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THE ATLANTIC COUNCIL OF THE UNITED STATES
BLACK SEA ENERGY & ECONOMIC FORUM 2010
DINNER AND LEADERSHIP SPEAKER:
AN INTEGRATING FUTURE FOR EURASIA
WELCOME/MODERATOR:
FREDERICK KEMPE,
PRESIDENT AND CEO,
ATLANTIC COUNCIL
SPEAKERS:
ALI BABACAN,
DEPUTY PRIME MINISTER AND MINISTER OF STATE FOR FINANCE AND ECONOMY,
REPUBLIC OF TURKEY
PAOLO SCARONI,
CEO,
ENI
WEDNESDAY, SEPTEMBER 29, 2010
Transcript by
Federal News Service
Washington, D.C.
FREDERICK KEMPE: Ladies and gentlemen, as your plates are cleared, now that – now that you’re done with the main course, we’re going to have the real main course. Ladies and gentlemen, Your Excellencies, distinguished guests, thank you for joining us tonight and welcome again to the Atlantic Council Black Sea Energy and Economic Forum.
There are too many Excellencies and plenipotentiaries in the audience for me to list them all, but let me just thank the energy minister of Turkey, of Azerbaijan and Bulgaria for being here. Let me also tip the hat to Atlantic Council board members and international advisory board members – and particularly Gen. Scowcroft, Dr. Brzezinski, Dinu Patriciu – for making all of this possible.
We have two remarkable speakers for this session on the integrating future of Eurasia: Mr. Paolo Scaroni and Deputy Prime Minister Ali Babacan.
Mr. Scaroni will speak first; Mr. Babacan will speak second. And then, with the time that we have remaining, we’ll see if we have some time for a little bit of Q&A with both of them. So listen to the speeches and see where you disagree so that you can ask the most impertinent and provocative questions imaginable.
To start us off, it is my distinct pleasure to introduce Mr. Paolo Scaroni, the CEO of Eni, Italy’s largest industrial company. But more importantly – more importantly about Mr. Scaroni, is what we love is we love soldier-statesmen; we love businessmen-statesmen.
Mr. Scaroni is a businessman-statesman. He operates with 78,000 employees in 77 countries. He has a view that integrates knowledge from all of those countries, and he comes out with quite interesting conceptual thinking about where the world is headed, what are the things that we’re up against.
Eni, like its CEO, is truly global. In the first half of 2010 alone, Eni put five new gas fields into production in Italy, Congo, Algeria, Tunisia, and is prospecting Angola, Venezuela, Pakistan, Norway and Indonesia – and I’m sure I’ve left something out.
Clearly, Mr. Scaroni’s perspective is global, but his nature is also global. He wears many other hats as well. He’s a director of the Columbia Business School. As a graduate of Columbia University, I welcome that, and he also attended Columbia.
He’s a director of the Scala Theater Foundation under the – (inaudible) – environment of France. Just yesterday, Mr. Scaroni took over as deputy chairman of the London Stock Exchange. He is also, as I said, a keen observer of international affairs and particularly how they intersect with energy matters.
So Mr. Scaroni, after having heard you at our inaugural meeting last year in Bucharest, it is a great honor to have you as co-chair again this year and as our launch speaker tonight at this dinner. The stage is yours. (Applause.)
PAOLO SCARONI: Ladies and gentlemen, good evening. I’m particularly pleased to be here tonight because the Black Sea region is crucial to energy security in Europe, and its importance can only grow in years to come.
The reason why the Black Sea is so crucial is that it connects the Caspian oil and gas production area, the European markets, and all the various channels lying in between. Here lots of different interests converge – those of oil and gas producers, those of consumers and those of transit countries.
Decisions taken here will impact not just this region, but the whole of Europe. At Eni, we understand and embrace this. We are an active operator across all the different roles. We have a strong upstream presence in the Caspian Sea through our operation in Kazakhstan and Turkmenistan.
We have more than 20 percent of the European gas market. We also have a strong presence in oil and gas transportation, and last but not least, we control the world’s leading oil service company, Sippin, which is an active builder of oil and gas infrastructure.
A year ago, at the Atlantic Council in Bucharest, I delivered a speech claiming that the priority for this region is to invest in new infrastructure both for oil and for gas. Since then, there have been two developments which are worth looking at carefully.
