Transcript Energy Challenges Seminar The Emerging U.S. Natural Gas &

Energy Challenges Seminar
The Emerging U.S. Natural Gas &
Electricity Crisis – How You Can Help
Andrew D. Weissman
Senior Managing Director
FTI Consulting, Inc.
[email protected]
University of North Carolina/Duke University
September 28, 2005
0
Major Threat
 U.S. faces serious energy crisis
– Natural gas & electricity as much or more than oil
 Supplies of fuel & feedstock no longer sufficient to sustain normal
growth of U.S. economy
– Major dislocation point; due to long-term structural imbalance
between supply and demand
 Already has resulted in serious economic harm
– At least $ ½ trillion bite from U.S. economy over past 2 ½ years
 Could quickly become far more severe
– In BTU equivalent terms, by 2015 potential natural gas supply gap =
1 ½ X current U.S. oil imports from Middle East
 Potentially = greatest threat to health of U.S. economy over next
10 to 15 years
 Could also thwart efforts to achieve major environmental goals,
significantly affect careers of current UNC and Duke students
1
Questions Posed
 Presentation focuses on four key issues:
1. Fundamental drivers
2. Actions required to ameliorate
3. Reasons not recognized sooner
4. Steps to strengthen our institutions to avoid repetition
– Government, private industry, academic
 Many lessons learned applicable to other major public policy
issues:
– Inability to effectively control health care costs/maximize quality
of health care services provided
– Lagging quality of U.S. public education system
– Lagging penetration rate for access to broadband
2
Solutions Start Here
 Thesis: need to teach more effectively -1. Limits of what markets can accomplish
– Problem of the commons, difficulty of ensuring adequate
investment in public goods, reluctance to make large capital
investments in high-risk projects with long lead times
2. Skills in integrated, interdisciplinary problem solving
 Real world has come to mirror division of university into series of
separate academic disciplines
– Armies of highly skilled specialists, but remarkably few capable
generalists; disinclination to focus on effectively solving problems in
holistic manner
 Greatest value often resides in connecting dots
 Also need to devote far more academic research & course work
to major public policy issues + develop new models for
partnerships with government to tackle these issues
3
Emerging Natural Gas &
Electricity Crisis Poses Greater
Threat to U.S. Economy Than
Rising Oil Prices
4
Key Fuel For Economy
 One quarter of our total energy
supply
 U.S. = largest natural gas U.S. in
world
 97 % of current supply obtained
from U.S. & Canada
 Perceived as clean fuel
 Has been fuel of choice to meet
incremental demand for:
– Residential
– Commercial
– Electric power
– Manufacturing sector
5
Increasingly Drives Electricity Pricing
 Natural gas is setting an increasing critical role in power
generation
 Sets market-clearing price for electricity in wholesale
markets increasing number of hours every year:
Source: CERA
6
Risks to U.S. Economy > Than for Oil
 Future natural gas price shocks = greater risks than oil
 Unlike oil (where impact global), impact of higher prices and
supply shortages concentrated in U.S.
 Including electricity, $$’s at stake nearly 50 % > than for oil
Total U.S. Energy Use – 2004 (Quad BTU)
Energy Source
Generation of Electricity
Direct Use of Natural Gas by
Residential, Commercial &
Industrial Users
Direct Use of Oil (Including
Transportation)
Direct Use of Coal &
Other Fuels
Total U.S.
Fuel Consumption
38.86 Quad Btu (Incl. Use of 5.33
Quad Btu of Natural Gas and 1.20
Quad Btu of Oil)
Percentage of
Total U.S. Fuel Use
38.9 %
17.40 Quad Btu
17.4 %
38.86 Quad Btu (Incl. 2.85 Quad
Btu of Natural Gas Liquids)
38.9 %
4.69 Quad Btu
99.81 Quad Btu
4.7 %
100.0 %
7
No National Energy Policy
 U.S. Department of Energy currently expects major shift in future
sources of supply
 Largely by default, U.S. now dependent upon two highly uncertain
potential sources of supply to meet future needs
– Hoped for major expansion in LNG + proposed Alaskan pipeline
8
LNG Imports Expected to Increase Sharply
Longer term, LNG imports could add significantly to U.S. trade deficit
 By 2020, in BTU equivalent terms, expected to exceed current oil imports from
Persian Gulf by 20 %
 EIA estimates will account for up to 87 % of incremental U.S. natural gas supply
Potential Increase in Balance of Payments Deficit
Due to Increased Imports of LNG
Impact of Liquefied Natural Gas Imports
$ 60
$ 50
$ 50.0
$ 40
(billion per year)

