Lecture 4 - Energy security: is this a challenge for the markets or for the strategic community as well?

Ladies and gentlemen,

Thank you all very much for coming here again at the Institute for European Studies where we're having our fourth of six lectures on the new security challenges. Today, once again, we have Jamie Shea with us who is going to talk about energy security; and why this is a challenge for the 21stcentury he will say in just a minute. Jamie, the floor is all yours.

Shea: Anthony, thank you very much. Promise this is the last time I'd be here before Christmas. So you will have a well-deserved break, above all -- from me. Thanks again though, as always, for hosting this lecture, number four, as you say, and today, as the temperatures go down in Brussels and I am sure all of you over the week-end have been ramping up your central heating at home and turning up the gas. We have a very appropriate topic, which is energy and energy security.

And, of course, as you also this week look up to Copenhagen and the last week of the climate change conference and we all ask ourselves – will there be an agreement or will there not, we all know that energy efficiency, alternative energy sources, reducing use of fossil fuels is going to be a very, very big ingredient in any credible deal on climate change in the 21st century.

We take energy for granted. I lived for a while as a student in Communist Poland, where energy was free and it was hardly surprising that every time, even in summer, that you walked into an office or an apartment block, it was always heated well above 80 C, or I felt that way, including with the windows permanently open and most of us know somebody who in the 1980's or the 1990's got rich working on the stock exchange and invested in a sport utility vehicle and never worried that that vehicle would only run for about 12 miles per gallon of petrol or gasoline – at the time when oil was cheaper than a bottle of Evian mineral water that was the last of anybody's worries.

Indeed, geopolitics has been dominated for much of my lifetime by the Big Oil, as it's called, and indeed as late as 1982 when “Forbes” magazine did its annual survey of the richest people in America – 15 out of the top 30 were oil barons, mainly from Texas because, still, even as late as 1982 before we came into the age of Microsoft and information technology, oil was still very much the key to the US economy and the key to individual wealth.

So, I would like to start off by stressing this link between oil and geopolitics. In fact, this all started in 1912 when Winston Churchill, who was then first Lord of the Admiralty in the UK, took the decision to convert the Royal Navy from coal to oil, because he believed this would make the new British ships, the Dreadnaughts, go faster than the German and the American ships and give Britain a strategic advantage.

And Churchill famously said -- remember this because I am going to repeat it at the end of my lecture – that “safety and certainty in oil lie in variety and variety alone”.

Of course, once the UK ran its Navy on oil, the quest for secure and abundant supplies of oil in Persia, Iraq, Middle East and elsewhere became a key strategic objective of the British Empire.

Indeed, in WWI when tanks made their appearance, aircraft made their appearance, fighting machines and much of the army converted from horse power – because most armies still went to war with horses, even during WWII the Germans had far more horses than tanks when they invaded the Soviet Union in June 1941, but as the conversion took place, then the dependence on oil and its role in achieving military victories grew and grew.

Lord George Curzon, the Viceroy of India, who later became the British Foreign Secretary after the WWI said famously “The Allies floated to victory upon a wave of oil”.

And after the WWI, as I said, the British were very grateful that they could expand their empire to Persia, to Iraq, which were at the time by far the world's largest sources of oil, apart from United States itself, where oil was first discovered in Texas and Pennsylvania in the middle of the 19th century.

In the WWII the battle for oil supplies was absolutely crucial. One of the reasons why Hitler decided not to strike at Moscow but to go south, to the Caucasus was a) to get for the Nazis possession of the Soviet oil wealth, but also try to undermine the Russians by taking away from Stalin control of his oil reserves. One of the things that saved the British in Egypt against the General Rommel – you all remember him – was the fact that he simply couldn't get enough oil to keep his Leopard tanks and his Panzer tanks moving towards Egypt, thereby giving General Montgomery a breathing space.

Indeed, towards the end of the WWII what really crippled the Japanese Air Force, the Japanese Navy, and crippled the Germans from late 1944 all the way through to the V-Day was simply lack of oil! By 1945 the Germans were only getting their hands on 5 per cent of the oil that they had had in 1941 and 1942!

They had lots of planes, which could have given the British Air Force and the American Air Force a very bad time, particularly after D-Day, but they simply couldn't get them into the air. And a great deal of the WWII is in fact the attempts of the Allies to bomb the German oil refineries, even as far afield as Romania, the Ploesti field in Romania, which we never succeeded in putting out of operation, but which was fundamental for the ability of the Germans to keep up the struggle.

In fact, Stalin at the Tehran conference in 1943 famously said “This is a war of engines and octanes and I drink to the American automobile industry and I drink to the American oil industry”. Because by 1944 the US was producing 90 per cent of the high-Octane fuel for all of the Allies combined. Now, this is not a history class, but nonetheless it does bear thinking about that even since the WWII oil is very frequently cropped up as a key factor in international politics.

Arguably, one of the most important meetings of the WWII for President Roosevelt was not Yalta, or Tehran or for Harry Truman even Potsdam – it was the meeting that Roosevelt had with Abdul-Aziz Ibn Saud, the ruler of Saudi Arabia on the USS Quincy in the Dardanelles in 1945 just after Yalta when America for the first time, and American oil companies gained access to the vital Saudi fields.

Much of politics in the Middle East – wherever you think of the coup against the Prime-Minister Mossadegh in Iran in 1953 or the Suez crisis against Nasser in 1956 -- was dictated by concerns about who would have control over the West's need for secure supplies of cheap oil and indeed the toll of the Arabs after the Yom Kippur war between Israel and Egypt in 1973 was to clamp an oil embargo on many Western countries, which had quadrupled the oil price – this was, of course, the beginning of OPEC – the cartel or the “Organization of Petroleum Exporting Countries”, which ended prosperity, as we knew it, for several years in the West.