Take the oil sector first. The need to build additional pipelines to transport Caspian oil has long been apparent, because of the congestion of the Bosporus Straits, whose international legal status was decided in Montreaux in 1936.
At that time, it made perfect sense to allow free transit to any nonmilitary vessel. The Bosporus was crossed by only 20 vessels a day, mostly grain carriers. But today, when crossing ships number 2,000 a day – many of them tankers which carry 3 million barrels a day – barrels of oil a day – the situation is very different.
Should the representatives of Turkey, Australia, Bulgaria, France, Germany, Greece, Japan, Russia, the U.K., and the Balkan states meet again for a modern-day Montreaux, they would surely take into account the long delay of up to a month for crossing and environmental impact of such transit.
Moreover, should the conference take place today, one event of this past year would also be at the forefront of representatives’ mind – the accident in the Gulf of Mexico, which has highlighted the environmental risk posed by oil spills. Any modern-day Montreaux congress would also take this remote but high-profile risk into account.
With Caspian oil production set to increase twofold in the next 10 years, and with global awareness of the risk of oil spills at record highs, the case for finding alternatives routes to get oil into the EU is even stronger than it was a year ago.
Eni is involved in the most advanced of these projects, the Trans-Anatolian Pipeline, together with our friends and partners of Calik, destined to transport Caspian oil from Samsun in the Black Sea to Ceyhan in the Mediterranean.
This project will contribute to reducing the number of tankers crossing the Bosporus up to 50 percent, cutting down delays and, more importantly, improving the Black Sea environment.
Turning now to the gas market, here too in Bucharest I made the case for the need to build alternative pipelines to assure European supply security. Over the last year, the gas market has seen two major developments that seem to indicate the new gas infrastructure is no longer needed.
The first is that following the shale gas revolution in the U.S., the U.S. will now be gas self-sufficient. As a result, the EU is now flooded with LNG, which was previously destined to the U.S. At the same time, we have seen a collapse in the consumption of gas caused by the economic crisis. Demand, which had grown year after year forever, collapsed last year by 6 percent. This combination of increased supply and reduced consumption has knocked down spot prices, which are now almost one-third of what they were in 2008.
This flood of cheap gas has also knocked supply security off the top of the European agenda and, one might argue, the transport infrastructure into Europe would be almost too much in the context of the reduced market.
But if, instead of a two-year view, we take a 10-year view, there are good reasons to believe that cheap gas will actually pave the way for a new cycle of tight gas markets and that concerns about supply security will make a comeback. Gas always had a secular growth trend, as it is the cleanest fossil fuel and the best of combining economic growth with environmental protection.
And gas is now also very cheap. Clean and cheap is a good combination, providing an incentive to switch to gas wherever possible. That’s especially true for power generation, of course, but also for residential heating and even in the oil-dominated transport sector.
To an expected upsurge in demand, we must add the fact that domestic EU production is declining by almost 100 bcm, or 100 billion cubic meters, by 2020. If you add together increasing demand – say, 150 bcm by 2020 – and declining domestic production, you get ballooning import requirements in the region of 250 billion cubic meters by 2020. This would lead European imports to almost double, from today 300 billion cubic meters to 550 billion cubic meters.
The prospect of doubling in European imports by 2020 – and 2020 is tomorrow, in energy terms – will quickly bring supply security concerns right back to the top of the political agenda. The best way of addressing these concerns is to accelerate in our strategy of developing additional supply sources and transit routes. In this context, the Black Sea region will play an even more crucial role going forward as the key piece of the diversification puzzle.
Eni is involved in a series of projects, existing and new, which will contribute to increasing supply security in the years ahead. The first is the Blue Stream, which Eni owns jointly with Gazprom. This strategic pipeline, which connects Russia to Turkey across the Black Sea, carries up to 16 billion cubic meters a year of Russian gas into Turkey.
The second is the multi-billion-euro South Stream pipeline project, which started off as another joint project between Gazprom and Eni, and has since become a multilateral project with the presence of EdF of France. South Stream is designed to annually pump 63 billion cubic meter of gas from Russia into the Bulgarian coast through the Black Sea, and then northward through Serbia and Hungary towards Austria.
The third project is the CNG project from Turkmenistan, designed to transport Turkmen gas – initially three, 4 billion cubic meters a year – by ship across the Caspian to Baku and then to Turkey. This gas will be a new export route for Turkmenistan and also an additional import for Europe, but it would also be free – will be freeing up additional volumes for Europe.
