The Hon. Lisa Raitt is joined by Joan MacNaughton, an internationally renowned energy expert and former senior UK government lead on energy, to discuss energy security, the effects of hostilities in the Middle East on oil prices, and the importance of long-term strategic planning for critical minerals and mining.
Lisa Raitt: Thank you for tuning in to The Raitt Stuff. I'm your host Lisa Raitt and in this podcast I'm going to share insights on current hot topics in the areas of public policy, politics and business, with some guests along the way. Welcome back to The Raitt Stuff. Today I have with me Joan McNaughton. Joan is an influential figure in the energy and climate policy debate, having been the Director General of Energy in the United Kingdom, overseeing the energy agenda during the UK presidency of the EU and leading the work on energy proposals agreed at the G8 Gleneagles Summit. She was also the founding chair of the World Energy Trilemma for the World Energy Council. It's an annual assessment of 129 countries' energy policies. And from 2004 to 2006, she chaired the International Energy Agency. Joan is a highly respected international expert, has lectured extensively on energy and climate policy. She's based in the UK, where Amber Batool and I had the great pleasure of meeting her in person this past spring. And now she holds various non-executive roles in corporates and academia. Joan, thank you so much for agreeing to be part of The Raitt Stuff today.
Joan MacNaughton: It's a pleasure, thank you for having me.
Lisa Raitt: I'm delighted. Well, you know, we're going to start because our listeners in North America, maybe it'd be helpful if you could share some of insights into your background and some of the projects that you've worked on so they can get a better sense as to what your role has been and continues to be.
Joan MacNaughton: Thank you, Lisa. I currently am working in the third sector, as you mentioned, in academia and also as a non-exec on some corporates. Before that, I was an executive board member for an equipment manufacturer in the power sector where I established a global public affairs team, on energy and climate policy for most of my career. I was 35 years in the UK government. And for my final posting, I was asked to take charge of UK energy policy, as you have mentioned. And as well as the two projects you mentioned for the G8 and the EU presidency, I led the crafting of a new energy strategy for the UK, which was published in 2003, I don't think in 2003 any big industrialized nation was putting a low carbon economy at the heart of its energy policy. As well as the low carbon goal, we had three other goals. One was around energy reliability or energy security, however you want to characterize it. A goal on creating competitive markets, both here and contributing to the development of competitive markets globally. And finally, trying to ensure that energy was affordable. We thought that on energy reliability, which must be a bit of a theme at the moment for reasons we'll come on to, provided you went for diversity with a lot of different suppliers, sources and routes, you could rely on markets by and large to deliver energy investment to ensure reliability, with just regulation to correct for market failures. Of course, alongside that, you're developing a lot of technologies, some of them are very innovative, particularly on the low carbon side of things. But if you look at it now, I think however diversified you were and however effective your own policies were, in relation to markets in your country or your participation in global markets, you'd have to take account of geopolitics and you'd have to be concerned about dependence or over dependence on either a single region, a single source of energy or a single supplier and the Straits of Hormuz are now perhaps the most vivid example that we have of a supply choke point that means you need to think about resilience in a wider framework. Another example, is critical raw materials where frankly, a lot of Western countries now are being highly active in relation to the dominance of China both in the supply and the processing. And that's been my most recent project I am a member of the Energy Security Leadership Council for the European Initiative for Energy Security, looking at critical raw materials and how you ensure you get the financing to flow and you get the supply chain to operate effectively.
Lisa Raitt: Before we get into the choke point, which is so important these days, we're speaking today post whatever deal it seems to have been announced by President Trump. I'd love to get your point of view on it. But I guess when I when I think about when you say energy reliability, it's not just about whether or not power generation is reliable, the mix of base plus renewables. You're talking about a much bigger thing. What We're calling it now energy security.
Joan MacNaughton: I was using that term because that was the term we used in 2003, but I absolutely agree with you. And I think energy security has now become such a strong component of defense security and economic security. So you're right, I think that's a better term.
Lisa Raitt: I don't know if it's better. I think it's an evolution, to be honest. I think we used to talk about making sure that we were able to have power to go to people's homes. And now it's much more beyond that. I think what I'm most taken with these days is the role that energy is playing in critical minerals, is playing in trade agendas around the world. It's not just talking about goods and services crossing borders. It is a discussions on secure on energy security and who can supply what?
