efficient heating systems and other energy-efficiency improvements to eligible low-income households occupying low-efficiency homes. Since its 2000 launch, Warm Front has assisted about 2.3 million households with annual average potential savings of approximately GBP 650 per household. ECO will take over the functions of the programme in England to provide energy-efficiency measures to lowincome and vulnerable households as Warm Front ends in fiscal year 2012/13. The ECO will also provide support for properties that may be more expensive to treat, such as those needing solid wall

insulation instead of a cavity wall solution, and require extra funding to pay back within the Green Deal finance period at no upfront cost to the household. An opportunity for change The Green Deal can make each household’s energy performance a critical contribution to the United Kingdom’s goals of reduced emissions, improved energy security and lower spending on fuel. Its success will depend on independent monitoring and the stringency of energy requirements, tools that can turn the Green Deal’s innovative financing and energy saving ambitions into a low-energy future.

The Green Deal is just one plan to warm homes.





A WINDY FUTURE As China shifts from coal power, an IEA-assisted roadmap shows how wind can generate 17% of the surging economy’s electricity by 2050.


Wind power to reduce coal-related pollution Coal is the main fuel used in Chinese power generation, so the shift to wind power will help reduce pollution by avoiding the burning of 130 million tonnes of coal equivalent (Mtce) in 2020, 260 Mtce in 2030 and 660 Mtce in 2050, according to the roadmap. This will reduce sulphur dioxide emissions in 2020 by 1.1 megatonnes (Mt) and in 2050 by 5.6 Mt. Of course, CO2 emissions will be limited as well, with the equivalent of 300 Mt less of this greenhouse gas entering the atmosphere in 2020, because of


the expected growth of wind power, and 1 500 Mt less in 2050. China also expects wind power to generate jobs, especially as its nascent industry gets off the ground. Based on a sampling from 2009 to 2010 and average manufacturing productivity, China expects each megawatt (MW) of wind power installed in the country to generate 15 jobs, including at least 13 in the

CHINA NEEDS TO DO MORE THAN JUST INSTALL NEW WIND TURBINES: IT NEEDS TO REFORMAT SIGNIFICANT ELEMENTS OF ITS ENERGY SYSTEM. ALSO, CHINA’S GRID WILL NEED TO BE STRENGTHENED AND EXPANDED. manufacturing industry. That ratio will fall to as little as 10 jobs per megawatt by 2050 as efficiencies and economies of scale improve. Construction and installation should particularly benefit the economy of Western China, where the greatest onshore wind opportunities lie, by improving roads and other developmental benefits. Going offshore to be close to biggest demand As the roadmap unfolds, the country will need to develop offshore wind to keep pace with growing demand for low-carbon electricity in Eastern China. While land-based wind generation is expected to cost no more than CNY 7 500 per kilowatt in 2020, the roadmap sees only slight improvement by 2050. By contrast, near-shore production is forecast to cost CNY 14 000 in 2020, or double the landbased rate, but fall to CNY 10 000 by 2050. The price per kilowatt from now-expensive deep offshore turbines is to fall by 60% in those 30 years, to just double the near-shore rate. Though costlier, offshore installations benefit from higher load factors and reduced transmission

The Journal of the International Energy Agency

Cecilia Tam is Head of the Energy Demand Technology Unit and also leads the Technology Roadmaps programme at the IEA. She has written for numerous IEA publications. Before joining the Agency, she was a Senior Equity Research Analyst at Dresdner Kleinwort Benson.

costs, as the offshore potential is located in Eastern China, site of the main demand centres. To reach its goals, China needs to do more than just install new wind turbines: it needs to reform significant elements of its energy system. As in other countries that are shifting to renewable energy, one major challenge is to orient pricing so it reflects the cost of environmental externalities – i.e. the price of carbon – as well as the value of flexibility and integration costs. Also, China’s grid will need to be strengthened, expanded and integrated to allow wind power from windier but more remote parts of the country to reach easily and efficiently the main energy demand centres in the east, while also encouraging these windier areas to maximise their own use of wind power. Transparency in power prices and an interprovincial grid must be in place by 2020. The mechanics for building expertise In the immediate term, the roadmap calls for China to establish a renewables research and development fund and an experimental platform to develop and deploy 5MW wind technology by 2015. Near-offshore experimental technology must be in place by 2020. To build such expertise, the roadmap calls for specialist windpower training courses and curricula to be added at Chinese universities by 2015.

A wind i d ffarm iin Xi Xinjiang ji iin western Chi China.