$ 40.0
$ 30
$ 32.0
$ 20
$ 18.0
$ 10
$0
$ 3.5
2004
2010
2015
2020
2025
9
U.S. Reaching a Crisis Point
 Recent events highlight vulnerability of U.S. economy to
soaring energy costs
 Severe natural gas summer-month price spike
 Post-Katrina/post-Rita explosion to all-time highs
 Not a short-term problem; past 3 ¾ years:
 6 X increase in natural gas prices, 3 X in oil
Recent Increases in
Crude Oil Prices
Recent Increases in
Natural Gas Prices
Daily Closing Prices
Natural Gas October '05
Daily Closing Prices
Crude Oil October '05
$70
$12
$11
$65
$10
$60
$9
$55
$8
$50
$7
$45
$6
$5
29-Aug
1-Aug
15-Aug
4-Jul
18-Jul
6-Jun
20-Jun
9-May
23-May
25-Apr
11-Apr
28-Mar
14-Mar
28-Feb
31-Jan
14-Feb
3-Jan
17-Jan
29-Aug
1-Aug
15-Aug
4-Jul
18-Jul
20-Jun
6-Jun
9-May
23-May
25-Apr
11-Apr
28-Mar
14-Mar
28-Feb
31-Jan
14-Feb
3-Jan
17-Jan
$40
10
Major Long-Term Inflexion Point
 Still just “tip of the iceberg”
 Cause = long-term structural imbalance between growing
demand and available supplies
– In North America for natural gas, globally for oil
 Supply gap certain to:
– Become more severe over time
– Result in major dislocations to U.S. & global economies
 No easy or quick solutions
11
Price Shocks to U.S. Economy
 Past 4 years have seen:
– $ 400 billion/year + increase in oil costs
– $ 225 billion/year + increase in natural gas costs
– $ 100 billion/year + increase in price of electricity
 Significant adverse impact on U.S. economy
– Reduces consumer spending power, ability of U.S. companies to
compete in global markets
– Federal Reserve Board estimates reduced U.S. GDP by ¾ of 1 % in
4th quarter of 2004 alone
 $ 200 billion/year + increase over past 4 years in energy
contribution to balance of payments deficit
– Creates need to borrow an additional $ 500 million per day from
other countries to pay for imported fuel
12
Katrina & Rita Add to Urgency
 Katrina & Rita have thrown a match onto an uncovered tank of
kerosene
 Production losses virtually certain to be far greater than for
Ivan one year ago
 Ivan: 45 million barrels of oil, 178 Bcf of natural gas, minimal
impact on refined products
 Katrina/Rita: could easily result in 160 to 180 million barrels of
lost oil production, 300 to 500 Bcf of loss natural gas production,
steepest draw downs ever of gasoline and other refined products
 Impact on oil market partially mitigated by surge of oil imports
from Europe + draw downs of government reserves
 No similar source of relief available for natural gas
 Magnitude of natural gas price increase depends upon severity
of winter weather
 But risk of severe price spikes is off the charts
13
Decisive Action Required
 Creates urgent need to put in place comprehensive program to
develop alternative sources of supply under direct U.S. control
 Emphasis should be on critical period of next 3 to 10 years
– Available options limited; risk of price spikes & potential supply
shortages particularly high