Joan MacNaughton: It is for sure. In addition to that, one wants to have confidence in the competitiveness of your own economy, and that competitiveness now has as a very large component, the competitiveness not just of the availability of energy, but of your energy prices. So if your prices are way out of whack, then you're going to be importing things which probably if your energy prices were on a level playing field you'd be producing yourself and there are a whole host of issues there around domestic manufacturing and service mixes and reliance on other countries and we don't want to get to the position where one country can hold another to hostage frankly.
Lisa Raitt: And that was the fear I think with the situation with Iran, because the Strait of Hamous is definitely a choke point, and with no oil flowing through there, it was causing some real shortages in in countries where they had to make some public policy changes.
Joan MacNaughton: That's absolutely right. Particularly in Asia, 80% of the oil flowing through the Strait and 90% of the LNG flowing through the Strait goes to the Asian market. So they were hit very fast, very immediate impacts in India, because they're so dependent on cooking gas and kerosene for cooking. In addition, you have countries who are completely dependent on imports but who don't have a very strong economy and as soon as the price went up, even if there were availability, they weren't able to purchase the oil or the gas. And so Sri Lanka, for example, just closed everything on Wednesdays.So that's a huge hit to their economy straight off; education, economy, everything. Other countries have taken a whole raft of different measures, including working from home, imposing speed limits and what have you. But those effects are not going to be short-lived. They are going to have an impact on GDP for some years to come and some of that loss of valuewill not be recovered.
Lisa Raitt: Are we going to get back to normal now that there's an agreement with the United States and Iran? Or is there an agreement, Joan? What what's going on? What's your take on it?
Joan MacNaughton: The agreement, as I understand it, is a one-pager. It's what you might call heads of terms rather than an agreement, and according to the announcement from the American president, there's going to be an immediate reopening of the strait unconditionally on Friday. Now, I am not sure whether the ship owners and the insurers are confident enough that there will be complete right of passage on Friday to do that. And there was an announcement reported this morning from the Iranian regime that the agreement is not between the US government and the Iranian government, but between the US and Israel on the one hand, and Iranian government and Hezbollah, the terrorist group active in Lebanon on the other. I have heard nothing suggesting that either Hezbollah or Israel has signed up. So what happens on Friday may be very interesting to watch because on the one hand America may be able to control the peace, if you would like to call it that, by persuading Israel not to engage in acts of aggression, Iran may be able to do a similar thing with Hezbollah. So the strait might reopen. However, if it does, it'll be a little time before people stop being tentative. It'll take quite a long time to clear the five or 600 tankers who are trapped in the upper part of the Gulf.
Lisa Raitt: Really? Five or six hundred tankers? Wow.
Joan MacNaughton: Yes, and then you have to look at what the mix will be of products coming through, because that Strait carries in addition to oil and LNG, it carries sulfur, which is critical to many industrial processes, it carries the components for fertilizer and a lot of farmers have had to take difficult decisions whether to plant and rely on being able to afford such fertilizers as available or being able to harvest crops if there isn't a sufficient availability. And aluminum, 8 % of the world's supply of aluminum comes through the Gulf so that you know that is going to produce some very difficult choices about what will be prioritized, how will the market prioritize it, will there be any other effort to prioritize? In addition to that, that's only about clearing the backlog. The normality in terms of how the oil market operates, how the gas market operates and possibly how some of these other markets that are impacted operate, I doubt very much whether we'll see that return to anything recognizably normal before 2027 at the earliest.
Lisa Raitt: Wow. And what about the Asian countries that you mentioned before? They'll have to continue in their restrictive world?
Joan MacNaughton: They will, and many of them are quite poor countries actually. And I think it is a very concerning situation because everybody's going to be more constrained in their finances than they were before the attacks. And a lot of developed countries have cut their foreign aid anyway, and yet the need will have gone up. Especially countries which were just beginning on a growth path, some of those who are perhaps further along the curve might be able to recover more quickly, but the people who were really struggling to get onto the upward curve I think will be impacted most.
Lisa Raitt: You mentioned that you're on the energy security leadership initiative for critical minerals and metals, critical materials. What how is Europe thinking about a future supply chain in critical materials, given the Chinese influence?
