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A steadying influence in uncertain times

Since its creation, in 1974, the IEA has sought to protect the security of energy supply to its member countries. Claude Mandil, the organisation’s recently appointed executive director, spoke to Helen Avati recently about security of oil supply, strategic oil stocks, energy investment and the organisation’s relationships with Opec and the EU

IT IS RARE for the new head of an organisation to arrive and be quickly faced with a looming crisis. But that is precisely what happened to Claude Mandil, an affable 61-year-old Frenchman, when he took up his duties as executive director of the 26-member, Paris-based, International Energy Agency (IEA) on 1 February.

Within days, serious problems had built up on three continents. The war with Iraq was imminent. Venezuela was struggling to regain the production level it had lost following the general strike in December, but had reached only 53% of November production in February. Shut-downs at nuclear power plants in Japan - because of a controversy about inadequate security reports - and ethnic violence in Nigeria's western delta, which led producers to shut in 0.8m barrels a day of production, were further problems.

Averting crises

This could have turned into the fourth serious oil-supply alert in the past 30 years, after the 1973 Arab-Israel conflict, the 1979-1981 Iran revolution and Iraq-Iran war, and the 1991 Gulf war. Increased output by producers with spare capacity - especially Saudi Arabia - and their pledge to make up any further loss of supply, combined with close co-ordination between the IEA and Opec during the period, averted a full-scale crisis.

IEA member countries

Australia (1979)

Japan

Austria

South Korea (2001)

Belgium

Luxembourg

Canada

The Netherlands

Czech Republic (2001)

New Zealand (1977)

Denmark

Norway* (1975)

Finland (1991)

Portugal (1980)

France (1991)

Spain

Germany

Sweden

Greece (1977)

Switzerland

Hungary (1997)

Turkey

Ireland

UK

Italy

US

 

*participates under a special agreement.

The European Commission also participates

in the work of the IEA

 

Note: all countries joined during formation in

1974, unless otherwise stated

 

Source: IEA



The supply situation is slowly improving, although stocks are still below their normal level for early summer. But the episode has left a strong feeling that more must be done to ensure there will always be sufficient oil available to meet expected demand.

It was the use of oil as a political weapon by some members of the Organisation of Arab Petroleum Exporting Countries, an Opec offshoot, during the 1973 Middle East conflict that led to the creation of the IEA in November 1974. The producers slashed their output by 25% and prices quadrupled. An embargo was launched, directed at the US and the Netherlands, but also affecting Denmark, Portugal, Rhodesia (Zimbabwe) and South Africa, as a warning against friendship with Israel.

Demand restraint

The agreement on an international energy programme, signed by the 16 original IEA member countries, called for each to hold oil stocks representing 60 days of net imports, later raised to the present level of 90 days, although many members have more. It also contained the obligation of demand restraint and a system for allocating these stocks in the case of a supply shortfall of over 7%.

But in over 28 years of the IEA's existence, the only time the stocks were used was during a brief period once the fighting started in the 1991 Gulf War.

Security-of-supply concerns were nothing new to Mandil, who had held all the top energy jobs in the French government before being chosen as executive director by the IEA governing board, succeeding Robert Priddle of the UK, who retired at the end of 2002.

Among other posts, he was chairman of the Institute for Industrial Development, director-general of the Bureau of Mines and Geology, director-general for Energy and Raw Materials at the industry ministry and chief executive officer of the French Petroleum Institute (IFP).

He also played two significant roles in the IEA. As French director-general of energy, he negotiated France's belated entry into the organisation in 1991. When the IEA was created, after the speech of the then US secretary of state, Henry Kissinger, about the need for an energy organisation, the French government thought it would lead to confrontation with Opec and refused to join. The government hoped its position would be appreciated by producer nations and encourage them to offer it more favourable treatment.

With France an active member of the IEA, Mandil served as chairman of the organisation's governing board from October 1997 to October 1998, before leaving the government for a short spell as managing director of Gaz de France and from there to the chairmanship of the IFP. His successor as director-general of energy and raw materials, Dominique Maillard, now serves as chairman of the IEA governing board. 

Looking back on the winter's upheavals, Mandil concludes that the IEA's assumption that producer and consumer governments had the same interest in avoiding a supply shortage was proved right.

In my first week at the IEA, I went to see the Opec secretary-general, Alvaro Silva Calderon, the Saudi Arabian oil minister, Ali Naimi, and the Opec president, Abdullah al-Attiyah, and exchanged mobile-phone numbers with them. It worked. In mid-January, Opec had already done what was necessary to make up for the missing barrels and when the war began, Opec suspended its production quotas and told its members with spare capacity to use it. 

Active co-ordination

Co-ordination within the IEA was also active, with frequent contacts between Mandil and member governments, at governing-board level or higher. A few days before the war started, the IEA began sending daily assessments to member countries, with its views on the situation in Iraq, but also covering the other trouble spots - Venezuela, Japan and Nigeria.

At the outbreak of the war, on 20 March, three co-ordinated press releases were issued, in an order decided the previous day: one from Opec, one from Saudi Arabia and one from the IEA.

The result of the use of oil as a political weapon in 1973 was an enormous effort by the IEA member countries to replace Middle East production. In 1970, oil was 45% of world primary energy consumption; by 2002, it had dropped to 37.5%, Mandil stresses. Over the same period, Opec has seen its share dwindle from 49% of world oil production to 38%. So we thought Opec would not permit a disruption in oil supplies, even if there were a severe crisis with Iraq. 

One thing Opec was anxious to avoid was a decision by the IEA that emergency oil stocks should be used, as they were, briefly, at the beginning of the Gulf War in 1991. For us, the stocks are a deterrent, a threat to act if the market is not sufficiently supplied, an arm we have no intention of using unless it becomes necessary, Mandil says. I was convinced in my conversations with Opec, and notably with the Saudis, that they would act responsibly and I convinced the governing board that we should not use the stocks.