In addition to conservation & renewable energy, potential elements
for inclusion in any response plan include:
1. Rapid deployment of advanced coal gasification systems to provide an
alternative fuel supply for currently under-utilized gas-fired combined
cycle units & major industrial users
2. Replacement of older, less efficient gas-fired generating units with
new advanced pulverized coal-fired units or combined cycle units that
utilize synthetic gas
3. Efforts to significantly accelerate development of new on-shore and
off-shore gas fields
4. Modernization of electric T&D system to significantly reduce line
losses
14
Rapid Deployment of Coal Gasification = Key
 Major goal: to minimize growth in use of natural gas to generate
electricity in order to preserve available supplies for higher
priority uses
 Rapid deployment of coal gasification = key to achieving this goal
 Low-hanging fruit
– Technology already demonstrated
– Ample coal supplies available
– Issue = willingness to take decisive action in a timely manner
 Requires adding at least:
– 35,000 to 50,000 MW’s of gasification capability by 2015
– An additional 35,000 MW by 2020
 Sufficient to displace:
– 33 to 45 % of expected increase in natural gas demand by 2015
– 40 to 50 % of expected increase in demand by 2020
15
Alternatives Potentially Dire
 Other potential actions (e.g., nuclear power or renewables)
can contribute significantly to long-term solution but will not
provide relief soon enough or on required scale
 Life or death issue for many U.S. companies
 Significant portion of U.S. manufacturing sector cannot
survive $ 12 to 20/MMBTU natural gas
– Even prices this high may not be sufficient for market to clear
 Potential adverse impact on U.S. balance of payments deficit,
value of U.S. dollar of lost manufacturing revenues could be
severe
 Massive imports of Liquefied Natural Gas (LNG) not the
answer
– Far too few multi-billion dollar liquefaction projects being
under-taken to meet likely global demand
– Competition for output likely to fierce + priced against oil
16
Not a Short Term
Problem
17
Collision of Tectonic Plates

Train wreck that is beginning to occur stems from collision of two tectonic
plates set in motion long ago:
1.
After several decades of development, production from most
conventional on-shore fields in U.S., Alberta and Near-Shelf region in
Gulf has either hit plateau or entered into a period of rapid – and
irreversible -- decline

Particularly severe in shallow waters off Gulf Coast
 Until recently, most important source of new U.S. supplies
2.
Simultaneously, demand is growing rapidly due to shift to natural gas
as near-exclusive fuel to meet incremental electricity needs of U.S.
economy

Due in part to:
 Delayed impact of Clean Air Act requirements enacted long ago
 20-year period required to work off huge generation surplus left over after oil
price shocks of ’70’s
18
Continued Economic Growth Requires
Expanded Supplies of Electricity
Demand for electricity generally increases every year
 Current ratio = 0.72% increase for each 1% growth in GDP
Electricity Consumption Grows Every Year
4.00
GWhrs
(thousands)

2.25
1982
1985
1988
1991
1994
1997
2000
2003
19
Major Shift in Incremental Source of Supply
Prior to late ’90’s, possible to meet high % of incremental electricity
needs of U.S. economy thru increased utilization of existing coal and
nuclear units:
Source of Electric Generation to Meet
Incremental Demand (1979-97)
1400
Billion Kwh

0
1979
1981
Coal
1983
1985
Nuclear
1987
1989
Natural Gas
1991
1993
1995
1997
Renewable (excl. Hydro)
20
Sharp Increase in Natural Gas Consumption

Beginning in 1998, however, as coal and nuclear fleet increasingly
utilized at maximum capacity, power sector consumption of natural
gas began to rapidly increase:
5.8
Power Sector Consumption of
Natural Gas (1997-2000)
5.6
5.691
TCf
5.4
5.322
5.2
5.0
5.081
4.8
TCf
TCf
4.6
4.4
4.2
4.561
TCf
1997
1998
1999
2000
21
Mild Winters Temporarily Masked Increase

Warmer-than-normal winters initially masked magnitude of increase
 Resulting reductions in use of natural gas for space heating entirely offset
power sector demand for natural gas
22
Prices Quadrupled

In 2000, mild winter weather no longer masked increase in power
sector demand

Led to 4X increase in natural gas prices nationally not predicted in
advance by anyone in industry
23
Abrupt Shift in Strategy for
Meeting U.S. Electricity Needs
Without Careful Evaluation by Any
Federal or State Agency
24
Need for New Capacity

By late 1990’s, as load continued to grow, new electric generating
capacity needed in every region of U.S. for first time in almost 30 years

At this key choice point, utility industry in midst of far-reaching change
 FERC de-regulation of wholesale markets + state PUC restructuring
 Explosive growth of Independent Power Producer industry & power
marketers

Power plant developers strongly favored gas-fired capacity over coal
 Shorter lead time and much lower (apparent) capital cost
 Lower perceived permitting risk/seen as “pro-environment”