And even, of course, as late as the Gulf wars of 1991 in Iraq and in 2003, although oil was NOT, and I repeat was NOT, the major reason for international intervention on both of these occasions – whatever you believe of the motives – in terms of weapons of mass destruction or whatever, but nonetheless there were many strategists, both in the Arab world, as well as in the Western world, who believe that a positive “side-effect” of those campaigns – not the main reason, but a positive side-effect -- would be the fact that it would help continue to keep the oil flowing without political manipulation.

So, ladies and gentlemen, the first question for today is that if oil – or Big Oil, King Oil, as it's called in Texas – has played such an important role in the history of the 20th century, is it going to play as big a role in the geopolitics of the 21st century?

Certainly, the first thing to say is that fossil fuels are going to be with us for a long time to come. It's one of my main messages. I know, as we've been speaking about climate change in Copenhagen, we all have been thinking about alternatives – nuclear power, ethanol, bio fuels, wind power, solar power, even I heard on the radio today of the British experiment in the Orkney Islands with sea turbines because apparently the sea moves at 10 miles an hour, which is enough to produce electricity from the deep oceans. And, yes, I'll come back to this in a minute, there is every reason for us, ladies and gentlemen, to try to develop those alternative fuels, not just to save the climate, but because its good for geopolitics as well.

But the reality is that today oil represents 40 per cent of our consumption, coal – 26 per cent, and gas – 24 per cent – by far the biggest proportion of the fuels that we consume. And indeed, on the best estimates, even in 20 years' time, three quarters of the energy mix would still be made up of fossil fuels. So, in other words, we can maybe see a day when we will cure, as George W. Bush once said, “our addiction to oil”, but it's not going to be easy, it's not going to be done overnight, particularly, as we consider a recent statistic from the International Energy Agency that the use of energy – even with the global financial crisis – is going to go up by 50 per cent between now and 2030 and oil would be at the minimum 30 per cent of that growth in consumption of energy.

So, what does this mean? The first strategic consequence is that the industrial countries, the Western countries, the developed countries – call them what you like – are becoming increasingly dependent upon imported energy. Many years ago the United States sourced about 70 per cent of its oil domestically – from Alaska, California, from Texas, Pennsylvania. That figure has now gone down to 15 per cent. In the early 70's the US only imported about one-third of its oil. Today it's 60 per cent, tomorrow – by 2025 it will be up to 65 per cent.

The US constitutes 4 per cent of the world's population, but has 250 million of the 520 million cars in the world today. And although Americans may be complaining that gas, as they call it, is much more expensive than it used to be, a US citizen only pays 18 per cent tax on a gallon of gas compared to 70 per cent tax in my country, so it's still cheap.

UK is in the same situation. I just give these as examples. Some years ago, with North Sea oil and gas the UK was looking towards self-sufficiency, but those fields are now in quick decline, so that the UK now also, for the first time for many years, finds itself as an importer of gas and oil. Imports represent today 80 per cent of UK gas consumption. We even import 70 per cent of our coal, although we have abundant coal fields – it is simply cheaper to get it elsewhere and because we were used to getting the stuff from the North Sea we haven't invested much in storage so that we are now, paradoxically, in the UK quite vulnerable to energy cut-offs because we don't have storage capability.

So, the first consequence therefore is that big countries are importing and from a smaller and smaller group of suppliers. Second consequence is that most of the production is now coming back into the OPEC cartel, like in the 1970's. For a while with the North Sea, with Norway and others there was a weakening of the OPEC, as non-OPEC countries were supplying, but the trend in the next 20 years is that the Middle East will regain its former position as being by far the most important source of oil and gas.

The Middle East has 50 per cent of the known reserves of oil and gas. The Saudis will continue to be the decisive factor, because they alone have a so-called “swing production” of between 2 million and 4.5 million barrels a day, which can supply the market if, for example, there is a strike in Venezuela, as occurred in 2003, or terrorist attacks against Shell pipelines in the Nigerian Delta, or embargo against Iran or whatever. Only the Saudis have that capability.

And indeed, they have invested 100 billion dollars over the last couple of years to be able to ramp up their production up from 10 million barrels a day at the moment to 12.5 million barrels a day, if necessary. The one problem with the Middle East is that its population is growing faster than any other area of the world. Today the population in the Middle East (on average 70 per cent) are below the age of 30. So, at the time that we may look at the Middle East increasingly for our imports, the Middle East is having a whole greater percentage of its oil and gas to feed the domestic market.

According to the International Energy Agency, the Saudis alone will consume 50 per cent more energy over the next few years, 50 per cent more than India, even though they have one-fifth, the Middle East has one-fifth of the population of India. So, first the Middle East.

Second consequence. State control. At the time of OPEC's emergence in 1973 virtually, all of the oil and gas was controlled by private sector companies. Today 15 of the 20 largest energy companies in the world are state-controlled. The “Seven Sisters”, as we call them, private oil companies – Shell, BP, you're familiar with them, Texaco and so on. They today produce only 10 per cent of the world's oil and gas and they control less that 3 per cent of the world's reserves. Over 80 per cent, as I said, is in state hands. And that, of course, has consequences.

First consequence, of course, are states as keen to sell oil and gas as private sector companies? Are they willing to invest their profits in further exploration and development, in many places, like Gazprom in Russia or Pemex in Mexico or PDVSA that is the Venezuelan Oil and Gas Company? The answer is no. For example, if you look at Venezuela, about two-thirds of all of its oil and gas profits are not reinvested, they go to pay the social programmes of Chavez to obviously make sure that his electorate is happy. I am not saying that this is a bad thing, but it does mean that these countries are now facing downfalls, reductions in their ability to maintain their contractual obligations to supply oil and gas because of a lack of investment.

