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Pauline Neville-Jones: Securing our Energy Supplies

Until now, I think we have always tended to assume that our resource supplies would be constant. When you got home after work, did you stop to think that your fridge might not be full?  Or that your bedroom light might not turn on when you flipped the light switch?

But while we have been relatively complacent, the chase for commodities has been going on for years. 

And we are in danger of finding that other players in world markets are stealing a march.

There are two prime reasons for this hot competition: sharp reduction over the last decade in abundance of supply over demand, and increasing difficulty and cost of accessing new resources.

<h2>The chase for commodities</h2>

Food and water are often cited. 

Water is worthy of a speech all to itself and I shall not deal with it at all today. 

But before turning to energy, where I shall focus my remarks, I do want to say some words about food - an example of increasingly tight commodity markets affecting us directly in prosperous Europe.

The World Bank predicts that, by 2030, demand for food will increase by fifty per cent.  Even if demand is not that great, existing demographic trends do mean unavoidable massive increases in demand. But how will suppliers meet it, when climate change and poor weather conditions can reduce crop output?  Will investment in new technologies to achieve greater efficiencies be the key? 

I am old enough to recall the Club of Rome predicting in the seventies that the world would run out of food.  It did not, despite the immense population increase since then. We just need to remember that this time there are extra complications in the way of taking the right decisions to feed hungry mouths.

Countries like Saudi Arabia and China have responded to the prospect of increased costs and the possibility of shortages by buying tracts of agricultural land in places like Africa.  Since 2007, China has leased or purchased 2 million hectares of foreign farmland.  That makes other countries' problems greater as they are not securing tracts of land for trading purposes, but for the direct shipment of products to their own populations.

Other suppliers are beginning to protect their own domestic food markets at the expense of exports.  This is a worrying development for those of us who believe in free trade.  This country has struggled for years to free the European Union of the incubus of elevated CAP price levels and protected markets. 

Personally I can see a need to change the produce mix in European agriculture for carbon footprint as well as food security reasons.  But I can also see a furious argument looming about the right course of action with security arguments being adduced as reasons to hang on to, rather than reduce, CAP subsidies.  Indeed, we all know it is not at all fanciful to see in the global economic downturn the lurking danger of massively increased protectionism. 

Turning to energy, let me give you some measure of the long term outlook. 

The US Energy Information Administration estimates that there will be an average of two percent annual growth in global oil demand over the years ahead, along with, conservatively, a three percent natural decline in production from existing reserves.  

That indicates long term continuing high prices tempting producers to rig the market structurally in their favour. 

I suppose one could say that the OPEC cartel has become an established part of the oil trading scene.  To some extent at least, Saudi pumping policies have mitigated this major restraint on free trade. But efforts are now being made in some quarters to cartelise gas. In October we learnt that Russia wanted to form a big gas Troika with Iran and Qatar. Between them, these three countries hold 60% of known gas reserves. 

As for the immediate future, some people might imagine that the chase for resources would slacken with the credit crunch and the global downturn.  Less demand, they would argue, means less pressure on commodities.   This may be true in some cases.  But in the case of energy, in particular, I would argue the opposite.

The downturn could actually aggravate our problems by holding back necessary investment for better equilibrium between supply and demand in the longer term. 

And a low growth international economy could well in my view actually aggravate, at least in the medium and long term, the availability and prices.

So while I would argue that our greatest danger lies in politically created energy shortages, I would also argue that the current economic downturn is more hostile to creating a more secure energy market condition for importing countries than the tight market conditions that recently prevailed.  If I am right, we need more urgently than ever a strategy to meet the growing challenge of energy supply.

<h2>The UK's changing energy position</h2>

For the UK, the background is of course our emerging fossil fuel dependence. 

Three weeks ago my Shadow Cabinet colleague, Greg Clark, launched our Low Carbon Economy Green Paper.

That paper had at its heart the idea that we can't go on as we are - the belief, deeply felt and closely argued, that we need to change the way we generate and use energy.

Of course, climate change and global warming drive this imperative.  But, as David Cameron said quite clearly at the launch, there is another reason why we need change in this area - just as important, just as hard-headed.

After decades as an energy-secure nation, safely reliant on our fossil fuel supplies from the North Sea, we have now added ourselves to the long list of import-dependent nations.  

The UK became a net natural gas importer in 2005 and moved to a net deficit in oil in 2006.  

As the UK comes to rely more on foreign imports of hydrocarbons, our energy security will be tied in with the ebb and flow of an erratic global market.  We will be forced to compete for steadily less easily available oil and gas resources. 