Near universal belief natural gas supplies would remain plentiful and
prices would remain low, based in part upon 1999 National Petroleum
Council Study
 Parallels in some respects impact of 2003 NPC Study urging strategy of
massively increasing dependence upon imports of LNG
25
Ample Natural Gas Supplies Expected

1999 NPC Study forecast North American natural gas production rising
to 33.5 TCf by 2015 without significant price increases
 Increased production expected to come principally from U.S. sources
26
Key Juncture

Timing of 1999 NPC study critical

Key choice point regarding long-term strategy for meeting
incremental electricity requirements of U.S. economy

Potential long-term implications for U.S. economy of decisions
required to be made during this period not well understood at the
time

With benefit of hindsight, one of the most significant failures of
public policy formulation of past decade
 Lack of adequate analysis and review at both federal and state level
nationwide

Arguably already has resulted in $ 100 billion + in potentially
avoidable energy costs
 Negated all or most of the benefits of industry restructuring

Potential long-term costs could be many times greater
27
Choices Necessary

Result of choices made = abrupt shift in U.S. energy policy
 $ 100 billion investment in new gas-fired plants
 Enough generation to meet total current electricity demand in Great
Britain, Germany and France combined
28
One of Two Major Causes of
California Energy Crisis in 2000
U.S. now dependent upon gas-fired units to meet virtually all of its incremental
electricity needs for at least the rest of this decade
Expected Sources of Incremental Generation
(2000-2020)
1800
Billion Kwh
Coal
Nuclear
Natural Gas
20
20
20
18
20
16
20
14
20
12
20
10
20
08
20
06
20
04
20
02
0
20
00

Renewable (excl. Hydro)
29
Primary Driver of Increased Consumption
After brief pause early in decade, power sector consumption of
natural gas likely to increase significantly every year:
Cumulative Increase in Power Industry Natural
Gas Consumption (2004-2015) vs. 2003
7
6
5
4
Total TCf

3
2
1
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Year
30
Cumulative Increases Huge

Increase likely to be > 3.4 TCf by 2010, > 5.7 TCf by 2015

No other current source of generation to meet incremental electricity
needs of U.S.economy
Projected Increase in Power Sector
Natural Gas Consumption
Year
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Increase
0.275
0.462
0.563
0.522
0.460
0.568
0.568
0.353
0.353
0.546
0.546
0.546
TCf
TCf
TCf
TCf
TCf
TCf
TCf
TCf
TCf
TCf
TCf
TCf
Increase
vs. 2003
0.250 TCf
0.712 TCf
1.275 TCf
1.797 TCf
2.257 TCf
2.825 TCf
3.393 TCf
3.746 TCf
4.099 TCf
4.645 TCf
5.191 TCf
5.737 TCf
Total
5.486
5.948
6.511
7.033
7.493
8.061
8.629
8.892
9.335
9.881
10.427
10.975
TCf
TCf
TCf
TCf
TCf
TCf
TCf
TCf
TCf
TCf
TCf
TCf
31
Creates Massive Hole in
Expected U.S. Energy Supply

2003 NPC Study reduces 1999 estimate of total natural gas production
from “traditional” North American sources of supply by an almost
unfathomable 50 TCf + between now and 2015

Creates >21 TCf gap between projected needs and available supplies
and between now and 2010
32
Creates Huge Void

North American supply certain to fall far short of current estimates of
U.S. demand

NPC U.S. production estimate for 2010 reduced by a staggering 16
BCf/day vs. 1999 forecast (i.e., just under 6.0 TCf/year)
2003 NPC Forecast of U.S. Production
33
Production Has Hit Plateau

At best, production increases in Rockies and Deepwater projects in
Gulf of Mexico expected to just barely offset declines in other basins
2003 NPC Forecast of North American Production
34
May Overestimate Significantly
Available Supplies

NPC estimates more of a “best case” than a “most likely” scenario

Many assumptions – while plausible – may not be achieved
 No contingency for further declines



Assumes that:

Decline rates, which have been increasing significantly, will soon level off

Well size, which has been falling rapidly, will soon begin to stabilize, with only
modest further decreases in future years
Also assumes that high degree of success in finding new targets in
existing fields and new fields in unexplored regions even though:

Expenditures on exploratory drilling have slowed markedly (as companies prefer to
buy proven reserves than to explore)