All these projects highlight the importance of Turkey and the Black Sea region to Europe and to its energy security. Politically, Turkey is not yet a member of the EU, but from an energy perspective, Turkey is indeed a member, and a very important one.
Thank you for your attention.
(Applause.)
MR. : (Audio break) – you will all join me in welcoming Deputy Prime Minister Babacan.
(Applause.)
ALI BABACAN: Ladies and gentlemen, distinguished guests, it is our great pleasure and honor to host this very important conference here in Istanbul. And I would like to extend my thanks to the Atlantic Council for organizing this prestigious event here in our country. And also I would like to extend my thanks to Ambassador Wilson for his nice words.
I will try to be as short as possible so that we have time for questions and answers at the end, with the CEO of Eni, the energy company, and we will have to leave at about 9:15 or so.
So first of all, a few words about geopolitics, because when we talk about energy and economy, a lot has to do with geopolitics.
Turkey has very close ties with a very wide region, and increasing its influence and attention to a very wide geography. Turkey is a country in Europe, a country in Asia, a country which has deep access – more and more access, I’ll say – into Africa, a country which has access to Central Asia, a country which is a Caspian country, a Balkan country, a Mediterranean country, a Black Sea country, a Middle East country. And probably history and geography shows us how deeply we are involved with such a wide region.
When we talk about Black Sea area and energy issues – there are some key words when we talk about energy. First of all, stability is very important. Many of the projects that we have been talking about have a lot to do with stability, sustained stability in the countries which are involved.
Cooperation is another key word, peaceful solution of conflicts in the region. We are talking about Turkmenistan and Azerbaijan. There are problems. We are in the future talking about Azerbaijan, Armenia and Turkey, possible important energy routes, communication and transportation routes; how to normalize relations between those three countries.
Security is also very important subject here – how to secure the energy projects that we are thinking of building. And regional ownership is another important concept. Whatever we are going to be doing in this region, it has to be owned by the region. People have to be convinced in the long-term viability of the projects.
And also, let me talk about Black Sea area and energy. Russian Federation is something – an important country in this region which has to be also considered very carefully.
We have been always taking a line of being inclusive when it comes to Russia, and when we talk about projects we have been always emphasizing complementing projects, rather than competing projects. So these are probably important cornerstones of our look at this – at this region.
Energy security is going to be more and more important for many countries, and diversification is another key concept – diversification of resources for the target countries, diversification of markets for the countries who produce oil and gas, and diversification of routes. And countries are more and more understanding about the need of diversification, not putting all the eggs in one basket, so to say.
Maybe this much about the overall approach and I would like to also mention a few words about the Turkish economy. Although energy has a bolder place in the screens that we are seeing, still at the end of the day, especially after the recent crisis, the crisis which we are still kind of going through, economy is another element here.
And then let me quick look at the global economy. There is growth, but there are also many risks involved. High unemployment in many countries is putting pressure on growth rates in many developed nations. High and an increasingly high unemployment rate is a big problem. Also, big deficits, big public debt in developed economies, is going to be another factor, another burden which is going to be there for years and years.
Financial sector, which has been dealt with to a certain extent, but still did not come back to normal times. Many, many banks and other financial sector companies are surviving through enormous and extraordinary support of central banks or treasuries. How to get back to normal is also important there.
And what does Turkey do in this kind of an – macroeconomic, global setting? Because of the reforms that we have done between 2003 to 2006, especially in our banking sector, throughout this recent crisis, Turkish banks were very safe. We didn’t have to transfer any government funds to any bank in Turkey. We didn’t even change our guarantee scheme. Our guarantee scheme is identical to what it was before this recent crisis.
Capital adequacy ratios of Turkish banks are at now 19 percent, which is one of the highest across OECD or many other lists that you can – you can compare. Also, Turkey entered this crisis with a relatively low public debt and relatively low budget deficit, so this gave us some space to maneuver during the peak of the crisis.
And then last year, starting from June, we started fiscal consolidation, much earlier than many countries did. During the time when many European countries were increasing spending, were trying to give fiscal stimulus to their economy, we did the reverse. Because we knew that for those countries where public debt is likely to be considered as a risk area, increasing the deficits does not work. It hurts the credibility, it hurts meeting a level of confidence, and then growth becomes very, very difficult to be attained.
