© OECD/IEA 2015

IEA’S ROLE IN ENERGY SECURITYWITH FOCUS ON OIL SECURITY

University of Economics, February 19 | Prague

Jan Bartos, Energy Policy and Security Division

© OECD/IEA 2015

What is the IEA?

Autonomous agency linked to Organisation for Economic Co-operation & Development (OECD)

Acts as energy policy advisor with some 250 staff based in Paris.

Activities:

o Co-ordinates efforts to ensure energy security

o Conducts policy analysis

o Links research activities and governmental directives

o Compiles energy statistics

o Reviews energy policies and programs

o Convenes, mobilizes science and technology experts

o Promotes co-operation with key non-member countries

Goals:

o Energy security

o Environmental protection

o Economic growth

o Engagement worldwide

© OECD/IEA 2015

Establishment of IEA

IEA established against backdrop of 1973-1974 oil crisis• Avoiding competition for limited resources

• Coordinated mechanisms for response

• Safety net

Today, energy security as urgent as ever• Oil security remains cornerstone

• IEA move to a more comprehensive approach beyond oil

IEA definition of

Energy Security

“Uninterrupted

availability of

energy sources at

an affordable price”

© OECD/IEA 2015

Energy security relies on markets

Under normal circumstances:

• market balances supply & demand smoothly

Preconditions:

• Sufficient interconnections

• Diversity of supply (countries & fuels)

• Robust infrastructure for seasonal fluctuations (ports, pipelines, storage)

• Appropriate government regulations (e.g. public service obligations)

All-risk, cross-sectoral approach

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Economic costs of disruptions

Higher oil import costs, GDP losses

Increased cost of production

• More expensive petrol/diesel

• But also more expensive goods

• Less disposable income

• Loss of jobs, businesses..

France, May 2016

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6

Growing importance of non-OECD

* Based on World Energy Outlook 2015 “New Policies” Scenario

0

20

40

60

80

100

120

1973 2014 2040

World oil demand, 1973 - 2040* (mb/d)

Other Non-OECD

India+China

OECD

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0

20

40

60

80

100

120

1973 2014 2030 2040

World oil supply, 1973 - 2040* (mb/d)

Other Non-OECD

OPEC

Other OECD

OECD Americas

* Based on World Energy Outlook 2015 “New Policies” Scenario

Shifting supply

© OECD/IEA 2015

Emerging economies continue to drive global energy demand

Growth in primary energy demand in WEO New Policies Scenario

Global energy demand increases by one-third from 2010 to 2035, with China & India accounting for 50% of growth

0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

4 500

2010 2015 2020 2025 2030 2035

Mto

e

China

India

Other dev. Asia

Russia

Middle East

Rest of world

OECD

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But oil is so cheap now!

Does it change anything?

Yes but maybe not the way we like…

© OECD/IEA 2015

World upstream oil and gas capital investment (WEO 2015)

• Trend continues in 2016 and 2017• Two consecutive years of reduced upstream spending last seen in 1980s • New fields can be more challenging with higher geological & technical risks

0

100

200

300

400

500

600

700

800

2005 2007 2009 2011 2013 2015

Bill

ion

do

llars

Longer-term risk from lower prices hitting upstream oil & gas investment

-20%

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What does it mean if oil prices stay lower for much longer?

Much more resilient non-OPEC supply & higher output from stable Middle

East could hold oil price close to $50/bbl until 2020s

Oil importers gain, each $1/bbl reduction is $15 billion off import bills;

major window of opportunity to press ahead with subsidy reform

If lower prices persist for decades, reliance on Middle East oil gets back to

1970s levels; risk of sharp market rebound if investment falls short

Lower prices could undercut essential policy support for the energy

transition: weaker incentives mean 15% of efficiency savings are lost

Reduction in revenues to key producers & boost to global oil demand

growth make prolonged period of lower prices progressively less likely

© OECD/IEA 2015

Oil use focused in transport

Increased oil use in transportation (60%) and expected to rise

Accentuates potential economic impact of a disruption

OECD Oil consumption by sector 1973-2014

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So what about this?

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Probably not so soon…

CPS: WEO 2014 Current Policies Scenario

NPS: WEO 2014 New Policies Scenario

450: WEO 2014 450 Scenario

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And gas? Electricity?

