The FINANCIAL — The FINANCIAL interviewed Dr. Christof Ruhl, BP Group Chief Economist and Vice President, on the world energy market volatility issues and the tiny Georgian market opportunities in the wake of the Russian-Georgian war.
The crude oil demand for the Organization of the Petroleum Exporting Countries (OPEC) on the international crude market is forecasted to be 31.14 million barrels per day in 2009, 190,000 barrels lower than the September forecast, according to a monthly OPEC report. The report said the global financial crisis would impose an obvious suppressing effect on the growth of the world economy. OECD countries have seen a current slowdown in economic growth, and the economic growth of developing counties has also decelerated. The worldwide weakening economy will definitely cut crude oil demand. Though, since 2003, oil prices have increased 300%, traded coal by 200% and natural gas by 100%. The FINANCIAL interviewed Dr. Christof Ruhl, BP Group Chief Economist and Vice President, on the world energy market volatility issues and the tiny Georgian market opportunities in the wake of the Russian-Georgian war.
Christof Rühl joined the World Bank as a Senior Economist in 1998 and became Chief Economist of the World Bank’s Russia country department in February 2001. In 1996 he joined the Office of the Chief Economist at the European Bank for Reconstruction and Development (EBRD) in London as a Principal Economist. Previously Mr. Rühl worked in academia: From 1991, he was Assistant Professor at the Economics Department of the University of California at Los Angeles (UCLA), and earlier held positions as Research Associate at the universities of Bremen (1986-88) and Hohenheim in Stuttgart, Germany (1988-91). Mr. Rühl, a German national, graduated in economics from the University of Bremen. Over the years, he also accepted visiting positions at various universities and research institutions, among them the Graduate School of Business at the University of Chicago (1997), the University of Western Ontario, Canada (1995), the Institute for Advanced Studies, Vienna (1994), and the Central European University in Prague and Budapest (1994-96). He has published a number of books and numerous articles. His areas of specialization are macroeconomics, monetary economics, and the economics of the transition from central planning.
Q. Global energy markets are being heavily affected by a “massive shift” in the composition of global economic growth, you told a small audience in Brussels. Non-OECD (Organization for Economic Cooperation and Development) countries like China and India accounted for nearly 50% of growth and for nearly 90% of energy demand growth in 2007. What’s your message to be delivered during your trips in general and in particular this one on Georgia?
A. The message to the world is that first of all in the long term one should expect a very high demand on energy to continue. It’s not only India and China, there are also many other countries who also want to develop and industrialize.
Secondly, it’s important to make energy available for these countries. Thirdly, there’s a message for all these countries, who are now trying to develop and compete for energy resources, that the most important thing is to become energy efficient. For a long time especially developing countries didn’t really worry about this, but it’s essential to realize that those countries that will be more energy efficient will have a competitive advantage.
Q. Much of the American presidential campaign is focusing on the nation’s energy needs, costs and future. Obama is a strong supporter of biofuels production, which he says is not the case for GOP candidate Senator John McCain. A member of McCain’s rural policy team, Senator Chuck Grassley of Iowa, says he disagrees with McCain’s outlook on ethanol and biofuels subsidies. How important and efficient do you think this approach is for the local and global markets?
A. At the moment renewable energies have very high growth rates, they grow very fast, both of them, they have government support and they start from a very low level. What you see at the moment is that they’re not important enough to tip the balance as global ethanol production is equivalent to 0.7% of global consumption, it’s growing but it’s not big yet. Power generation from wind, solar and geothermal, is somewhere between 1% and 1.5% of global power generation. Locally it looks different already; the ethanol production in Brazil and the USA changes the refinery systems there. In Portugal, Spain, Denmark and Germany they have more than 10% of their national electricity produced from renewables.
There’s also a problem with most of these fuels in that most of the places are not competitive yet as without government subsidies you can compete in only a few places. The success is a question of whether the technologies can be improved.
This is the reason why a company like BP invests in research and development because we believe that all these renewable technology aces are necessary to guarantee this high growth. The short answer is that they’re very necessary and the long answer is that whether we can fulfil people’s hopes depends on the technological development.