Quite irrespective of price levels determined by economic considerations, this has a clear bearing on our national security.  Heavy reliance on foreign suppliers - many of them owned by countries with unstable or unfriendly governments - for one of our basic everyday requirements reduces the resilience of UK Inc. 

<h2>The impact of the economic crisis on energy supply</h2>

The prospect of politically created shortages is largely known ground. 

What is less widely understood, it seems to me, is the potentially adverse effect on the UK's future balance of supply and demand - and thus of our energy security - of the economic downturn.  

The relationship between economics and security is by no means clear cut.  The free traders of the nineteenth century were wrong when they predicted that economic integration would lead to world peace. 

But as it takes hold, the recession is showing signs of aggravating insecurity generally. 

Demonstrations and direct action have already begun in developed Western countries and could spread further round the world.  Governments faced by political confrontation tend to turn inwards at the expense of international cooperation and long term policy making. Given the numerous and urgent international problems awaiting resolution, leadership of a high order will be required to prevent domestic politics crowding out global issues.

And what of the economic effects of the downturn on energy policy?    Let me give three instances of the sort of worries I have. 

First, the massive drop in oil prices makes diversification into other energy technologies, such as wind farms, much less immediately cost effective. 

The rational economic response is to delay investment until economic conditions change. But the joker in the pack is climate change:  it tells us that we cannot sensibly postpone diversification until the economic indicators are more much more favourable.  But it may well be hard to avoid a slow down. 

Secondly, as the credit crunch tightens, so do the funds for the massive new investment required for the next generation of oil fields such as those in the High North.  

We may not need their production quite so soon, but need it we surely will, just as we already urgently need new investment in one of the industry bottlenecks: refining capacity.  But it is hard to see where the finance for this future need will come from now - condemning us, as growth restarts, to the danger of excessive and volatile oil and gas prices, which bring in their train price spikes and short term supply crises. 

What I am saying is not just theory. One of the protections we need against such markets is adequate storage to see us through emergencies.  But our storage capacity is feeble - while Germany has 99 days of gas storage capacity, and France has 122 days, Britain has at present just 15 days. 

So what are we to make of the news that, at the beginning of January, energy groups wrote to the Government to warn that it was currently uneconomic to build storage facilities?  

Portland Gas has suspended plans to build a storage facility, and Stag Energy is finding it difficult to raise money for the Gateway Project to build storage under the Irish Sea.

Even on the Government's own optimistic projections, by 2020 we will still only have only around 30 days.  We should not - and need not - have got into this position of serious and prolonged vulnerability.  Which brings me to my third example of the dangers we now face. 

Russia's action in halting supplies to Ukraine could well have happened anyway.  These two governments do not exactly like each other. And playing cat and mouse power politics through resource nationalism is a heady idea for Moscow.

Putin himself has attributed Russian action in Ukraine to be the result, 'to a significant extent, of the activities of the previous US administration and the European Union which supported it'.  The aim was to teach a political lesson, not just to Ukraine, but to those whose policies get in the way of Moscow's geopolitical ambitions.  These are straight political arguments.  Not economic or market considerations. 

I reckon that in this instance the Russians may, even from their own point of view, have overdone it.  The political nature of their motives was exposed and those they intended to impress will, I hope, have drawn some conclusions for the long term not intended by Moscow.  But on the best of scenarios, greater energy independence is sometime off and history does not suggest to me that in the meantime this will stop Moscow seizing opportunities to exploit our dependence.  This is still the country of the opportunistic zero sum game in international relations.  

And at present I think there is another driver, deriving directly from the effects of the economic downturn on Russian energy revenues. 

As Russia - not least the Oligarchs - ran low on roubles, hiking the price of gas to a vulnerable client was an obvious gambit.  It would be reassuring if, following this sort of Russian behaviour, it looked as if the Nabucco pipeline, which would give Europe a non Russian transit option, was a real starter.  Quite apart from the politics I fear that in the downturn lack of investment funds will be an added problem. 

<h2>The UK's supply position</h2>

The UK was lucky that this dispute did not affect us directly.  But indirectly, of course it did and does.  

Insecurity can take many forms and lack of political solidarity is one of them.  Being on your own is lonely and destabilising.  Ask the Icelanders.  The UK is no Iceland, and the EU no total pushover.  But there has been singular lack of solidarity in the European Union over relations with Russia.

The government will of course point out that the UK's main and growing gas supplier is Norway.  And it is indeed a relief that such a supplier is on our doorstep and that delivery is direct and physically secure in normal circumstances.  

In 2007, 70 per cent of our gross gas imports came from Norway.  In the years ahead, our dependence on Norwegian supplies is set to increase significantly. 

