Atlantic Council Energy & Economic Summit: “New Opportunities in a Dynamic Region”

Session 1: New Gas and Europe’s Energy Security

Steve LeVine,
Washington Correspondent, Quartz, Schwartz Fellow, New America Foundation and Adjunct Professor, Edmund A. Walsh School of Foreign Service (SFS), Georgetown University

His Excellency Yuriy Boyko,
Minister of Fuel and Energy, Ukraine

His Excellency Taner Yildiz,
Minister of Energy and Natural Resources, Republic of Turkey

Rovnag Abdullayev,
President of SOCAR

Bruno Lescoeur, CEO, Edison

Riccardo Puliti,
Managing Director,
Energy and Natural Resources, European Bank for Reconstruction and Development (EBRD)

Fuji Ballroom 1
Swissôtel, The Bosphorus
Istanbul, Turkey

10:30 a.m. – 12:00 p.m.

Date: Thursday, November 15, 2012

Transcript by
Federal News Service
Washington, D.C.

STEVE LEVINE: (In progress) – the session for organizing the two-day event.

If you look at the agenda over the two days, we’re going to be digging down pretty deep into the same themes that we’re going to discuss today. So in this – among this group. And so we’re going to try here to give grand themes, to try to discuss and to explore the meaning behind the big themes, the big trends that are going on.

What we see right now is an inflection point. The energy game on the Caspian Sea has been going on for almost two decades now. And what we’re seeing is a shift from the merely notional to the concrete – the decision in Azerbaijan to finance and to get commercial players behind the TANAP pipeline and a decision to come on the competition between Nabucco West and TAP.

At the same time that those volumes – the 10 bcm – will be coming into Europe – we have other volumes coming in; we have other trends coming at the same time. We have PSA going to be signed next month in Ukraine. There’s the potential for offshore gas and shale gas to come from Ukraine; there’s the potential for natural gas to come up from Iraq. Gas is being drilled and we don’t know – in the East Mediterranean offshore Israel and Cyprus – we don’t where those volumes are going to go, but there’s the potential that that also could come up into Europe.

And then, of course, tomorrow we’re going to have the chief economist of the IEA speak to us again to elaborate on the report that he unveiled this week on global themes going on in natural gas and oil. And the global shakeup under way because of the U.S. shale gas revolution and potential that all of this effort that’s been under way for the last 10 years or so to bring natural gas into Europe, European energy security, may be eclipsed by global trends – unexpected global trends. LNG coming from all over the world into Europe.

So I’m going to introduce – we have three keynote speakers and then we’re going to have two participants who are going to speak as well.

Our first speaking is Taner Yildiz, the minister of Energy and Natural Resources from Turkey. He was introduced at the first session. So without further ado, Mr. Yildiz.

Can you –

TANER YILDIZ: This here?

MR. LEVINE: You can either speak from your seat or if you prefer, you can –

MIN. YILDIZ: (Speaking in Turkish.)

MR. LEVINE: The next speaker will be Rovnag Abdullayev, the president of SOCAR. Mr. Abdullayev was a member of the National Assembly since – has been a member of the National Assembly of Azerbaijan since 2005. He’s also the president of the Azerbaijan Football Federation Association – (laughter).

ROVNAG ABDULLAYEV: (Speaking in Azerbaijani.) (Applause.)

MR. LEVINE: Thank you, Mr. Abdullayev.

Our next speaker is Yuriy Boyko, the minister of Fuel and Energy of Ukraine. Mr. Boyko previously was minister 2006-2007 and he also formerly was chairman of Naftogaz from 2002 to 2005.

Mr. Boyko.

YURIY BOYKO: Thank you. First of all, I want to thank all the organizers of this meeting, because it’s very important to have an opportunity to consider such important questions with colleagues, with people who know these issues and to move forward using this opinion.

And energy world is changing as quickly as the world, totally, and if you consider what’s happened the last three years – especially in gas – in the world, I think that everybody say yes when we shall say that position number one is shale gas revolution in American, which will change the gas map all over the world. It’s happened in America, but it came to Europe and more and more gas is coming to Europe using new opportunities for countries who receive additional resources.

