Transcript Chatham House 2008

Facing the New Challenges in the Global Energy Market:
Geopolitical and Financial Risks
Amy Myers Jaffe
LIFTOFF
Launching Our Future
Today
th
40 Annual ECC
Conference
James A. Baker III Institute
for Public Policy,
Rice University
February 14, 2008
Key Finding
Many of the risks that originally created
the so-called “terror premium” have
eased in the past year and this is now
reflected in downward oil price trends.
Other factors, related to the dollar and
financial market trends, created a
bubble effect that clouded
fundamentals.
In the end, fundamentals do reassert
themselves. Oil is a cyclical industry and
it is hard to defy that reality.
Geopolitical Risk from Middle
East
Tensions and Conflict in the
Middle East at a lull.
Israel in negotiations with Syria.
Violence in Iraq on a downswing, reducing chances
of a spread to regional conflict.
Iranian politics in a transition.
Geopolitical Risk from Iran
Iranian spring election results an
indication that economic
sanctions are working.
Iran’s political conservatives’ concrete interests in
promoting greater foreign investment and
attaining a larger measure of autonomy for the
private sector, put together with their current
political rapprochement with domestic reformist
groups could translate into a more flexible
position on the nuclear issue. There is a greater
possibility of diplomatic negotiations with the
West than in the past.
Geopolitical Risk from AlQaeda
Starting in 2004, the attitude towards oil shifted and
Al-Qaeda writings refocused on how supplying
oil to the enemies of Islam justified the
destruction of oil facilities by any means
necessary. But Al-Qaeda assessed as having
been weakened.
1)
2)
Attacks are aimed to destroy the economic basis of the kingdom rather
than allow anyone collaborating with the United States to benefit from
the oil
Prominent ideologue and strategist for global radical Islam Abu Musa`b
al-Suri set a strategic direction of autonomous cells carrying out
terrorist operations and focused specifically on the oil industry –a
strategy which appears to have been adopted both by Al-Qaeda and a
number of ideological affiliates
However, local and autonomous aspect of terror cells, in the aftermath of the
U.S. military campaign in Afghanistan which disrupted some of AlQaeda’s global coordination capability, has reduced the chances of a
successful strike against major oil facilities that requires expert
coordination, planning and material support.
Scenario: Russian six month cutoff of natural gas supply to
Europe—Extreme price impacts but market adjustments possible
starting after a year
$9.00
$8.00
$7.00
$/Mcf
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
$-1.00
2008
2009
2010
2011
2012
2013
2014
Henry Hub
German-Austria Border
NBP
Tokyo
2015
2016
Sydney
2017
2018
Scenario: Russian six month cutoff of natural gas supply to
Europe—Supply Impacts. LNG impacts mean supply adjustments
divided among many players, not just EU
2
Tcf per year
1
0
-1
-2
-3
-4
2005
2010
Russia
2015
2020
Ukraine
2025
East of Caspian
2030
2035
Rest of World
2040
Contagion, Petrodollar Recycling and
Financial Crises
*Current potential for market contagion means sagging US economy
or banking crisis could become global
*High oil prices worsen U.S. trade deficit and create asset bubbles
*Debt accumulation started commodity and asset bubbles
*Hot money from Middle East flowing around the world ala the
1970s
*Escalating U.S. debt (combined with rising developing world debt)
could threatening global financial system if U.S. creditors (Asia
and GCC) become fearful and begin to switch away from the
dollar
*End of the dollar-standard era? Will it be orderly transition or
chaotic crisis?
*Is it the 1970s all over again??? Did the Fed really learn from its
mistakes about interest rates, stagflation and monetary policy?
The effect of the weakening $
•
It is no coincidence that the price of oil hits all time highs as the dollar sinks to new
lows. Since May 2003, when oil price was $28.18, the depreciating $ accounts for
roughly $50 of the $100 increase.
In fact, a stronger dollar yields a very different picture of oil price.