Many E&P companies are said to have largely exhausted their inventory of
attractive prospects during 2000/2001
Also, does not take into account potential for steep decline in
imports in Canada due to Tar Sands development + commitment
to retire all existing coal-fired plants in Ontario by 2007 and
other potential Kyoto-related measures
35
High Level of Uncertainty Regarding
Ability to Achieve Targets

To meet NPC targets, more than ½ future U.S. production must come
from undiscovered wells in undiscovered fields
36
Steep Price Increases Likely

Potential price increases likely to be far greater than currently
assumed

To a significant degree, all but core industrial users who value natural
gas highly already have been driven out of market

For remaining users, cost of natural gas often a smaller % of total cost
of goods produced than for users forced to leave market in previous
years

Economy currently still reasonable strong

Far higher percentage of industrial users hedged than in earlier years

Most viable fuel switching already has occurred

End result: may require steep increases to free up even relatively
modest supplies – let alone amounts required
37
Bottom Line

U.S. faces unprecedented natural gas supply shortfall

Already has caused serious harm to the economy
 Severe, unanticipated price spikes 3 out of past 5 winters
 One of two major precipitating causes of California crisis in 2000
 May have helped to precipitate recession in 2001 (worst
manufacturing recession in 22 years)

No precedent for being able to sustain growth of U.S. economy
without being able to expand supplies of electricity

Yet, no urgent effort is being made at national level to:
 Dramatically improve efficiency of energy utilization beyond
current levels
 Increase our ability to supply electricity from alternative sources
(e.g., coal, nuclear and renewable energy)

Unless corrected, likely to have severe adverse repercussions for
economy
38
Why Isn’t Urgency of Emerging
Crisis Better Understood?
39
Masked by Weather

Winter of 2002-2003 gave an early indication of severity of current
shortfall
 Started winter with above-average amounts of natural gas in storage
 Number of gas-weighted Heating Degree Days only 0.7 % > normal
 Still just barely avoided crisis
 Since that time, demand has grown significantly and supplies have fallen

On a weather normalized basis, even at current record price levels,
U.S. market chronically under-supplied
 Energy Ventures Group estimate: by at least 500 to 750 BCf

During the past year, only an extraordinary streak of back-to-back
mild weather events has masked severity of shortfall

As soon as weather reverts to historical norms, natural gas prices will
soar
 Even if oil prices moderate (which is not likely to occur)
40
Extraordinary String of Back-to-Back Events

In 2004, not just one episode of milder-than-normal weather, but an
unbroken string of one after another followed by another
 Temperatures generally warmer-than-normal (in winter, spring and fall),
significantly reducing space heating demand
 But summer then far cooler-than-normal (reducing use of power sector
demand for natural gas to run air conditioners by at least 300 BCf)

Includes:
 3rd mildest spring in past 110 years in spring of 2004
 Followed by 2nd coolest summer in 30 years
 Followed by an exceptionally mild fall
 Followed by an exceptionally mild winter, with Heating Degree Days far
below normal for 4 months in a row (i.e., November through February)

March was the first month in a year with slightly above normal
weather-related demand - but April has again been exceptionally mild
41
Extremely Mild Spring Last Year

3rd mildest spring in 110 years
42
Like Flicking a Switch on First Day of Summer

Followed immediately by exceptionally mild summer
 Huge impact on power sector consumption of natural gas
43
Switch Back

Then switched back in fall:
44
Exceptionally Mild Winter

Then capped off by exceptionally mild temperatures in core winter
months from December through February – particularly in Midwest
 Greatest impact on consumption of natural gas
45
Current Strategy
For Meeting U.S. Needs
Certain to Fail
46
Role of LNG




Increased imports of LNG should and almost certainly will play at
least some role in filling a portion of existing U.S. natural supply gap
Concerns regarding transportation safety appear to be exaggerated
BUT -- availability of new supplies in timely manner + price = far
greater concerns
Increased imports of LNG may be appropriate when:
 Obtained from reliable suppliers
 Within time frame required to meet U.S. needs
 Pursuant to firm, long-term commitments made directly to end-users of
natural gas, Local Distribution Companies or generators
 With guaranteed, commercially binding start-dates for deliveries
enforceable through meaningful penalties
 At reasonable prices not indexed to the price of oil
 Pursuant to contracts that guarantee replacement supplies if shipments
from the expected source of supply are curtailed