Indeed, some well-known intellectuals, such as Martin Wolf, the Chief Economist of the Financial Times or the former World Bank Deputy Director Joe Stiglitz or the famous Columbia University economist, development economist Jeffrey Sachs have actually spoken of something called “the curse of oil”. Interestingly, when oil has been in state hands since the 1960's per capita income has actually gone down in these countries, rather than up.

Much of the proceeds have been spent to make work social programmes, much of the money have been spent on arms. Oil producers spend anywhere between twice and ten times more on weapons per capita, as do the developing countries.

Indeed, a Venezuelan Development Minister Juan Pablo Perez Alfonso back in the 1960's even called it not “black gold” oil, but the “Devil's excrement” complaining exactly of this – that instead of being like “Manna from Heaven” for a developing economy, oil can be a curse. It feeds corruption, it feeds over-militarization, a lot of the money is sent abroad rather than invested.

Look at Saudi Arabia, which has had a major problem because it hasn't been able to create employment for its dramatically expanding population of young people. The oil industry produces about 95 per cent of the revenue, but employs less than 10 per cent of the population in Saudi Arabia and, of course, when the price goes down and there has been incredible volatility in oil price. A couple of years ago it was nearly 150 – you remember? -- dollars per barrel. Then it went down to as low as 32 dollars a barrel at the beginning of this year, then it went up to 80, now it's back at around 65 dollars on the Rotterdam Spot-market and, of course, has therefore created a situation where a population heavily dependent upon subsidies, they suddenly found subsidies cut off and many scholars have made the link between radicalization – remember last week we spoke about terrorism? -- radicalization and, of course, unemployment throughout the Middle East.

The next consequence is that, ladies and gentlemen, the developing world is consuming more. As late as the first Gulf War in 1991 – believe it or not -- China was an oil exporter! It didn't need it, it sent it abroad. Now, as I hardly need to tell you at the time when the Indians have introduced the Tata car for less than 1,000 dollars and the Chinese the Cherry car for a similar price, China has become a massive importer of oil. Indeed, between 2000 and 2007, 85 per cent of the growth in energy markets has come from the developing countries rather than from the developed countries and that tendency, given that China and India have not been as badly affected by financial crisis, their economies are still growing quite healthily, that tendency will continue.

Indeed, calling to one statistic: if we are to keep the planet stable at about 2 degrees – well, that won't be that stable, but at least it's manageable – 2 degrees increasing global temperatures and China is going to consume 20 per cent more oil over the next ten years the only way for that to be done is for the developed countries to take a cut of 20 per cent in their oil consumption.

Now, having said that, there are still massive inequalities, let's be frank. One EU citizen consumes as much oil, as seven Algerians, although those Algerians over the next fifteen years will double their energy consumption. A citizen in the developing country on average consumes 8.2 times more energy than a citizen in what we used to call “the third world”. But as the developing world takes off, the gap is, of course, narrowing and will continue to narrow. In fact, one book that I've read recently is called “The-Two-Billion-Car World” and you can imagine the consequences for consumption, if we reach that particular target.

Now, ladies and gentlemen, fossil fuels are of course, non-renewable, we can only use them once. We can't recycle them, so if we are to meet the world's vastly expanding energy needs, we either need to consume less or we need to discover more reserves. But what is clear is that sooner or later we are going to run out. This is called the “peak oil” debate – you've probably heard about this. There is a big controversy among energy specialists -- when will we hit “peak oil”? “Peak oil” is the moment when it becomes harder and harder to discover new fields, it becomes more and more expensive to exploit those fields, consumption meanwhile rises and so inevitably demand goes above supply and, as it does, we go down very, very quickly in terms of out ability to supply and, of course, you have to remember that, although we talk a lot about solar panels or wind power or whatever, we still depend on oil for 90 per cent of our transport needs.

Even the US uses 70 per cent of its oil for transport and every time you go shopping for your Christmas goods, you're going to any shop, any supermarket 95 per cent of all of the goods in that shop have used oil to get into that shop.

So we are in a situation where we have clearly to try to see if it's possible to find more oil. Here, I'm afraid, the statistics are not very encouraging. Since the oil age began about a hundred years ago we have used 875 billion barrels of oil to get where we are today. The US Geological Survey estimates that there are 1,7 trillion barrels left that we know about. [That] doesn't mean to say they are easy to get at: you know, - off the coast, very deep, under the Arctic ice pack for instance, in shells, star shells (or whatever) in Canada, but we know about them.

And the US Geological Survey estimates that there may still be about 900 billion barrels out there somewhere. That means 2.6 trillion. So you may think – well, that's not too bad. We used 875 billion, but we still got 2.6 trillion. The only trouble is that if present consumption trends continue, that's only going to get us through to about 2030 – 2040. So, in other words, we will use double the amount of oil in 20 years, as we have used in the previous one century getting where we are today.

And this is the statistic that tells the story. Between 1960 and 1989, the world discovered on average twice as much oil as it consumed. But since 1989, discoveries of new fields have only been about half of the increase in consumption. The fields are getting smaller. You know, the old days when you could easily come across a 15-billion-dollar-barrel field and exploit it, they are going fast.

And I don't want to paint a totally gloomy picture here, because it's Christmas after all, the season of optimism and good cheer, and indeed there are some positive signs. One is, believe it or not – the financial crisis – some of you may think what the hell could he possibly be saying that there’s something good about the financial crisis? – But we all know: a mild winter last year, fairly mild, a very, if you like, cold summer even. I was in America this summer it was very cold, so the Americans didn't have their air conditioning systems turned on. All of this has reduced demand quite considerably.