Q. On August 1, when most of the world’s attention was focusing on the Beijing Olympics, The Guardian reported that China became the world’s leading producer of renewable energy, according to a report by the Climate Group. Do you think China has the potential to become the energy leader and suppress Russia as an energy empire?
A. That will need a long term because China’s energy needs are enormous and they’re growing and at this moment there exists no renewal that could start to satisfy China’s needs.
Q. As Russian opposition leader Garry Kasparov said in the Wall Street Journal, In 2000 BP attempted to rebrand itself with the slogan “beyond petroleum”. These days the company is scrambling to get “beyond Putin”. “The vulnerability of Russia’s economic system is becoming more exposed, and we see some signs of this right now in these very turbulent markets,” you claimed. You became Chief Economist of the World Bank’s Russia country department in 2001 and happened to work in Russia during the period when TNK-BP had problems there. Though, since the Russian-Georgian war the issues have been settled. Do you agree that oil businesses in Russian including BP are politicized?
A. The major issue there was the disagreement on the direction of the company among the different shareholders starting from management issues to what the company’s next targets should be. It was necessary that shareholders came to the agreement and I think that’s what we did.
It’s no secret that in the Russian energy sector we’ve repeatedly seen episodes which could be found as politically motivated. Russia is not the only country in that respect. More importantly you see it in Russia and globally you see this increasing tendency, which has to do with the high price of oil and the desire of national countries to manage their own resources and it’s very important to realize what an efficient investment regime is. Some countries have been doing it successfully for a long time like Australia, Norway, and UK. Some other countries have had many difficulties in starting trade and it’s not for nothing when people speak of the “oil curse”.
Q. “Financial investors are no fools. They observe the same kind of market fundamentals and interactions as we do, and then they invest. They jump on the train but they don't determine the direction of the train,” you said in the Euractiv interview. In October the US-Georgian business summit is scheduled in Tbilisi. What’s your outlook on Georgia’s energy market? Where do you see the basic attractions foreign investors could benefit by putting money in the local market?
A. Georgia made a fundamental decision a long time ago to try to be an open country for foreign investments. Most of the energy related investments in Georgia are infrastructure investments and not necessarily resource exploration or production. Georgia is recognized and well advanced as a globally integrated country, which is open to investors.
Q. As you said, last year when oil prices went up so much, it was in the wake of OPEC cuts, and undiminished large demand in a period of record economic growth in developing countries. How do you see the future outlook in the wake of the Russian-Georgian war both in terms of global markets and in particular in Georgia’s emerging economy?
A. Currently oil prices are falling. Any war, any damage to infrastructure has the potential to impact prices. In this particular case this has not happened.
Prices for all major fuels continued to rise in 2007 and into 2008. Oil has seen the steepest and longest rise – it rose for six consecutive years, the longest stretch even in our data, which goes back until 861. Ten years ago today, the price of Brent stood at USD 11.36 – we have seen a tenfold increase since then.
Q. On December 8-10 you’re going to attend an Oil and Gas Conference in Moscow. “Russia is in need of innovation and investments into its oil and gas sector,” says the organizer company of the conference. “Brownfield exploration, mainly concentrated in West Siberia, is currently expiring and ninety percent of oil resources discovered over the last century have been fully exploited. The future now largely depends on the greenfield development, which has spurred the move to unlock the vast oil wealth of Eastern Siberia and offshore.” What’s your message to be delivered at the conference?
A. My message to Russia is the same as everywhere, if you want to attract investments, you need preconditions of a stable and reliable investment climate and that applies to all the players including foreigners and domestic players and to the referee, which is the government and the judiciary.
Q. There’s much talk about Georgia and Ukraine’s joining NATO. Though, as long as Europe’s significantly depended on Russian energy, Germany will obviously block Georgia’s integration into the Alliance. What alternative sources could be built in order to free Europe from Russian energy dependence? How seriously dependent is Europe on Russia at the moment?
