"We must find mechanisms to strengthen cooperation with the emerging economies"

Interview: Maria van der Hoeven, new chief of the IEA

"We must find mechanisms to strengthen cooperation with the emerging economies"

By Karel Beckman

The International Energy Agency (IEA), whose membership is limited to the countries of the OECD, is faced with a steady decline of its clout in the global oil market at the expense of the fast-growing emerging economies. Will the IEA become obsolete? Maria van der Hoeven, the new Executive Director of the International Energy Agency (IEA), is convinced that the Agency has a future, if it manages to adapt to changing times. Above all, she believes it is crucial for the IEA to involve countries like China and India in the work of the IEA on a formal basis. "I cannot change the constraint of OECD membership", she says in an interview with EER - the first in-depth interview she has given about the IEA since she took over from Nobuo Tanaka in September 2011. "But I am working on proposals for more institutional, more binding agreements with those countries."

Maria van der Hoeven, Executive Director of the IEA

With Maria van der Hoeven, the International Energy Agency (IEA) for the first time has an Executive Director with a political background. Van der Hoeven was two-time Minister in the Dutch government (of Economic Affairs and of Education, Culture and Science) before she joined the IEA on 1 September 2011. She also served as a member of the Dutch Parliament for the Christian-Democrats for over ten years. By contrast, her immediate predecessors Nobuo Tanaka and Claude Mandil had been high-ranking civil servants before they came to head the IEA.

For the IEA, Van der Hoeven's political experience may be of great importance in the years ahead. The OECD-linked organisation, founded in 1974 in response to the Arab oil embargo - as a counterpart to oil cartel OPEC - has entered a crucial phase of its existence. As Henry Kissinger, founding father of the IEA, put it at the IEA Ministerial Conference in 2009: "The IEA now stands at a critical juncture. The world has changed considerably since 1973. In order to be effective in this new landscape the IEA must be prepared to evolve with it."

What Kissinger was referring to is the steady decline in the IEA's "market share" of the global oil market. Despite steady growth in its membership (for example, France joined in 1992), the IEA countries today represent only about half of global oil consumption. In 1974 this was still some 75%. What is more, 90% of demand growth in the coming decades is expected to come from non-OECD countries like India, China and Brazil. As a result, the IEA may find it difficult in the future to do what it was created to do: to guarantee security of oil supply at times of shortages and to stabilize the oil market in times of crisis.

The problem for the Agency is that as an OECD-linked organisation it cannot admit non-OECD countries as members. Thus, the emerging economies cannot become part of the IEA and cannot take part in the Coordinated Emergency Response Mechanism (CERM) which the agency has at its disposal to intervene in the oil market. The CERM is based on a compulsory system that requires all IEA member countries to maintain at least 90 days of oil stocks that may be released in case of a supply shortage. The mechanism has never been used in full, although the IEA did intervene in the market by releasing emergency stocks on three occasions: during the first Gulf War in 1991, in 2005 with Hurricane Katrina and in 2011 during the Libyan war.

What the IEA can and does do is cooperate with non-members on a voluntary basis. The Agency has entered over forty "implementing agreements", many with third countries, which focus on specific technologies and policy areas, such as renewable energies and energy efficiency. The IEA's research division also prepares "Country Reports" not just for its own members but for non-members as well, and each year the agency's flagship World Energy Outlook (WEO) focuses on a particular country or geographic region. Last year, WEO examined Russia, and this year for the first time the WEO will focus on an OPEC country: Iraq.

As an organisation that has its roots solidly in the oil market, the IEA has a second problem as well, namely the declining importance of oil in the world's energy mix. Oil is still paramount in the transport sector, but the IEA projects that its share in total primary energy demand will decline from 33% in 2009 to 27% in 2035. By contrast, the share of natural gas will grow from 21% in 2009 to 25% in 2035 - but the IEA does not have "emergency gas stocks". In addition, renewable energies are becoming steadily more important, but again, the IEA has no instruments to influence the supply of solar power, wind power or biomass.

The IEA does have another important tool to influence markets and policies, though. That tool is research. Over time the Agency has managed to cleverly and successfully transform itself from an "oil consumer organisation" into the world's premier energy think tank. The IEA regularly publishes authoritative in-depth country reports and research into technologies, policies and markets, including shale gas, electricity, energy efficiency, geothermal energy and solar power. Its annual World Energy Outlook has become a standard work on the global energy market and the threats and prospects it faces. In recent years the IEA has also become the official energy advisor to the G8 and G20, carrying out extensive research for those organisations. In this capacity as super energy think tank, the IEA exercises substantial (if indirect) influence on global energy and climate policies.