•
– Construction: Use the $-Euro exchange rate to calculate the Euro price of oil. Then,
convert this price back to $ using the $-Euro exchange rate from the year 2000. This is a
“ceteris paribus” argument, so a different exchange rate may very well lead to a different
supply-demand balance.
•
Supply-demand fundamentals would have, nevertheless, pushed oil prices over $78,
which would have been new territory.
Daily Exchange
Rate ($/Euro)
Daily Oil Price
(WTI)
1.7
140.0
1.6
120.0
1.5
100.0
1.4
1.3
80.0
1.2
60.0
1.1
40.0
1.0
0.0
1/4/99
4/4/99
7/4/99
10/4/99
1/4/00
4/4/00
7/4/00
10/4/00
1/4/01
4/4/01
7/4/01
10/4/01
1/4/02
4/4/02
7/4/02
10/4/02
1/4/03
4/4/03
7/4/03
10/4/03
1/4/04
4/4/04
7/4/04
10/4/04
1/4/05
4/4/05
7/4/05
10/4/05
1/4/06
4/4/06
7/4/06
10/4/06
1/4/07
4/4/07
7/4/07
10/4/07
1/4/08
4/4/08
0.8
1/4/99
4/4/99
7/4/99
10/4/99
1/4/00
4/4/00
7/4/00
10/4/00
1/4/01
4/4/01
7/4/01
10/4/01
1/4/02
4/4/02
7/4/02
10/4/02
1/4/03
4/4/03
7/4/03
10/4/03
1/4/04
4/4/04
7/4/04
10/4/04
1/4/05
4/4/05
7/4/05
10/4/05
1/4/06
4/4/06
7/4/06
10/4/06
1/4/07
4/4/07
7/4/07
10/4/07
1/4/08
4/4/08
20.0
0.9
$ Price (actual)
Euro Price (actual)
$ Price (fixed 2000 XR)
Source: Medlock (2008)
The number of deepwater drilling rigs is about to increase
exponentially
Average Deepwater Rig Day-Rates
$/day
600
500
400
300
US GOM semi 5000-7499-ft
US GOM semi 7500-ft+
North Sea semi 3000-4999-ft
Drillship GOM Dynam Positioned
200
100
Jun-08
Mar-08
Dec-07
Sep-07
Jun-07
Mar-07
Dec-06
Sep-06
Jun-06
Mar-06
Dec-05
Sep-05
Jun-05
Mar-05
Dec-04
Sep-04
Jun-04
Mar-04
Dec-03
0
Deepwater Rigs under construction – Now let’s see if we get a supply response!
# rigs
30
25
8
20
12
15
5
10
18
12
5
0
12
4
2
2002
2003
3
2004
2005
11
8
1
2006
2007
Semisubmersibles
________________
Source: ODS-Petrodata and Lehman Brothers Estimates
15
Drillships
2008E
2009E
2010E
2011E
Refinery capacity expansion to outpace product demand
Refinery investment had not kept up with rapid demand growth in recent years, but we are
approaching a turning point, especially East of Suez
• Refinery capacity additions could outpace demand growth in 2010 by 2:1
Global Upgrading
Capacity Additions (k b/d)(1)
Global CDU Capacity
Additions (k b/d)
2006
1,667
2007
1,138
2010
1.0
707
670
0.6
1,809
0.4
2,255
2012
1,096
809
0.8
2,392
1,199
1,162
1.2
1,551
2011
1,566
1.4
1,833
2008
2009
1,507
1.6
0.2
3,120
2013
0.0
China
0.5
1.0
South Asia
________________
1.5
2.0
Middle East
2.5
0.0
2006
3.0
3.5
Rest of World
China
Source: Lehman Brothers Estimates.
1.
Includes coking, catalytic cracking, and hydrocracking units and expansions.