Joan MacNaughton: Well, that's the challenge. When China is responsible for processing 90 % of some of those elements, it is very long term to well, medium to long term, perhaps to ensure that you can reduce your dependence. The initiative which I'm part of it's not just about critical raw materials, it looks more broadly at energy security and in particular the read across from what you might call civil industry to the defense industry and the scope actually for synergies in policies which can take account of the demand which either of those can bring to the table. But the report that we published in autumn last year set out some recommendations for the European countries on how to tackle this, including better coordination among financiers, project developers and policy makers, the coordination among off-takers and policy makers in the kind of support they're giving., Financing for support for building up the supply chain which the European Commission is proposing, should be increased fivefold between now and 2030 and then monitoring and managing the situation more effectively. The other thing they've proposed is that there should be standardized criteria for the environmental and social standards to be applied in mining so that European countries and partner countries who have some of these resources can work together with confidence that what they're doing is going to be acceptable to people downstream the supply chain.
Lisa Raitt: Yeah, very important because the processing, the mining, mining has taken on a whole new dimension, I think, than it used to be thought of. it's in critically important to the economy, but as well to the to the energy security and supplies to the country. Joan, we just have a few more minutes left, but I wanted to ask you a question that kind of marries together your work in energy security and what one of your directorships right now. I understand that you sit on the board for Heathrow Airport. And Amber and I, when we were visiting with you in the spring, asked you, and I don't think we were joking about it, but we were wondering whether or not we'd have enough jet fuel to actually make it back to North America. Should any of our listeners be concerned about shortages in jet fuel if they encounter if they're going abroad for a European adventure?
Joan MacNaughton: It depends on the time frame and of course it does depend on whether the current deal or agreement or whatever you'd like to call it, does stick. If that sticks then the prospects are obviously much better. If we continue to have a choke point in the Straits of Hormuz, if we continue to find that the refined products and the basic oil products are not getting through then there can be issues. At the moment the airlines, most of the airlines are saying that they are covered for their summer schedules. So if you're looking for a European holiday between now and September you're probably going to be okay although you may well find that it's costing more than you thought it would. I think beyond September, given that however quickly the oil flows, the different elements of the market will take time to find their level and given that Europe for example is highly dependent on imports for jet fuel, you would be well advised to look very carefully at how the situation seems to be evolving.
There has been some demand destruction. Lufthansa's cancelled 20,000 flights, I think, already. Most of the airlines are cancelling at the margin, rationalizing their operations. But by and large, they seem confident about the summer. And after that, I prefer to take stock a month or two down the line when we see what kind of progress has been made on the Gulf front.
Lisa Raitt: Right. Our Prime Minister Mark Carney announced in his spring economic update that he was looking at privatization or selling of our Canadian airports, which are land leases to individual, not for profit corporations that are somewhat still attached to government, but not quite.You sit on an entity that once was part of government but now is firmly, I think, in the in the private sector. Any lessons learned? Was it a successful transfer over, do you think, from government into private sector for Heathrow?
Joan MacNaughton: Well, I'm not saying this just because I sit on the board, but two facts. First of all, Heathrow is Europe's biggest hub and it's one of the most connected airports in the world. Secondly, it is now Europe's best performing hub in terms of punctuality and our own performance on things like passenger satisfaction, which is broken down into several different aspects of the passenger experience, has been improving. So I would say the private sector can bring a lot to bear in relation to airports. What I'd recommend is to establish your regime so that you encourage in more patient capital, people who are genuinely interested in investing in the infrastructure and in the medium to long term. There is a counter example of privatization which we are just experiencing in the water sector which has been disastrous. It hasn't delivered the investment, it's taken a lot of money out of the sector and it hasn't delivered the kind of quality of service or environmental performance that I think the public had a right to expect. And there are various factors at play in there, but one of them is the regulatory framework, where I do not think the balance between emphasis on prices to consumers and emphasis on the quality of what was happening, and the investment that needed to go into the operations, that didn't work properly. There's a very good report on that, that was conducted for the government and it might give some good lessons for how you get a regulatory framework to work well and how not to do it.
Lisa Raitt: Well, I appreciate that, Joan. And thank you so much for joining me today on the Rate stuff. Your insights are incredibly well informed. And I know that our clients are going to be grateful for hearing what you had to say about all the various topics of energy security, reliability, and what's happening in Asia and as well, what is going to be happening in the future with critical materials. Thank you so much for joining me.
Joan MacNaughton: Pleasure, thank you.
Lisa Raitt: Thanks so much for tuning in. Now, if you have any questions or comments or even requests on topics to discuss, drop me a line at lisa.raitt@cibc.com. Your interactions actually will make this better. I'm your host, Lisa Raitt, and this has been The Raitt Stuff.
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