Dr. Fatih BIROL IEA Chief Economist Tokyo, 17 February 2015

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1 Dr. Fatih BIROL IEA Chief Economist Tokyo, 17 February 2015

2 Signs of stress in the global energy system Current calm in markets should not disguise difficult road ahead Turmoil in the Middle East raises doubts over future oil balance Resurgent debate over the security of gas supply to Europe Mixed signals in run-up to crucial climate summit in Paris in 2015 Global CO 2 emissions still rising, with most emitters on an upward path At $550 billion, fossil fuel subsidies over four-times those to renewables Increasing emphasis on energy efficiency starting to bring results Will change in global energy be led by policies, or driven by events?

3 Changing dynamics of global demand Energy demand by region Mtoe Rest of world OECD Rest of world China OECD China As China slows, then India, Southeast Asia, the Middle East and parts of Africa & Latin America take over as the engines of global energy demand growth.

4 United States holds a strong position on energy costs $/toe Weighted average cost of energy paid by consumers European Union Japan United China India States Economies face higher costs, but the pace of change varies: China overtakes the US, costs double in India & remain high in the European Union & Japan

5 Instability in the Middle East a major risk to oil markets mb/d +15 Oil production growth in United States, Canada, Brazil & the Middle East Increase to 2040: 14 mb/d Middle East Increase to 2040: 14 mb/d Brazil Canada United States Net decline in output from other producers The short-term picture of a well-supplied market should not obscure future risks as demand rises to 104 mb/d & reliance grows on Iraq & the rest of the Middle East

6 Looking ahead on the oil price Against a backdrop of weaker demand, buoyant supply in North America has brought prices down but can it keep them down? Lower prices are starting to curtail upstream spending plans, with implications for future supply Over time, squeezed cash flow would constrain the capacity of North America & Brazil to act as engines of global supply growth An oil price at current levels could provide some breathing space to major oil importers, boosting demand & GDP It would also accelerate reliance on low-cost producers in the Middle East, some of which face major investment challenges

7 The oil price is hitting 2015 upstream spending plans Billion dollars 750 Global upstream oil and gas investment 17% (est.) Announced spending cuts for 2015 are highest (at 20-40%) in North America & Brazil; for US tight oil, a decision to stop drilling feeds through quickly into production levels

8 Unconventional gas production a rising share of the mix World natural gas production by type bcm % Other 50% 40% 30% 20% Tight gas Coalbed methane Shale gas Conventional Share of unconventional (right axis) % Most of the growth in gas supply comes from unconventional sources; by 2040, more than half of total unconventional output is produced outside the US and Canada

9 Gas on the way to become first fuel, with role of LNG on the rise bcm Main sources of regional LNG supply Other North Africa Australia West Africa Southeast Asia Middle East Other West Africa North Africa Russia East Africa US & Canada Australia Middle East Share of LNG rises in global gas trade, pushed by a near-tripling in liquefaction sites: LNG brings more integrated & secure gas markets, but only limited relief on prices

10 New markets open up in Asia Natural gas imports by source to selected Asian markets bcm % Other % Australia North America % Middle East Southeast Asia % Sub-Saharan Africa North Africa 50 20% Caspian Russia OECD Asia China India Asia-Pacific becomes the main destination for internationally traded gas, with existing importers being joined by China, India and a host of smaller consumers

11 Nuclear capacity grows by 60%, but no nuclear renaissance in sight Net capacity change in key regions, China India Russia United States Japan European Union GW By 2040, an expanded nuclear fleet has saved almost 4 years of current CO 2 emissions & for some countries has improved energy security & balances of energy trade

12 GW Nuclear power: public concerns must be heard and addressed Canada India Retirements of nuclear power capacity Spent nuclear fuel : 705 thousand tonnes 50 United States European Union % of today s capacity to retire by 2040 European Union United States Japan Others China thousand tonnes Russia Korea Japan Other Key public concerns include plant operation, decommissioning & waste management; By 2040, almost 200 reactors are retired & the amount of spent fuel doubles

13 Trillion dollars (2013) The 2 C goal last chance in Paris? World CO 2 budget for 2 C ~2300 Gt Average annual low-carbon investment, % % 50% CCS Nuclear Renewables Efficiency 25% 0.5 Share of budget used in Central Scenario 2013 Central Scenario For 2 C target The entire global CO 2 budget to 2100 is used up by 2040 Paris must send a strong signal for increasing low-carbon investment four times beyond current levels

14 Japan s power system: moving to a more diverse & sustainable mix Thousand TWh gco 2 /kwh Japan electricity generation by source and CO2 intensity historical projected Renewables Nuclear Oil Gas Coal CO 2 electricity emissions intensity (right axis) With nuclear plants expected to restart & increased use of renewables, Japan s electricity mix becomes much more diversified by 2040

15 The Low Nuclear Case: implications for Japan 100% 80% 60% 40% Japan s power generation mix in the Central Scenario and Low Nuclear Case Nuclear Renewables Oil Gas Coal 40% 30% 20% 10% -10% -20% -30% Change in Japan s energy indicators in Low Nuclear Case relative to Central Scenario 20% 2012 Central Scenario 2040 Low Nuclear Case: 2040 In the Low Nuclear Case, Japan faces greater risks to its energy security, a $450 billion increase in fuel import bills & a 14% rise in total CO 2 emissions -40% -50% Net energy self-sufficiency in 2040 Cumulative spending on natural gas and coal imports Energy-related CO2 emissions in 2040 Power sector CO2 emissions in 2040

16 Navigating a stormy energy future Geopolitical & market uncertainties are set to propel energy security high up the global energy agenda Nuclear power grows, with the increase concentrated in a few countries costs, financing & public concerns are the key barriers Without clear direction from Paris in 2015, the world is set for warming well beyond the 2 C goal The unconventional revolution will take time to spread: developments in China are critical to the global outlook The rise in LNG is set to have a tangible impact on international market efficiency & security