12
2007
2008
South Asia
2009
2010
Middle East
2011
2012
2013
Rest of World
Latest Demand Trends
May 2008
Source: Energy Intelligence
('000 b/d)
Chg. vs.
Chg. vs.
Main Markets
May '08
May '07
Q1'08
Q1'07
United States
20,443
-1.4%
19,935
-4.6%
Japan
4,477
+1.6%
5,448
+1.1%
Europe Big 4
7,537
-1.9%
7,785
-0.8%
OECD G-7
35,110
-1.2%
35,965
-2.4%
Other OECD
12,317
-1.1%
12,839
+0.0%
Total OECD-30
47,427
-1.1%
48,804
-1.8%
Ex-USSR
4,222
+0.9%
3,701
+0.3%
China
8,089
+5.4%
7,824
+6.7%
Other Non-OECD
25,883
+2.0%
25,506
+2.3%
Total Non-OECD
38,194
+2.6%
37,032
+3.0%
Total World
85,621
+0.5%
85,836
+0.2%
Latest Demand Trends
July 2008
Source: Energy Intelligence
('000 b/d)
Chg. vs.
Chg. vs.
Main Markets
July '08
July '07
Q2'08
Q2'07
United States
20,052
-3.4%
19,897
-4.3%
Japan
4,534
-1.3%
4,792
-11.8%
Europe Big 4
7,669
-3.2%
7,645
-2.8%
OECD G-7
34,957
-3.1%
34,977
-5.1%
Other OECD
12,572
+0.9%
12,671
+1.7%
Total OECD-30
47,529
-2.6%
47,648
-4.4%
Ex-USSR
3,996
+0.0%
4,141
+12.2%
China
8,043
+4.9%
8,317
+13.4%
Other Non-OECD
26,196
+4.2%
26,186
+4.3%
Total Non-OECD
38,235
+4.1%
38,644
+7.6%
Total World
85,764
+0.3%
86,292
+0.6%
Will Dependence on NOCs Collide with
Pent Up Demand in Developing World?
Geopolitics is driving our energy future.
There are many reasons to remain concerned about a
major supply disruption that could affect mobility.
The restructuring of the oil industry means that we are
going to be more dependent on national oil
companies to produce future energy supply.
Longer term, given this restructuring, the future oil
supply may fail to materialize in the volumes we
expect and need.
There exists a vast pent up demand for automobiles
and electricity in the developing world that will be
hard to meet long term without a breakthrough
change in the status quo.
Control of World Oil Reserves
Control of Oil Reserves, 2005
Majority of remaining oil
resources are controlled by
traditional state monopolies
and emerging partially
privatized firms.
IOCs
10%
Russian
OCs
6%
NOCs-IOCs
jointly
7%
NOCs
77%
World Proved Crude Oil Reserves, 1980-2006
1,400
Billion Barrels
1,200
1,000
800
Iran, Iraq,
Venezuela,
UAE
Saudi Arabia
600
400
Alberta oil sands
200
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
OECD
RoW
NOCs have important national goals and priorities that go
beyond the maximization of return on capital to shareholders.
NOC national priorities sometimes interfere with these firms’ abilities to maximize the value of
oil resources; replace reserves; expand production in line with market opportunity; and meet
performance goals in line with best practices in international industry.
Examples
Goal
•
Oil wealth redistribution to society
at large
•
Fuel at subsidised prices
•
Wealth creation for the nation
•
•
Contribution to national GDP
Fund for future generations
•
Industrialization and economic
development
•
Local content programs
•
Energy security, including assurance of
domestic fuel supply and security of
demand for producing nations
•
Foreign and strategic policy
and alliance building
•
Oil Diplomacy and advisory role to
national leaders
•
Participation in national level
politics
•
Leadership with greater political
aspirations and involvement of unions
and employees in national politics
•
Ensure no domestic fuel
shortages
NOC Efficiency
Technical Efficiency
•
On average, NOCs that are fully government-owned and sell petroleum products at subsidized
prices, will be only 35 percent as technically efficient as a comparable firm which is privately held
and has no obligation to sell refined products at discounted prices.
