This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Speech by Michael Fallon, Energy Minister, on the future of oil and gas supplies from the Middle East and North Africa.
Good morning. It’s a pleasure to be here with you all today. I’d like to thank Chatham House for providing this forum. The focus of today’s discussions - the future of oil and gas supplies from the Middle East and North Africa - is certainly of critical importance to us all.
Future role of oil and gas in meeting global energy demand
The world will continue to rely on oil and gas for the foreseeable future, making the security of competitively priced oil and gas supplies of vital importance to the world’s economy.
Oil and gas consumption is expected to rise significantly for some time, even as we move towards a low carbon economy. In particular demand for transport fuel is projected to continue to grow outside the OECD, while gas is increasingly replacing coal as a fuel for power generation around the world.
The latest predictions from the IEA are that that under its central scenario the world will be consuming over 100 million barrels of oil a day in 2035, up from 89 million barrels a day in 2012.
However over the same time the IEA expects that conventional crude oil output from existing fields is set to fall by around 40 million barrels per day by 2035. This means that new sources of oil will need to be developed to make up the difference.
The development of unconventional oil will clearly have an important role in the coming years. And the same is true for gas - with unconventional gas expected to account for almost 50% of the increase in global gas production to 2035. Further work is required on how to safely and sustainably exploit these resources.
But this is not the whole answer. Indeed, the IEA emphasises the Middle East as being at the centre of the longer term oil outlook. Even with projections that domestic consumption in the region will increase significantly, exports from the region will continue to be integral to global supply.
This requires huge investment in production – an estimated $660bn per year will need to be invested in existing and new oil and gas fields to meet global demand. British companies are well placed to make this investment and are already active in many places around the world, including the Gulf. BP and Shell, for example, are already present in Iraq, while Shell is a partner in the Qatargas 4 LNG and Pearl GTL projects in Qatar.
The IEA highlights Iraq – with its huge oil reserves - as the country that could be the single largest contributor to global production growth. That requires investment now, in infrastructure, sustainable water management, and the strong legal and financial frameworks that investors need.
The IEA also projects increasing gas production from the Middle East and North Africa from both conventional and unconventional sources. When I visited Qatar in November, I was struck at how important Qatar is and will continue to be as a gas supplier to the wider MENA region and beyond. Qatar is of course a significant supplier of LNG to the UK. I also met the Algerian energy Minister last year, and was interested to learn more about the potential scale of Algeria’s unconventional gas resources. Of course there remain uncertainties as to the extent to which these resources will prove to be economically recoverable. In global gas markets, MENA gas producers are likely to be faced with growing competition from new sources of LNG from suppliers in the US, Canada, Australia and East Africa.
I mentioned the significant investment required. Key to supporting this is helping to ensure that we have well-functioning oil and gas markets. This is a shared challenge, which transcends national boundaries, and we value international collaboration on this agenda.
We saw in 2008 how damaging severe price fluctuations can be, when a mid-year spike of $145/barrel was followed by a fall to $30/barrel by year end.
These swings severely damaged the confidence of consumers and producers alike: the price rise led to consumers sharply reducing demand for oil and goods and services in the wider economy; and the price drop created major challenges and uncertainties for many producing countries, both in terms of meeting the wider needs of their populations and in deciding the investment needed for future production.
When the world met in Jeddah and London that year to discuss how to avoid such sharp fluctuations happening in the future, the central conclusion that emerged was the need to improve the functioning of the global oil market. Participants agreed that delivering such reform required significant improvement in the dialogue between consuming and producing countries facilitated by the International Energy Forum.
This led to the re-launch of the IEF in 2011. Since then the Forum has done important work with the IEA, OPEC and others to improve market transparency through the development of Joint Organisation Data Initiative, it has investigated the links between physical and financial oil markets and has worked to improve energy outlook data.
Maintaining this dialogue and work is essential if we are to ensure the world economy has the secure and competitively priced energy supplies it needs. In a period of relative price stability such as we have recently had, it would be all too easy for complacency to set in and for the world to downgrade the importance of such discussions. We should not, and I look forward to the IEF Ministerial meeting this May.
The UK also supports international efforts aimed at removing inefficient fossil fuel subsidies. The IEA estimates that $544bn was spent globally on consumption subsidies in 2012. The G20 and APEC have committed to action on this issue, and I would encourage all those with such subsidies to consider their long term impact.
A well-functioning and integrated European energy market in electricity and gas will be a critical part of ensuring security of our energy supplies and keeping energy costs down.
The European Council has already agreed that the internal energy market should be completed by 2014. This is something the UK strongly supports. This means full and effective implementation of the Third Package of energy legislation in every Member State.
We will need to effectively implement rules to allow energy to flow properly across markets. And Europe will need significant investment in interconnection to better link markets together.
And international efforts are – of course – crucial to facilitating the shift to low carbon energy. I welcome the role being taken by many countries in the Middle East and North Africa to support this transition, for example the World Future Energy Summit hosted by the UAE last week.
The draft 2030 package the European Commission adopted last week will set the long term perspective on this low carbon shift for the EU, and I welcome both the ambitious approach to a greenhouse gas emissions target of 40% for the EU but hopefully going higher in the case of a global deal, but also the acceptance by the Commission on the need for Member States to decarbonise in the most flexible and cost-effective way for each of them, moving away from binding national technology specific targets.
UK energy policy
I’d like to turn now to reflect on UK energy policy. We are seeking to achieve three key aims – energy security, emissions reduction to meet our ambitious climate changes targets, and maintaining affordability for consumers.
The North Sea continues to be hugely important for the UK. We are determined to maximise production of these oil and gas reserves and are currently conducting a review – the Wood Review – to ensure our regulatory regime is as business friendly as possible.
Unconventional oil and gas is an exciting prospect for us, and we have recently announced changes to our tax regime which will make the UK the most attractive location for investment in shale gas.
And we are working hard to put the policies in place to enable the shift to a low carbon energy system. We are committed to reducing our greenhouse gas emissions by 80% by 2050. Our energy policies include a number of flagship programmes to achieve this, including our far-reaching Electricity Market Reforms, the ambitious energy efficiency programme through the Green Deal.
Nevertheless, UK import dependency for oil and gas is set to rise over coming years.
We became a net importer of oil in 2005. In 2012 our oil import dependence increased to 36%, and is expected to rise to 47% by 2020.
For gas, we became a net importer in 2004; and in 2012 our gas import dependency stood at 50% - with Qatar one of our key suppliers. By 2020 imports are likely to rise to 58% and it is clear that gas will remain an important element of our energy mix for decades to come.
And as we increasingly look to international markets for our energy supplies, we also welcome the interest from international investors in the UK energy sector.
It is estimated that replacing and upgrading our electricity infrastructure alone will require up to £110 billion of capital investment between now and 2020. I recognise that policy certainty is key to this – and the Energy Act and our electricity market reforms deliver this.
I have been delighted to see investments in the UK energy sector ramping up. For example I welcome Masdar’s investment of £500m in the London Array, the world’s largest offshore wind farm. And the decision of the Abu Dhabi National Energy Company to lead in the development of the Morrone field in the North Sea.
Perhaps I can end by noting that common challenges face us all. We need to ensure that energy markets can provide the supplies consumers need at affordable prices while providing the necessary long term incentives for producers and investors. Achieving this is no mean feat, but dialogue and cooperation has a central role to play.