China wind farm: photo by kudumomo,

hina’s ambitions in wind power rival those of many IEA member countries: it plans to use turbines both on- and offshore to generate 8.4% of the country’s electricity by 2030 and then double that share just 20 years later. To reach those levels, a “roadmap” developed with the IEA sees China adding about 15 gigawatts (GW) of wind power each year to its 2010 base of 31GW, leaping from 1.3% of electricity production to 5% by 2020. The roadmap was the result of a joint effort led by the Chinese National Development and Reform Commission’s Energy Research Institute (NDRC ERI) with close technical support from the IEA. It not only set the expectations for developing wind power but also assessed the country’s strengths, obstacles and priorities for fulfilling the roadmap. China’s energy requirements have been surging along with its economy, with growth in electricity demand expected to outpace overall energy demand growth as it nearly doubles by 2020 to 8 000 terawatt-hours (TWh), then increasing to 10 000 TWh ten years later and 13 000 TWh in 2050. The roadmap plans for wind power to make up 15% of all installed capacity by 2030 and 26% by 2050. China’s track record so far lends credence to these ambitions: the country’s proportion of newly installed capacity worldwide increased from less than 10% in 2006 to 49% in 2010.

By Cecilia Tam




to Awardnds m o d a etherl s Free esent ristani | N r p n hah oeve der H ussain al-S n a v Maria ister H rector Prime Min i D HRH Prince Charles, IEA Chief Economist Fatih Birol A IE eputy D Global Assessment Initiatives Meeting | Clarence House, London q a r I

gy Perspectives Energy Technolo ch | Paris Press laun

IEA Deputy Dire ctor Ri Energy Buildingchard Jones, Vice-Chancellor Mic unveiling | Uni versity of Leed hael Arthur s, UK

Executive Director Maria van der Hoeven visits three Indian companies taking big steps in renewable energy and building efficiency: from left, Omax Auto Systems’ factory; ITC Hotels’ Green Centre; and Chelsea Jeans’ textile mill | Gurgaon Four Freedoms Awards: © The Roosevelt Stichting/Lex de Meester Fotografie; Global Assessments Initiatives: photograph by Paul Burns/Clarence House, all rights reserved; ETP 2012 launch: © OECD/IEA, 2012; Leeds Energy Building inauguration: © University of Leeds; Indian site visits: © OECD/IEA, 2012




ENERGETIC READING WORLD ENERGY OUTLOOK 2012 Language: English; Release: 12 November 2012; Price: €135

ENERGY TECHNOLOGY PERSPECTIVES 2012 Language: English; Release: Available now Pages: 690; Price: €150; ISBN: 978-92-64-17488-7

WEO 2012 presents authoritative projections of energy trends through to 2035 and insights into what they mean for energy security, environmental sustainability and economic development. Global energy demand, production, trade, investment and CO2 emissions are broken down by region or country, by fuel and by sector. Special strategic analyses include coverage of the Iraqi energy sector, examining its role both in satisfying the country’s internal needs and in meeting global oil demand; what unlocking the potential for energy efficiency could do, country by country and sector by sector, for oil security, the climate and the economy; and the water-energy nexus, as water resources become increasingly stressed and access more contentious.

Energy Technology Perspectives (ETP) is the most ambitious IEA publication on developments in energy technology. It demonstrates how technologies – from electric vehicles to smart grids – can help limit the global temperature rise to 2°C and enhance energy security. ETP 2012 presents scenarios and strategies to 2050 to guide decision makers on what needs to be done to build a clean, secure and competitive energy future. Among other revelations, it documents current progress on clean energy deployment, and how to accelerate it; links energy security and low carbon energy; and as energy systems become more complex, shows why systems integration is beneficial and how it can be achieved.

MEDIUM-TERM RENEWABLE ENERGY MARKET REPORT 2012 Language: English; Release: Available now Pages: 182; Price: €100; ISBN: 978-92-64-17799-4

ENERGY POLICIES OF IEA COUNTRIES - IRELAND Language: English; Release: Available now Pages: 176; Price: €75; ISBN: 978-92-64-17146-6

