'There should not be a fear that 2011 will be like 2008'

86 countries sign up to International Energy Forum's new charter

'There should not be a fear that 2011 will be like 2008'

By Alex Forbes

Given the multiple conflicting challenges faced by the global energy industry, dialogue between energy-producing countries and energy-consuming countries has never been more important. This imperative was recently recognised by the 86 member countries of the International Energy Forum (IEF), the organisation that provides the main platform for such dialogue, when they signed a new Charter at an Extraordinary IEF Ministerial Meeting. In this exclusive interview, the Secretary General of the Forum, Noé van Hulst, gives his views on why the new charter was needed and discusses the impact of 2011's 'Black Swan' events - the Arab Spring and Japan's nuclear crisis - on energy economies. 'If you look at the fundamentals there shouldn't be a fear that 2011 is going to be like 2008.'

Noé van Hulst, Secretary General of the International Energy Forum (photo: Roger Dohmen)

A new charter has just come into effect at the International Energy Forum (IEF). Given that the IEF has been in existence for some years as an organisation promoting dialogue between energy producers and consumers, why was the charter needed?

You have to see the movement towards the new Charter in the perspective of 2008, the famous annus horribilis of oil price volatility, when we saw oil prices spike to $147/barrel and subsequently fall to under $40. The consensus was - and is - that this excessive volatility is bad for producing countries, bad for consuming countries, and terrible for investment and for the world economy.

As a consequence, producers and consumers set in motion a process that led to the signing of this Charter. Oil ministers back then felt that we needed an enhanced framework in the IEF for stronger co-operation between producers, consumers and transit states. That drive for reinforced commitment exceeded our expectations. We now have on board 86 countries, including all the major producers and consumers, as formal members.

How will the new Charter change the role and the work of the Forum?

It clearly defines the role of the IEF as a neutral facilitator of the producer-consumer dialogue. We are the only international energy organisation that has global coverage of producers and consumers, including, of course, the emerging economies that are of increasing importance to everybody: China, India, Brazil, South Africa, Mexico, Russia. They are all part of and will play an active role in the IEF.

We are also increasingly working with the G20, because of our global coverage. They have been asking us, as well as the International Energy Agency (IEA) and the Organisation of Petroleum Exporting Countries (OPEC) to do work on their energy issues.

Arab Spring

You describe 2008 as the annus horribilis of oil price volatility. After a period of relative stability, 2011 is turning out to be another volatile year. The wave of political unrest spreading through North Africa and the Middle East - the "Arab Spring" - has once again pushed oil prices through the psychologically important $100/barrel barrier. Given what happened in 2008 and afterwards, how concerned should we be about very high oil prices and price volatility?

Another important consequence of the events in 2008 was a new co-operation programme between the IEF, the IEA and OPEC on how to mitigate excessive volatility. Part of this co-operation has been to look at energy outlooks: where are we going - short-term, medium-term and long-term - in energy markets. We had an expert meeting here in Riyadh on energy outlooks in January. The consensus was that 2011 is not 2008.

If you look at where oil markets are, 2011 is significantly different. We have comfortable levels of spare capacity, both upstream and downstream, which we didn't in 2008. We have comfortable levels of commercial inventories. If you look at the fundamentals there shouldn't be a fear that 2011 is going to be like 2008.

The question then, of course, is: "Why are oil prices where they are?" This has a lot to do with what people call the "fear factor". Tunisia and Egypt had hardly any impact on oil supply. All the time it was

I'm still hopeful that the market will start to understand that a lot of the concerns currently driving prices are over-stated

fear that was driving up prices. With Egypt there was fear over the Suez Canal. Nothing happened - but still prices went up. The Libyan crisis took oil off the market, but that was rapidly compensated by Gulf producers such as Saudi Arabia. As the former US President Franklin Delano Roosevelt once famously said: "The only thing we have to fear is fear itself."

How are the IEF and its members responding to the current high oil price situation?

As I've said already, the producing country members have responded very quickly to the physical changes in the market by providing additional supply. The IEF as an organisation has not yet responded but one of the new provisions in the Charter is that members can decide to hold an Extraordinary Ministerial Meeting.