So we followed a very different route from what many European countries did last year. We started fiscal tightening in June. We announced a three-year program last year in September, a program by which we announced how, step by step, we are going to be – we are going to be decreasing our deficits and hence keep our public debt under control.
And right after we announced that program and started to implement it, Turkish credit ratings were upgraded. Four major credit rating agencies upgraded Turkey. One of them upgraded Turkey by two notches, and Turkey is the only country in the world which received a two-notch upgrade throughout this crisis.
Our CDS spread, which is an important measure of risk nowadays, is at record low levels. Right now, Turkish Eurobonds are considered to be safer than those of Italy, Spain, Portugal, Ireland – so those countries have higher CDS spreads rates than Turkey.
And this brought growth, and impressive rates of growth. Our growth started last year during the last quarter. This year, first half of the year, our growth rate is 11 percent. Throughout the year for the full year, markets expect 6.5 to 7.5 percent growth rate for Turkey, and this is the highest figure across Europe. And for 2011, Turkey is expected to be the highest growth country across Europe.
This is the estimation or projection of the European Commission, OECD, IMF, and many other international organizations that we can think about.
Growth also is now decreasing our unemployment rates. Compared to the second quarter of 2009, in the second quarter of 2010 our unemployment figure decreased by 2.6 percent; 1.6 million new jobs were created in Turkey over the 12-month period between the second quarter of 2009 and the second quarter of 2010.
We are experiencing capital flows which is causing lira also to appreciate to certain extent, and in a way the picture that we see here in Turkey is quite opposite of what is seen in rest of Europe. Actually, the OECD secretary-general was in Turkey just about two weeks ago. He announced the new report, the economic outlook of Turkey, and he referred Turkey as an oasis in the middle of a desert. Very different policies last year; very different results this year.
And the success of Turkey in itself is attracting a lot of attention throughout this region. We are helping quite a few countries with their own reform processes, including Greece, Syria; we are very active now in Iraq, not only about economic matters, but also how to reshape the politics of Iraq. We are very active in Afghanistan for their democratization process, so to say, and our foreign policy overall is getting quite a wide coverage.
So strong economy inside, success inside is helping us to be also a source of inspiration in this region. So what is the secret? What is the formula here? That was asked to me many times between 2002 to 2006, let’s say, during that fast recovery period, and also it’s been asked a lot over the last one-year period. What is the secret? What is the formula?
And my answer is just one word: it is confidence. When we have confidence, economy gets very easy to be managed. But when there is no confidence, things could become very messy. Talking about confidence, it is not just economic policies. It is also the political stability in the country. The continuity of the policies, it’s the predictability of what the government will do and will not do.
One important risk area right now that we see in terms of the global economy is weakened governments, administrations in many major economies. During the difficult times, sometimes we have to make very difficult decisions and take – making those difficult decisions, taking those difficult steps need strong governments.
In Europe, in many other developed nations, we are observing problems – differences between administrations and parliaments, minority governments, coalition governments which don’t have coherence among them. And this is a source of worry for us.
But in Turkey, unlike many other examples, we are a strong, one-party government which has in a way reconfirmed its support by the people, by the most recent referendum that we had in Turkey, a referendum by which we’ve increased the quality of our democracy. We have made sure that now our democracy is going to continue to be a civil democracy, not a democracy being interrupted from time to time by military interventions and so forth.
And also, the last referendum opened the way for Turkey to do more judicial reforms. We want Turkey to be truly a state of law. We have done many reforms on the economy side, but our judicial reforms are lagging. We couldn’t do much, but after this referendum, after the major changes, amendments in our constitution, now the way is open for more judicial reforms in Turkey, which is going to make our country more and more a state of law.
So I should stop here with respect to time, and thank you for your attention and interest. Thanks. (Applause.)
MR. KEMPE: Thank you very much. This is a real treat. We believe in public-private partnership. I can think of nothing more public than one of the fastest-growing economies on Earth.
We were having – one of the wonderful things about my job is I get to overhear conversations. And we were solving the world’s problems with Ahmet Calik and Paolo Scaroni and Brent Scowcroft and Zbigniew Brzezinski and Minister Babacan. I think we solved most of the problems of the world.
But so you have someone running one of the fastest-growing economies on Earth. You have someone running one of the most successful companies on Earth in 77 countries, 78,000 employees. So let me turn to Minister Babacan first and then to Mr. Scaroni.