Renewable energy has emerged as a sigDespite a severe economic downturn, Ireland nificant source in the global energy mix, acremains committed to moving towards a lowcounting for around one-fifth of worldwide carbon economy, including a goal to produce electricity production. Massive investment 40% of its electricity from renewable sources has taken place on a global scale, with costs by 2020. This IEA review of Ireland’s energy for most technologies falling steadily. This policies lauds that commitment, noting that new annual IEA publication, Medium-Term the country’s location at the edge of the Renewable Energy Market Report 2012, proAtlantic Ocean ensures one of the best wind vides a key benchmark, assessing the current and ocean resources in Europe. But to reach state of play of renewable energy, identifying the main drivers and its targets and break its heavy use of imported fossil fuels, Ireland barriers to deployment and projecting renewable energy electricity must invest even more in renewable technologies, improve energy efcapacity and generation through 2017. Starting with an in-depth analficiency and successfully develop a range of gas and electricity infraysis of key country-level markets, the report examines the prospects structure projects and market solutions while continuing to integrate for renewable energy finance and provides a global outlook for each its energy markets with regional neighbours. renewable electricity technology. Visit the online bookshop at or email:


September 18-21 World Shale Conference. Houston.


22-25 Energy Week. Singapore.

World Energy Outlook excerpt on Iraq. London. 25-26 Energy Week. Moscow.

15-16 Chatham House Conference November

Resilience and Diplomacy.




Global Green Growth Forum.



World Energy Outlook 2012 release. London.

13-14 Oil and Money Conference.

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IEF-IGU Ministerial Gas Forum. Paris.

18 26

on Climate Change: Security,


London. 16

IEA’s 38th anniversary. Start of COP18. Qatar, ends 7 Dec.

27-29 Shale Gas World Europe. Warsaw.





China, the world’s fourth-largest user of natural gas, is seeking to double the share of gas in its primary energy mix within the next five years. To expand its gas industry successfully, it will have to look to the experiences of other countries. Gas Pricing and Regulation finds that strong policy drivers are necessary, especially for the reform of gas pricing and market opening. China needs a clear vision about the future of its gas industry – which requires a natural gas law or an energy law with a gas section – and the government must avoid splitting responsibility over the gas business among different ministries and agencies as well as limit the influence from the three big national oil companies. The main issues in increasing domestic production are technology, pricing and development of the infrastructure to bring gas to the market. The pricing reform is already engaged on a regional level but needs to be expanded. China must move away from its regulated cost-plus approach, which fails to send the appropriate market signals in terms of upstream development and demand response, and move instead to a more market-oriented approach. China’s gas market is relatively recent and growing fast. By comparison, most OECD countries studied by the IEA had decades-old gas industries before they started to liberalise their gas markets, and few had such dynamic growth. Additionally, in most cases, the OECD countries had already built significant gas transmission and distribution infrastructures, which had been largely or fully amortised. China’s transmission network is more limited and is still being expanded.

A combination of rapidly increasing energy demand and fuel imports plus growing concern about economic and environmental consequences is generating increasing calls for effective and thorough energy governance in India. Numerous policy reforms over the past 20 years have shifted the country’s energy sector from a state-dominated system towards one that is based on market principles. However, with the reform process left unfinished, India now finds itself trapped halfway along the transition to an open and well-performing energy sector. India suffered the largest-ever power outage in late July 2012, which affected nearly half of the population. While this incident highlights the importance of modern and smart energy systems, it indicates that the country is increasingly unable to deliver a secure supply of energy to its population, a quarter of which still lacks access to electricity. Understanding Energy Challenges in India aims to provide an informative and holistic understanding of the country’s energy sector to stakeholders in India, as well as the broad public. The publication explores in detail the policies, players and issues of the country’s power, coal, oil and gas, renewable energy and nuclear sectors. It also highlights key challenges that must be resolved for the evolution of India’s fast-growing energy sector towards a sustainable future and which are eventually critical for the prospects of the Indian and global economies.

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NOT HITTING THE BOTTOM HEADLINE HERE OF THE BARREL Proven oil reserves, worldwide (billions of barrels)

Years of supply remaining at then-current production

2 400


2 000


1 600


1 200







0 1981





The Journal of the International Energy Agency

Graphic: © OECD/IEA, 2012; source BP Statistical Review of World Energy June 2012; photo: © Fancy

Pessimists have long warned that we are about to run out of oil. Yet the prospects for future supply don’t show obvious signs of worsening: as the tops of the derricks and the peaks of the plumes indicate, the ratio of proven oil reserves to annual production has actually improved over the last 30 years. The resource base from which proven reserves are developed is ultimately finite but also immense. And although these resources can be increasingly difficult and expensive to produce, what can be recovered profitably grows with technological advances and higher oil prices. What is less certain is whether the conditions will exist to produce the oil and whether consumers decide – from both a financial and environmental perspective – that they can afford to use it.



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IEA Journal: Issue 3 - Energy Security: Oil