Even then, however, dependence upon LNG has a huge potential cost
in terms of job loss to U.S. economy and adverse balance of payments
impact
47
Threatens Long-Term U.S. Prosperity

Impact of energy costs on trade deficit = particularly serious longterm threat
 >30 % decline in value of U.S. dollar vs. EURO over past 2 years
 Decline expected to continue and potentially accelerate

Higher energy costs increase trade deficit through:
 Rapid increase in expenditures for imported fuels (i.e., oil + LNG)
 Decline in U.S. exports – particularly chemical industry & agricultural
products (two largest exporting industries)

Heavily-LNG dependent strategy virtually guarantees U.S. natural gas
& electricity costs will be among highest in the world
 Greater distance from producers results in higher delivered costs

As a result, heavily LNG-dependent likely to:
 Increase inflation rate
 Significantly reduce growth rate of U.S. economy
 Cause significant job loss
 Seriously impair ability of U.S. companies to compete in world markets
48
Fuel Imports Drive Trade Deficit

Dollar outflow to pay for imported fuels has tripled over past 4
years:
US Fuel Imports
(billions of dollars)
$ 250
U.S. Fuel Imports
$ 225
$ 200
(billions)
$ 150
$ 100
$ 75
$ 50
$0
2002

2005
Could double again over next 24 to 48 months
49
LNG Imports Expected to Increase Sharply
Longer term, LNG imports could add significantly to U.S. trade deficit
 By 2020, in BTU equivalent terms, expected to exceed current oil imports from
Persian Gulf by 20 %
 EIA estimates will account for up to 87 % of incremental U.S. natural gas supply
Potential Increase in Balance of Payments Deficit
Due to Increased Imports of LNG
Impact of Liquefied Natural Gas Imports
$ 60
$ 50
$ 50.0
$ 40
(billion per year)

$ 40.0
$ 30
$ 32.0
$ 20
$ 18.0
$ 10
$0
$ 3.5
2004
2010
2015
2020
2025
50
Need for Careful Evaluation of Alternatives

To date, no careful effort has been made at either Federal or State
level to evaluate potential alternatives to a policy of massively
increasing imports of LNG

In many respects surprising

Just 36 months ago, EIA did not expect increased imports of LNG to
play an significant role in meeting future U.S. energy needs
 U.S. now expecting to rely upon increased imports of LNG for up to 87 %
of its incremental supplies of natural gas (potentially 100 % excl. Alaska)
 Must be obtained almost entirely from projects that have not yet even
broken ground
 Pricing terms uncertain – but likely to be closely linked with oil
 By 2020, in BTU equivalent terms, imports of LNG expected to
significantly exceed current oil imports from Middle East
 Could seriously exacerbate already severe U.S. balance of payments
deficit and further weaken value of U.S. dollar
51
Unanswered Questions

Unanswered questions include:
1. How many new projects actually will be built
2. When they will be completed
3. Likely price terms/extent to which pricing will be tied to oil
4. How U.S. can protect itself against potential for extended delays in
completion of projects not under its control
5. Extent of risk U.S. will be outbid for the output of these projects from
competitors in other Regions (e.g., China, India, Japan, Korea, many
European countries)
6. Potential for shipping to be disrupted or for shipments to be diverted to
other countries
7. Potential pricing power of suppliers (who have the ability to sell spot
market cargoes to the highest bidder anywhere in the world)
8. Whether there is any way to mitigate the job loss or the severe potential
adverse impact on the U.S. balance of payments deficit from relying on a
new source of imported fuel rather than domestic sources of supply
52
Potential Alternatives

Potential alternatives include:
 More intensive efforts to facilitate development of domestic supplies of
natural gas
 An urgent effort to rapidly deploy coal gasification on a major scale
nationally, both to provide a source of fuel for existing gas-fired combined
cycle units and existing industrial facilities and as a source of fuel for new
facilities
 Relief of major electric transmission bottlenecks that prevent full
utilization of existing coal-fired plants
 Replacement of older, steam-fired gas plants in load pockets with new,
more efficient combined cycle units
 Accelerated construction of new coal and nuclear plants
 Further efforts to promote renewable energy
 Accelerated energy conservation, especially in commercial office
buildings and retail shopping malls (where the greatest waste currently
occurs)
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Issues Requiring Evaluation