You talked quite convincingly about Turkey’s economic transformation, but I’d like you to look ahead five, 10 years. There are risks. You’ve talked about all the regions you’re part of, and every one of them is a relatively precarious region. Iran, Iraq – there are all sorts of potential problems that could come up.
What do you worry about most? When you look at all the economic success you’ve had and you look at the economy of Turkey and the region, A, what do you worry about most, but B, when you sit down with your fellow leaders, what do you want them to make priority number one, priority number two, when you’re sitting down with your colleagues?
MR. BABACAN: What worries us the most? I think in terms of economic outlook, the situation in the European Union, more specifically in the Eurozone, is a big source of worry.
The big public debt which has been accumulated during this crisis, the degenerating demographic structure of European countries, and the fact that they are so much integrated with the European Union in terms of trade flows, in terms of finance flows, any problems in the European Union will affect us.
We are also worried about what is going to happen in the United States in terms of, especially, financial flows and the stability of the global economy. What will happen in the U.S. economy is a source of worry for us. That’s on the economic side.
MR. KEMPE: And a source of worry because of the debt situation? A source of worry because of political leadership? Why is the U.S. a source of worry for you, particularly if you look at your economic balances? They’re not that driven by the United States.
MR. BABACAN: In terms of trade, yes. But in terms of financial flows, whatever can go wrong in the U.S. will affect Europe, will affect Turkey. It has been so in the crisis of 2008-2009. Europe was influenced; Turkey was influenced. And a possible second dip, which is being talked about. Some people assess a probability of 1 percent. Some people assess a probability of 60 or 70 percent. And a second dip originating from the U.S. will have influence in this region as well.
MR. KEMPE: And does your government assess a probability to that?
MR. BABACAN: No, we’re just preparing – prepare ourselves for different scenarios so that we have packages or measures ready with us. Whichever scenario we come across, we are ready to implement the measures that we are preparing. That’s about the economy.
On the political side, what worries us the most is probably, number one, the Israeli-Palestinian conflict because it’s at the core of many problems in this region, and also the ongoing discussions about Iran’s nuclear program. Probably that is another source of worry for us.
MR. KEMPE: And source of worry in Iran – just very quickly, because I want to turn to Mr. Scaroni – a source of worry, Iran is a source of worry in what sense?
MR. BABACAN: Iran’s nuclear program, which is at the center of many discussions now. And what is being done, what kind of policy is being implemented nowadays and where we are going, in a way, is a source of worry for us. Because we believe that diplomacy is the best way to solve problems, and we are not observing that diplomacy is working well enough.
What we are talking about is sanctions and the possibility of war. Diplomacy is the track that is not working well, and that’s why Turkey is trying to be very active to make sure that we are trying to find a diplomatic way because the other ways, other routes, are very dangerous.
MR. KEMPE: Paolo Scaroni, we have gone out of our way at the Atlantic Council to open up a platform in Washington for globally engaged – particularly European, but not only European – business leaders, partly because we don’t think your voices are being heard enough in the circles of power. You operate in the real world, and you operate in the real world in a daily way.
So first of all, I wouldn’t mind if you responded somewhat to what Minister Babacan is taking about his concerns – and feel free to do that. But more specifically, I found what you were saying about the gas market quite interesting. And there is a geopolitics to energy that sort of outstrips the geopolitics of any other product. And one is now talking about shale gas as a great sort of geopolitical shift moment. Is it?
And then, secondarily, your – you’ve been prescribing that the Europeans should get more networked, even this region should be more networked in gas and therefore you wouldn’t have some of the vulnerabilities that we’ve seen in the past.
Why isn’t that happening? What stops that from happening? What is your vision and what would cause it to happen?
So first of all, response if you have any. Second of all, shale gas, alternative gas; is it a geopolitical shift of a dramatic dimension? And then why can’t one actually create a true Europe in terms of a gas network?
MR. SCARONI: Well, a lot of questions.
MR. KEMPE: Yes.
MR. SCARONI: Let me try first to deal with my – the kind of subjects that I know better; that is, I leave to the minister his worries about the global economies, debt, public debt, et cetera. And I share his view; this is an issue.
Having said that, I’m very optimistic about the future of the economy because I’m not a person that thinks that we are heading towards a double dip of the economy in Europe and in the U.S. I think that the worst is behind us, and we should be optimistic, more optimistic than a couple of years ago, about our future.
