DECEMBER ENERGY MINISTERIAL IN LONDON

UNCLAS SECTION 01 OF 04 LONDON 000227 SIPDIS DOE FOR SHRIER, PERSON E.O. 12958: N/A TAGS: ENRG ECON EINV UK SUBJECT: DECEMBER ENERGY MINISTERIAL IN LONDON ¶1. (SBU) Summary: Ministers and high-ranking officials from 27 countries, leading international energy and financial institutions, pledged to work together to reduce oil price volatility, at the HMG-hosted London Energy Meeting on December 19 in London. Participants agreed that the recent price surges followed by a near collapse in prices have created such uncertainty in the market to delay, if not derail, investments in energy projects. Many of the attendees blamed speculators for triggering the price spikes, though the U.S. delegation, headed by Acting Deputy Secretary of Energy Jeffrey Kupfer, maintained that prices were in line with historic levels and that transparency, including uncertainty about inventories, was a significant factor. Independent experts, including the Cambridge Energy Research Associates (CERA),also disputed the claim that speculators played a decisive role. Several officials from Middle Eastern oil producing states called for oil prices to be maintained at $70 to $75/barrel to encourage investment. The meeting concluded with a consensus to form an experts' working group that would examine questions of production and price volatility, among other issues, in the run-up to the 2010 International Energy Forum Ministerial in Mexico. End Summary. The Major Players ¶2. (SBU) The London meeting was held as a follow-up to the June Jeddah meeting of oil producing and consuming nations. Thirty-eight countries were invited, of which 27 attended. The U.S. was represented by Acting Deputy Secretary of Energy Jeffrey Kupfer, Acting Energy Assistant Secretary Jonathan Shrier, and Deputy Assistant Secretary of State for Energy, Commodities and Sanctions, Doug Hengel. Ministers who attended were Hussain al-Sharistani, Minister for Petroleum, Iraq; Gholmhosssein Nozari, Minister for Petroleum, Iran; Ali I Naimi, Minister of Petroleum and Mineral Resources, Saudi Arabia; Jose Maria Botelho de Vaconcelos, Minister For Petroleum, Angola; Chakib Khelil, Minister for Energy, Algeria; Lisa Riatt, Minister for Mines and Energy, Canada; Amin Sameh Fahmy, Minister of Petroleum, Egypt; Jean Louis Borloo, Minister for Ecology and Energy, France; Michael Glos, Federal Minister of Economics, Germany; Claudio Scajola, Minister for Economic Development, Italy; Toshihiro Nikai, Minister of Economy, Japan; Odein Ajumogobia, Minister for Petroleum, Nigeria; Terje Riis-Johansen, Minster for Petroleum and Energy, Norway; Mohammed bin Hamad Al-Ruhmy, Minister of Petroleum and Gas, Oman; Abdullah Bin Hamad al-Attiyah, Minister of Energy and Industry, Qatar; Buyelwa Sonjica, Minister of Minerals and Energy, South Africa; and Maria van der Hoeven, Minister of Economic Affairs, The Netherlands. Russia, Venezuela, Mexico, China, India, Spain, Austria, Ecuador, Indonesia, South Korea, Turkey among them, were presented at the non-Minister level. The Executive Director of the International Energy Agency, Nubuo Tanaka; Abdalla El-Badri, Secretary General of OPEC; Noe van Hulst, Secretary General of the International Energy Forum Secretariat; and Andris Peibalgs, Energy Commissioner of the EU, also attended. UK Prime Minister Gordon Brown opened the meeting, with Secretary of State for Energy and Climate Change, Ed Miliband as the chair. The Papers - Price Volatility A Given ¶3. (SBU) In preparation for the meeting, HMG and the LONDON 00000227 002 OF 004 Government of the Kingdom of Saudi Arabia commissioned from Cambridge Energy Research Associates (CERA) a paper to explore the question of price volatility, as well as conducting its own analysis of the oil markets. Daniel Yergen presented CERA's paper, which concluded that there will always be volatility in the oil market and that spare capacity will increase in the short term because of falling oil demand and as supply from current investments come to the market. In the medium term, however, low prices and financial constraints may hinder investment. Spare capacity will start to erode, and the oil market will begin to tighten in the first half of the next decade. CERA argued that the best way to reduce volatility in the oil market was to increase the quality and frequency of global oil information, particularly related to demand and supply. Prime Minister Brown Calls for Transparency ¶4. (SBU) In his opening remarks, PM Brown called for increased transparency about production supplies and investment plans, diversification away from oil, investments in renewable energy sources, coordinated government action on price stability and work with the IMF and the World Bank to help people in the poorest countries adjust and respond to commodity price volatility. He also called for energy producing and consuming nations to reaffirm that they will work together on energy issues as a crucial part of promoting growth and stability in the world economy, in the run-up to the London Economic Summit of the G20 in April. Brown's full remarks can be found at http://www.number10.gov.uk. Price Volatility Deterring Investments ¶5. (SBU) Representatives from the oil-producing countries, and in particular Saudi Arabia, Bahrain, Iraq, and Iran, argued that first the excessive volatility of prices this summer and then the low oil prices registered in recent weeks have derailed investment projects in energy and the current financial situation is stifling innovation. Saudi Minister Ali I Naimii argued that only when prices are in the $70-75 a barrel range are there sufficient incentives to undertake new projects. He also chided European governments for imposing high taxes on petroleum for consumers, which affects demand. When prices per barrel spike, European governments should adjust tax rates to ensure demand remains constant. Bahrain Minister for Oil and Gas Abdul Hassain Ali Mirza warned that low oil prices are more dangerous that high prices, since international and national oil companies will shelve investment plans, which would set the stage for even higher spikes in prices when global economies begin to recover. He also argued for oil prices to be "fixed" at a floor level of $70. ¶6. (SBU) Kupfer, in his remarks, cautioned about any target price or intervention by