In fact, gas price has fallen by 80 per cent, causing Gazprom, which used to be the world's most powerful company, now to be seriously indebted. Gazprom has lost 85 per cent of its profits over the last two years and two-thirds of its market value because of declining sales. So, certainly, that has helped. Although, again, let's be honest – once the economy picks up we can rapidly see oil going back up to 150, maybe even 200 dollars a barrel. So, to the extent, the capitalism always brings cycles of boom after cycles of bust, unfortunately cycles of bust also after cycles of boom. We shouldn't treat that a s a permanent condition. But still, it's there.

Second good news is that with technology we are able to get a lot more out of existing reserves, to keep the fields going a lot longer, because of being able to drill deeper, because geological studies are now much better, finding oil between rocks and so on. It's like when you drink, you know, out of a bottle with a straw – if you can get a straw round the edges, you can always suck up a little bit more juice that otherwise it might be thrown away.

For example, we can now do deep-sea drilling, which we could never do before. New technology has opened up, for example, gas shells in Louisiana in the United States that has given America the prospect to be virtually self-reliant in gas in the next 20 years. So, one should never, sort of, discount the ability of technology to come to our rescue.

Also, you may have seen from the newspapers that last week Iraq held an auction for the exploitation of 12 new fields. Iraq is probably the most underutilized source of oil we have at the moment. For example, its largest field, which Shell, Royal Dutch Shell estimates could produce 1,8 million barrels a day is currently producing 46,000 barrels a day and Iraq has easily the potential to leapfrog over Iran and become the country with the second largest oil reserves.

The one problem, which was interesting, was that two of the fields were not auctioned for because they are in politically unstable areas or because legal arrangements, for example, between Kurds and Sunnis or the Kurdish authority and the Iraqi government are not quite clear. There are also other fields. There is Yamal in the Arctic, which is Russia's biggest natural gas field, Shtokman, which is Russia's largest underwater natural gas field. There is Barzan gas field in Qatar, so there are still supplies out there, but again I come back to what I said earlier about energy security, which is that demand is going to go up and the International Energy Agency calculates that by 2030 to keep the supply going we are going to have to find somewhere an extra 45 million barrels of oil per day.

That's the equivalent of 4 times the current daily Saudi production and, as I said, the tendency is that discoveries are getting smaller and the costs of exploitation are also going up. And, of course, the trouble is with the financial crisis at the moment and the low oil and low gas prices nobody is bothering to invest in very expensive new exploitation, so when eventually the demand goes up, because we would have not used these years to find new oil, the supply will be consistent or going down, so we are going to have a price crunch: the 200-dollar barrel will soon be a reality.

Now, ladies and gentlemen, what does all this mean in terms of NATO or European security, and energy security in general? Well, obviously for the Europeans Russia is the major player here. It has 25 per cent of the world's gas reserves and about 10 per cent of the world's oil reserves and Europe imports 40 per cent of its gas from Russia and as European gas consumption is due to rise by 40 per cent in the next 20 years most of that will obviously come from Russia.

The thing about gas is you can't sort of change your customer relations because oil, you know, it comes in tankers. You can go to Venezuela or Nigeria or somebody else but gas comes in pipelines, you can't move pipelines, at least not very, very easily. So you tend to be tied in, by the pipelines, to a specific supplier. And you can't get out of that dependency, unless you have massive alternative investments and an alternative secure source of supply.

Now, of course, it's also true that Russia needs to sells us gas, just like we need to buy it. Russia depends for its exports on gas. Eighty per cent of its revenue comes from raw materials, so that dictates that there should be a stable relationship. But there are some worrying signs on horizon. First of all, as Russia becomes more prosperous its own gas consumption is rising rapidly, up by two-thirds over the next 20 years. If the Russians can't produce more gas, they are going to have a difficult choice: do we give it to our own population, do we give it to China, do we give it to Europe? There may not be enough to go round.

Russia also has underinvested in new exploitation. It's even buying gas from Central Asia at 4 times the price it was paying 5 years ago, particularly from Turkmenistan, to be able to put into the pipelines to make sure that it could continue to satisfy its contracts. That's not an easy situation to be in. As I said, there are new fields up in Yamal, up in Shtokman, but the decision to exploit those has been postponed because Gazprom last year invested 17 per cent less than it did the year before. It has a cash crisis.

The second issue is that Russia has not attracted much Western investment and technology, mainly for a policy of state ownership. You've all seen the problems of BP-TNK, which had to sell 60 per cent of its stake in Russian petroleum to Gazprom because of sudden and massive tax bills that came out of nowhere. All the problems that Shell had also having to sell up in the cycle of two projects in the Far East and that means that Russia may lack the Western investment and technology to exploit the fields.

And the Swedish Defense Research Agency calculates that since 1991 there have been 55 disruptions of Russian supplies to Europe and according to the Swedish Defense Research Agency only 10 of them don't have a political motivation and so, clearly, there is this worry to what degree a monopoly could be used for purposes of political pressure.

So, this has brought about a situation where the Europeans and particularly the European Union have had to develop a common energy policy to make sure that they have diversified sources of supply. One is to avoid the situation where one company, like Gazprom, not only has a monopoly over the supply, but also has the monopoly over the distribution networks. Imagine, for example, if you have a car, which is tied to Texaco, so that you can only fill up your car from Texaco petrol station. You can't go to any other one, you can't go to a Shell one, you can't go to a Lukoil one, you cant' go to Total, you can only go to Texaco. Obviously, that would greatly reduce your flexibility, as you well know. So, the first thing is to make sure that producers do not also own distribution networks and thereby achieve a monopoly.