That’s why it gives a good chance to combine interests of consumers, gas and suppliers of gas, because it’s very important to my – to make compromise between consumers and suppliers. For example, we – (inaudible) – are consumers of gas and Mr. Abdullayev, he is a supplier. And find compromise between us and to give an opportunity to companies who produce gas to increase and companies who buy gas not to kill the economy and to move towards and buy more and more gas.

What is the situation in our country? What’s the main task of our country, of our government? First of all, we have very ambitious plans to be energy independent in the next decade. Basing on two – in gas sector, I mean – basing on two main issues. First, we are increasing our domestic production, mainly in the Black Sea region, and we began drilling and we began receiving first gas from new gas fuels recently. And we actually increased from 1 (percent) to 3 percent a year in the next decade from the Black Sea region. We have bought the most new equipment, new drilling platforms, and we shall continue this program. And this is very important, because domestic production for our country is task number one.

Second is shale gas program, which started in our country when companies from America and companies from Europe began – became the – (inaudible) – which was provided by our government in the beginning of this year. What is the most important for these companies to consider that it must be a good policy to explain people that is ecologically – in any case, ecologically is securable programs and securable question, because situation in Europe shows others if companies doesn’t explain their task and doesn’t explain people what they are doing, they couldn’t – I say, they couldn’t achieve the results.

But according to the second issue for our country is our role as a – (inaudible) – country. Today the key element of energy security in Europe, because our transportation system transport more than 100 bcm Russian gas from Europe – from Russia to Europe and of course, different countries in Europe and to our partners in Turkey, also. That’s why with all respect to new programs and new projects, which will be realized in this region, it’s very important to consider and to see the modernization of our transportation system, supported in order to be key element of energy security in Europe, it’s very important not only for our country, but for all partners who are more or less connected in this progress – in this process in this business.

That’s why we consider these questions very seriously and I appreciate European financial institutions, who began realizing program support our transportation system – giving money in this transportation system – and in this way, support energy security in Europe whole.

I wish all the members of this forum good work. I’m sure that it will continue, because it’s very important to have an opportunity to consider questions in such – (inaudible [28:47]). And I’m sure that all of our partners will find solution, find models which give opportunity to be effective to all the nations, to all the countries who are represented here.

Thank you. (Applause.)

MR. LEVINE: Thank you.

I’d like to invite – we’ve finished the three keynotes. I’m going to invite both of the participants to make remarks.

First, Bruno Lescoeur, who is the CEO of Edison. Prior to this, Mr. Lescoeur was the manager of development at EDF Group’s gas operations, which put him in a position to negotiate a cooperate agreement with Gazprom to join the South Stream gas pipeline.

BRUNO LESCOEUR: Minister Yidiz – (inaudible) – distinguished guests of the Atlantic Council, ladies and gentlemen, it’s with great pleasure that I address you today on a crucial issue for new energy policy, the growing link between the prospect of European energy demand and a sound development of gas exports from the Caspian region to the European Union. It’s a topic that’s ranked very high in the geopolitical agenda and it is currently a strategic issue for a number of industrial development projects.

I wish to take the chance of the great expertise that has been gathered by the Atlantic Council in this room in order to discuss some of our views on the general context of the Caspian development.

It is now clear that the world and – (inaudible) – in the gas industry has changed over the last few years. A – (inaudible) – region global gas market has emerged, Southeast Asia will strongly drive prices higher now, following what will happen on the power sector and on the far distance, a broad picture.

It is not a topic for today, but let me recall, having in mind, the result of the shale gas – the gas market equilibrium to shale gas in the U.S. On the gas market equilibrium, our – (inaudible) – an impact could unconventional defragment of gas have on China’s overall energy balance and its South Sea policy.

The U.S., as in Northern America, is emerging as a true energy island, which may continue its (golden ?) and conventional independence of – (inaudible) – for competitive incremental gas sources on the global, liquefied natural gas market. A number of signals tell us that the U.S. energy industry is trying capture the opportunity of their domestic gas refinability into exports routes. As the last presidential campaign unfolded, the focus on domestic manufacturing and energy independence emerged as a key priority, but we shall not forget that the process could theoretically be worth more than 150 billion cubic meters of (liquefaction ?) capacity on more than 15 projects. Each of them could thus represent the potential – (inaudible) – to Europe, comparable to that of the Caspian route.

