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The Changing Politics of Energy

The Changing Politics of Energy. Amy Myers Jaffe Wallace S. Wilson Fellow for Energy Studies, James A. Baker III Institute for Public Policy IPAA Midyear Meeting San Francisco June 15-17,2005. Baker Institute Energy Forum.

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The Changing Politics of Energy

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  1. The Changing Politics of Energy Amy Myers Jaffe Wallace S. Wilson Fellow for Energy Studies, James A. Baker III Institute for Public Policy IPAA Midyear Meeting San Francisco June 15-17,2005

  2. Baker Institute Energy Forum The Baker Institute Energy Forum is an interdisciplinary, research program focusing on energy supply and security and public policy. MISSION – Serve as a focal point for the exchange of ideas that enhance understanding of the complex political, cultural, religious, economic, social and technological forces that influence open access to energy resources and their equitable distribution. GOAL – Promote the development of better public policy choices related to energy supply, security and pricing.

  3. Geopolitics, not Geology, is driving the energy future

  4. Peak Oil Theories How Valid? • Historical precedents for wrong-headed predictions: U.S. Bureau of Mines forecast in 1914 that the U.S. had only 10 years of oil supply left. • U.S. Geological Survey 2000 report estimated 649 billion barrels of oil could be added between 1995 to 2025, up 20% from the 1994 assessment. • Ratio of world-proven reserves to production stands at 42 years, substantially higher than it was in 1972. Total world reserves over 2.6 trillion

  5. Industry is near or at capacity World World U.S. Oil Output Refining Natural Gas Capacity Utilization System

  6. OPEC production capacity has fallen, not increased, since 1979 Opec can replace all Iraqi/Kuwait oil in 1990 Economic boom erodes capacity in 1997 Demand bumps up against capacity

  7. Access to Oil & Gas Reserves Constrained NOC reserves(equity access) Reserves held by Russian companies Full IOC accessreserves 113 / 6% 140 / 7% 324 / 17% 1,354 / 70% NOC Reserves (no equity access) Source: PFC Upstream Competition Service & BP; reserve figures are conventional billion boe, 2001

  8. Ranking Risks • Middle East –Period of Great Political Transition; Shiism vs Sunni Islamists • Future of U.S. role in Iraq • Arab-Israeli Conflict • U.S.-Iran • Russia – Putin and the Statists • Latin America: Populism and Increased Chinese Presence • Asia Pacific promise: Conflict resolution? • Africa: Greater U.S. priority, Geopolitical competition from China • China: Economic Bubble Burst? • EU Increasingly Challenge U.S. Global Leadership; Push Environmental Agenda

  9. Will Saudi Arabia continue to play the marginal producer role? Three questions: • Political will: will the kingdom continue to favor stable prices? • Political stability: are facilities at risk? • Domestic oil monopoly: will it continue to perform? Money, management, personnel, proper planning? New expansions taking place but could be less than needed to meet the future

  10. Unconventional oil and gas • Oil shale and tar sands costs are falling • These sources could become more important if political stability in the Middle East deteriorates; Canadian unconventional production up 220,000 b/d this year • Rapid growth in coal bed methane in the last decade • In 2001, about 40 Bcf of the 134 Bcf of methane liberated from underground mines was recovered, compared with 13.8 Bcf recovered in 1990 • Gas to liquids finding its time; Qatar plans to produce 400,000 b/d by 2012 • Coal may also provide substitutes for gas and oil

  11. US Natural Gas Supply --2000 Geographically Diverse

  12. Access to US resources is not just geological; local politics prevails against market forces • Environmental pressures have blocked natural gas resource development in key areas of the US

  13. Alaska route … the original proposal LNG 6% Imports, 10 bcf/d Canada route … opposed by Alaska politicians … but soaks up more gas Japan Canada 94% LNG into the West Cost is economically compelling... but twenty years of pursuit have yielded only failure. Australia Key Mid-West markets Bolivia/Peru/Argentina Algeri/TTrinidad/Nigeria/Qatar/Malaysia/Australia Algeria/Trinidad/Nigeria/Qatar/Malaysia/Australia Trinidad expansion, Nigerian expansion, Venezuela, Nigeria II, Egypt, Argentina • US market supply deficits expected to attract increased imports from distant suppliers

  14. Geopolitics of Gas • New Market Structures • Regional to Global • Changing Roles for Governments • From Builder to Just a Facilitator • Supply Security • Rising Dependence on Middle East, Russia Exports; Historically, Few Political Disruptions, May Give Way to Greater Risks in the Future • Challenges to Gas Future • Investor Confidence • Resource Curse –Higher Scrutiny, Harder Politics • Siting and Terrorism • Slowdown to Electricity Reforms • Coal Fights Back

  15. 2. Changing Role for the State • “Old World” • State-owned enterprises • Tightly regulated, monopoly markets • Oil-indexed gas prices • “New World” • Private operators and financing • Contestable, multiple markets • Gas-on-gas competition • The New World: Faster or Slower Shift to Gas?

  16. Challenges to Gas Future • Investor Confidence • $3.1 trillion capital needed for next 30 years • Mainly upstream (E&D; liquefaction) • Inhospitable investment environments • “Resource Curse” • Arun, Algeria, Russia: all plagued • Yet projects went forward • New world: higher scrutiny and new schemes • Siting and terrorism • Regasification facilities • Electricity • 2/3 of expected incremental demand • Will markets be restructured? • Caution of Brazil • Will coal fight back? Large Scale Renewables? Nuclear? • Coal in Poland

  17. U.S. Natural Gas vs. Coal Use

  18. Bush Push for More Domestic Drilling ANWR Alaska Gas Pipeline Ethanol Fuels Nuclear Coal Increased International Cooperation on Energy Science R & D LNG Blue States Greater Focus on Hybrid Cars, CAFÉ, or Emission Limits Renewable Fuels Targets and Investment Funds Alaska Gas Pipeline Increased National Science R & D Budget Kyoto and Environmental Goals Better Defined Who will lead U.S. energy policy?