Having said that, let me talk about gas. Now, in the last 18 months, in the world of gas, has happened something that made this market, which was so predictable that it was even boring, to become absolutely a nightmare for the people who operate in this business.
The origin of this, apart from the crisis, has been the shale gas in the U.S. The shale gas has made the U.S., which was supposed to import growing quantities of LNG, a market self-sufficient, and somebody even thinks that one day the U.S. might export shale gas in the rest of the world. For this reason, prices have been collapsing. There is gas everywhere – too much everywhere. And nobody really understands where the market is heading to.
Now, coming from this, there are two issues that are worth exploring for a few seconds. The first one: Is this shale gas revolution a U.S. phenomenon, or we should expect shale gas to become available in Europe, in China, in Japan or in other countries which are big consumers of gas? Now, focusing for a second on Europe, I personally do not think that shale gas will play in Europe a similar role to the U.S., essentially for, I would say for three reasons.
The first one is that you might not know that, but the U.S. is the only one country in the world where if you own land, you own everything which is underneath. In the rest of the world, this is not true. You own the land, but the underneath is of the government.
MR. KEMPE: So if I have a shale gas find on my piece of property –
MR. SCARONI: It’s not yours.
MR. KEMPE: Like, in Poland.
MR. SCARONI: In Poland, it’s not yours.
MR. KEMPE: It’s not yours.
MR. SCARONI: In the U.S., it is yours. Now, of course, this makes the life more complex, because you know that to exploit the shale gas you have to deal with two entities – the owner of the land and the government – everywhere but the U.S. And this is the first reason.
Now, the second reason is that in Europe, and certainly in Western Europe, population is so dense that we imagine the kind of very – how do you say, intrusive activity of producing shale gas –
MR. KEMPE: And it is intrusive.
MR. SCARONI: It is very intrusive. In the suburbs of Paris or of Milan, is unthinkable. And this makes Western Europe at least not a place where shale gas is likely to happen. It’s more likely to happen in countries such Poland or Ukraine, which presents similar situation to the U.S.
Now, the third reason is that the shale gas revolution is not a technological breakthrough – nothing really new. It has been simply the use of different technology, very well known, in a cheap and effective way, using effective suppliers, effective man force, effective technicians. And these kinds of things – you will find them in Texas. Is very hard to find them outside the U.S., simply because the industry has been developing so much in the U.S. and much less so in the rest of the world.
So the shale gas, even it’s exploitable, will probably cost more outside the U.S. than in the U.S. Now, this makes that for at least the next 10 years, we should not expect major quantities of shale gas outside the U.S. Having said that, we are investing in that and we are planning to invest in shale gas outside the U.S., but having a long-term view.
Now, the second quick point, all around gas, is about this – the role of Russia as a supplier of European gas. This is a theme which pops up from time to time, how important is Russia for Europe? Now, of course, Russia is a very important supplier. It supplies roughly 140 billion cubic meters of gas out of 550 billion gas of consumption. So is the major –
MR. KEMPE: But you have also said yourself, even more important, Eastern Europe where some markets it’s 100 percent.
MR. SCARONI: Yes, absolutely.
Now, the point is that this – that this supply isn’t even across the European Union. There are countries such as Bulgaria or Slovakia or Estonia which leave out of 100 percent – 100 percent of their gas is Russian gas. And there are countries such as Spain, which do not import at all Russian gas.
Now, the quick conclusion of all this is that if Europe would interconnect to different countries, so if European Union would interconnect the union in such a way that you can bring gas from Spain into Poland and from Czech Republic into the U.K., then Europe could survive a winter without any Russian gas at all.
So when we talk about supply security, on top of thinking about how many pipelines should be build, do we need shale gas or do we need more regasifiers, we should focus on what is completely in the hands of the Europeans – the European Union – which is to interconnect the European countries.
MR. KEMPE: And what stops that? Why doesn’t that –
MR. SCARONI: Well, that’s a good question. I don’t have an answer for that. (Laughter.)
MR. KEMPE: (Chuckles.) I’m going to – we have very limited time, but I’m going to turn to the audience for one question for Minister Babacan, one question for Mr. Scaroni. Do I see takers? Please. And if you could please identify yourself and to whom you want to address a question.