The second area is pipeline diplomacy. And I know that all of you have seen this because this has been a much talked-about subject. Who gets the pipelines? Across whose territory do the pipelines run? And it's clear that there are here two aspects. The first aspect is that 80 per cent of the Russian gas goes to Europe via Ukraine and you've seen in the last couple of winters that there have been disputes between Russia and Ukraine, particularly over payment of bills and transit fees that Russia has to pay and on both occasions this has led to Russia turning off the taps and half of Europe, at least in the East, has frozen because it is a 100 per cent dependent upon Russian gas.

So, one aspect is for Russia to build pipelines to Europe that by-pass Ukraine, for example the North Stream, that will go under the Baltic Sea to Germany or another one is the South Stream, which would basically go over Turkey through the Black Sea and over into Vienna. But, of course, this will still give Russia and even greater role in supplying gas to Europe. So one other alternative is Nabucco, named after Verdi's opera, because it was first discussed while the businessmen involved in it were actually listening to Verdi's opera “Nabucco”, just so that anyone wondering where the exotic title came from, which is the idea of having pipeline from Georgia, through Azerbaijan, through Turkey, and then again to Vienna. The advantage there, of course, is that it bypasses Russia and therefore Europe would have a 10 per cent cushion, which would make sure that it had diversified supply.

And it's, of course, very important for the Europeans to build precisely that pipeline, but, ladies and gentlemen, there is not much use of a car without the driver. Correct? And there is not much use of a pipeline if there is no gas to put in the pipeline. And so the success of Nabucco depends very critically on the ability of the European Union to negotiate with Azerbaijan a contract, which would allow at least 25 per cent of the gas initially to come from Azerbaijan. Later on, Iraq may be able to supply. There are even speculations that in the long-distance future Iran might be able to supply this pipeline with gas. But it's very important not just to build a pipeline but make sure you've identified the source of the gas.

So, what could the Allies do? What can we do as a community of countries to ensure our energy security? Well, coming back to Churchill, diversification is obviously the key – don't put all your eggs in one basket. We should build Nabucco, certainly. But we should also look at tapping in more gas from Sonotrach in Algeria, or from Nigeria via a Saharan pipeline, if it can be done, and we now have at least liquefied natural gas. Qatar, for example, the United States, Australia have pioneered liquefied natural gas, which was liquefied to -160C in tanks, into liquid and then re-gasified afterwards and, of course, as it comes in ships you can get it from any suppliers. And EU quite sensibly is supporting liquefied natural gas terminals at Rotterdam and Gdansk at the moment because you need the infrastructure obviously to be able to bring it in.

And then, of course, yes – renewables! It's quite interesting that the UK and Denmark have invested heavily in wind and indeed get about 20 per cent of their electricity today from wind. Of course, up there in Scotland or Denmark, if you've been there recently, there is plenty of wind to keep those systems going. It's calculated that sun from the Sahara if we could tap it because, again, if you've been in Sahara recently – there is no shortage of sun, believe me! That could supply about 15 per cent of Europe's electricity needs.

And there is a great deal of focus on nuclear power; and it's true – one megawatt of nuclear power is the equivalent of 80,000 barrels of oil. The problem with nuclear, as I hardly need to tell you, is first of all the safety problem, the disposal of the waste, but above all, it is unbelievably expensive! The current nuclear power stations cost 5 times more than their predecessors to build and to exploit. Even the US, which has decided to go nuclear again, will not have new power stations until 2017 and in Europe, apart from Finland, although we've been discussing a lot nuclear power, nobody has actually started yet in Europe to build a new nuclear power station. So, even if we go down that route, it's not going to help us any time soon.

So, why don't we do quite simple things, but they are not going to bankrupt us. The first thing is connect up the grid. One of the reasons why Bulgarians froze at -25C in their apartments during Ukrainian – Russian gas dispute last winter is because Bulgaria did not have an inter-connector from either Romania or Hungary. Sixty kilometers, that's all it took to be able to pump in electricity from elsewhere. And therefore, it's good news that the European Union has now started to devote money to actually have this inter-connectors. The Czechs quite sensibly a few years ago had one to Germany, which meant that once they were cut-off they could get what they needed from Germany. So, inter-connectors.

Second , storage. I mentioned that earlier. Hungary has seen a writing on the wall and it has invested 800 million dollars in storing enough gas for one year's supply as a cushion. And that is something, again, which the Europeans should do.

The third thing that they need to do is to have what is called “unbundling” -- in other words, a free energy market, so the companies could compete with each other and gain access to pipelines – very important because if you control the pipeline, you can determine whose gas goes into that pipeline. So, a free energy market, so that people in Europe can buy their gas from the cheapest supplier, with real competition and, then, reciprocity.

The Europeans have something called the Energy Charter, which Russia, hopefully, will one day ratify, which means that if you own some of my production, I have the right to own some of your production. If you want to invest in my companies, then you should allow me to invest in your companies as well. The less state ownership, there is the less the chance that any of energy will be the subject of political blackmail.

But above all, ladies and gentlemen, do I need to tell you, the only real answer in the short term is simply like dieting? If you want to get slim, there is only one really good recipe: eat less, eat less. And it's true if we want energy security we are simply going to have to learn to consume less of the stuff.

There is tremendous wasting. Somebody told me that the old-fashioned light bulb – you remember the old-fashioned light bulb? – Only 4 per cent of the energy you put in actually switches it on – the rest is wasted. And another person told me the other day something incredible: that over the next 30 years the Chinese are going to build, in terms of buildings, the equivalent of everything that the United States has today. – The real estate park...

Imagine that they don't build according to green technology. No insulation, no solar power, no efficient energy use. Imagine, imagine the waste that they could bring about!

