Defence, Security and the long term UK National Interest 

Wednesday 24 February 2010 London 

Good afternoon Ladies and Gentlemen,  

I was asked to talk about Energy AND Security, but I will talk about Energy Security. From a consuming nation’s perspective, it is in fact security of supply – that is the availability, sustainability and affordability of supplies of energy – without which our modern societies and military power cannot function.  

In the developing world of energy, energy security is taking on a new line. We have traditionally regarded the Middle East and oil, Russia and gas, the High Seas and LNG as a crucial life. They are all important BUT diversity of potential sources is actually large. In fact, the real energy security problems could be much closer to home than we think.  

Let me share with you three key points that have important implications on UK energy security, namely: 

i. Climate Security 

ii. Changing energy supplies pattern 

iii. The North Sea 

i. Climate Security And Energy Security  

In the 2006 report ‘The Energy Challenge’, the UK Government set out two major challenges in its energy policy: firstly, to reduce carbon emissions, and secondly to deliver secure and affordable energy. These targets were repeated in the recent National Policy Statement for Energy (the UK Low Carbon Transition Plan), where the Government yet again put climate security first and energy security second.  

But the priorities are wrong. We are simply looking at different timeframes: energy security needs are here and now, whereas climate change needs to be seen in a long time horizon. The UK is one of the very few countries – almost the only one -which put reduced carbon emissions as the first priority, ahead of energy security. And most of the attention and effort has been concentrated on the former with not enough on the latter. In other countries, the priorities are very clearly the other way round. 

It has to be questioned whether the ‘carbon first’ priority will in practice deliver the carbon result. All the signs are that whatever costs the policy-makers may want to impose from above in the name of long term climate gains, the people -that is the consumers, customers, business and households in our society -will put energy security first, along with energy reliability and energy affordability. Attempting to go against the grain of public interest and concern could well end up with neither climate security or energy security in the measures we seek.  

Furthermore, CO2 reduction is obviously a global issue. All our efforts to tackle climate change are going to be wasted and all our carbon emissions targets missed if we don’t manage to get the developing world, namely China and India on board. And the public are well aware of that. 

In the coming decades, fossil fuels, gas in particular, will dominate, with most renewables still uncompetitive. After 2020, the alternatives (wind, solar, biofuels, nuclear) could start to kick in. Any climate agreement or deal is likely to have little impact on energy demand patterns at least until the end of the decade ahead, partly because of the sheer size of the energy market and partly because of the limitations of the alternatives. So far, the low carbon (electricity) technologies are almost always more expensive than those they replace, and they are usually less energy efficient. 

Also, the future of renewables and green technologies rely on carbon prices. But the EU Emissions Trading Scheme has failed to increase the carbon price sufficiently (for instance, to make carbon capture and storage – CCS – commercially feasible, carbon price should be at least 60 Euros/tonne). Carbon trading seems to be losing momentum amid the uncertainty created by the failure of the Copenhagen meeting. The failure of the summit to come up with a legally binding global pact has highlighted cracks among nations about which of them should have to spend money to make the biggest cuts in CO2.

Besides, a string of recent revelations about questionable practices and outright mistakes by scientists who contributed to the big 2007 U.N. climate-science report has led some politicians to advocate slowing the push for legislation that would cap greenhouse-gas emissions. 

ii. Changing Energy Supplies Pattern 

-Let me start with oil:

Are we running out of oil? No. Oil remains in abundant supply. New sources are coming on line off West Africa, Latin America, the Middle East and there are big 

new discoveries in deep water off Brazil, off the Ghana coast, just to name a few.

Further ahead lie with estimates of large new reserves (up to 25 percent of world reserves) in the Arctic region. So, whatever other problems there are about energy, 

actual shortages of resources in the ground are not one of them. The hard practical problems are of course: costs, transportation, politics and the investment cycle. 

If we look at Iraq in particular, we get a very positive scene. Iraq is the world’s third largest holder of proven oil reserves, but its oil industry has suffered from many years of neglect, under investment and sabotage. Yet, recently, Iraq opened its doors to foreign investment, signing large oil deals with major oil companies. The current official goal for Iraq oil production is to reach 4Mb/d in the next five years. Looking further ahead some officials have mentioned much bigger figures, even exceeding 10 Mb/d within six years. This would take the country from its current position of being the world’s 11oil producer to being the third. Indeed, the deals that have been recently signed would almost triple Iraq's output, with a consequent significant contribution to world’s oil supply and therefore an impact on oil prices. No wonder OPEC are so interested in the way things are developing in Iraq.  

