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Economics and Geopolitics of Energy
INTRODUCTION
Jean-Marie CHEVALIER Fabienne SALAUN
 Economics and Geopolitics of Energy  January
10th, 2008
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Economics and Geopolitics of Energy

• The economic dimension

• Microeconomics of investment decision
• Macroeconomic energy/economics/budget/growth
• Money at stake

• Industrial Organization

• Market structure and Market Design
• Market liberalization
• Regulation - Deregulation
• Industrial Concentration Market Power
• New Business Models

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Economics and Geopolitics of Energy

• The geopolitical dimension

• Natural resources endowment
• Energy and power of nations
• The battles for resources
• Global Regional, national, local.

• The increasing pressure for environment
• Energy and environment are closely connected

• The technical dimension energy value chains

A HUGE FIELD FOR ECONOMIC RESEARCH
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The Driving Forces

• Human needs
• The playing field
• Corporate strategies
• The long quest for oil, money and power
• Energy policies

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The Stake of the XXI century the Equation of
Johannesburg

• The need for economic development
• The need for additional energy
• The need for a sustainable future

Cost reflective pricing - Efficiency Diversity
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2006 - 2007

• The Stern review
• An inconvenient truth (Al Gore)
• IEA 2006 outlook The energy future we are
  creating is unsustainable
• November 2006 European blackout
• December 2006 January 2007 Russian-Byelorussian
  dispute
• January 10, 2007 The energy package of the
  Commission
• December 2007 The Alarming IPCC Report

The growing awareness of global warning and the
urgency to act
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The Message

• Energy is a global issue and world energy future
  has to be sustainable
• Oil price is still the leading energy price
• A number of elements tend to indicate that energy
  prices will be much higher than in the past (50
  to 60 /b vs 20 to 30)
• The building of a single European energy market
  provides an energy vision of the future.
• The key strategic principles energy efficiency
  - management of the climate change
  diversification of energy technologies and
  sources.
• A permanent challenge for market intelligence,
  energy intelligence, catching business and
  political opportunities.

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The Program of the Seminar
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World Energy Balance
2030
2004
Reference Scenario 17 Gtoe
11 Gtoe
?
CLIMATE CHANGE UNCERTAINTIES
Alternative Scenario 15 Gtoe
Source World Energy Outlook 2006 IEA
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USA, China Europe

• European Standards for China
• Vehicles 641
• Gas oil and gasoline consumption
  17Mb/d

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The World Energy Balance by regions
2004
2030
Reference Scenario
Source World Energy Outlook 2006 IEA
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China Energy Balance
2004
Reference Scenario
2030
?
1626 Mtoe
3395 Mtoe
Source World Energy Outlook 2006 IEA
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Source Nations Unies
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India Energy Balance
2004
Reference Scenario
2030
?
573 Mtoe
1104 Mtoe
Source World Energy Outlook 2006 IEA
Source World Energy Outlook 2004 IEA
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European Energy Balances
(Primary Energy Consumption by Fuel)
Source CERA
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The French Energy Flows Diagram
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Source Observatoire de lEnergie
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World Energy Intensities
Energy intensity in 2003 (in toe/million EUR of
GDP at 1995 market prices)
Source Commission Européenne - Enerdata
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World Oil Reserves - 2007
World Proved Reserves 1317.2 Gbl 179.7 Gt
Source Pétrole 1975 et Pétrole 2006
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Reserves

• Proven, Recoverable reserves (at present economic
  and technological situation)
• Reserves figures are flexible technology new
  discoveries prices
• Owners do not need to discover too much
• Peak oil data depends on
• Geology
• Price
• Technology
• Demand patterns
• Uncertainty about the date and the shape of the
  peak (undulating plateau?)
• Even if peak is not for tomorrow, we have to
  prepare the beyond petroleum era.

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World Natural Gas Reserves - 2007
World Proved Reserves 180 460 Gm3
Source Pétrole 1975 et Pétrole 2006
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World Coal Reserves - 2007
World Proved Reserves 909 Gt
Reserves/Production Ratio in 2006 128.3 years
Source Pétrole 2006
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World Energy Consumption 1800-2000
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Major Energy Trends

• Dominant position of Oil, Gas and Coal
• Concentration of Oil Gas reserves in countries
  at risk
• Increased energy imports from USA, Europe and
  Asia (China, India, Japan)
• Rapid growth of LNG
• The slow renaissance of Nuclear Power
• The slow development of renewables

UNCERTAINTIES AND THREATS
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Dynamic Uncertainties of the Futur (F. Knight)

• Economic Disruptions? (economic growth, energy
  demand)
• Environmental Constraints how strong, how
  urgent?
• Geopolitics of Supply (nationalism and turmoil)
• Financing 20 000 billion of investments
  (2005-2030)
• Political and Regulatory uncertainties
• The unexpected happens (M. Thatcher)

A World at Risk Adjustment by Prices and
Adaptations
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Economics and Geopolitics of
OIL
 Economics and Geopolitics of Energy  January
10th, 2008
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The History of Oil