Not all the IEA countries were willing to agree at first, but consensus was soon reached.

Consensus and disagreements

I would like to stress two things that were amply confirmed in our recent experience, Mandil continues, that it is reasonable to consider the producing countries as serious partners with fundamentally the same interest as ours in ensuring adequate supplies. And in a crisis, it is imperative to keep closely in touch with them. 

That said, the IEA is not in agreement with Opec. We don't like the way they manage the market, the way they follow seasonal variations, and we think their conception of a price band is dangerous. I told Opec in a friendly way that even if we approved of price bands, it would not be in their interest. They lose more market share every day. With a price of $22-28 a barrel, difficult oil - I mean very deep, very heavy or production from enhanced recovery in old fields - becomes increasingly cheaper because of technical progress. 

Although it would lessen their dependence on areas considered politically fragile, it is not in the interest of consumer countries, either, for Opec to lose too much market share, Mandil maintains. First, it means that we use expensive oil before cheap oil. And then, the political and economic consequences the loss of income could have on Opec member countries would be serious and is, therefore, in nobody's interest. 

Markets stretched

In addition to disagreement over prices, Opec and the IEA do not see eye to eye on volumes. At the annual IFP-sponsored oil summit conference, in Paris, in April, al-Attiyah said: My worry today is that the market is full of oil. We are facing a glut, not a shortage. 

At the same time, at the IEA's offices near the Eiffel Tower, a few kilometres away, Mandil was asserting that markets remained stretched, and that stocks in consumer countries were more than 200m barrels lower than at the same time in 2002.

Unlike the oil-supply pinch in 1991, when there were multiple recriminations against the IEA for not using stocks early enough, the policy followed this time seems to have been generally approved.

And any fear that Mandil's French nationality would be a problem in dealing with the US government was dispelled by the good rapport quickly established with the US energy secretary, Spencer Abraham.

Even a formerly strong critic of the IEA, the European Union (EU) vice-president and energy supremo, Loyola de Palacio, acknowledged the organisation's usefulness in the recent crisis. In a speech on the world oil-market situation and Opec, in Brussels on 9 July, she said: The close contacts maintained between producing countries and consumers, notably between Opec and the IEA, during the whole of this delicate period, permitted an appropriate monitoring of the situation. 

The proposals for directives on oil and gas supply security that the European Commission released in September were preceded and accompanied by unflattering comments about the IEA as unrealistic and ineffective. Disagreeable things were said and written, Mandil admits. I had an explanation about this with Madame de Palacio.

She said the criticism was about the past and that she is now convinced the system is working well. 

Storage policy

The purpose of the oil-security directive, under consideration by the European Parliament, is to strengthen the EU's storage policy, to maximise the dissuasive effect of emergency stocks. It calls for an increase in the obligatory level of stocks to 120 days of the past year's consumption (while the IEA stocks are based on net imports) and gives the Commission a say in deciding their use.

Commenting on the proposals, Mandil says: The EU wants 120 days of stocks and wants to exercise control. The IEA has nothing to say as long as all its members maintain 90 days' stocks. Anything above that could be co-ordinated by the EU. It's their own affair, although in the IEA's opinion, 90 days are sufficient. 

But there is one point on which we have a real disagreement. In its original text, the Commission wanted to use the stocks to influence oil prices. The IEA believes stocks should be used only in case of a supply disruption. The majority of the EU's member countries (all also members of the IEA) do not want to increase their stocks or give the Commission the right to decide on their use and have given the proposal a cool reception.

Gas matters

The EU proposal on gas supply security, including the right for the Commission to decide the use of stocks in an emergency, does not appeal to most of its members. But there is no potential conflict of influence here, as the IEA has no authority over gas-supply security.

It has, however, given much attention in past months to the subject of how security can be ensured in an increasingly liberalised natural gas market.

According to Mandil, it would be difficult to set up a system to deal with supply disruptions because of the nature of gas markets, which are separate in different areas, with widely diverging prices. Each state must see to it that sufficient gas stocks are held, diversify sources and make sure that gas does not gain a disproportionately large market share, he says.

The IEA recently cautioned two of its members about excessive dependence on gas in the in-depth surveys of national energy policies published for each country every four years. Ireland was contemplating the closure of a large coal-fired power plant to reduce greenhouse-gas emissions and meet its Kyoto target, which would have raised the share of gas in the power sector to 80% in 2010.

Hungary, by maintaining very low prices for households, artificially boosts demand for gas, which is already its top energy source, with 40% of the total.

With increasing security-of-supply concerns about oil and gas and the need to lower emissions to the Kyoto-mandated levels, there is more tolerance in the IEA about nuclear generation than in the past, when such circumlocutions as non-carbon-dioxide-emitting energy were used to describe it, Mandil says.

He experienced the downside of nuclear power when he served as France's representative and then chairman of the G-7 nuclear-safety working group, which reviewed the hazardous nuclear power plants in former communist countries in the 1990s and succeeded in forcing the shut-down of Chernobyl, Ukraine. 

Nuclear opposition

Political opposition to nuclear power still exists in the IEA, especially in Austria, Ireland and Denmark. But the general opinion among members is that nuclear represents a useful part of the energy balance in countries whose public opinion accepts it, he adds.

The IEA's main concern is about energy investment. The big problem in coming years is whether private-sector investors will be willing to put their money into energy projects, especially oil and gas, which are not always profitable, Mandil insists. This will be the subject of the organisation's next world energy outlook - entitled World Energy Investment Outlook - to be published in the autumn.

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