Key market risks and factors
that will affect future energy import profiles

A Report by Energy Intelligence Research for the Westminster Energy Forum & the Royal United Services Institute

A major report entitled ‘Strategic Implications of Future World Energy Flows for the UK’ examines key market risks and factors that will affect the UK’s and other nations’ strategic energy import profiles.

Such issues are fundamental to the UK’s expected energy consumption, its economic growth, its balance of payments post the North Sea resource decline, and the UK’s geopolitical relationships with countries that are deemed to be much higher risk than those from which the UK currently imports much of its energy.

The main report, prepared by Energy Intelligence Research for the Westminster Energy Forum and the Royal United Service Institute, has been sponsored by KPMG & Global Union Energy Ventures.

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Strategic Implications of Future World Energy Flows for the UK

KEY POINTS:

The emergence and increasing use of energy as a foreign policy tool has raised the background level of risk that mature, energy importing economies face. Most of the remaining and easily extractable global reserves happen to be controlled by regimes that are either potentially unstable or are unfriendly towards the West.

By analysing the import breakdown of a country by its sources of supply, weighted in proportion to a number derived from a listing of countries ranked by their level of corruption, comparisons between nations of their relative energy import security risk may be made. Given that energy security is a dynamic process rather than a goal, a relative rather than absolute ranking was used, to enable horizontal comparisons and comparisons across time.

The United Kingdom currently sources 65% of its crude oil imports from Norway, one of the least corrupt countries in the world. The next eight import sources for UK have a substantially higher risk level, with the Former Soviet Union and Saudi Arabia being key players in this hierarchy.

It is estimated that the UK's 4.5 billion barrels of proved crude oil reserves in 2005 will last another 6 years assuming production levels of around 95 million tons per year. Assuming current production levels, UK gas reserves are estimated to last another 6 years. Total oil output from Norway topped 3.4 million b/d in 2001 and has been in decline since. A 3.7% per year decline in Norwegian crude production is projected for the next five years.

As a result of these combined North Sea declines, the growing importance of UK energy imports from the Former Soviet Union and OPEC, especially Saudi Arabia, as increasingly significant sources will have implications for the UK’s energy import risk profile, and for the UK’s foreign relations with these countries.

By 2015 world crude oil production will have increased by just below 20 million b/d compared to 2005 levels.

Saudi Arabia alone has indicated it will allocate around $50 billion to expand its capacity from about 11 million b/d to 12 million-12.5 million b/d by 2008 or 2009. Future oil capacity expansion will be closely monitored by Opec producers, Saudi Arabia in particular, in an attempt to bring on necessary excess capacity to enhance its control over the oil market in the face of unexpectedly strong demand, but not at such a rapid rate as to exert downward pressure on oil prices.

Meanwhile, the National Oil Companies (NOCs) of Venezuela and Nigeria, in particular, are imposing more onerous fiscal terms on foreign joint venture partners to capture a larger proportion of the "economic rent" from high prices.

In Russia, developments after 2010 in the Far East, Timon Pechora and Central and Eastern Siberia are projected to push average annual growth back to 5%, exceeding 13.6 million b/d by 2015, moving it ahead of declining North American output in absolute terms.

Central Asia is already an oil and gas exporter and the region will become an increasingly attractive supplier to world energy markets. However, the region is riddled with political tensions and uncertainty. By 2015 the four Central Asian countries (Kazakhstan, Azerbaijan, Turkmenistan and Uzbekistan) will contribute 2.4 million b/d, and if Russian and the smaller producers are added the total contribution from the Former Soviet Union (excluding Russia itself) is 6.6 million b/d.

Conclusion

The world will struggle to expand production capacity sufficiently to meet increasing demand.

The contributions from the Central Asian countries -- at nearly 15% of the total -- are therefore absolutely essential and will be a major strategic challenge for both East and West. This, combined with the leading role that Russia will play in terms of oil and gas exports, highlights the crucial preparation that the UK will need to make in the run up to the Russian G8 Presidency in 2006 in order to effect the most open and stable market for requisite foreign investment in energy development and infrastructure in the region.

The UK’s implied energy import risk profile has been luxuriously low for many years but is about to climb steeply. An increase in domestic consumption, combined with rapid North Sea decline seriously affecting UK production and that of our leading import source Norway, means that the key producers in the Middle East as well as the Former Soviet Union will play a major role in determining the UK’s energy import risk profile in future.

The upwards shift in the UK’s energy risk profile comes at a time when good corporate governance is under the microscope like never before. Investors, shareholders and employees will want to know how their own companies are acting to mitigate the increased risks which they will no doubt face as well as our safer supplies of oil dwindle. With the Operating Financial Review legislation due to be enacted soon, this issue will be one which oil companies will simply have to report on.

How the UK Government addresses this strategic challenge in the wake of the 2006 Energy Review will tell us much about how intelligently it is evaluating the future linkages between UK economic growth and energy consumption give it will now become increasingly dependent on imports from politically riskier regions at more testing prices.