A. I’m not sure whether the reason why Germany is against Georgia’s joining NATO is the Russian gas dependency. The European dependency on Russian gas is declining; technically this dependency is uneven across Europe. If you look at Europe on the map it looks like five fingers of a hand, there are two pipelines coming out of Russia and initially in the East of Europe, so there are more links between them than to the west. If you have a domestic policy to stabilize the market the dependency will be less. What the world energy markets need is more integration and more diversification of supplies. It will take time to activate alternative resources.
BP Statistical Review of World Energy, June 2008n (extract) – Christof Ruhl
Global energy consumption growth remained robust in 2007, driven by above-average economic growth and despite continued high prices. OECD countries are showing the most significant reaction to continued high energy prices. Divergent price movements, between fuels and regions, affected energy market developments in 2007. Crude oil prices rose for a sixth consecutive year – the longest unbroken period of growth in our data set. Natural gas prices increased modestly except in Europe, where spot prices fell substantially. For a second consecutive year, steam coal prices fell in North America but increased elsewhere.
ENERGY DEVELOPMENTS World primary energy consumption increased by 2.4% in 2007 – down from 2.7% in 2006, but still the fifth consecutive year of above-average growth. The Asia-Pacific region accounted for two-thirds of global energy consumption growth, rising by an above-average 5% even though consumption in Japan declined by 0.9%. North American consumption rebounded after a weak year in 2006, rising by 1.6% – double the 10-year average. Chinese growth of 7.7% was the weakest since 2002, although still above the10-year average (as was China’s economic growth). China again accounted for half of global energy consumption growth. Indian consumption grew by 6.8%, the third-largest volumetric increment after China and the US. EU energy consumption declined by 2.2%, with Germany registering the world’s largest decline in energy consumption.
Global oil consumption grew by 1.1% in 2007.Consumption growth was robust in oil-exporting countries.
World primary energy consumption increased by 2.4% in 2007.
US gas consumption increased in 2007 by 6.5%. Gas consumption rose by 3.1% in 2007, slightly above the 10-year average. The US accounted for the largest incremental growth in both production and consumption.
BP Global
BP p.l.c., previously known as British Petroleum, is the third largest global energy company, a multinational oil company ("oil major") with headquarters in London. The company is among the largest private sector energy corporations in the world, and one of the six "supermajors" (vertically integrated private sector oil exploration, natural gas, and petroleum product marketing companies).
The BP group operates across six continents, and thier products and services are available in more than 100 countries
BP Georgia
BP is one of the world’s largest energy companies, and it has been operating in Georgia since 1996. Its business is primarily about the safe transportation and delivery of energy, while operating in a manner which is truly sustainable.
BP in Georgia operates three major oil and gas pipelines through Georgia as well as an aviation fuelling business at Tbilisi airport.
The Western Route Export Pipeline (WREP), also known as the Baku-Supsa pipeline, which was our first investment in Georgia, has operated safely and successfully since 1999. It has brought valuable transit fee revenues to Georgia, transporting an average of 155,000 barrels of Caspian oil to global markets each day. To safeguard the integrity of the pipeline and facilities, operations were suspended in 2006 to perform necessary maintenance and to reroute a section of the pipeline where a risk of landslide was detected. A full re-commissioning program has already been initiated and the pipeline will be restarted when the integrity of the pipeline has been satisfactorily tested.
The Baku-Tbilisi-Ceyhan (BTC) pipeline began fully operating in June 2006, delivering its first tanker of oil to global markets. With a total construction cost of USD 4 billion, the BTC pipeline is the first direct transportation link between the Caspian and the Mediterranean seas. At full capacity, it can deliver one million barrels of oil to market, generating important revenues for the Georgian government for decades to come.
The South Caucasus gas pipeline (SCP) carries gas from the Shah Deniz field in the Caspian to markets in Azerbaijan, Georgia and Turkey, representing an important new source of gas supply for the region. Following commissioning, first commercial gas was delivered into the Georgian market in January 2007.
BP’s aviation fuelling business, Air BP, has been present in Georgia since 1998. It operates a terminal at Tbilisi airport providing jet fuel for national and international airline customers.
Wirtten By Kate Tabatadze
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