•
Most of the NOCs in OPEC countries offer subsidized fuel prices. While individual firms may vary
in efficiency, on average government held firms in general exhibit only 60 to 65 percent of the
efficiency of the privately-held international oil majors
Revenue Efficiency
•
Our analysis shows that there is a large difference in the revenue efficiency growth which could be
achieved through process improvement and better integration:
– IOCs: In the range of 10-20% growth
– NOCs: In the range of 30-90% growth
Overall
Many NOCs are 80 percent or more below the frontier of the most efficient firms in the industry
50 percent of that gap in efficiency is accounted for by:
•
Their lack of vertical integration
•
The inefficiencies created by having to provide facilities to meet domestic product demand that is
growing inefficiently largely due to subsidized prices
•
100 percent government ownership
•
Some government interference in the businesses
Revenue Efficiency
Revenue efficiency is measured as the percent of revenue a
company achieves relative to “best practice” for a given level of
reserves and employees.
Percent
Revenue
Generated
Relative to
“Best
Practice”
Geopolitical and Economic Implications
• NOC’s national priorities sometimes
interfere with the firm’s ability to:
– Maximize the value of oil resources,
– Replace reserves
– Expand production, and
– Perform in a technically efficient
manner.
NOC Geopolitical Responses to
Tightening Markets
NOCs feel empowered by oil supply shortages and this will
tempt them to flex their geopolitical muscle…
• Russia increasingly assertive to defend its sphere of
influence, using energy levers
• Iran flexing spoiler power in the Persian Gulf
• China becoming heavily embedded in producing
countries; less trusting of market based system
• Producers try to get more than economic gain; advance
geopolitical and regional goals; Example: Venezuela trying
to leverage geopolitical power from oil (the special
problem of the Citgo assets)
• Consumer nations seek geographic diversification of oil
and gas supplies as well as alternative energy to respond
to saber rattling by oil producers; Regardless of your view
on Russian motivation, Ukraine affair was landscape
changing event in Europe
• Resource Wars Fear Literature: Could scarcity lead to
greater conflict? Within oil producing countries? Between
energy scarce countries?
Geopolitical and Economic Implications
•
•
•
•
NOCs are expected to control a greater portion of future oil production over the
next two decades but they will have difficulty fulfilling this role
Many NOCs have stagnant (or falling) oil production due to civil unrest,
government interference, corruption, inefficiency, and diversion of capital to
social spending
Combined with the lack of spending of the largest IOCs, supply might fail to
materialize in the volumes and time frame that it is needed, despite “price
signals” for investment
Uncertainty about climate policy is another influence dampening the investment
response
OPEC Investment Barely Keeps Pace with
Losses from Iraq, Venezuela and Indonesia
1998
2001
2003
2005
Saudi Arabia
9.8
9.9
10.15
10.3
Iran
3.7
3.8
3.8
4
Iraq
2.8
3.05
2.2
1.8
Kuwait
2.4
2.4
2.5
2.6
UAE
2.4
2.45
2.5
2.4
Qatar
0.72
0.75
0.75
0.82
3.3
3.1
2.5
2.5
Nigeria
2.05
2.3
2.3
2.3
Indonesia
1.35
1.3
1.15
0.9
Libya
1.45
1.45
1.45
1.6
Algeria
0.88
0.88
1.15
1.35
30.85
31.38
30.45
30.57
25.85
28.23
29.2
29.87
5
3.15
1.25
0.7
Venezuela
Total
Call on OPEC
Spare Capacity
The Largest Five IOCs represent 20 percent of non-OPEC Production
with 9.7 million b/d and had $150 billion in operating cash flow in 2006
(compared to $50 billion for the next largest twenty American firms).