The IEA's gradual evolution away from an oil consumer and emergency organisation into a global energy think tank is reflected in the broader mandate it has acquired over time. The organisation now focuses on what are sometimes called the three E's: energy security, economic development and environmental protection. In 2005 the IEA' s Governing Board confirmed that the IEA's focus on oil had to be expanded and that Energy Security and Sustainability were to be the IEA's main priorities.

Nevertheless, despite this transformation, the IEA was slow to lose its aura of being a lobby club for oil and fossil fuel interests. Advocates of "peak oil" criticized what they called the IEA's too rosy predictions of future oil production, which the Agency did adjust downward considerably in recent years, even if it never came to embrace the Peak Oil theory. Advocates of renewable energy believed the IEA was too pessimistic on the possibilities of renewables. On this subject, too, the IEA has made something of an about-turn, becoming much more upbeat on renewables in recent years. In 2009 the IEA was challenged by the establishment of IRENA - the International Renewable Energy Agency, which now boasts 89 members compared to the IEA's 28.The IEA signed a partnership agreement with IRENA in January, in particular to share data and come to a shared research framework.

At the same time, in the international geopolitical arena the IEA found a competitor in the International Energy Forum (IEF), which was established in 1991 to facilitate the "dialogue" between oil producers and oil consumers and has 88 members.

Maria van der Hoeven with founding father of the IEA Henry Kissinger (photo: Philip Provily)

The IEA, then, faces considerable challenges and questions about its future strategy. European Energy Review is greatly pleased, therefore, to be the first medium to have been able to conduct an in-depth interview with the new Executive Director, Maria van der Hoeven, about how she plans to deal with those challenges. EER's editor Karel Beckman spoke to Ms Van der Hoeven at the IEA's office in Paris, around the corner from the Eiffel Tower, and asked her about her ambitions for the IEA and what she brings to the job that's different from what others have brought.

You are the first former Minister and parliamentarian to hold the job of Executive Director of the IEA. How has your experience as a politician served you so far?

I have found that my experience as a politician and the network of contacts I had built up is very helpful in my present job. Having been a Minister in Economics and in Science, I have a good background in energy. What is more, I have a good idea what the concerns are of Ministers and Prime Ministers. I know they always have to think about their Parliament, the opposition, public opinion. They have to keep the interests of all stakeholders in mind if they want to create a successful energy policy. And I know they always have very little time.

What are the concerns of Ministers?

It's always about energy security. Always. It's always about whether the energy security of their country is fully met. For exporting countries it’s about security of demand, for importing countries about security of supply. But those are two sides of the same coin.

So what do you hope to bring to the IEA, with your political background?

When the IEA was founded in 1974, its member countries represented 75% of global oil demand. Now it is almost down to 50%. And 90% of the demand growth is coming from non-IEA countries. So for the IEA countries, if they want to take care of their energy security, it's absolutely necessary to involve the newly emerging economies in the work of the IEA. We need new alliances with other countries. The balance in the world is shifting and we need to incorporate this new reality into the work of the IEA. This is what I see as my main task. My contacts and political background should help me with this.

How can the IEA involve the emerging countries if they cannot become members since they are not part of the OECD?

OECD membership is a constraint, that’s a fact, but it's there. It's a reality. It is not something I will be able to change. It would take too long and I only have four years. So I have to find other ways. We are already cooperating with the emerging countries. At the IEA Ministerial meeting in 2009 China, India and Russia were present. At the Ministerial meetinglast year Mexico, Chile, Brazil, South Africa, Estonia, and Indonesia were also there. We are engaged with these countries in various ways at an operational level. But not yet at a political level. What I decided to focus on is to come up with arrangements that will bring these countries closer to the IEA.

What kind of arrangements?

We are working on proposals now that we will present to the Governing Board in June. So I cannot go into details yet. We are developing four different instruments. They are intended to involve those countries in a more formal way than is the case now. We want to develop more institutional, more binding agreements with those countries.

What would be in it for them?

They would have more information, more data, statistics. And they would be drawn into a framework where discussions about energy security are being held. They would get the opportunity to acquire knowledge from the IEA.