If oil prices stay above $100/b, and they don't show much sign of going below that level, at least not the Brent price, what's your expectation that an Extraordinary Ministerial Meeting might be called – perhaps just to reassure the markets.

As the Secretary-General of the IEF I cannot say anything about whether such a meeting is likely to be held or not. I'm still hopeful that the market will start to understand that a lot of the concerns currently driving prices are over-stated.

People need to remember the history of the Middle East. For decades the Middle East has provided substantial amounts of oil to the markets, despite many crises, even wars. Real physical disruptions lasting for a substantial time have been extremely limited - and there have always been market reactions from other players. Even if governments change, they will want to continue selling oil and gas to raise revenues to finance their ambitions.

What long-term implications does the Arab Spring have for energy markets and the work of the IEF?

For now, I see hardly any impacts on energy markets. If anything, paradoxically, I expect an increased

What people forget while talking about these single big events (like Macondo and Fukushima) is that also thousands of people die in coal mines every year

interest in having stable markets that provide stable streams of revenue. The oil-producing countries increasingly will be looking at ways to use their revenues to provide young and growing populations with education, with jobs, with a higher standard of living. So there will be increasing pressure on them to raise sufficient revenues to contribute to the welfare of their populations.

Taking that idea further, once all the troubles settle down, could a more democratic political landscape in the Middle East and North Africa help markets rather than hinder them? Might that lead to less resource nationalism and better relations between international oil companies (IOCs) and national oil companies (NOCs)?

In general, I would tend to agree with the idea that market stability and the investment climate may well benefit from many of the changes.

Japan's nuclear crisis

The other big energy event of 2011 is the post-tsunami nuclear crisis in Japan, which looks likely to slow, perhaps even reverse the renaissance of nuclear power. What are the long-term implications for energy markets? Does the IEF have a role to play in addressing these implications?

It's way too early to assess what really happened and to draw conclusions on the effects of that event. We need much more factual information on what happened and analysis of how the safety measures worked (or failed) and how that compares with other nuclear plants, etcetera, etcetera. I'm surprised by how quickly some people jump to all kinds of conclusions . . .

We're not just talking journalists and pundits here. Look, for example, at the German government, which has temporarily closed seven old nuclear power stations, perhaps forever. This has affected German elections and gas prices in Europe. So whatever the reality of the nuclear problems in Japan, we're still seeing an impact on energy markets.

'There is still a wide divergence of views on what is really driving the oil market today'

I know. But, speaking not as IEF Secretary-General but as an observer of the markets, I doubt whether ultimately this crisis will have the fundamental consequences that some people are writing about. A certain slow-down of expansion may well take place as experts and governments need time to review existing safety standards, the organisation of independent oversight of nuclear plants, and how resilient nuclear plants are to natural disasters. But I find it hard to imagine that this will, over the long term, reverse the expansion of nuclear power, particularly in the US and Asia. Perhaps Europe is a bit more nervous about this than others.

If you look at the long-term energy picture it is quite obvious that we will need nuclear power. That doesn't mean that we shouldn't look at what happened in Japan and learn the lessons. But, again, it's way too early to draw from that the conclusion that we're going to see a reversal of the renaissance of nuclear power.

What we will do at the IEF and what we have already put on the agenda of our committees is to discuss with representatives from industry and governments the general topic of energy safety. We had the Macondo oil spill in the Gulf of Mexico last year. Now we have the Japan nuclear crisis. What people forget while talking about these single big events is that also thousands of people die in coal mines every year.

Market transparency and regulation 

A core part of the IEF's work has been to improve the transparency of the oil market with the Joint Oil Data Initiative (JODI, recently re-named the Joint Organisations Data Initiative). How effective has JODI been and what is being done to enhance its effectiveness?

The good news is that over the past three years we have seen increased participation in JODI-Oil, with nearly 100 countries now involved, improvements across the board in monthly oil data submissions (supply, demand, stocks), more timeliness, more consistency and more completeness.

The not-so-good news is that improvement is stagnating. So we need new impetus to improve performance. We need more timeliness and completeness, particularly in the area of oil stocks in the

Last year various investment bankers, I won't mention names, were saying that the oil market had become very boring because there was not enough volatility in their view

emerging economies, as demand is shifting to those economies. Most of the demand increase in coming decades will come from there. So we need to improve visibility and transparency. The quality of the data is also something we need to keep working on. This is a topic that the G20 Finance Ministers have asked us to work on and we presented the first report on how to do this to them when they met in Paris on 19 February.