Finally, what's in this for NATO? Probably not a lot, you may be concluding from what I've said. It's clearly the question of climate change policy, energy policy, industrial policy and so on. But there is nonetheless an aspect, which is that of civil infrastructure protection. As the energy is traded over global distances with liquefied natural gas tankers, oil tankers, as America gets its oil from Nigeria, not from Texas, as India gets its coal from Mozambique, not India itself, as China goes looking for oil in the Sudan. The Indian Ocean becomes the Atlantic of the 21st century where 90 per cent of global trade is transported today: 65 per cent of oil, choke points, like the Strait of Hormuz or the Strait of Malacca, through which 20 per cent of global supplies pass every day – become very important geo-strategic objectives. If you could shut these pipelines down, you could (to use Anthony Eden's phrase in Suez) – “you can have your hand on our windpipe”.

And, therefore, protection of that infrastructure becomes important. Just… There have been terrorist attacks on oil tankers in the past in the Persian Gulf in the 80's during the war between Iraq and Iran – 150 oil tankers were attacked by missiles in the Persian Gulf. Fortunately, not many were seriously damaged, but still...

In the Nigerian Delta we've seen attacks by the local independence movement called MEND – Movement for the Emancipation of the Nigerian Delta – against Shell oil rigs and personnel and so on. And I am not even talking about piracy, which, of course, is not about terrorism. It's about making money, but the pirates have seized, as you saw, oil tankers and ratcheted up oil premiums, the insurance premiums for oil tankers going through the Straight of Aden.

So, ladies and gentlemen, I do think there is a role for the Alliance in this area of protection of critical infrastructure and that we can use our naval expertise, our partners to try to anticipate problems, to respond should there be a disaster or an emergency, particularly if an oil tanker gets into trouble going through the polar ice pack in the next few years to cut two weeks of the journey time to Tokyo, the northwest passage. Definitely, there the military with all of its helicopters and maritime patrol aircraft and ships can be useful.

In conclusion therefore, can we have energy security? Yes. But we have to do five things: number one – we have to avoid too much geopolitics; contrary to what I said about the past in this issue. We need to avoid a beggar-my-neighbor hc_dict() scramble for resources with our neighbors in the way that the colonial powers in the 19th century had a scramble for Africa – everybody was trying to get their bid before the door closed. There is enough energy to go round if we share it as a common good instead of trying to monopolize it purely for ourselves and shut the other out.

Secondly, as I said, we are wasting enormous amount, we have to use it more conservatively. And that means probably the price will go up because one way to make people use something conservatively is put the price up.

Thirdly, we have to protect our critical infrastructure and find ways of cooperating in doing that with Russia, with China, with India, with the maritime powers of the world who would be protecting their tankers on the oceans.

Fourth, we have to bring not just the consumers into the International Energy Agency to discuss this, but also the producers, such as Russia, such as Saudi Arabia, Qatar and some of the other non-Western consumers, for example, like China and India so there is not, if you like, on the one hand, the interests of the producers and, on the other hand, the interest of the consumers and it becomes a confrontation, or a dialogue of the deaf, but finally we have to be realistic.

You may not like King Oil, but King Oil likes you. He would be around for a long time to come, even if today we have a crash programme to invest in renewables or ethanol or solar, or wind, or whatever. That is going to make us, if we like this or not, dependent on a number of rather unstable, non-democratic areas of the world and we are going to have to pay a great deal of attention not just to how we get our oil at an acceptable price, but what we can do to help manage the oil resource better for their own internal development and to remain stable politically.

Thank you.

Q: - You have just mentioned the scramble for energy and that we must avoid it. But don't you see scramble for energy by India and China, especially in Africa? Do you see this as a problem and, if so, what would be the solution to this? Thank you.

Shea: - Yeah, you're perfectly correct to say this. About ten years ago China's investments in Africa were under 2 billion dollars. Today they are well over a 100 billion dollars and rising fast and, you are absolutely right, we have to avoid two types of situations. The first type of situation is where obtaining supplies from countries becomes so important that we overlook their human rights record. Sudan being an obvious case in point: turn the blind eye blind, so that international community is divided and governments like that of Sudan feel that they are under no pressure whatsoever to liberalize, because they can sell their oil with no strings attached.

So it is very important that we try to send the same message. I actually believe that China lately because it has heard this debate has been much more aware of the need also to send political messages to Sudan and not see itself, as a Security Council member, as rising power, to be completely oblivious to that. So, that's a positive sign.

The second issue, of course, is to have a dialogue. This is why I mentioned the International Energy Agency between the major consuming countries, so we avoid this notion of monopoly. As long as we have an open market in energy where people are free to buy, people are free to supply, there should be, there will be enough to go round. We, of course, eventually are going to get out of fossil fuels anyway – because of climate change and we will find more economical ways of developing alternatives.

For example, if you take the lithium battery for electric cars, I would say another ten years. We have hybrid, we have the Prius, hybrid car already. Another ten years and electric car will be reality. So, there is no long-term reason why, as I said half the word should be supplied and the other half would not be supplied. But the key thing, you're absolutely right, is to have a dialogue.

The other thing, of course, is to make sure that the money, which is invested, really does benefit the people of Africa and not goes, you know, into Swiss bank accounts of people in the regime. So much of this oil money has been wasted, which is the reason I mentioned the “curse of oil”. It's going into “prestige projects”, you know, that didn't benefit the people, it hasn't created employment, it's been used to favor one tribal, one faction over another and we have to at least have some kind of dialogue to ensure that the investments that do go in are not just a sort of compensation for the oil, but serve the long-term development needs of the country concerned.