Natural gas has an ever greater role

• Growing demand

• Gas markets more integrated;

• More vulnerability (long pipelines; LNG)

So does ELECTRICITY

• Growing demand

• Increased share of variable renewables (solar, wind)

• Closely linked to secure gas supply (flexibility)

There will always be various threats to supply

• Cross-sectoral: Cyber, climate change effects…

© OECD/IEA 2015

Different factors for disruptions

17

UkraineHybrid war /

cyberCanada Pipeline

Leaks

JapanTsunami

Syria/IraqISIS

AsiaFuel price protests

US Hurricanes

Central AsiaPipelines

LibyaCivil war

IranSanctions

Strait of Hormuz17 mb/d

Turkish Straits

2.9 mb/d

Danish Straits

3.3 mb/d

North SeaOutages

Panama Canal

0.85 mb/d

VenezuelaPoliticalUnrest

Bab El-Mandab3.8 mb/d

NigeriaCivil Unrest

Natural disasters

Technical disruptions

Social disruptions

Key oil chokepoints

MalacaStrait

17 mb/d

© OECD/IEA 2015

Who deals with an oil disruption?

Large

Small

Imp

act

of

dis

rup

tio

n

Industry / market copes

Scope of disruption

District Country Region Global

Local Govtemergency measures

National emergency measures

Regional group

emergency measures

IEA Collective Action

IEA retains operational role for oil security

© OECD/IEA 2015

Member gov. responsibilities

• Legislation:

to ensure participation in IEA decisions with appropriate emergency measures

• National Emergency Strategy Organisation (NESO)

“Crisis team”

Co-ordinates emergency operations

Interfaces with domestic oil industry

Interfaces with IEA emergency operations

• Data collection

Monthly Oil Statistics

Emergency questionnaire

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© OECD/IEA 2015

IEA oil emergency response measures

© OECD/IEA 2015

Supply-side measures

Stock-draw

• Most commonly used & most effective measure

• IEA countries obligated to hold at least 90 days net-imports

• 4.2 billion barrels: 1.5 public stocks for emergency

Production Surge

• Very limited as non-OPEC production at max economic efficiency

• Little or no spare capacity outside OPEC

• Good oilfield practices limit extent of short-term surge

Total oil stocks in IEA regions

Total oil stocks at year end

© OECD/IEA 2015

Economic benefits of stocks

Payoff from “insurance”

Over 30 years period USD 3.5 trillion avoided costs

Indicative annual benefits and costs per barrel of stock(Source: IEA analysis of costs and benefits of stockholding, 2013)

© OECD/IEA 2015

Total IEA stocks by type

Crude, NGL and Feedstocks Finished Product

IEA North AmericaIEA Europe

IEA Pacific

691

1

659 682

Public Industry

213 255

371

518

Public Industry

388

31238

179

Public Industry

Product39%

Crude61%

© OECD/IEA 2015

Demand-side measures

Demand restraint

• Most policies focus on transportation sector Wide range of measures, from light to heavy

Danger of further strangling economy!

Short-term can lead to long-term behavioral changes & fuel efficiencies (car-pooling, smart truck logistics etc.)

• Some potential in reduced heating

Fuel switching

• Significant decline since 1970s

• In 2015 only 2% oil in electricity generation (25% in 1973)

• Virtually no potential for short-term switching in transport

Other

• Relaxation of regulation, e.g. on fuel quality specifications

© OECD/IEA 2015

Considerations for action

• Need to respond promptly to those oil supply disruptions which appear capable of causing severe economic harm

• Market will always balance supply & demand, given time & freedom of price movement… But will disruption cause severe economic harm?

• Need to understand market context of disruption: Analysis helps answer whether market can cope with disruption

using available resources (commercial stocks and/or OPEC spare capacity)?

• If action is needed, speed & unity of response are key factors Delayed/hesitant response can exacerbate situation

Decision on action will likely need to be made before all necessary information is available

© OECD/IEA 2015

IEA collective action objectives

Market will balance supply & demand

Purpose of IEA Collective Action: limit extent & impact of sudden supply disruption• Mitigate economic damage by temporarily replacing disrupted

supplies to stabilize the market

• Market still sets price & allocates

Managing prices is not the purpose of IEA Collective Action• Distorted market signals worsening long-term balance

• Finite so ineffective over time

• Some IEA countries specifically ban use of emergency stocks for price management

© OECD/IEA 2015

2.0

2.0

4.3

5.6

4.1

4.3

2.1

2.6

2.3

1.5

1.3

1.5

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Nov 1956 - Mar 1957

Jun - Aug 1967

Oct 1973 - Mar 1974

Nov 1978 - Apr 1979

Oct 1980 - Jan 1981

Aug 1990 - Jan 1991

Jun - Jul 2001

Dec 2002 - Mar 2003

Mar - Dec 2003

September 2005

September 2008

Feb - Oct 2011

Gross peak supply loss (mb/d)