There's a lot that will be needed: more training for statisticians, more interaction with the analysts that use the data, and the countries themselves need to better equip their statistical offices. They need to tackle confidentiality issues with providing data where that plays a role. What we have proposed to the G20 is that they would be ideally placed to lead by example by setting a target of a fully satisfactory JODI performance for all G20 countries by the end of 2011.

The IEF has been working on a JODI-type initiative for natural gas markets. How is that going? When can we expect to see it up and running? What role will the Gas Exporting Countries Forum (GECF) be playing in making it work?(Editor's note: The GECF is an intergovernmental organisation of some of the world's leading natural gas producers, including Russia, Iran and Qatar, that some believe could turn into a gas cartel similar to oil cartel OPEC.)

I'm happy to say it's well under way. It's our target to put it out to the market before the end of 2011. We will only do that, however, once we think it has substantial value to the market. It will have to go through a lot of iterations with the market, but it has to be at a certain level before it can start doing that.

We signed a memorandum of understanding with the GECF on the day of our ministerial meeting in February. So we are happy to have got them on board with this important initiative. They will provide the data from their member countries, particularly on supply, but also on demand and stocks.

A recent focus of the IEF's work has been the interactions between physical and financial energy markets. What conclusions have you reached about the issues that exist there and what can be done to address them?

I talked earlier about the co-operation we have with the IEA and OPEC. This is another part of that programme. We play the facilitator role but we bring together the IEA, OPEC and also in this case the

The urbanisation rate in China means they have to build every year the equivalent of two Chicagos. And India one Chicago

regulators: CFTC (US Commodity Futures Trading Commission), FSA (UK Financial Services Authority), the EU. They were also there to discuss this. It won't surprise you if I say that if you put all the global experts together on this important topic you still don't reach a consensus. There is still a wide divergence of views on what is really driving the oil market today. Everybody agrees that oil is not only a physical commodity but has also become a financial asset. But is it fundamentals or financials mainly driving the market? There is no consensus on that. It's very hard to pin down the empirical evidence.

The good news is that everybody agrees that better transparency will help, not only in the physical markets but also on the financial, the paper oil markets, particularly the OTC (over-the-counter) markets. There is also a consensus that we need strong international coordination of regulation to avoid any loopholes that otherwise might emerge.

What we're seeing again this year, as we did in 2008, is various institutions making wild price predictions and, at the same time, some of these institutions also take market positions. Surely that's not right. Shouldn't something be done to address that?

In my personal capacity I agree with you. This needs to be exposed. You guys, the serious journalists, also have a role to play in exposing this kind of behaviour. Last year various investment bankers, I won't mention names, were saying that the oil market had become very boring because there was not enough volatility in their view.

Back to the future

Recently published long-term energy outlooks - from the IEA, from OPEC and from the big IOCs - paint a future of inexorably rising energy demand as population grows and as people aspire to better living standards. Will it be possible, in your view, to reconcile the three key conflicting challenges of making energy supply secure, affordable and environmentally acceptable? Or are we destined to face an energy and climate crisis?

That's a very good question. It's one of the toughest global challenges, for sure. The main reason is that people are still underestimating the challenges, particularly the issue of growing demand. In Europe, people under-estimate the tremendous upward pressure on demand in developing countries, particularly in Asia. There is a tremendous urbanisation trend in the whole developing world. People tend to underestimate what that implies for transportation demand, for oil, for gas, etcetera. The urbanisation rate in China means they have to build every year the equivalent of two Chicagos. And India one Chicago.

At the same time it is an opportunity, of course. Countries like China and India are increasingly aware that they need to be much more energy efficient, that they need to curb their emissions. China, for example, is taking a leading role in clean energy technologies. There are opportunities to build those cities in a more environmentally sustainable way.

The point is that what will determine the outcome is how the emerging economies handle the energy challenges.

Earlier stories on the International Energy Forum Cease-fire in the Energy War (May-June 2008) Stop being paranoid about being energy-dependent (July 2009) 'Extreme oil price volatility is the enemy of investment' (March 2010)