"If Iraq fails, it will mean trouble for all of us"

March 15, 2012 | 00:00

Interview: Fatih Birol, Chief Economist IEA

"If Iraq fails, it will mean trouble for all of us"

What the world needs to keep up with the strong global growth in energy in the coming decades is two things above all: Iraq - and shale gas. That is the view of Fatih Birol, Chief Economist of the International Energy Agency. "If it does not come from Iraq, I don't see where significant production growth will come from", notes "Mister IEA". He urges the international oil companies to "listen carefully to the perspective of the federal government in Iraq." And he has news on the shale gas front: the IEA is preparing, with a number of governments, a set of "best practices" for shale gas production, which will be presented to the world on the 29th of May. "Governments need to ensure that all companies adhere to the best standards, or they will risk a public backlash against unconventional production".

Iraqi Deputy Prime Minister for Energy al-Shahristani (second from right) with Fatih Birol, flanked by two IEA staff members, during a recent visit from the IEA to Baghdad.

On the 9th of October this year, the International Energy Agency (IEA) will come out with a unique publication: a special report on Iraq. It is the first time the IEA has ever carried out an in-depth study of an OPEC country.

Traditionally of course the IEA and OPEC have been each other's opponents in the oil market. For the first twenty years of its existence, the IEA actually avoided all personal contact with the oil cartel. This changed in 1995 when then-Director of the IEA Robert Priddle and OPEC Secretary-General Rilwani Lukman met each other in person in great secrecy in a hotel room in Vienna. In recent years relations between the rival organizations have improved greatly. Still, the Iraq report is another major breakthrough in the IEA-OPEC relationship. It is also a major new step for the IEA as the world's foremost energy research organisation.

Last year the Agency already broke new ground with a special report on Russia. The Iraq report will be an even more unique event. When EER spoke to him in Paris, on 6 March, Fatih Birol, the IEA's Chief Economist (who actually worked for OPEC in Vienna before he joined the IEA), had just returned from a visit to Iraq. "I like to visit a country before I write about it", he says. "I don't want to write the report only from behind my computer."

Birol, was still excited by his visit to Baghdad. The choice of Iraq is no coincidence, he explains. Although the Iraqi government asked the IEA to produce the study, to help the country develop its energy policy, the request could not have been more appropriate, in Birol's view. According to the Turkish engineer and economist, who is generally regarded as the IEA's most authoritative spokesman, the fate of the global oil market will depend to a significant extent on how Iraq will develop in the years ahead. Birol notes that "energy demand will continue to be very strong, mainly from the emerging countries. For supply growth we have a major hope that Iraq will grow its production. If it doesn't come from Iraq, I don't see where we will get significant growth from. Other countries can still increase their production, but really significant growth will have to come from Iraq. What will or will not happen in Iraq will have a major influence on oil markets."

Birol recognizes that Iraq is facing major challenges, particularly with regard to legislation, infrastructure and the availability of water. In addition, when it comes to gas,"there is a huge amount of flaring taking place", says Birol. "It is extremely important that more gas will be captured and used for domestic electricity production."

With the new study, the IEA hopes to accomplish three things for Iraq: to analyze the domestic energy market (including the power market), to provide an overview of the country's oil and gas prospects and to make clear what Iraq can mean for the world. Most importantly, the IEA hopes that its report will help to generate investment in Iraq's energy sector.

So what about safety? Political stability? Birol says he travelled "with strong security measures". But he also says he was greatly impressed by the country's leadership, in particular from al-Shahristani, the Deputy Prime Minister for Energy. "All the authorities are very keen to make life easier for international oil companies that want to come in and invest in Iraq", notes Birol. "Of course they have to think about their country's interests and the political unity of the country. But they are very open to work with IOC's."

The IOC's are "already very involved" in Iraq, says Birol. "But what they need to see is what happens when the production reaches a certain level. Yesterday [i.e. on 5 March, editor] production reached 3

"If shale gas becomes a success, it will be as important as the introduction of nuclear power of the seventies"
million barrels per day. That can be doubled within five years or so. The question is what will happen after that. If they can continue to expand production, it will mean a big jump in wealth for Iraq." And if these efforts fail? If Iraq will not be able to grow its production significantly? "Then it will mean trouble - for all of us. It will not be good news at all. I do not think oil markets can afford a non-successful development of Iraq."