Europe is in the process of reassessing the role of gas in its energy mix. This later reassessment is largely dependent on how we sustain prospective gas supplies for Europe would be fitting into a more integral, more flexible and ultimately more competitive scenario. Establishing a Caspian connection for European gas supplies will represent a tremendous opportunity.

Let me focus on Europe, the key destination market for sources potentially transiting Turkey. The situation in – (inaudible) – project in the first year of 2000 and the crisis is challenging the traditional energy – (inaudible) – resulting in what has been called by commentators as the lost decade for European gas demand. I’m curious for what our friend – (inaudible) – will say tomorrow that our – while European demand is not foreseeing a steady growth – (inaudible) – any time soon, even taking into account the increasing forecasted impact of energy efficiency both on electricity and gas uses.

Does this mean abandoning hopes for what has been called a golden age of gas in Europe before it’s been started? Of course not. In reality, gas may – gas may continue to be regarded as a key component of the – (inaudible) – throughout the continent and by all member states of the European Union and opportunities lie ahead of us. European energy – but European energy is in reality a patched work of different situations with diverse microeconomic fundamentals, diverging regional prospects in energy demand – (inaudible) – degrees of mixed diversification and indeed diverging energy policies.

Assessments of European security of supply requires, for sure, some regional understanding of market dynamics. In our views, two different set of consideration can therefore be drawn on all – on old and new European countries which I’ll – (inaudible) – in detail. And it has, of course, an impact on the potential Caspian developments. In all of Western Europe, as you all know, volumes remain very high and two sort of volumes – gas volumes consumed in Europe will continue to be consumed in those countries at least until 2013. Still, the combination between the crisis and a significant substitution for gas for power generation and the development of – (inaudible) – is changing the supply pattern. This is why most commentators expect a slight decrease in demand for the next few years and – (inaudible).

Furthermore, the level of diversification reached by many countries is positively improving. And a good example is Edison’s home country, Italy, scoring particularly high in the diversification of resources. And substantial addition have been made over the past decade to import capacities for using liquefied natural gas and on direct producer-consumer links. This process is still ongoing and the investments in incremental import capacity are continuing. What is yet to be fully accomplished in this part of Europe is a functional integrated market. We have seen more important – somewhat important signal of convergence, as for example, on the Italian market vis-à-vis the northwestern European gas market, that the integration process is still ongoing.

When it comes to gas plan developments, like most incremental projects, it is therefore clear that they have to contribute to this process by qualifying in two major dimensions: competitiveness and flexibility with supplies and contractual format competing on a broad international market and on an – (inaudible) – energy market environment.

So diversification – (inaudible) – provided by Caspian sources of gas has to be regarded as important, assuming that this region provides reliable large, progressively larger volumes capable of impacting on a 400 bcm market scenario. This is in fact the way to solve some – (inaudible) – being sold by policymakers. Also, it’s present confederation – (inaudible) the difference, unless you forget the – (inaudible) – picture. When it comes to new Central, Eastern and Southeast Europe, challenges are different. Gas demand could grow significantly, far beyond 150 bcm, triggered by both economic growth and increased substitution of power generation.

This would represent major opportunities for our gas industry, but we need to face another challenge. Eastern European countries are in dire need of diversifying routes and sources. If gas is to – (inaudible) – growth, it’s strategic impact on the economies, security of – (inaudible) – and increased access to multiple vendors are understandably crucial to the policymakers.

Furthermore, they are largely lacking interconnections to the market base in an individual country is often limited. This is particularly true for Southeast Europe, a region most – (inaudible) – gas development, due to its geographical position. Linking the Caspian to this region would represent a major opportunity if it was to provide this country with a multi-source platform in full alignment with the general European priorities, any gas it produced could be – (inaudible) – and are waiting for a limit volume to flow competitively towards markets where they are most needed.

Let me add here first an Edison-specific comment: This is exactly the reason why we have progressively preferred our westbound development ITGI – interconnection Turkey-Greece-Italy – with the dedicated Balkan development IGB, interconnection with Bulgaria. This project appears to be as a clear example of low-hanging fruit of Caspian development and it would allow up to 5 bcm to flow into Bulgaria and Southeast Europe, with a limited and – (inaudible) – investment.