But while relying on Norway is indeed safer than many other options on the table, with our contract terms - purchase on the spot market - security of supply is not absolute.

By contrast with the UK, Statoil Hydro, the state-owned Norwegian supplier, has long-term contracts with its continental European customers.   Thus, in a crisis or a situation giving rise to shortages, the UK could miss out.  The executive vice president Thor Otto Lohne of the Norwegian pipeline company, Gassco, has warned the Government in terms: 'The UK is a secondary priority....like it or not, that is a fact'.  

So we need a strategy.  And urgently.

<h2>We need a strategy</h2>

In a vague way, Tony Blair noticed that there was a problem.  In 2006 he said that 'in the future, energy security will be almost as important as defence to the overall security of a country's interest'.  But the government has never developed a strategy.  

There are certainly no easy answers and no quick solutions, but it is required of government to take the lead.

Yet, instead of fostering conservation of fossil fuels to slow down the onset of dependence and reduce the carbon footprint, under Labour the UK pumped as hard as ever.  

And instead of grasping the admittedly politically sensitive issue of nuclear, the government ducked.  The Conservative party supports nuclear energy as part of the UK's energy mix- provided only that the industry does not become a burden on the taxpayer.

So, for all their talk about greenery and some wind farms, there has been no noticeable change at all in our carbon-dependence under the Labour Government.  

And, as I have said, the downturn will make changing this pattern of behaviour all the harder.  But change it we must. 

What we need, urgently, is a stronger, more focused, more achievable and integrated policy.  One that is carried through into action.

In the Conservative Party, the Energy Team under Greg Clark has already set out our plan for achieving a decarbonised economy by 2050.  Our proposals emphasise:

carbon capture and storage,
renewables, and in particular offshore wind,
greater energy efficiency through a smart grid, and
the decentralisation of energy generation through feed-in tariffs.

There is nothing soft or woolly about this thinking - to be safe in the long term, we need to go green. 

But in the short and medium term, before we get to the stage where our energy mix itself provides a high level of security, a series of other measures must be taken to redress the insecure features of our energy supply.

<h2>Energy and national security</h2>

Government should not, of course, substitute itself for the powerful energy industry we have.  Our oil and gas majors are some of the most important and best run in the world.  In the national interest they need to stay this way.  

But we need to recognise three things.  

First, that their commercial interests and the interests of the nation may not always be aligned.  Frankly, storage against emergencies is a case in point. We cannot lay total responsibility for security of supply on the corporates.

Secondly, it is not the role of energy companies to determine the choices society makes on energy trade offs that need to be made in the name of climate change.  These are big value based decisions and leadership properly belongs to government. 

Thirdly, in a world where for many decades the relationship between energy demand and supply is destined to remain tight, and where the greater part - some say up to 90% - of the world's known reserves are controlled by government owned enterprises, HMG, as the government of an energy importing nation, cannot just leave everything to the market.  It should not substitute itself but it needs to set itself up better than is the case at present.

For these reasons, energy supply is clearly an important part of our 'national security'.  As you know, National security' is a broad concept not restricted these days to matters of war and peace.  So government must have the capacity to assess availability of essential commodities and security of their supply, and to look ahead at potential global developments in the economic as well as other spheres.  This horizon scanning should be normal tool of everyday government.

Let me look, now, at three specific policies a National Security Council would develop and monitor to work alongside our decarbonisation strategy.  

<h2>Energy and refocusing foreign policy </h2>

First, we need explicitly to recognise the importance of commodities and raw materials in the setting and implementation of the FCO's policy priorities round the world. 

An obvious way of increasing security of supply is to promote diversity.  Just as Churchill said at the height of the hydrocarbon age that 'safety and certainty in oil lie in variety and variety alone', so in the post-hydrocarbon age we need to encourage a wider range of suppliers.  

FCO officials have a remit in energy issues, but I would describe it as vague and undirected.  It needs to become more purposive and over time we may need to establish a more conscious role for government than we have today in relation to other important industrial commodities.  We need concerted action directed at keeping markets free and unobstructed and supplies flowing. 

But this is not just an economic or commercial matter. Students of the Caucasus will know that Nagorno Karabakh, over which there is a frozen conflict, lies close to the crucial Baku-Tblisi Ceyhan pipeline which comes to Europe.  Should it not be a high priority to promote a settlement through the OSCE?   

And I would say that the "Stans" and the GCC countries should be candidates for further upgrades in our foreign policy priorities.  It may be thought that our relations with the Gulf countries are pretty good, so where is the problem?  All I can say is that they feel neglected.  Good idea too, I would say, that we should not see the emergence of a gas cartel with a Gulf member. 