Non- OPEC Production
2006
Other
27%
Total FSU
25%
ENI
2%
Total
3%
Next 20 US
4%
Big 5
20%
Pemex
7%
Petrobras
Total 4%
Chinese
8%
Source: Baker Institute Working Paper: The International Oil Companies
The Largest Five IOCs spent 56 percent of operating cash flow in 2006
on stock buybacks and dividends.
Figure 3: Selected Outlays (Big 5)
60,000
Millions of Dollars
50,000
40,000
30,000
20,000
10,000
0
1993 1994
1995
Purchases of Equity
1996 1997
Dividends
1998
1999 2000
Exploration
2001
Development
2002 2003
2004
Property Acquisitions
Source: Baker Institute Working Paper: The International Oil Companies
2005 2006
The Big Five Oil Companies
(in Nominal US Dollars)
Year
1994
2006
2007
Operating Cash Flow
42 billion
154 billion
160 billion
Share Buy Backs
1.4 billion
55 billion
55 billion
Dividends
14 billion
31 billion
33 billion
Exploration Spending
6.5 billion
9 billion
9.9 billion
Development Spending
16 billion
50 billion
54 billion
Property Acquisitions
1.9 billion
4.7 billion
3 billion
Source: “The International Oil Companies,” The Changing Role of National Oil Companies in
International Energy Markets, James A. Baker III Institute for Public Policy, Rice University
(based on SEC filings)
The Next Twenty American Firms are spending the same amount on
exploration as the Largest Five IOCs.
Figure 6: Exploration Expenditues
12,000
10,000
$ Millions
8,000
6,000
4,000
2,000
1993
1994
1995
1996
1997
Next 10 US
1998
1999
Big 5
2000
2001
2002
Next 20 US
Source: Baker Institute Working Paper: The International Oil Companies
2003
2004
2005
2006
The Largest Five IOCs are struggling to replace reserves.
Reserve Replacement Ratio
300
250
200
150
100
50
0
1995
1996
1997
1998
1999
2000
100% Replacement
2001
Big 5
2002
2003
Next 20
Source: Baker Institute Working Paper: The International Oil Companies
2004
2005
2006
The market is not rewarding the majors for this strategy. Moreover, the
NOCs do not need the majors for capital financing. NOCs can go
directly to the markets and investors are rewarding the more
commercial NOCS.
Share Price Performance
Indexed, October 2002 equals 100
800
700
600
500
NOC's used for Index:
CNOOC
Eni
Gazprom
Indian Oil
MOL
Norsk Hydro
NOC's + 531%
OMV
ONGC
Petrobras
PetroChina
Sinopec
Statoil
400
300
Majors's + 113%
200
100
0
Oct-02
Apr-03
Oct-03
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Source: Baker Institute Working Paper: The International Oil Companies
Oct-06
Apr-07
Oct-07
Transportation Energy Use, Vehicle Stocks, and Economic Development
•
Countries such as China are at the “launching” point. So, we should
expect vehicle stocks and transportation fuel use to grow very rapidly in
those countries as they continue to develop.
"Average" Country Simulation of Patterns
Note: Series are plotted on
different scales in order to depict
them in the same chart
US
Vehicles per Capita
Fuel Use per Capita
China
GDP per Capita
Source: Medlock and Soligo (2003)
IEA Reference Scenario:
Increase in World Primary Energy Demand, 2005-2030
100%
Rest of the world
India
China
80%
60%
40%
20%
0%
Coal
Oil
Gas
Nuclear Hydro Rest of Total
renewables
China & India will contribute about 45% of the increase in
global energy demand to 2030 on current trends
McCain versus Obama on energy policy
Cap-and-Trade
Higher CAFE
•Yes: reduce
emissions 80%
from 1990 levels
by 2050
•Increase fuel
economy
beyond 35mpg
•52 mpg by
2025
•100% permit
auction
Renewable
Energy
Standard
25% by
2025
Drill Offshore?