The picture I have drawn, allow me now to derive some conclusion of those features which appear necessary for Caspian development to fit with European market and policy prospects. First and foremost, it is my (thought ?) that the final policy picture is that of a multi-source development allowing to the great array of opportunities – (inaudible) – to flow West down.

Dear Minister Yidiz, I think this is a crucial turning point for Turkey, which had been regarded by its European peers as a rotating platform of our future energy. Turkey is surrounded by opportunities, which will come on stream over time. Shah Deniz in Azerbaijan, but also, further as – other Central Asian sources – (inaudible) – investment of – (inaudible) – and implemented at a speed imaginable only a few years ago.

In this context, Turkey has to be an important and open platform for transit of gas, unless the gas will flow outside Europe – as well as Europe. This is a necessary condition for capital developments to grow over time, until a sensible volume is reached, representing some percent of Europe supplies. This complex Caspian exercise is not coming to such a success competition with more agile energy liquefied natural gas development will, of course, develop.

The second aspect to be emphasized is that Caspian developments have to happen in the new framework of Europe’s energy markets. They have to cope with increased flexibility requirements with a growing interconnected marketplace, with a more integrated competitive area reaching out to the power sector. In this line, the southern corridor has to be initiated within a cooperative and balanced approach between consumer and producers or it will diverge from the essence of what has been a key European Union policy priority.

As you well know, my company, Edison, has been indeed looking into the subject for the past few years, with its presence throughout the Balkan, Greece and Italy and its ITGI project. Now, Edison is the gas platform for the EDF Group – the largest electricity company in European.

Let me conclude recalling that Edison – (inaudible) – gas activities and projects into unique units. We (don’t ?) know its – (inaudible) – and strategy – (inaudible) – to combine with EDF financial strengths, European presence and complementary projects like the terminal in south – northwest Europe or some storage facility – (inaudible) – and the mentioned participation of EDF as a partner in the South Stream project.

This new configuration, completely consistent with the expectation for Italy to become the Southern Europe gas – (inaudible) – as indicated in the Italian energy strategy – allows (inaudible) – prospective in other energies. This is also why we have decided to keep IGI as one of our projects and development. We aware and understanding such a – (inaudible) – consortium and strategically decided to pursue different options, which we believe that this process and its participations – including the governments of Greece, Italy and Turkey – can only benefit from incremental – (inaudible) – should the position evolve from Azerbaijan or other sources require extremely mature and competitive routes ready to start.

It was a privilege to share with all of you today my view and I look forward to the debate. (Applause.)

MR. LEVINE: Thank you very much.

Our next speaker: Riccardo Puliti is the manager – managing director of Energy and Natural Resources for the EBRD.

RICCARDO PULITI: Thank you very much.

First of all, good morning to everybody: ladies and gentlemen. And my first big thank you goes to the Atlantic Council for this very kind invitation.

Now, if we talk about European energy security, we have to talk certainly about the certainty of the – (inaudible) – supply of energy, in this case of gas. But also – especially in a very difficult moment like this in Europe – about competitive pricing and about affordability. We cannot deny that the consumption of power for families in Europe has gone down and continues to go down. So the affordability of energy is very, very important.

I do live in the United Kingdom. And when you’re in the United Kingdom and you listen to people talking about energy (property ?), if a family’s unable to pay for the energy bill, you start being concerned. And the United Kingdom is a country which had – (inaudible) – conversation 200 years. So these are all things that must be kept very much in mind. As a consuming country vis-à-vis a producing country and to – (inaudible) – countries.

In addition, we talk a lot about the unconventional gas revolution in the United States. The truth of the matter is that it hasn’t touched Europe so much at the moment, if not in a very peculiar way. The United States is becoming very auto-sufficient. They don’t need to import gas anymore. So a lot of the gas to be produced in countries like Qatar, in Nigeria, is being redirected elsewhere – either to Asia or to Europe.

The United States actually do export some Atlantic shale gas, but it goes to Japan, since Japan is willing and able to pay high prices due to the permanent shutdown of the nuclear power plants following the Fukushima accident.

So how can Europe achieve competitive pricing and make energy affordability for our residential and industrial companies? And please, competitiveness is very, very important. Our manufacturing base often compete with the United States where the price of gas is what, $3.00 – $3.00 for a million btu’s? So you can see that we really need to work there.