  19. Emissions Policies: States Rights Or Federal Prerogative? • Proposed California Air Resource Board (CARB) Restrictions are stringent • From a base year of 2002, it calls for emissions reductions of: – 22% by 2012 – 30% by 2016 • Emission rules process under way in8 states including: New York, Massachusetts, New Jersey, Vermont, Connecticut, Rhode Island, Maine, and California • Washington and Oregon plan to become the 9th and 10th states, representing a total of 29% of the U.S. auto market • Governor Arnold Schwarzenegger recently signed Executive Order S-3-05 in order to allow California to continue to be the “leader in the fight against global warming.” • This bill calls for: • GHG emissions at 2000 levels by 2010 • GHG emissions at 1990 levels by 2020 • GHG emissions at 80% below 1990 levels by 2050

  20. Energy Policy Act of 2005 • Passed House April 21, 2005, 249-183 • Approved 21-1 on May 21 by Senate Energy and Natural Resources Committee • Began debate on Senate floor June 14 Provisions • Requires government to purchase a set amount of electric energy from renewable sources • New rules ensuring reliability of electricity grid • Provides $200 million annually for clean coal research • Calls for new nuclear research including the construction of a new test reactor at the Idaho National Laboratory • New hydrogen research programs supporting its production, storage, distribution, and use; as well as fuel cell applications • Establishes carbon sequestration R&D program • Appropriations to DOE for renewable energy R&D of $610 million FY 2006, $659 million FY 2007, $710 million FY 2008

  21. 3. Security of Supply • To date, few political interruptions • Ukraine (middle 1990s) and Belarus (2004) • Algeria (early 1980s) • Argentina (2004) • Is a Gas Cartel Feasible? • Gas Exporting Countries Forum (GECF) • Large competitive fringe • How will concentration play out?

  22. Natural Gas Supply Projections: Mideast, Russia, Australia Grows, U.S., Canada shrinks

  23. Major LNG Importers 2015 and beyond: More Countries Import More Gas

  24. Future LNG Exporters Shares: Greater Chances of Political Disruption?

  25. Security of Gas Supplies • Reserves are highly concentrated at top of distribution: • Russia has 30.5% • Russia + Iran have 45% • Add Qatar, Saudi Arabia + UAE • These 5 countries have 62% • But regional distribution is better. Middle East has 36% of gas reserves compared with 65% of oil reserves.

  26. Conditions for an Effective Cartel • Cartel members control large share of market • Must agree to production quotas or capacity controls • Must prevent cheating • Must prevent new entry • Inelastic demand for product • Low elasticity of supply of non-members • Small number of members • Easier to coordinate • Easier to catch cheaters

  27. Prospects for a Gas Cartel • Distribution of gas reserves is concentrated • Gas exports are even more concentrated. • Russia has 28% • Top 7 have 79% of exports • But Canada, Norway and Netherlands with 30% of exports are not likely to join • Only significant Middle East exporter is Qatar with 2.6% • But export concentration reflects underdevelopment of gas deposits in many countries. • More widespread development will create many sources of supply. (the supply elasticity of non-members of a cartel is large in short - intermediate term)

  28. Prospects for Gas Exporting Countries Forum (GECF) • Little power at present • Attempts to prevent European liberalization • Algerian gas for Boston • Too many members with competing interests to constrain capacity expansion in intermediate term.

  29. In the Long Run • As in oil, world will become increasingly dependent on few sources of gas after 2030 • Russia and OPEC will have incentives to coordinate pricing of oil and gas • Consuming nations can reduce market power of exporters by • Promoting competition among energy sources by • Liberalizing domestic energy sectors • Develop technologies that facilitate fuel switching • Improve energy efficiency

  30. Prices Rise and Converge Over Time: Access to Pipeline Supplies Matters

  31. Multi-Faceted Demand Response • Multi-fuel burning equipment. • Indirect substitution of different plants. • Substituting towards/from baseload. • Over time, newer vintages appear • Choose fuel • Change fuel efficiency • Aggregate energy adjustments where no other fuel is substituted. • Industry moves offshore

  32. EMF Modeling Forum at Stanford2020 Natural Gas Conditions, Other Cases NPC assumes that policies restrict responses to price. Wellhead Prices (2000 Dollars per Mcf)

  33. Energy Policy Act of 2005 Natural Gas Provisions • Incentives for production of natural gas from deep wells in the shallow waters of the Gulf of Mexico • Directs the Secretaries of Energy, Transportation, and Homeland Security, the Federal Energy Regulatory Commission, and state and local officials to convene at least 3 forums to discuss LNG issues in order to foster cooperative efforts relating to LNG • FERC is authorized to establish an electronic information system to provide information about the price of transportation costs of natural gas in interstate commerce • FERC is authorized to grant new storage capacity at market rates provided there is needed storage capacity, it is in the public interest, and customers are adequately protected • Grants FERC the exclusive authority under the Natural Gas Act to approve or deny any application for the siting, construction, expansion, and operation of import/export facilities onshore or in State waters

  34. Climate Change Bills in the Senate • McCain – Lieberman • Establishes cap-and-trade system • Aims to cut carbon emissions to 2000 level by 2010 • Worst-case scenario: freezes carbon emissions at 2010 levels • Provides $1 Billion in subsidies for the development of cleaner energy technologies (including nuclear power) • Bingaman – Hagel • Calls for mid-2012 levels by 2020 • Industry can buy its way out of cap if carbon credits become prohibitively expensive • Provides generous incentives for technological development and climate research

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