Lower oil prices to help ease India's trade deficit: IEA

In terms of India, lower oil prices is very good news for India. When we look at last 5 years before the prices dropped down, India every year paid about USD 125 billion to import oil. However with lower prices today around USD 60, this USD 125 billion will go to levels of USD 65-70 billion which provides about USD 65-70 billion saving for the Indian economy.

Q: What is your reading of the geo-political situation in the Middle East currently, the recent events that have taken place in Yemen? What about the potential of a deal being struck with Iran and what does that mean for the region and for energy?

A: When we are looking at Middle East first of all I should say that Middle East is and will remain the most important oil production region in the world, which will export oil to Asia, Africa and other countries of the world. When we look at the geo-political problems in Middle East, I believe these problems are not one-off type but may well be structural problems.

For example, the very issue of ISIS in Middle East may well be a structural issue. Problems between Yemen and other countries in the region they may well be long lasting problems. So, from that perspective oil security will be very important issue and India making strong efforts to increase its oil stocks in case of emergency is a move in the right direction.

Coming to Iran, it has huge oil and gas reserves. However, to have the reserves and to produce those reserves are two different things. Iran, if all the problems with the international committee are resolved, will need substantial amount of investments and access to technology in order to increase production.

Therefore, I do not think that Iran will quickly and in a substantial way bring large amounts of oil to the markets, it will take some time but if Iran solves its problems with international community, in the future Iran may well play a more important role than today both for oil and natural gas.

Q: I do want to talk to you about the implications of these changes taking place in the Middle East, first up on what that means for OPEC which many analysts and experts now say is behaving less and less like a cartel with individual members fighting to maintain market share?

A: The challenges between different OPEC members are questions that need to be addressed by OPEC members. The Middle East countries - they are the bulk of the OPEC members today, they are extremely important for the global oil markets.

We all talk about US shale revolution which is a very good news because a lot of oil is coming from United States but we all have to understand that the production growth coming from United States is good for them, good for rest of the world but US is still a significant oil importer.

America will never be a major oil exporter like Saudi Arabia. Therefore, exports from Middle East will be crucial for many countries including India, China, African countries and others. What happens in Middle East in terms of geo-politics will determine the markets, will determine the importers such as India for many years to come.

Q: In which case how would you assess the impact of these security concerns that you have been talking about in the Middle East on the crude oil market and its dynamics – demand, supply and of course prices?

A: Today, the oil markets are well supplied and there are two reasons for that. Firstly, we have seen an unparalleled growth of production in United States and Canada.

Secondly, at the same time we have seen the demand being historically very weak but this will not continue because the US production growth is set to slow down and with the consolidation of the global economy, oil demand will increase.

Therefore, my main worry is that in order to see a production growth from Middle East to meet the growth in the oil demand coming from India, China, other Asian countries and from other parts of the world, we need to invest in the Middle East oil production today. But when I look at the numbers we have in hand at the IEA we see that the appetite for oil investment in Middle East is close to zero and there are two reasons behind that.

One, lower oil prices but second and more importantly the security issues in Middle East give very little appetite to investors to invest in Middle East because countries and companies do not know what will happen in Middle East and they are worried about the predictability of their investments given the security situation today.

If the investments continue to be very weak or close to zero in Middle East, we will not see a production increase in Middle East and in the future this may well be a major challenge for the oil markets.

_PAGEBREAK_

Q: The IEA March report indicates the demand for oil bottomed out in the second quarter of 2014 itself. So, demand in fact increased by about 0.9 million barrels per day in the last quarter of 2014 and by one million barrels per day in the first quarter of 2015. Where is this increase in demand coming from?

A: The Increase in demand is coming mainly in three different areas, growth of demand. First of all Asia, China and India the economies thankfully still growing in both these countries and they will give a boost to the oil demand growth.

Second area is United States, US economy is performing well when we look at the numbers in terms of employment, in terms of trade, they are proven to be going in the right direction and the consolidation of the US economy gives a boost to oil demand for the United States.

And the third area which is another major oil consuming region is Middle East itself. Middle East countries with the growing population and not doing very bad in terms of oil gives also some contribution to the oil demand growth.