•Supports limited
offshore drilling
(1Aug2008)
•Prioritize the
Construction of
the Alaska
Natural Gas
Pipeline
•Supports Low
Carbon Fuel
Standard
Tax on Big Oil
•Proposes giving
working families
$1,000 energy
rebate; paid from oil
companies’ profits
•Proposes selling
70million barrels of
oil from reserves to
lower current gas
prices (4Aug2008)
•(Proposes
eliminating need for
oil from Middle East
& Venezuela in 10
years)
•Yes: reduce
emissions 66%
from 1990 levels
by 2050
•Mix of free
permit allocation
and auction
•(Introduced a
climate change
bill with Sen.
Lieberman in
2003)
•Supports
increases in
principle
•supports
enforcing
existing
standards
No national
standard
but support
state
targets
•Supports, but
states should
decide
(17Jun2008)
•No drilling in
ANWR.
Tax Credits
•Proposes $7,000 tax credit
on the purchase of fuelefficient cars
•Proposes that new
vehicles sold in US are flexfuel by the end of his first
term: $4 billion in loans/ tax
credits to U.S. auto plants
•Supports extending tax
credit for renewable energy
production
•Opposes windfall
profits on oil
companies
•$5,000 tax credit for
purchase of zero carbon
emission cars
•Suspend 18.4-centa-gallon federal tax
during summer
•Opposes extending corn
ethanol tax credit: opposes
tariff on imports of ethanol
produced from sugarcane
•Strongly opposes
the use of the
government oil
reserves
•Proposes tax credit to
companies investing in
R&D for clean, alternative
energy (equal to 10% of
wages spent on R&D)
Three Interacting Forces:
Energy Security/Climate Change Legislation, Energy
Consumption, and Technological Innovation
•
As climate change and security
of supply grow into critical
geopolitical issues, governments
and consumers are searching
for solutions
•
This is leading a movement to
increasingly strict regulation
and public sensitivity to security
and environmental issues
•
Fuel and technology types will
have to change to meet
consumer and legislative
expectations
–
Hybrid vehicles
–
Clean coal
–
Nuclear
–
Solar, Wind
–
Ethanol
Future fuel mix will be driven by three
interacting forces
Legislation
Future
Fuel Mix
Consumers
Technical &
Business
Innovation
Figure source: Accenture
New Political Lexicon
“We must treat energy security and
climate security as two sides of the
same coin”
--Tony Blair, October 20, 2006
This is a mistaken notion. There is a conflict between the two that will need to
be resolved through smart science and good policy.
Instruments and targets
Energy
security
Increased energ y
efficiency
• Some policies can further both
goals:
Increased non-fos sil
ener gy
C O2
s equestr ation
Damage mitiga tion
and r emediatio n
C O 2 emis sion
constr aints
Directly restr ict use
of coal and unconventional oil
Range of effect
uncer tain
Climate
change
•
•
– Increasing energy efficiency
– Increasing non-fossil fuel sources
Some policies have conflicting effects:
– Directly limiting the use of coal and
unconventional oil
– CO2 emissions constraints, which can
artificially increase demand for natural
gas
Climate change policies with no effect on
energy security:
– Increased sequestration
– Climate damage adaptation and
remediation
IEA Base Case Reference Scenario:
Increase in World Oil Supply, 2004-2030
25
20
mb/d
Other
15
Iran
10
5
Iraq
S.Arabia
0
OPEC conventional
Non-conventional
Non-OPEC
conventional
Under a business as usual scenario, world will increasingly rely on Persian
Gulf and unconventional oil, including about 3.5 to 4 million b/d of
Canadian tar sands production, 1.5 to 2 mb/d of upgraded heavy oil, 2.4
mb/d of gas to liquids and 1.7 mb/d of coal to liquids, oil shale, etc