governments to set a price and emphasized the importance of well-functioning markets and effective regulation (not over regulation). He also noted the need for greater market data transparency, especially on inventories, through the Joint Oil Data Initiative or JODI; the need for continued investment, especially in light of production decline rates and surplus capacity requirements; and the removal of market-distorting energy price subsidies. ¶7. (SBU) Tanaka from the IEA urged producing consumers to take on a larger commitment to invest. He warned that there is a real risk of a supply crunch once demand recovers. He also urged countries to seriously pursue more energy LONDON 00000227 003 OF 004 efficiency, and highlighted the Clean Energy New Deal called for Poznan. Saudi Minister Naimi said that Saudis intend to increase production to 12.5 million barrels a day by mid-year 2009, regardless of the financial situation. Iraqi Minister al-Sharistani said Iraq is committed to increasing its production by 2 million barrels per day within 4-5 years, and to 6 million barrels per day within 10 years. Around the table: Speculators to Blame ¶8. (SBU) Saudi Minister Naimi was the first to claim that speculators triggered much of the price spikes registered over the summer 2008. Fundamentals of the sector alone were not responsible for the excessive price volatility; the behavior of the futures market indicated the interference of speculators, he claimed. Officials from Kuwait, Italy, Japan, Algeria, Iran, India, Norway, China, South Korea, Spain, and Russia also placed the blame on speculators for the excessive price volatility, though none of the delegates provided data to substantiate these claims, and called for some regulation of the futures market for oil and gas. ¶9. (SBU) Other delegations did not agree on the role of the speculators. Nubuo Tanaka, Executive Director of the International Energy Agency pointed to the fall in demand as the main cause in the excessive price volatility. Global energy demand will contract in 2008, the first time this has occurred since 1983, he said. The Saudi minister did concede that oil price volatility was also exacerbated by the rapid de-leveraging of assets in global financial markets. ¶10. (SBU) Inadequate transparency, such as uncertainty about inventory levels, rather than speculation, was a significant cause of the excessive price volatility argued Acting Deputy Secretary Kupfer. He agreed on the need for effective regulation of energy markets but warned against over-regulation. Without sufficient spare capacity, shocks to the system become magnified, fueling the volatility, he stated. Maintaining investment flows is therefore important. Diversified energy portfolios, including renewables and energy efficiency, are also important checks on volatility. He also noted that the ten-year average price of oil was in the $40/barrel range, and that current prices are consistent with this trend line. Others Also Call for Transparency ¶11. (SBU) PM Brown laid down the challenge in his remarks for oil producing and oil consuming countries to be more transparent in the collection and release of data. Delegates across the board appeared to be in consent about the need for greater transparency. Italian Minister Scajola specifically called for greater adherence to JODI, which covers data on production, refining, demand and stocks of seven product categories: crude oil, LPG, gasoline, kerosene, diesel oil, fuel oil and total oil. Noe van Hulst from the International Energy Forum Secretariat in his remarks drew attention to his organization's "scorecard" on compliance with JODI and urged participants to undertake a more thorough approach to JODI in the year to come. Kupfer also called for countries represented at the meeting to enhance their reporting to JODI. He noted that CERA's report concluded that the transparency of the market was the greatest factor in minimizing volatility. Fossil Fuel Here to Stay ¶12. (SBU) Investment in renewable energy will create stability in oil markets, as shocks to oil supplies would LONDON 00000227 004 OF 004 have less impact. However, all the participants agreed that fossil fuels will remain the mainstay of energy supply for several decades. Saudi Minister Naimi claimed that fossil fuels will still be 80 percent of energy sources in 2030, but also urged that investment in renewables be undertaken. He stated that Saudi Arabia was interested in CCS and making significant investments in renewables, including solar, and wryly noted that some day, the Saudis will be exporting energy in megawatts as well as barrels. He also noted energy independence as being a fallacy and that ground has been lost due to discriminatory policies and actions by some countries. ¶13. (SBU) PM Brown highlighted the importance of carbon capture and storage (CCS),in his remarks, and noted that Britain will take part in the first of the pilot CCS programs. Norway, the Netherlands, Spain also echoed the importance of CCS as any part of any overall energy strategy. Energy Initiative for Hard Hit Countries ¶14. (SBU) South African Minister Buyelwa Sonjica called for greater assistance to countries hit hardest by excessive oil price volatility, and noted that the Jeddah meeting in June pledged support for these countries. Norway also echoed this call. Italian Minister Scajola noted that Italy, during its 2009 G8 Presidency, intends to include energy poverty, with a particular focus on Africa, as one of its agenda items. China called for greater technology transfer and diffusion of energy efficient technologies to developing countries. Importance of the International Energy Forum ¶15. (SBU) There was a general consensus that the International Energy Forum (IEF) should be the venue for the post-Jeddah and London follow-up consumer-producing dialogue. The UK proposed and the delegates consented to the formation of an experts' working group to examine the questions of oil price volatility, supply and demand. IEF was tasked to identify, and find solutions to, the uncertainties that are hampering investment decisions. The UK suggested (without much support) advancing the 2010 IEF Ministerial, scheduled for April in Mexico. ¶16. (U) DOE cleared this cable January 22. Visit London's Classified Website: http://www.intelink.sgov.gov/wiki/Portal:Unit ed_Kingdom TUTTLE