These are the three areas that are the engines of the oil demand growth but the pace of the oil demand growth which will be very much hinged on the economic growth in these countries – what will be the economic growth in India, in China, in other parts of the world will determine how much the oil demand will grow in the next quarters to come but our expectation is about one million barrels per day but there may be definitely upward and downward adjustments to that number.

Q: You have increase in demand on one hand, on the other hand Saudi Arabia pumping at not full capacity but close to full capacity, you have got record inventories piling up in the US. What does this mean for oil prices at least in the near to medium-term?

A: There are two factors that will determine the evolution of this price. The first one is on the economic side, how the economy will perform in this key region, in Asia, United States in terms of consumption, but the second one is also very important, we should not forget them. These lower prices resulted in substantial amount of cutting of spending of the oil companies.

According to the numbers of IEA in the year 2015 oil investments will drop by close to 20 percent compared to 2014. We have never seen such a big decline. Even in the financial crisis years the decline was lower than this. So, lower investments in the oil production will mainly come from US, Canada and Brazil.

The high cost areas will be affecting the supply side so that the growth of supply may be dampening as a result of this lower investment which was the result of many companies cutting their spending, cutting their investment for future oil production in the year 2015 and beyond.

Q: The 20 percent cut you have explained where it has come from, the 20 percent cut in investments. Would you attribute a large of that to a slowdown in shale projects in the US because of where the price of crude is right now? Would you say that it is also hurting other regions in the world – oil producing regions, like for instance the Middle East?

A: There are two main reasons of this cut of investments which is about 20 percent, which is about USD 100 billion cut. The first one is the lower oil price trajectory which gives less incentive to the oil companies to invest because they think it is unpredictable and this comes mainly from US, Canada and Brazil.

But, the second reason is in Middle East. As a result of security issues, security concerns – many companies are concerned about the future of their investments and they are very reluctant to invest in the region in many countries in that region which they do not know how the political situation will develop in the next months, years to come.

Q: You have been saying that oil prices will return to about a USD 100 a barrel in the next year or two. Would it be fair to infer then that you expect them to stay at this range of USD 60-70 a barrel in the short to medium term?

A: When we look at the global oil markets today there is enough oil in the markets and the demand is still weak in the course of a slow recovery. Therefore, it will be difficult to believe that the oil prices will jump substantially in the very near-term.

But when we see the impact of the cutting of spending, cutting of investment in future oil production and if it is coupled this spending with a stronger economic growth worldwide, we may well see an upward pressure on the prices.

Q: What impact do these lower oil prices have on shale gas projects which has been the new big source of energy supplies across the world not just in the US but also newer countries like Australia, Argentina that are pursuing shale gas in a big way?

A: The shale gas projects worldwide are going in full steam. In United States the production has continued to grow, Canada continued to grow and many countries such as Argentina but also China is trying to make major efforts in order to make most use of shale gas.

I was last week in China, I had meetings with my colleagues in China; I see that they are very keen to replicate the revolution of the United States, of Canada, in China and I can tell you that China has major shale gas resources.

If China is able to turn those resources into production it may well have major implications for the global gas markets but also with the coal markets as gas and coal are competing with each other in terms of being a major fuel for the electricity generation and China being the largest coal country in the world.

Q: What kind of contribution do you see shale gas having in the long-term energy mix? I also want to point out an IEA report that said that natural gas production is expected to increase by 50 percent in the next 20 years or so. How would you connect these two and what that means for gas markets?

A: That we will look at it before looking at the future when we look at the recent past. About 70 percent, the big chunk of the growth in total gas production in the world 70 percent came from the shale gas, not conventional gas but the shale gas.

When we look at the future, we expect this momentum to continue and about higher than half of the growth in the global gas production growth will come from shale gas.

US continued to grow, Canada, Argentina, some countries in Europe-Poland, Germany recently gave a green light to shale gas exploration and also a very important factor here is what will happen in China? As a result, we will think that the shale gas revolution will continue with significant implications on the global energy markets.