CO2–intensity of fossil fuels
12
H
H
CO2 (109 metric tons)
10
H
H
H
H
H
H
HH
HHHH
HH
HH
H
H
HH
H
8
6
4
JJJ
J JJ
J
J
JJJ
J
JJJ
J JJ
J
JJ
B
BB
B
BB
BB
B
B
BBB
B
B
BB
BBB
B
BB
B
Pet r ol eum
J
N at u r al gas
H
Coal
JJ
2
0
0
20
40
60
80
1 00
1 20
1 40
1 60
1 80
200
Ener gy (118
0 jou l es)
Source: EIA
US electricity generation
Generation by source 2006
Generating capacity 2005
Ot her Renewables (2%)
Ot her (1%)
Renewables (10%)
Hydroelect ric (net ) (7%)
P umped Storage (2%)
Nuclear (11%)
Coal (33%)
Nuclear (19%)
Coal (49%)
T urbine or Diesel (14%)
Nat ural Gas (20%)
Combined Cycle (18%)
P et roleum (2%)
2.0%
Oil & Nat ural Gas St eam (13%)
Coal
1.5%
Oil & Natural Gas Steam
1.0%
Combined Cycle
T urbine or Diesel
Average annual net capacity growth 2005-2030 in the
EIA Annual Energy Outlook, 2008 reference case
0.5%
0.0%
-0.5%
-1.0%
-1.5%
Nuclear
P umped Storage
Renewables
Concern about future CO2 regulation
already is delaying new coal plants
•
•
•
Amount of coal capacity cancelled in
2007 is nearly the amount cancelled
between 2004 and 2007
Some cancellations are also the
result of rising construction costs
– But these also tend to favor less
capital-intensive CCGT and
also disadvantage nuclear in
addition to coal
Despite the cancellations, some coal
projects are still proposed
– 2,800 of the 6,700 MW still
proposed at the beginning of
2008 was IGCC
Source: Wood
Mackenzie
Restricting CO2 emissions
•
•
•
•
Natural gas, as the least CO2-intensive fossil fuel, will be favored
Increase the price of energy other than natural gas by 50% in OECD western
Europe, North America and Asia, leave it unchanged elsewhere in the world
– The increase in energy price will reduce the energy-intensity of GDP, but
absent an increase in natural gas prices will raise the demand for natural
gas
– The endogenously calculated price of natural gas thus also will rise
In the US, the demand for natural gas to generate electricity is modeled
conditional on the available capacities of the different types of plants
– The estimated cross-price elasticity of substitution between fuels is lower in
the US
In the restricted emissions case, we assumed that all the planned coal-fired
capacity additions in the US were required to be natural gas instead
– As in the reference case, we still allow substantial development of IGCC
with sequestration, along with nuclear and renewables capacity
Access restrictions in the US
•
•
•
•
Relaxing restrictions on drilling in the US might satisfy some increased
demand resulting from CO2 emission restrictions
Specifically, some Federal lands and offshore areas known to contain
significant natural gas reserves are effectively off-limits
– Some restrictions are via legislation, executive order, regulation or
administrative decisions
– Other resources have been rendered uneconomic by Federal and
State regulatory requirements that increase costs and create delays
Major resources affected include interior Western States, some US
offshore areas and the Alaska National Wildlife Refuge and some other
areas in Alaska
Ultimately, the amount restricted will depend on gas prices and other
costs
Off-limits (Tcf)
Outline of Resource
restricted
areas
Planning Region/Basin
Rocky
Mountains
OCS
Montana
Wyoming Thrust Belt
Green River
Powder River
Uinta-Piceance
San Juan
Eastern Gulf of Mexico
North Atlantic
Middle Atlantic
South Atlantic
Washington/Oregon
North/Central
California
Southern California
Total Lower 48
Alaska
Total
ANWR
North Aleutian Basin
9.4
0.8
39.5
6.0
8.4
5.3
22.1
QuickTime™ and a
18.0decompressor
TIFF (LZW)
are needed to see this picture.