• 1859 Titusville (Pennysylvania). First oil well
• 1864-1911 The Standard Oil of J.D. Rockefeller
• 1900-1930 The long quest for oil, power and
  money
• 1928 Achnacarry The international oil cartel of
  the Seven Sisters (1928-1960)
• 1960 The development of the European Oil
  Companies
• 1960 Creation of OPEC
• 1973 First oil shock. OPEC becomes a price maker
• 1979-80 Second oil shock. OPEC is still a price
  maker
• 1998 Oil price at 10/bl
• 1999-2003 OPEC Price range 22-28 /bl
• A structural change in oil markets

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World Oil Reserves - 2007
World Proved Reserves 1317.2 Gbl 179.7 Gt
Source Pétrole 1975 et Pétrole 2006
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Reserves

• Proven, Recoverable reserves (at present economic
  and technological situation)
• Reserves figures are flexible technology new
  discoveries prices
• Owners do not need to discover too much
• Peak oil data depends on
• Geology
• Price
• Technology
• Demand patterns
• Uncertainty about the date and the shape of the
  peak (undulating plateau?)
• Even if peak is not for tomorrow, we have to
  prepare the beyond petroleum era.

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How CERA sees the Undulating Plateau?
Source Cambridge Energy Research Associates
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What is the Shape of the Peak Curve?

• - price (demand )
• Geology
• Climate change (Taxes)
• Political turmoil

• - Prices (supply )
• Technology

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Oil and Gas Exporting Countries 43 MB/day at
risk
Europe 13.3MB/Day
USA 13.5MB/Day
144M
ChinaJapan India 10.3MB/Day
2276M
Ormuz 13MBD
Malacca 10.3MBD
Countries in red 89 of World Oil Reserves 81 of
World Gas Reserves
Total oil imports 2005 50MB/D
Data source BP Statistical Review World Energy
2006
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Investments for the Future 2005-2030 ( in 2005 )

• Closed countries (Mexico, Kuwait)
• Country risk (Iraq)
• Resource nationalism
• Financial markets

• IOC
• NOC
• (Pemex-Sonatrach)
• New comers
• (China India Korea)

Oil 4.300 billion Gas 4
000 billion Electricity 11000 billion
 Risks are not below the ground, but above the
ground  (Daniel Yergin, CERA)
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United States a Growing Dependence on Imports
for Oil and Natural Gas

• Limits of domestic production
• (need a world floor price)
• Growing share of oil imports
• 36 in 1973, 50 en 2004
• Top five suppliers (2003)
• Saudi Arabia, Mexico, Canada, Venezuela, Nigeria
  
• (Search Diversification Africa, Iraq, Caspian,
  Latin America)
• Security stocks around 120 days in 2003
• Dash for imported gas
• Strategic priority security of supply
• Bushs Energy law (July 2005) additional supply
  RD
• Environment and Energy a worrying paradox

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USA, China Europe

• European Standards for China
• Vehicles 641
• Gas oil and gasoline consumption
  17Mb/d

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CHINA

• Energy balance
• Coal (66) Oil (24) Gas (2.5) Primary
  Electricity (7.5)
• Sustainability of economic growth?
• Key drivers for energy demand INDUSTRY
  (Electricity), Heating, Cooling, transport
• Pollution is a real concern
• Need of an energy vision diversity
  efficiency environment exploration
  Private investment vs state control
• Nuclear issue 30GW added by 2020?
• Security of supply (Short Medium Long term)
• Huge range of business opportunities with high
  transaction costs

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China Energy Balance
2004
Reference Scenario
2030
?
1626 Mtoe
3395 Mtoe
Source World Energy Outlook 2006 IEA
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Source Nations Unies
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World Oil Surplus (2004)

• Government of Oil Producing countries

Average Cost of Oil (World) 7/bbl Price 2006
65.16/bbl (Brent)
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Corporate Players
Source Total
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Oil Companies
Source Fortune (2006)
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Oil Markets

• Several different markets for crude oil (Brent
  WTI Dubai)
• Markets for petroleum products
• Spot Markets
• OTC Markets (Over The Counter)
• Futures and derivatives
• Geopolitics and markets share the determination
  of oil price (R. Mabro)
• Oil is a commodity under political control
• Poor data, lack of transparency, weight of
  financiers

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Prix du Pétrole 1999-2007
2003 Venezuela Nigeria Iraq OPEC Price Regulation
Zone of volatility
OPEC floor price
Highest demand growth since 1976 Tight
market Sensitivity OPEC regulation limits
Source Interational Energy Agency US. Energy
Information Administration - Doe
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Conclusion

• Middle East 62 of world oil reserves
• OPEC countries 75 of world oil reserves

Despite many diversification efforts, world oil
dependence towards the Middle East is still large
and should keep growing in the next decades.
The oil curse

• Poor economic performance during the last two
  decades demographic trend
• Dutch Disease and lack of governance

Oil surplus

• Oil surplus low cost of oil production use of
  oil money