Now, we have traditional partners in terms of suppliers and in terms of transit. And I have to say, we are very happy to work with them. Ukraine is one of them and I have to say the European Bank for Reconstruction and Development is working very much with the Ukrainian government to refurbish and upgrade the transportation pipeline.

You can see, if you Europe was to achieve competitive prices and affordability, we need competition. Competition is the easiest way to achieve these kind of results. In order to agree to have competition, we need very good international agreements with our partners, our neighbors and in other countries that are far, but at the same time, they can provide us with affordable energy. We also need very good roots internally in our market so that – so that energy can flow easily and can be – and can be done affordably through competition.

So what are we trying to do at the European Bank for Reconstruction and Development? Together, I have to say, with the European – (inaudible) – and of course, under the European Union, we are trying to build a system where there are as many suppliers and as many routes as possible. I just mentioned working with Ukraine. And for example, we have been working with Poland. I have to say, Poland is a quick-growing country in energy. We find an energy turning on – (inaudible). And I have to say it is an important feature, because you see, gas can arrive from anywhere. So it’s very important to be quick on your feet – on your feet – and be able to develop your resources as much as possible.

I have to say, EBRD has always been very attentive to the Caspian region and to Turkey and to the Caucasus region and we will continue to do so. We were the first ones to finance Shah Deniz One; we financed the Baku-Tbilisi-Ceyhan oil pipeline; we financed the South Caucasus pipeline among many other pipeline. I want to say we will continue to do so. This is an area where we’ll focus and where we’ll put more and more of our human and financial resources.

We are, of course, looking great attention to Shah Deniz Two. We’ve been approached for some financing and we’ll do that. We have been approached by – (inaudible) – and we are very happy and we will do that. We will finance that. In addition, we’ll finance whoever will be the winner between ITGI and Nabucco West. I’d like to say that it’s very important that the most commercially viable of these projects – or maybe more than that – can be brought to the market, because I think the time for subsidies has really gone. I think we are paying quite much for our energy in Europe.

It is very interesting to see from the gas viewpoint that apparently, Europe is consuming 5 percent more coal than what we used to – to consume in – (inaudible). Why? Because the displace effect in the United States where gas is replacing a lot of coal in power generation, it means that coal is very cheap. So it comes to our countries and creates, if you want, some issues. And the issues are, of course, the very important adverse publicity that we have with our civil society – which is very important – and also, because coal is not the best fuel that goes together with renewables. You don’t have the kind of flexibility that you need to have to trade off with the intermittency of renewables.

So I want to say – I would like to conclude my session to say full support to the corridor south – to the southern corridor, but please don’t forget that there are other possibilities. And it is still – (inaudible) – to move as quick as possible. I was appointed managing director – head of natural resources and energy in 2007 and I started with the southern corridor. Five years later, I’m still here.

So I want to say there are other countries – (inaudible) – very, very quick and (various scouts ?) coming from the north. And there is a policy in the European Union – and we will support it – to build more and more interconnectors among certain countries. We’re working on an interconnector between Bulgaria and Greece and now they want Poland and Slovakia. So you can see that even the southeastern Europe region can be served and serve – (inaudible).

So I would like to conclude to say project duality is key is so we really hope to – I would really be happy to sign a quick financial agreement for all these projects coming from the Caspian via – (inaudible) – as soon as possible.

Thank you. (Applause.)

MR. LEVINE: Thank you very much.

We’re going to go ahead and – I wanted to take the speaker’s privilege to ask the first question. And it’s for Ministers Boyko and Yildiz.

It’s worth taking the long view, until 2006 when we spoke about the natural gas problem, energy security in this region. What we were talking about was the effort to connect the Caucasus and Central Asia to Europe through the construction of pipelines. In 2006 was the cutoff of natural gas from Russia going to Ukraine, which was then passed onto Europe, which is really subtexts of the whole conversation that we’re having today. Energy security really is key to that event.

But if you look at the big trends that the forecasts from all of the organizations that we look at are that the world is becoming awash in natural gas. The forecast by Wood Mackenzie by the year 2018, there’s going to be so much natural gas on the world market, that a lot of – for the producing countries, if they don’t have their projects on the market by then, they may never get to build those projects.