<h2>Strengthening infrastructure & improving resilience</h2>

Let me turn now to my second policy: improving the resilience of our critical infrastructure.

The nation's resilience should not be just about managing the consequences of shortages or of extreme events, but of providing against them in a cost effective manner. 

So alongside assessing the availability and supply of essential commodities, we are looking at options for giving the National Security Council - in cooperation with industry - a role in monitoring the state of our critical infrastructure.

On the energy side of things, in addition to storage which must be increased, this could include monitoring capacities for power generation, transmission and distribution.  If it considered there were important gaps, it would require the relevant companies to upgrade the infrastructure.

This leads on to a separate point which our Energy Team are already considering: the role of the regulator.  We are considering putting in place a requirement for regulators in all essential sectors to take into account national security and resilience considerations.

<h2>Not just a national issue</h2>

Finally, while these are all vital steps which need to be taken here in the UK, energy security is ultimately not just a national issue, but a shared goal. International institutions have a role to play.

First, the EU. 

In the EU there has already been too much looking after number one at the direct expense of neighbours. 

Not just the UK, but other European member states, need to diversify sources and types of supply.  But this will only reduce dependence on Russia over time.  

For the immediate future, in a recession, the best way to ensure that countries do not move towards autarky is to resolve together to move firmly in the opposite direction. At the risk of delivering a blinding flash of the obvious, let me say that we need to work for a firm, realistic and co-ordinated European energy policy towards Russia. One which gives her a long term and stable - but not excessive place - in the European market.  Where ownership structures of downstream energy companies in which Russians have a stake are transparent and the governance meet Western norms.

I am not one of those who believe in peak oil or gas.  I do not believe the world will run out of fossil fuels before diversifying.  But in the case of Russian supplies, even before the downturn it was clear that, because of underinvestment and its own inefficient use, Russia would struggle to meet its contractual commitments.  I doubt it is in European interest for us to see Gazprom having to choose between supplying the Russian consumer and his Western European counterpart.  As part of a more constructive relationship between the EU and Russia, alongside Russia signing the Energy Charter, I believe it would serve consumer interests to help Russia reduce its energy inefficiency and invest in its energy infrastructure.  Back, of course, to the availability of investment funds.

One last point on the international side: it follows that in support of foreign policy priorities, the MoD should have regard to energy security in the tasking of our armed forces - especially the Royal Navy.  Security of the sea lanes and the safety of maritime traffic is already on the agenda.  My own view is that we will soon find that it is not just in the Indian Ocean that active patrolling against piracy and terrorism is needed.  Western navies will need to join forces to provide protection of major sea lanes round the world as well as train other navies to take a share of the burden.  NATO is extremely relevant to this emerging task. 

Energy security itself is increasingly an object of specific attention by NATO.

Already, two years ago at Riga, Senator Richard Lugar said: 'Because an attack using energy as a weapon can devastate a nation's economy and yield hundreds or even thousands of casualties, the Alliance must avow that defending against such attacks is an Article Five commitment'.

I agree, but with one important modification.  In a world of diverse threats to security - which is not the same as the world of territorial defence - I do not think it necessary or desirable for NATO to declare every threat or danger to be an Article 5 matter. NATO nations need to develop, in doctrinal and practical ways, the concept of solidarity and mutual assistance as part of the operational underpinning given to collective security in the twenty first century.  This was well exemplified but not well publicised in the assistance given by NATO forces following Hurricane Katrina when they delivered emergency supplies and fixed damaged infrastructure.

I hope this is high on the agenda of the review of NATO's Strategic Concept.

Let me conclude.

Over the years, we have seen a chase for commodities and an increase in resource nationalism. 

This continues.  And on top of it we face an economic downturn hostile to creating a more secure energy market condition.  So now, more than ever, we need a strategy to address. 

There are three components to this strategy work.

First, we need to recognise the importance of commodities and raw materials in the setting and implementation of the FCO's policy priorities round the world.  

Secondly, we need to improve the resilience of our energy infrastructure.  We need to look at increasing our storage capacity, and look at options for giving government - in co-operation with industry and regulators - a role in the systematic monitoring of the state of critical infrastructure.

Finally, we need to make use of our international institutions.

The EU, to develop a constructive but realistic relationship with Russia over energy.

And NATO, to help police sea lanes and provide solidarity and mutual assistance in the event of major disruption to our energy supplies.

These components will work alongside our policies to achieve a decarbonised economy by 2050, when our energy mix should provide a high level of security.

Doing little and ever so slowly, like the present government, is no longer an option.

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