*EPF409 04/24/2003
Energy Supply Security Risks Expected as Focus at Paris Meeting
(Oil stocks, long-term investment among major concerns, says State Dept.'s Robl) (1210)

By Andrzej Zwaniecki
Washington File Staff Writer

Washington -- Resilience demonstrated by energy markets in the face of recent oil supply disruptions reduces the immediate pressure on the International Energy Agency (IEA) to deal with near-term supply risks, a State Department official says.

The oil markets' reaction to the war in Iraq and political disturbances in Venezuela and Nigeria indicates that they can function well even during a quick sequence of major supply disruptions, said Terri Robl from the department's office of international energy and commodity policy in an interview with the Washington File a few days ahead of the IEA meeting in Paris.

Energy ministers from the forum's 26 member countries are scheduled to discuss April 28-29 different aspects of near-term and long-term energy security, including emergency oil stocks, the natural gas market, obstacles to investment, and roles of governments in liberalized markets.

Oil Stocks and Non-Member Countries

Robl said that the willingness of major oil suppliers to increase their production to make up for lost supplies elsewhere and the existence of strategic oil stocks helped calm the markets in recent months. The government/public emergency oil stocks of nearly 1,300 million barrels held by the Czech Republic, France, Germany, Hungary, Japan, South Korea, Spain and the United States could cope with substantial supply disruptions, according to an IEA background paper. Robl said these stocks made it easier for the United States and other major oil consuming countries to encourage producers to "do what they need to do" to put additional supplies on the market.

"Just holding the stocks ready did the trick," Robl said. "We didn't even have to use them."

Nevertheless, the IEA has scheduled a discussion on how governments can strengthen near-term supply security in the current geopolitical and market environment. It said that the oil market has become "stretched and fragile" as the industry reserves, excess production capacity and capacity for short-term oil substitution have been reduced.

Yet a few IEA member countries do not comply with their existing obligations either in respect to demand restraint or stock holding requirements, Robl said.

She said that high on the IEA agenda also would be the role of non-member countries -- both major energy producers such as Russia and Mexico and major energy consumers such as China and India -- in stabilizing energy markets. Robl said the Bush administration has been working with the Chinese and Indian governments to make sure that they understand market mechanisms and the role strategic stocks play so that they do not resort to either energy hoarding or panic buying when the market is "getting tight."

Energy Markets Hungry for Investment

The IEA has cautioned that focusing exclusively on short-term supply security can "jeopardize necessary progress on the broader set of energy interests, including longer-term security." An IEA report issued in 2002 concluded that a growing number of countries, including traditional net energy exporters, would become increasingly dependent for their energy supplies, particularly for oil, on a small group of countries.

The IEA said that "massive" investment -- larger than in the past -- would be needed to increase production and supply capacity necessary for meeting future demand. It expressed concern that such investment may not be forthcoming without decisive actions taken by governments of both energy-producing and energy-consuming countries. The IEA noted that large investments in oil and natural gas exploration and transportation systems are needed in politically unstable regions where the investment climate is often far from good.

Robl said that promoting political and economic reforms critical for attracting necessary investment to countries in such regions goes beyond the authority and competency of a specialized forum such as the IEA. She said, however, that the IEA could help its members better understand the main obstacles to investment and suggest appropriate government responses.

Consuming countries should work on reducing their energy dependency, Robl said. They "need to look at ways of diversifying supplies" through the geographic expansion of their supplier base and the introduction or increased share of components other than oil in the energy mix. The IEA said it also wants to discuss government support for the development of advanced energy technologies that could help meet increasing demand.

Where is the natural gas market heading?

The IEA warned that "with the increased share of natural gas in the energy mix, coupled with the increased dependence for supply on a limited number of countries, there is risk that the gas sector may develop along the lines seen in the oil sector."

Robl said that natural gas-producing countries might be tempted to try to form a cartel similar to the Organization of Petroleum Exporting Countries (OPEC). But she added that this is unlikely to happen because they have seen the drawbacks of such supplier groups.

Moreover, because gas depends singularly on pipelines for transportation, Robl said, consuming countries look for supplies not around the world but relatively close to home. While this may change with the increasing supply of liquefied natural gas, she said, current market conditions tend to promote the development of long-term bilateral and regional contractual relationships. Nevertheless, Robl said, the IEA has been trying to discourage gas-producing countries from forming a cartel and persuade them that keeping their markets open would be to their advantage.

Liberalization and energy security

The IEA cautioned that in gas and electricity markets, which have been liberalized in some countries in the 1990s, security of supply "cannot be taken for granted and does not come for free." It said that governments could address supply security concerns in those markets by defining clearly the roles and the responsibilities of the players and developing a "well thought-out" framework of specific rules and conditions.

Robl said the IEA indeed needs to deal with certain issues related to the market liberalization. It needs to discuss, for example, "what you do if the investment is required, and the market doesn't support that investment or if the investment does not go naturally to a particular area where demand for energy is huge," Robl said.

However, these "tricky" issues do not imply that deregulation should be scaled back, she said. What happened in California, for example, where electricity consumers experienced serious supply shortages, was not a failure of liberalization but rather "flawed" deregulation, Robl said.

"We think liberalization has a lot of positive effects," she said. And overall "our experience so far has been quite positive."

Balanced energy strategy

The IEA said that the challenges related to environmental damage, market reform and access to energy for less developed countries must be part of a "balanced" energy strategy. The "actions to respond to these challenges ... require government engagement at the highest levels," it said. The IEA said it wants its members to discuss among other things how governments can promote the development and deployment of energy technologies to support sustainable development.

Robl said that every country has to carefully balance its economic, environmental and energy security concerns. And "different countries will come up with different balances and different solutions," she said.

(The Washington File is a product of the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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