Russia’s situation has changed. It’s gone from a – this point of being the aggressor – the natural gas aggressor in Europe to being in survival mode. Where is it going to sell its natural gas in a situation where Europeans – Europe’s demand for natural gas is dropping. It cannot sell – it hasn’t reached price agreements with China or with Japan.

To what degree – this is the question; sorry for the big windup: To what degree do all of these trends eclipse the rationale behind the policy, behind the energy security policy that we’re talking about today? Do these big trends obviate the need for there to be such an assertive pipeline policy?

Minister Boyko first.

MIN. BOYKO: Thank you. First of all, the situation is fully changed from 2006 in what issues? First, today I think it’s appeared a real gas market in Europe. There’s competitiveness with new interconnect us with better connections between countries – between countries, with new energy terminals with new resources. And today we see that it’s making something, I think, in the next three to five years it will be a real gas market in Europe. It wasn’t before. It was several (contracts) – long distance and with several countries. And many, it was not free resources in this market in 2006 just as today.

Second is new infrastructure, which today is building by companies and countries. I think it – several projects are fully political. To our opinion, South Stream, which is building across Black Sea to Europe with Russian partners with several European companies is mainly political project, because today we have just reliable infrastructure in our country which produces – which transports more than 100 bcm per year. And if it’s necessary, today we’re a key element of energy security in Europe. And to our opinion, it’s much more political question – (inaudible).

What is important to receive new resources to Europe and what is doing by our partners from Azerbaijan and other countries? They bring new resources to Europe. And we are ready to take part in this process and ready to support this project, because the diversification of resources is what, in our opinion, is a very important thing for Europe, just as it would show by Americans from new energy gas, which appeared on the European market. It became lower and lower prices, what is important for the European consumer.

So many things have changed from 2006 and I’m sure that more will be changed in the next three to five years. That is very good. It’s very good, because all the changes are very important and very progressive. Thank you.

MR. LEVINE: Minister Yildiz.

MIN. YILDIZ: (In Turkish.)

MR. LEVINE: All right. I’m going to take – we’re going to take questions now. Please identify who you would like to address your question to and your affiliation.

We don’t have questions. All right. All right, well, let me just ask if – since we have a few minutes – if anyone would like to – we have one. Yes?

Q: Yes. My name is – (inaudible) – and I’m a Turkish journalist.

I (vehemently ?) – recall the role played by the United States in the realization of Baku-Tbilisi-Ceyhan pipeline – Baku-Ceyhan pipeline, oil pipeline. It really – (inaudible). Now, due to this newly acquired position on energy – specifically due to its autonomy on energy – there’s a talk of U.S. disengagement from the Middle East and there’s also a policy of (payment ?) to Asia.

In this respect, where do you position the role of the West, especially as a player behind the scenes, as it seems to play a significant role, will it cease to play a role. This would be, you know, maybe to the Turkish minister as well as to Mr. Abdullayev.

MR. LEVINE: Mr. Abdullayev?

MR. ABDULLAYEV: (In Azerbaijani.)

Q: (In Ukrainian.)

MIN. BOYKO: (In Ukrainian.)

MR. LEVINE: I’m going to take these two questions. Make them short and the answers should be short too. We’re at the very end.

Q: Thank you. I’m – (inaudible) – from Eco Energy, Israel.

In the past seven, eight years we’ve saw energy and natural gas flow – (inaudible) – in the region. Natural gas stopped several times, approaching – (inaudible) – Europe, Egyptian gas halted supply to Jordan and Israel.

I’d like the ministers – especially since Turkey is approaching to be a major supplier of gas to Europe from several areas and several regions, what guarantees – what mechanisms can Europe get that such gas supply will not – (inaudible) in the future. Thank you.

MR. LEVINE: OK. And let’s take this question at the same time.

Q: (In foreign language.)

MR. LEVINE: OK. I’m going to – both of these questions should go to Minister Yildiz and we have to make them short.

MIN. YILDIZ: (In Turkish.)

MR. LEVINE: Let’s thank the speakers. Thank you very much.

And the next session begins in this room in 10 minutes on Kurdistan and in the Lausanne Room on extending Euro-Atlanticism.

Thanks. Thanks for coming. (Applause.)