Q: This is to Mr. Scaroni, and it’s Professor Alan Riley, from City University, London. My question is about shale gas. And my argument really is that I think there’s a danger of being too pessimistic. Yes, it’s of course true that America is different, but the geology – we are on the same planet.
And while it’s true that, you know, there’s going to be no drilling in the Paris Basin, just because there’ll be no shale gas rigs outside Notre Dame, Eastern Europe is not as populated; there’s not such a density there. They’ve got greater energy security issues.
You’re also seeing in the U.K. and in a number of other states a significant development of coalbed – of coalbed methane gas. They’re talking, in the U.K., by 2020 about 20 percent of gas production will be from coalbed alone.
So you see two things happening. One is coalbed on one side in the West and then shale gas in the East. And while there are issues there and the land geology issues are difficult, you can create tax regimes to encourage the development of the gas. You could provide special payments for landowners. There are ways with which you can actually effectively mimic the – if you like, the economy of the Barnett Shale to actually encourage this, very, very much so.
And I think one of the other things which we are underestimating, and I think this is very, very serious, is that the CO2 climate change policies of the European Union are going to make it very, very difficult to be reached with the economic crisis. We can’t afford all the renewables.
What we can afford is if we switch to gas, we can switch off the coal-fired power stations and see if then we cut CO2. So the demand for gas and for cheap gas is there. And that creates a really powerful government incentive. So my point would be is perhaps you’re being a little too pessimistic about –
MR. KEMPE: And you’re saying it’s going to move faster than Mr. Scaroni’s saying.
Q: Yes. That was my point.
MR. KEMPE: Store that question, and I – and let me take a question. Let me, first of all, welcome Minister Traykov from Bulgaria, who came to our first conference. Sadly, he has to leave early tomorrow morning, but it is an honor for us to have you here. Thank you for joining us this evening for dinner.
And please, if you could – if we can get a microphone to the Bulgarian minister. Thank you very much.
TRAYCHO TRAYKOV: Thank you, Mr. Kempe. Distinguished Minister Babacan, when you were making your interesting comments about how Turkey is developing, I couldn’t help but drawing comparisons with Bulgaria.
Like Turkey, we have very low public debt. It’s only about 15 percent of the GDP, which makes it one of the most in the EU. We have also had two notches public credit rating increase in the last 14 months. We have decreased unemployment by 1 percent.
There are rising exports, but still weak growth. And the weak growth is probably very likely due to, as you rightly pointed out, due to insufficient confidence.
And now there is the debate, how do you encourage confidence? And what is the role of active on-hand industrial policy in this? Now, I’d be interested in hearing your view on that. Should you pick champions? Should you leave it completely to the markets?
So I’d be very – Mr. Scaroni, there was an interesting reading that appeared recently and that’s the energy strategy of Germany. And as you know, it foresees 40 percent of energy coming from renewable energy sources by 2030 and 80 percent coming by – from renewable energy sources in 2050. Where does this leave natural gas?
MR. KEMPE: Minister Traykov, thank you for the question. Thank you for being here.
So how do you encourage confidence? And let me add to that for your question, though we have to keep it quite brief, is, are you satisfied with the integration of this region?
There’s been some talk today, after Prime Minister Erdogan’s speech, of whether one doesn’t need – and this is something that Dinu Patriciu has argued for – far deeper integration, economic integration of the Black Sea countries. But first of all, to Mr. Scaroni.
MR. SCARONI: Well, the question of the gentleman is not really a question. He thinks that gas shales and coalbed would be faster in developing than I think. That’s possible. That’s possible. I think that probably the countries in which it’s worth to invest are Eastern European countries first, which is what we are investigating. I still think it will take a fairly long time to replicate the industrial conditions of the U.S. in using the technologies we need to use for shale gas.
MR. KEMPE: But you’re not questioning the potential geopolitical impact.
MR. SCARONI: No, no.
MR. KEMPE: You’re actually saying yes, it could be – (cross talk) – you’re just saying that there are –
MR. SCARONI: No, I agree with the gentleman that everywhere where we have coal mines, we have coalbed methane. So that’s for sure.
I also think that particularly in Eastern Europe there must be some shale gas, as I think there is some shale gas or what we call tight gas, which is a similar kind of gas, in North Africa, to the point that we’re investing in it and we are developing it.