What does Birol think in this context of ExxonMobil's decision to sign contracts with the Kurdistan Regional Government in the north of the country? This move has greatly angered the government in Baghdad, who views these agreements as illegal. Birol: "There is an Iraqi government and that government is taking the decisions how to deal with the IOCs at national level. There's a lot still to be done to clarify the legal framework, but we should give a good ear to what they have to say and what they decide. Everybody should play the game and listen carefully to the federal government's perspective." And he warns yet again: "There are not many other places in the world that can substantially increase their oil production."

Green activists

In addition to oil, Birol sees one potential bright spot in the global supply side picture and that is unconventional gas. The IEA believes unconventional gas has such a great potential that last year the Agency produced a special report, titled: "Are we entering a golden age of gas?" However, there was still a question mark behind the sentence and that, says Birol, was because shale gas production faces one monumental challenge: its environmental impact.

This, says Birol, is "a very real issue. It's not something that is made up by green activists or bloggers as some companies are claiming." Yet, according to Birol, it is a problem that can be solved - if production companies work strictly according to "best environmental practices". Indeed, it is a problem that must be solved, he adds, to make the "golden age of gas" come true.

To address this crucial issue, the IEA has just started a new initiative that aims to define "golden rules for the golden age of gas". Last week, Birol and IEA staff attended the kick-off meeting for this initiative,

"I have not seen any investor change their behavior because of the Durban agreement"
which took place in Warsaw. On the 29th of May, the IEA intends to publish a WEO special report including what Birol calls "the Magna Carta of unconventional gas production": the rules that should ensure that the global economic potential of shale gas will be realized without harming the environment. "Governments need to ensure that all companies adhere to the best standards, or risk a public backlash against unconventional production", says Birol.

IEA's Executive Director Maria van der Hoeven is equally clear about the need for industry to adhere to best practices in shale gas production. She says she "understands" that "there is a lot of resistance to fracking" in Europe and elsewhere. "There are too many unanswered questions at present. About what is happening in the ground. What the consequences are for the water. These are rightful questions that should be answered and that we intend to address fully."

Van der Hoeven calls the new IEA initiative an "exciting development". She notes that shale gas production is of crucial importance to security of supply. "It is everywhere so it reduces import dependency for many countries." Birol goes even further. "If shale gas becomes a success, it will be as important as the introduction of nuclear power of the seventies", he says.

Excuse to do nothing

Birol's enthusiasm about Iraq and shale gas should not be taken to mean that he has giving up caring about CO2 emissions. On the contrary, he sees the reduction of CO2 emissions as the energy market's greatest challenge. But he is not optimistic about the chances of that challenge being met. He notes that the agreement made at the climate conference in Durban last year, to come to a climate agreement in 2015, was hailed by some commentators as a breakthrough. He does not share that view. "I have not seen any investor change their behavior because of the Durban agreement", he says.

He warns that "Durban" should not be used by policymakers as an excuse to "do nothing" till 2015. "That is far too late to change our energy and climate policies. It will be much more difficult to achieve our goals then." But he is afraid that his message is not getting through. "I travel a lot and I see climate change sliding down politicians' agenda's very rapidly", he says. "Including in European countries."


Who is Fatih Birol?

Dr. Fatih Birol is the Chief Economist of the International Energy Agency, with responsibility for the organisation's economic analysis of energy and climate change policy. He oversees the annual World Energy Outlook which is the flagship publication of the IEA. He is also the founder and chair of the IEA Energy Business Council which brings together leaders of some of the world's largest energy companies and policymakers to seek solutions to global energy challenges.Prior to joining the IEA in 1995, Birol worked for six years at the Organisation of the Petroleum Exporting Countries (OPEC) in Vienna. Birol was born in Ankara in 1958. He earned a BSc degree in power engineering from the Technical University of Istanbul. He received his MSc andPhD in energy economics from the Technical University of Vienna. He is a great fan of Istanbul football club Galatasaray.

Special thanks to Thijs van de Graaf, author with Dries Lesage of "The International Energy Agency after 35 Years: Reform Needs and Institutional Capability" (Springer Science and Business Media, 2009) for helping provide background information.

Read Karel's interview with IEA's Executive Director Maria van der Hoeven here 


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