_PAGEBREAK_

Q: In an associated question to that issue, there is now a growing debate in the US to open up or to reduce the restrictions on fuel exports. How do you think that debate will evolve and if the US does decide to relax these restrictions what impact will it have on global energy? A: United States is in the middle of discussions in terms of crude exports, natural gas exports. A lot of LNG will come from United States, not immediately but in a few years of time which will provide more flexibility to the gas markets. If we see some crude exports – whatever the level is, it will be also good for the global oil security.

Q: What is your outlook on coal which is an important source of energy here in India for us? Coal prices internationally have been at lows over the last couple of years, what is your assessment or outlook on coal?

A: Coal prices are at historic lows today because demand is low and there are two reasons why coal demand is low. First, the general economic growth is sluggish. Second and more important is, more and more big countries are using less and less coal.

In the United States coal consumption is declining substantially and China last year we have seen for the first time Chinese coal consumption decline mainly because of local pollution.

As a result of lower demand I expect coal prices will be lower in the next few years. This is important news for India as coal is the backbone of the Indian energy system, electricity generation. However, it is also very important to use coal in the power plants in a very efficient manner thinking of the local pollution implications of coal use.      Q: We have lower crude prices right now. We have an expected substantial increase in gas production. We have just spoken about how coal market is getting impacted. How do all of these impact, what is going on in the non-conventional energy or renewals market? Will that be heard substantially by what is going on here?

A: Of course, the lower oil prices are an implication for the alternative fuels for renewable energies. For coal, for gas, in terms of renewable energies in many countries, renewable energies are supported by the governments.

For example, when we come to India I applaud the Indian government’s target on the solar energy. I can tell you, I travel around the world as you very well know we recently discussed endeavours, when I look at the many countries Indian solar programme gives an inspiration to many countries to make more use of solar energy.

For India the use of solar energy has two major benefits. One, it will reduce the environmental footprint especially for local pollution of energy because it is very clean. And the second when we look at the map of India, we see that today in India, there are 300 days where we receive very good quality of sun, solar energy.

It is unparalleled amount of solar energy and luckily this solar energy is the best in the areas in the regions where we have a problem of access to electricity of significant amount of population. So, it is a very good coincidence that this solar energy is there where people do not take access to electricity.

Therefore, I applaud the move of the Modi government for solar energy. But we have to be cautious what will be the implication of this on the Indian electricity system. As we all know, if there is no sun, if there is no wind, it will have implications for this stability of the electricity system, so some measures need to be taken and I am sure that my colleagues in the Indian government will take care of that.

Q: Speaking of India, I want to point out that the IEA’s world energy outlook for 2015 is expected to focus on India in a big way that is the purpose of your visit here. I want your observations on the big developments we have seen in the energy business in the recent past, for instance the coal auctions that took place recently, the resultant reduction in oil based subsidies because of lower crude prices, the gas pricing debate which is highly contentious and also many experts rue the lack of any progress on building strategic reserves. What are your views on all these important elements of our energy policy?

A: This year we are going to make a special report on India which we call India Energy outlook which I am going to release in New Delhi by the end of November. Why do we work on India this year? Because India is in the middle of a major transformation that can beat a country at the centre stage of the global affairs.

In the performance the expansion of the Indian economy critically hinges on whether or not the energy issues are that in the right manner. And the recent move of the Modi government to put the energy on top of the policy agenda is a very welcomed move and luckily there is a wonderful coincidence here.

The move from the government coincides very much with the lower oil prices which gives a very good momentum to this policy reforms. When I look at India, the future of Indian energy system, I see three major factors that will determine whether or not these efforts will be successful. These three factors are investment, investment and again investment.

Whether or not India will be able to mobilise the investment for the energy infrastructure which will be of crucial importance and our report with the help of the Indian government, Indian industry and other colleagues in India will shed light on the investment issue as well as other issues. The coal markets, oil markets, the security of oil and environmental issues including local pollution. As I said, I am going to release the report at the end of November, in New Delhi to our Indian colleagues.

Q: You said investment, investment, investment. How much investment does India need according to you for its energy sector?

A: India has to invest each year about USD 100 billion and to mobilise this USD 100 billion will be of a challenge. It will be as there is out of public funds but there is a need to grove in contribution from the private sector.