So that would be my view, but, of course, it's also very important that if we encourage the Chinese and the Indians, that we play by the same rules ourselves; obviously in terms of not being against their desire to invest in Western energy companies. There was a case a couple of years ago – you may remember – when a Chinese oil company – the Chinese National Oil Corporation tried to buy an oil company in California and the US Congress introduced a resolution in the name of, you know, national security to stop that from happening.

And I think it's very important, as I said, if we are going to encourage the Chinese, the Indians and others that there really be an open market, that we allow them to invest in our companies and so on, subject to the usual rules of transparency, exactly, but in return they allow us to invest in their companies as well. So we take energy to the extent we can out of state control, where unfortunately it has been going in the last few years, and put it more and more into the hands of the market. The profit motive will be enough for them to invent the technologies and find capital to develop new fields.

Q: - What's your opinion about fusion of energy, ITER Project in Southern France?

Shea: - I am not a specialist on this. I mean, my brother-in-law is a nuclear physicist. I should have invited him here today and there is now this new technology called “cold fusion”, which does seem to offer great benefits, if it can be developed. But all I am saying though is that when we come to nuclear we have to sort of distinguish, if you like, between some of the hype, you know, -- the expectations -- and the actual reality, which is that it is very, very difficult to develop the third generation nuclear power stations.

A French company (because France, as you know, is a big developer of nuclear power. France sells many nuclear power projects abroad) and it has been developing one in Finland for the last few years, which has suffered very extensive delays, precisely because getting the technology right is very, very difficult indeed. If you can show me a nuclear power station, which is not at least ten years behind the schedule on construction, I would generally be surprised.

I am not saying “no” to nuclear because in many respects if we want a carbon-free source of energy it is one that holds a tremendous promise, but we just have to be realistic. Private companies will not build a nuclear power plant unless they are given massive, massive subsidies from governments to do so. When they don't have these subsidies, the private sector doesn't really touch it. It's quite interesting that over the last few years the private sector has invested four times more in wind power than it has in nuclear power where the subsidies have not been forthcoming.

So, I think that nuclear power may be something for the longer term: once we get the technology right, once we deal with the wastage, once we find ways of managing the cost and also protection against terrorist attacks but, above all – and I have mentioned this in my very first lecture when I spoke about proliferation – provided we come up with the new Nuclear Proliferation Treaty that gives us some guarantees that all of these new nuclear reactors around the world that people are foreseeing aren't simply going to allow more regimes, like Iran or North Korea, to process their own fuel, to enrich their own uranium or plutonium and build their own bombs, because that's the problem, you know. How do you ensure that the peaceful nuclear power won't be diverted for military purposes?

I think sorting out these issues is going to take time. That's why I think nuclear has promise for the future, but don't see it as a panacea for the next ten to twenty years.

Q: - I would like to stress your conclusion number 2: we have to use energy more efficiently or use less. The existing installed capacity of fossil power generation has efficiency rate of 30-32 per cent worldwide, whereas the existing state-of-the-art technology is up to 60 per cent. So, by using the latest technology we can almost double the outcome of electricity we get out of every gallon of oil or every cubic meter of gas and there is such a huge potential. I mean, the EU spent 700 billion Euros per year on fossil imports that is much more than the US recovery plan, but every year. So, that’s the money that can be saved. There is so much pollution that can be saved, so much security that can be strengthened by using it more efficiently, also in the power generation.

Shea: - Yes. You obviously are student of these matters – judging by your question. The best answer I can give you is that – yes, there is a lot we can do, for example, just making the building industry conform to certain standards, when comes to insulation, solar panels, night storage of electricity, which can then be recycled the next day rather than wasted.

Again, I don't pretend to be a technical person at all, but I am sure that in terms of regulations on the building industry there is an enormous amount that can be done. I've mentioned the Chinese example. Jimmie Carter incidentally was also ridiculed a few years ago when he suggested during the gas crisis in America after the Yom Kippur war that Americans should turn down the heating and put on a sweater. And he was ridiculed for that, but it's not necessarily bad advice,

quite frankly, in terms of one's own consideration.

Building public transport networks where you can travel on a high-speed train, which uses about one-fifth of the energy of an aircraft to get to your destination. That's the point! Just like, obviously, public transport rather than the individual use of cars. I mean, these are not new ideas, they go back and back.

Even the EU directive now on using the new type of light bulbs, which have a much greater life span and much less use of energy than the old ones. I mean, these are fairly simple things.

The one point I would make though, just as I put this glass down, is that we have to make sure that we look at the totality. One of the things that I think did go wrong was the original EU policy on ethanol, bio fuels and ethanol - you remember? Certainly, we had a dash to gas a few years ago, now we had a rush into ethanol as a kind of panacea that was going to be the alternative to petrol in cars, but when we looked to it what we discovered? First, that old types based on corn, corn ethanol rather than grasses, actually put more CO2 into the atmosphere than the fossil fuels.

Number 2, farmers looking for subsidies, and this was certainly the case in the United States, suddenly started to convert their land to produce corn, which was no longer available for food. Food prices went up and you actually had food riots! I mean this is not exclusively the EU, the United States, in other places they are doing it as well. In the Amazon they say: “Hey! Corn prices are going up, let's chop down the Amazon!”

And, as I said in an earlier lecture, about 20 per cent of all carbon storage is done in the Amazon in the world. So, stupid to be putting more CO2 from ethanol while cutting down forests that capture CO2 to produce more ethanol and we all know that the price of a tank of ethanol for a BMW 5 series would feed a hungry African for one year, one year!

Even if the United States – this is a lovely statistics that I found – converted all of its agricultural land to ethanol production it would only be one-fifth of what the Americans consume in gasoline every year. And eventually the EU recognized that corn-based ethanol was not really a solution, and it changed its policy. I am not saying that other types of ethanol based on cellulosic technologies can't be effective, but it's an example where you suddenly think you've got a panacea, you're rushing to it, but without understanding that it has in economics, in terms of food production, in terms of climate, other consequences as well, so it's important to, sort of, get the package right.