In terms of the costs of producing it, these costs depends very much from the efficiency you get and to replicate the efficiency that you can have in Texas does not seem to me very easy. It would require some time.
Moving now to maybe the question about renewables, well, the European Union is fixing quite ambitious targets. When the targets for 2020 are already pretty ambitious, when we fix targets on 2050, God only knows if they’re realistic or not, frankly. So yes, you can say 80; I can say 90. He says 70, but 2050 is very hard to understand if we will get there.
What we do know is that the technologies we have attained for renewables, particularly wind and solar, are so little in terms of the results they give in order to replace hydrocarbons, that it’s hard to believe that we can reach easily those targets, particularly solar energy. We are using technologies which are 70 years old, producing very little energy and very – not dense enough. You need a lot of surface to produce very little quantity of electricity.
And on top of that, you have noncontinuous energy. So you have to solve the problem of storage of electricity, which is another problem that technology is not yet capable of solving.
So yes, we need to work in that direction. To be really sure that the European Union will be able to meet these very ambitious targets, that’s another story.
MR. KEMPE: Thank you for that very fascinating answer. Minister Babacan?
MR. BABACAN: Well, the question was about confidence, how to – how to build it.
MR. KEMPE: Can everyone hear that? Okay, thank you.
MR. BABACAN: It is something which takes time to build, but it is very easy and fast to lose. It is first confidence with people of the country so that they will have the trust to spend what they have in their hands, so that they can spend their income. But our growth is coming mainly from private-sector investments and private consumption. Exports are not doing well because of the situation in Europe. (Inaudible.)
MR. KEMPE: I think it fell behind. Is it there? There it is. Sorry about that.
MR. BABACAN: And once companies feel confident, then they continue to invest. And when banks feel confidence, they lend money. And how to lend money – we need strong banks to continue lending.
Our total credit volume increased by almost one-third during the last one-year period – consumer credits, commercial credits, and so forth. Whereas we are observing many countries where the banks, maybe they do have the liquidity, but they don’t feel confident enough to lend.
And overall, how to build confidence is making promises and fulfilling them, setting credible targets and hitting them, announcing policies and implementing them.
It has a lot to do with also the continuity, and that we have frequent changes of government or when we have frequent elections in countries, then continuity becomes a problem. Because for a government to deliver, we need the time. We make promises, but do we have enough time to deliver is also another important element here.
That’s why our stock market responded very positively to the outcome of the referendum, because the return was a signal that the government is there, it’s strong, and it will continue to strong and maybe for the next elections, the general elections of 2011, it is now more likely that we will continue as a single-party government.
Because if there’s a likelihood of a change of government, then it means there’s a likelihood of change of policies. So no matter what you promise, is easily reversed by another government which could come in. So I think continuity is here important, and also a track record of making promises and delivering.
When we look back and study our documents of 2001, when we first founded the party, or when you look at our official documents of election manifesto of 2002 or at the government program of 2002 and all the other economic program documents, you will see continuity with what we were mentioning is our main principles back in 2001. We are still insisting on the very same principles.
And also building a relationship of trust in the private sector, knowing that the government is private-sector-oriented, knowing that the reforms will follow and the reforms will be for pro-market economy. They’ll be pro-business. There may be problems, but what the business are interested in, what the companies are interested in, is not just for today’s problems, but how is the trend? Are the problems being resolved? Is the government business-friendly or not? I think these also play a very important role.
And also in making the system more transparent, easier to understand, even for international investors – red tape, also transparency in implementation of the policies, preparing equal footing and equal opportunity for companies to act. I think all these, as a whole, play an important role to build and increase confidence.
MR. KEMPE: And let me underscore that last point of transparency. First of all, I want to thank both of these gentlemen. Your time is probably more valuable than anything you have, and you’ve shared a lot of it with us this evening. We realize how many other demands you have on your time; you really honored us by being here.
This engagement tomorrow and then into Friday, what will make this initiative successful, which will make this forum successful is if everyone here engages. When you see questions you have, ask them. When you see things we ought to do better, tell us.
But I must say, I think today, starting with when you start a forum with the prime minister of Turkey and the prime minister of Georgia getting you going with a high-level CEO panel we had, and then – and then to have this kind of evening with two such sound, clear thinkers giving us the public-private view.
Thank you to both of you and thank you to all of you for getting us off to such a great start.
MR. BABACAN: Thank you. (Applause.)
(END)