-The gas outlook is much more exciting: Climate change policies are likely to lead to more gas in the medium term. As coal and old nuclear power plants are phased out, gas demand will increase due to the need for gas-fired power plants. Given the low carbon content of gas, the introduction of a carbon price will have the least effect on gas price compared to oil and coal. Additionally, gas can complement renewable energy. Given the intermittency with which wind and solar power operate, gas-fired plants are ideal for providing the necessary swing capacity. So on the coldest days of the year, when wind doesn’t blow, gas fired power stations will keep us warm.  

Success in the development of US unconventional gas has transformed the gas picture in the country. Less than a decade ago, the US was expecting large LNG imports, in the light of falling indigenous supplies and growing domestic demand. Advances in drilling techniques, however, have opened large US reserves of unconventional gas. Growth in indigenous supply has reduced the import requirement of the country – as of January 2010 the US became the world’s largest gas producer ahead of Russia.  

The new developments of shale gas in the US and Canada have benefits that go beyond that region. A lower import requirement for a large consumer, such as the US, effectively diversifies the global gas supply portfolio by increasing the available supply to the global market. Supplies otherwise intended for North America can be redirected. In 2009, LNG tankers, originally heading to the US, sailed to Europe and Asia instead.   

Prospective shale gas may nearly double estimates of global natural gas reserves. Europe has unconventional gas potential, in particular Germany, France, Austria, Sweden, Hungary and Poland as well as other Eastern European countries. As technologies applied in the US are transferred to Europe and Asia, and discoveries prove to be commercially viable, it is possible that the nature of gas supplies will change substantially, with dramatic implications geopolitically. We can already sense the gradual shift in the bargaining power at the negotiation table with Gazprom.

A combination of additional supplies, low demand and rising US shale gas production, have depressed LNG prices. The low spot and forward prices at which LNG can be imported into Europe have increased gas-on-gas competition and caused substitution in favour of LNG from more expensive pipeline gas (namely the oil-indexed Russian and Algerian).  

iii. The North Sea 

It is true that oil and gas production from the North Sea has peaked, and the province can be described as mature, but this does not necessarily mean that it is a dying province that is slipping into history. The North Sea era is not over yet. Whilst the UK has been producing oil and gas for more than 40 years, there are substantial reserves still to be recovered with up to 25 billion barrels of oil and gas remaining to be extracted. The problem is that the remaining reserves are smaller, more costly and technically challenging to develop.  

The North Sea is still making a significant contribution to the country’s energy supplies and economy. In 2009, it provided two thirds of the nation’s total energy needs. The UK remains, after Norway, the second largest producer of natural gas in Europe. In 2009, despite the fall in oil and gas prices, the UK oil industry contributed nearly 20% of total corporation tax receipts by the Exchequer dwarfing the contribution of the banking and finance sector.  

While indigenous production from the UKCS will continue to make an important contribution to overall security of energy supply, the province is mature and needs considerable investment to sustain production.  

The future of the North Sea will depend on a combination of factors. The fiscal regime is a major determinant and is under the Government control, unlike other factors such as oil price and cost.  

So to conclude, In the evolving global energy scene, we may need to think about energy security in a rather different way, and focus on security within. 

The UK needs to get its priorities right while being realistic about its carbon reductions targets.  

The cost of alternative green energy, the failure of Copenhagen and the scandals surrounding climate change scientists will not make it any easier to put over the case for sacrifice now to secure climate mitigation later – least of all in the lower income countries. 

And in an open global economy, a high share of imports is not a problem in itself. Some of the most severe energy supply breakdowns of recent years have occurred for internal and domestic reasons. One recalls the miners’ strike in the UK back in the seventies. Hurricanes, terrorist sabotage, labour disputes, plain negligence and incompetence can all lead to major dislocations. 

The focus today should be on expanding the infrastructure needed to open new supply routes and sources – namely LNG terminals, and storage capacity. It was Winston Churchill who advocated diversity, and diversity alone, as the key to security of oil supply, when the British Navy first turned from coal to oil at the outset of the First World War. Almost a Century later, his formula is still compelling.  

On the supply side, the emerging picture is showing significant differences from that of the last five years. All the signs are that it will continue to evolve gradually in new directions. And when facts change, policies have to adapt accordingly.  

As for the resources right at our own doorsteps, we should not forget that the North Sea is still an important province not to be written off.  

The signal to the UK Government is, as put decades ago by Winston Churchill: “It is always wise to look ahead, but foolish to look further than you can see." We would all do well to follow it.