And that's why, again, I think a diversification based on a range of different alternatives rather than one is probably going to be the best way forward.

Yes sir…

Q: - I have two points to make. You just mentioned that China is now a massive importer of oil. It's true, but maybe just halfly. China still mainly relies on coal consumption. It is true that [China’s oil importers are rising] . I am not an energy expert and but I have no statistics [on that]. But, as far as I know, coal consumption is still about 90 per cent of China's energy consumption today. That's one point. The second point is that you mentioned China's investment in Africa, some African countries' oil industry. This is true, but compared with Western countries, China's investment in Africa is still quite low. Another point is that China's investment in African energy industry is based on equality, mutual respect and mutual benefit, as well as for the good of the global community because, as I said, I am not an expert in this area, but the majority of oil products for the Chinese companies in Africa were sold in the global market, so it plays a positive role in making the global market stable. Right?

Shea: - Thank you, again, for those very, very good questions. On China. China imports about 50 per cent of its oil at the moment, but, given obviously its population and its very rapid rate of development, that figure will go higher. I think you're right – coal is the crucial issue because China has a lot of coal. Coal is still, I think in the world today, the major source of electricity, including in the United States by the way, which has the world's largest reserves of coal. And my country I mentioned too – the United Kingdom – we still depend upon coal and, of course, everybody remembers in Eastern Germany -- remember the days of the Cold War? -- I mean the pollution caused in Eastern Europe by the burning of lignite – or brown coal for the environment.

So, coal is the biggest polluter of all. Coal top, oil in the middle and natural gas much lower in terms of fossil fuels and I think that one of the key challenges for Copenhagen, and we spoke about this earlier, when I spoke about climate change, is to come up with some kind of technologies that can be used to sequester carbon caused by the burning of coal, to capture it and then to bury it so it doesn't enter into the atmosphere.

And, of course, this goes to the debate about how much money – 10 billion a year, 20 billion a year – the developed countries are going to give to the developing countries in order to procure this technology for carbon capture and storage, but this is going to be the key because I see statistics – you probably must know the situation better than I do, but I see statistics that China is planning to build 550 new coal-fired power stations over the next 20 years and that potentially is a lot of CO2.

That said, I don't know if any of you were listening to the BBC World Service Radio over the weekend, probably you were doing Christmas shopping, had better things to do, but there was an interesting series of programmes by Jonathon Porritt who used to be the Director of Greenpeace, called “Can China go green?” and he actually presented quite an optimistic picture that the Chinese are very aware now of climate change as an issue. In Copenhagen they have accepted targets, as you know.

China is now the world's largest investor in solar panels. It has some of the most advanced companies producing solar panels and so on. And China is crucially aware, particularly in the building industry and so on, of the need to cut CO2. So, he presented it as an interesting challenge between, on the one hand, the rapid speed of China's economic development, which is pushing forward, you know, the large increase in consumption of coal, fuel and gas, but on the other hand, also a sort of sense that we've got to do business differently, we've got to use new technologies, we've got cut CO2, and, forgive me, said that it was the Yin and Yang -- as there were the two conflicting tendencies – and which one in the 21st century will win and the future of not just China, but I think the future of climate change is largely going to depend on how China manages that.

When it comes to Africa, you're quite right. I spoke about the curse of oil. We've seen so many countries – I don't need to name them, but you know – that have not used fantastic revenues from oil to modernize and to transform in the way that you would have expected. You know, Saudi Arabia, for example, its per capita GDP was ahead of the United States in the 1950's, which is incredible. That's not the case today. Many Middle Eastern countries in the 1950's had a per capita GDP 4 or 5 times that of South Korea. Now it's the opposite – South Korea is 4 or 5 times higher.

So, what we've seen, frankly, is that those countries that don't have natural resources have developed their services and industries, developed the skills of their people, developed job opportunities in a way that those countries, which have been able to rely upon oil to fund their very bloated state sector have not done. And, as I said, as the prices became more volatile, they've had boom and bust and social instability.

So, now we have a number of new countries coming on to the market. We have Sudan, we have, for example, Ghana, which has recently discovered very large oil deposits, Brazil, which has now, as I said discovered large deposits of its coastline. Can that be more like Norway, if I can put it in this way? Norway, which has used its oil and its gas and put vast amount in a fund for the future generations and used it in a very targeted way for its own development.

Can we try, and you know this is not a challenge just for China, it's a challenge for the World Bank, for the United Nations, for all of us what we can to persuade countries, as I said, to use this money in a way that is really going to kick off their long-term development and not produce a situation where vast amounts are wasted on military forces, on “prestige projects”, on corruption and the general population doesn't really see much of an increase in the standard of living.

And, of course, you know, as the Shell experience in the Niger Delta convincingly shows also the oil companies, too, have much more now a duty of social responsibility vis-a-vis the populations where they develop the oil in terms of environmental damage, in terms of development of the local population and so on. Because when it doesn't happen, as Shell discovered in the Nigerian Delta – they saw an insurrection, which kidnapped the executives, which cuts their pipelines or attacks on their rigs and makes life very difficult. So that's the challenge as I see it.

I'd like to thank all of you today, very much. The good news is that you get a break, both from me and from University or from whatever over Christmas, but for those of you who still have to stamina to complete the course we have two final lectures in the New Year – one on cyber crime and the final one on failed states. Are they still going to be as big a problem in the 21st century, as they were in the last decade of the 20th century?

So, hopefully, I'll see at least some of you after Christmas. In the meantime, Merry Christmas and a very happy New Year! Thank you again for coming today.