To date, there has not been any rigorous analysis – or, indeed, any
analysis at all – of the potential risks and benefits of these
alternatives vs. a heavily-LNG dependent strategy in terms of:
 Reliability of U.S. energy supply
 Potential pricing power of major LNG suppliers/ability to dramatically
increase U.S. natural gas prices by shipping to other countries cargoes
originally expected to be delivered to the U.S. market
 Resulting potential for severe price shocks and heightened price volatility
in the U.S. natural gas and electricity markets
 Potential job loss or job creation in the U.S. economy depending upon
whether U.S. energy supply is obtained using domestic resources or by
increasing dependence upon imported fuels
 The continued ability of U.S. industry and U.S. farmers (who depend upon
the availability of competitively-priced fertilizer) to compete in world
markets
 The U.S. balance of payments deficit
 The future growth of the U.S. economy
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Lack of Any Fall-back Strategy

Nor has any apparent effort been made to develop a possible U.S.
“fall-back” strategy if:
 The global LNG market does not develop as rapidly as forecasts assume or
available reserves are used to develop liquid fuels instead of LNG;
 Other countries outbid the U.S. for the limited new supplies expected to
become available on the world market over the next 7 to 10 years; or
 Supplies from one or more suppliers are interrupted at any point in time
due to political unrest, labor strikes, terrorist incidents, wars or any of
the other factors that frequently interrupt international shipments of oil

Instead, to date, one of the most important energy policy choices
ever facing the U.S. has been made almost entirely by default, with
little or no apparent thought given to the potential risks of a heavily
LNG-dependent strategy

It’s as if we learned nothing from the gas-fired plant fiasco of the first
½ of this decade – which already has resulted in $ 100 billion or more
in unanticipated costs – or dependence upon imported oil
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Urgent Need to Deploy Coal
Gasification On a Major Scale
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Rapid Deployment of Coal Gasification = Key

Major goal: to minimize growth in use of natural gas to generate
electricity in order to preserve available supplies of natural gas for other,
higher priority uses

Rapid deployment of coal gasification = key to achieving this goal

Low-hanging fruit
 Technology already demonstrated
 Ample coal supplies available
 Issue = willingness to take decisive action in a timely manner

Requires adding at least:
 35,000 to 50,000 MW’s of gasification capability by 2015
 An additional 35,000 MW by 2020

Sufficient to displace:
 33 to 45 % of expected increase in natural gas demand by 2015
 40 to 50 % of expected increase in demand by 2020

Proposed Alaskan pipeline potentially can supply most of the remaining
required increase by 2016 or 2017
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Huge Potential Benefits

Potential benefits compelling:
1. Huge reduction in natural gas & electricity costs, compared to increases
that are otherwise nearly certain to occur
– Savings easily could reach $ 150 to 300 billion per year
2. Creates a large number of new U.S. jobs, to construct new gasification
facilities and coal mines and provide required fuel on an ongoing basis
3. Greatly reduces risk of a long-term, energy-price-induced slow down in
growth rate of U.S. economy
4. As a practical matter, only strategy to avoid massive further declines in
U.S. manufacturing sector
5. Eliminates – or at least reduces greatly – massive increase in U.S.
balance of payments deficit otherwise likely to occur due to:
– Loss of large number of U.S. manufacturing jobs
– Proposed massive increase in imports of Liquefied Natural Gas
(LNG)
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Compelling Reasons to Act

Health and prosperity of U.S economy for at least next 10 to 15 years
directly at stake

Steep natural gas price increases of past several years demonstrates
seriousness of problems

Realistic action plan at federal level must be developed and
implemented on an “urgent, highest priority possible” basis
 Alternative = potentially catastrophic further energy price increases and
potential periodic shortages of electricity and natural gas

Proposed actions cost effective even at prices well below current
levels

Only unresolved issue = willingness to act – especially in the time
frame required to avoid severe potential set-backs for U.S. economy
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How to Contact Andy for Questions
Mailing Address:
Andy Weissman
FTI Consulting, Inc.
1201 Eye St., N.W.
Suite 400
Washington, D.C. 20005
E-mail:
[email protected]
Office Phone:
202/589-2391
Cell:
202/744-1956
Fax:
202/312-9101
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FTI CONSULTING INC.
SEPTEMBER 2005
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