There is already the International Energy Forum (IEF) in which the IEA countries and the BRIC countries and many others are involved at a ministerial level. They have a Joint Organisations Data Initiative in which they share information. Isn't it enough for countries to work together in that context?

No organisation covers and analyses the entire energy spectrum the way the IEA does. The IEF is a very important institution, but it has a different mission. It is an instrument for the producer-consumer

dialogue. For example, at the upcoming IEF Ministerial in Kuwait I will be in a session with the Iranians and the Americans. I am looking forward to that! But I don't see it as competition with the IEA. I would describe the IEF as an extremely important forum with a strong oil and gas focus. It works to foster dialogue, while our focus is on energy security across the fuel spectrum through authoritative analysis and data, as well as very tangible emergency response mechanisms such as the use of strategic oil stocks.

The IEA has also been challenged by IRENA - the International Renewable Energy Agency which was founded in 2009. This has 89 member countries now.

I was involved in IRENA from the beginning. I met Hermann Scheer, the "father" of IRENA, several times. What he had in mind was to bring knowledge about renewable energy together and to see to it that it got deployed in developing countries. That goes far beyond the mandate of the IEA. We look at renewable energy in the context of the total energy picture. Of course we signed a partnership agreement with IRENA in January, which includes developing a joint approach to renewable energy statistics.

But given the OECD-constraint of the IEA, aren't you afraid those new organisations will overtake the IEA and make it obsolete?

There is enough room for different organisations. In fact, it would not be practical to have one organisation to cover all worldwide energy issues. I don't think it would be effective. Each organisation has its own mandate and can do what it does best. And countries can be members of different organisations. We used to be considered a club for rich countries, but that has changed. And the IEA can still grow. We look forward to concluding membership talks with Chile and Estonia, and Russia might even become a member of the OECD. Imagine what would happen if they then applied for membership of the IEA.

Would you welcome them?

It would be a major shift. But you can only welcome a country like Russia when you are prepared for it. We have 28 Member States that are represented on the Governing Board and they all need to realize that the world around them is changing.

Don't they realize that?

Some do better than others.

The United States is focusing very much on energy independence at the moment and might even become a gas exporting country. How would that impact the IEA? Is the US still committed to the international energy security effort through the IEA?

I think they are still very much committed. They realize that all countries are interlinked when it comes to energy. We have seen it recently with Japan. In June all nuclear power plants may be shut down in Japan. That will have a tremendous impact on the worldwide demand for oil and gas. Americans are as

concerned about this as are the Japanese.They also realize that even if they started exporting gas, they need other countries to export to. When it comes to gas, US exports can only help to feed the huge demand for liquefied natural gas in Asia which is keeping LNG prices so much above American ones. And I don't think the American attitude would change if they became a gas exporting country. Remember, they will still remain a major oil importer, and also an enormous market for gas as well as all other fuels. By the way, we already have exporting countries as members, e.g. Norway, Canada, Australia, the Netherlands. So in that sense it would not make a difference.

Talking about the global energy market, despite the economic crisis and slowing demand, prices remain high. Are you worried that we are seeing a lot of supply side problems?

Market attention has been evenly focused on the potential disruption in Iranian crude flows in coming months as the EU's 1 July oil embargo nears and on the very real loss of supplies from non-OPEC producers Syria, South Sudan, Sudan and Yemen. But there are also some bright spots. Libya is coming back sooner and faster than expected. Output from the Americas is growing this year. Key Gulf producers are putting a lot of extra oil into the market, more than last year. And some countries have huge stockpiles.

Such as?

Relative to their net-imports, the UK, Japan, and Korea hold particularly large stocks. And of course by sheer volume, the US does.

Should they use those?

I am not saying that. That's up to them.

So what should be done in your view to stabilise the market as much as possible?

There are a lot of people involved nowadays in the oil market .These people react to rumours and news. You cannot control that. There are a lot of geopolitical problems. We need to create the conditions and transparency that prevent this kind of instability. We need to try to solve the geopolitical problems. Some people argue that we should intervene in the market but I don't agree with that. Who would set the price then? An agency? A government? I don't think that would work.

What do you hope you will have achieved when you leave the IEA after four years?

The most important thing for me is that we will have found a mechanism to strengthen cooperation with the emerging economies also on a political level.

Read Karel's interview with IEA's Chief Economist Fatih Birol here