Libyan Civil War

Hurricanes Gustav/IkeHurricanes Katrina/Rita

War in Iraq

Venezuelan strike

Iraqi oil export suspension

Iraqi invasion of Kuwait

Outbreak of Iran-Iraq warIranian Revolution

Arab-Israeli War and Arab oil embargo

Six-Day War

Suez Crisis

Major oil supply disruptions

Disruption severity is not only measured in oil lost

• Other factors are key in evaluation: Level of commercial inventories, likely duration, available spare

capacity, quality of lost crude, seasonality, logistics etc.

• Each disruption must be assessed individually – market context is critical

© OECD/IEA 2015

Energy security wider than oil

Share of oil in world energy mix declining but will still remain most important fuel in foreseeable future• Regional industry changes impacts on energy security?

E.g. European refining sector restructuring

Shale gas & oil story in USA – new “market-driven” OPEC for emergencies?

Natural gas has increasing role • Gas markets more integrated; more shipped via long pipelines & LNG ->

increasing distances lead to increased potential for vulnerabilities

Electricity: demand is set to grow faster than any other final form of energy (more than 2/3 expansion 2011-2035)• Increased share of variable renewable generation (VRG) must be

integrated without jeopardizing security

• Natural gas gaining prominence in providing base load flexibility & peak power = gas & electricity market intertwined in security, cost & reliability

© OECD/IEA 2015

Gas emergency response measures

Use of alternative supply routes

Diversity of supply routes & sources is key

Pipeline (inc reverse capacity), LNG (spot cargoes)

Stocks (storage)

Industry and/or public stocks

Underground and/or LNG storage

Spare capacity

Domestic production, gas in pipelines

Demand-side measures

Interruptible contracts (pre-negotiated)

Public appeal (Government campaigns)

Fuel-switching33

© OECD/IEA 2015

Electricity supply security

Ability of power system to maintain reliable power supplies in real-time response to:

unexpected shocks

sudden disruptions loss of largest generation

Loss of largest network components

rapid changes in aggregate, load & fuel supply conditions Variable renewable energy

Distributed generation

© OECD/IEA 2015

Strengthening emergency response

Emergency response reviews

• Peer reviews on emergency preparedness & policies

• Focus on oil, gas, electricity security of supply

• Emergency response procedures

• Institutional arrangements to identify / improve weaknesses

• Mostly member but also partner countries

Emergency response exercises

• Biennial exercises testing processes, decision making, communication, data…

• Workshops for new, complex issues

• Tailored exercises for some partner countries

IEA involvement with G7, G20, EU…

© OECD/IEA 2015

What about other countries?

Supply-side

• China & India building Strategic Reserves, others exploring options

• Some low-level industry obligations in ASEAN countries

Demand-side

• Some demand restraint / management policies but frequently undermined by subsidies

Important to keep extending involvement and cooperation

© OECD/IEA 2015

Work with Partner Countries

Active programme with non-member countries (association/joint statements/ MoU/ work programmes):

• Accession countries: Chile, Mexico

• China (workshops, ERE)

• India (workshops, ERE, ERA)

• ASEAN/APEC (workshops, ERE)

• Thailand (workshops, ERE, ERA)

• Indonesia (ERA)

• Colombia (ERA)

• G7/G20, Energy Community, others

© OECD/IEA 2015

Future IEA Stock Coverage?

0

10

20

30

40

50

60

1974 2016 2030

Day

s C

ove

r

IEA oil stockholding requirements will become less effective in responding to supply

disruptions as emerging economies make up an increasing share of global demand

10days

50 days

49 days

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Conclusions

Demand growth driven by non-OECD – changing energy security perspectives

Global & more integrated energy markets create new energy security challenges

Need for global dialogue & cooperation

Threats to energy security come from many sources

Flexibility is crucial with efficient & transparent markets

Government policies must complement efficient markets

© OECD/IEA 2015

For more information

Available for download at http://www.iea.org/topics/energysecurity/

600 pages describing the emergency response policies for oil and gas of IEA and key partner countries.

PDF files for whole publication and individual chapters.

© OECD/IEA 2015© O

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Thank you!

Jan.bartos@iea.org

Twitter: @IEA

YouTube: IEAEnergy

Facebook: InternationalEnergyAgency