15.1
3.9
2.3
6.0
10.0
146.8
Sources: NPC Supply Task Group Report, MMS
8.6
8.6
164.0
Reduced emissions: Changes in demand
6
South/Central America
ASEAN
5
China
India
4
Africa
3
Middle East
Other FSU
2
Russia
Other Asia/P acific
1
Japan, Korea
Other Europe
0
EU15
-1
Canada, Mexico
USA
-2
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Increased access & reduced emissions:
Changes in demand
8
South/Central America
7
ASEAN
China
6
India
5
Africa
Middle East
4
Other FSU
3
Russia
2
Other Asia/P acific
Japan, Korea
1
Other Europe
0
EU15
Canada, Mexico
-1
USA
-2
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Reduced emissions: Changes in supply
6
Central/South America
Other Asia
5
China
ASEAN
Other Africa
4
North Africa
Other FSU
3
Russia
Other Middle East
UAE
2
Saudi Arabia
Iraq
1
Iran
Qatar
Australia, NZ, P NG
0
Europe
North America
-1
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Reduced emissions: Changes in imports
4
Other FSU
3.5
3
Other Asia/P acific
2.5
2
China
1.5
Japan, Korea
1
0.5
North America
0
-0.5
EU15
-1
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Increased access & reduced emissions:
Changes in imports
3.5
Other FSU
3
2.5
Other Asia/P acific
2
1.5
China
1
Japan, Korea
0.5
0
North America
-0.5
-1
EU15
-1.5
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Reduced emissions: Changes in exports
4.5
Central/South America
4
Other Europe
3.5
Australia, NZ, P NG
ASEAN
3
Other Africa
2.5
North Africa
2
Other Middle East
1.5
UAE
1
Iraq
Iran
0.5
Saudi Arabia
0
Russia
-0.5
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Increased access & reduced emissions:
Changes in exports
3.5
Central/South America
3
Other Europe
Australia, NZ, P NG
2.5
ASEAN
2
Other Africa
1.5
North Africa
Other Middle East
1
UAE
0.5
Iraq
0
Iran
Saudi Arabia
-0.5
Russia
-1
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Reduced emissions: Changes in LNG imports
3.5
Rest of World
India
3
China
2.5
South Korea
Japan
2
Rest of Europe
1.5
France
UK
1
Netherlands
0.5
Italy
Spain, P ortugal
0
Mexico
-0.5
Canada
USA
-1
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Increased access & reduced emissions:
Change in LNG imports
2
Rest of World
India
1.5
China
South Korea
1
Japan
Rest of Europe
0.5
France
UK
0
Netherlands
Italy
-0.5
Spain, P ortugal
Mexico
-1
Canada
USA
-1.5
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Reduced emissions: Changes in LNG exports
3.5
Rest of World
South America
3
Other SE Asia
2.5
Indonesia
Australia
2
Russia
1.5
Other Africa
Nigeria
1
North Africa
0.5
Other Middle East
Qatar
0
Saudi Arabia
UAE
-0.5
Iran
-1
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Increased access & reduced emissions:
Change in LNG exports
2
Rest of World
South America
1.5
Other SE Asia
Indonesia
Australia
1
Russia
Other Africa
0.5
Nigeria
North Africa
0
Other Middle East
Qatar
Saudi Arabia
-0.5
UAE
Iran
-1
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039
Concluding remarks
• Restricting CO2 emissions will shift primary energy use toward
natural gas
• Developed OECD will become more dependent upon Russia
and the Middle East (Iran)
• Access to prospective areas currently off-limits in the US can
lessen the increased dependence on the Middle East and
Russia and offset some of the increased demand from carbon
restrictions
• Increased US domestic supply does displace some Middle East
exports
– Increased US domestic supply also changes the elasticity of
response of the market to disruptions and shocks
– The big winners of Western carbon controls will be Iran and
Russia if US OCS remains blocked to drilling
– However, the effects of opening OCS are unlikely to be large
enough to fully offset the effects of tightened emission
controls