Facing the New Challenges in the Global Energy Market: Geopolitical and Financial Risks

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Facing the New Challenges in the Global Energy Market:
Geopolitical and Financial Risks


Amy Myers Jaffe

James A. Baker III Institute
for Public Policy,

Rice University


LIFTOFF

Launching Our Future
Today

40
th

Annual ECC
Conference



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 Al
-
Qaeda

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)
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

2)
P
rominent 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 Al
-
Qaeda’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




2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

$
-
1.00

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$/Mcf

Henry Hub

NBP

German
-
Austria Border

Tokyo

Sydney

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




2005

2010

2015

2020

2025

2030

2035

2040

-
4

-
3

-
2

-
1

0

1

2

Tcf per year

Russia

Ukraine

East of Caspian

Rest of World

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.

0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
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
Daily Exchange
Rate ($/Euro)
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
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
Daily Oil Price
(WTI)
$ 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

________________

Source: ODS
-
Petrodata and Lehman Brothers Estimates

Deepwater Rigs under construction


Now let’s see if we get a supply response!

4
2
3
1
12
18
11
8
8
12
12
5
0
5
10
15
20
25
30
2002
2003
2004
2005
2006
2007
2008E
2009E
2010E
2011E
Semisubmersibles
Drillships
# rigs
0
100
200
300
400
500
600
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
US GOM semi 5000-7499-ft
US GOM semi 7500-ft+
North Sea semi 3000-4999-ft
Drillship GOM Dynam Positioned
$/day
15

Refinery capacity expansion to outpace product demand


Refinery capacity additions could outpace demand growth in 2010 by 2:1

Refinery investment had not kept up with rapid demand growth in recent years, but we are
approaching a turning point, especially East of Suez

Global CDU Capacity

Additions (k b/d)

Global Upgrading

Capacity Additions (k b/d)(1)

________________

Source: Lehman Brothers Estimates.

1.
Includes coking, catalytic cracking, and hydrocracking units and expansions.

3,120
2,255
1,809
2,392
1,551
1,833
1,138
1,667
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2006
2007
2008
2009
2010
2011
2012
2013
China
South Asia
Middle East
Rest of World
809
670
1,162
1,507
1,566
707
1,096
1,199
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
2006
2007
2008
2009
2010
2011
2012
2013
China
South Asia
Middle East
Rest of World
12

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
NOCs
77%
NOCs-IOCs
jointly
7%
IOCs
10%
Russian
OCs
6%
Majority of remaining oil
resources are controlled by
traditional state monopolies
and emerging partially
privatized firms.

World Proved Crude Oil Reserves, 1980-2006
-
200
400
600
800
1,000
1,200
1,400
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Billion Barrels
OECD
RoW
Iran, Iraq,
Venezuela,
UAE
Alberta oil sands
Saudi Arabia

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.



Goal

Examples


Fuel at subsidised prices


Oil wealth redistribution to society
at large



Foreign and strategic policy
and alliance building


Wealth creation for the nation



Energy security, including assurance of
domestic fuel supply and security of
demand for producing nations


Industrialization and economic
development




Participation in national level
politics



Contribution to national GDP


Fund for future generations


Local content programs


Ensure no domestic fuel
shortages


Leadership with greater political
aspirations and involvement of unions
and employees in national politics


Oil Diplomacy and advisory role to
national leaders

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

Percent
Revenue
Generated
Relative to
“Best
Practice”

Revenue efficiency is measured as the percent of revenue a
company achieves relative to “best practice” for a given level of
reserves and employees.

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

Venezuela

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

Total


30.85

31.38

30.45

30.57

Call on OPEC


25.85

28.23

29.2

29.87

Spare Capacity


5

3.15

1.25

0.7

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).

Source: Baker Institute Working Paper: The International Oil Companies

Non- OPEC Production
2006
ENI
2%
Total
3%
Pemex
7%
Petrobras
4%

Total
Chinese
8%
Big
5
20%
Next
20
US
4%
Other
27%
Total FSU
25%
The Largest Five IOCs spent 56 percent of operating cash flow in 2006
on stock buybacks and dividends.

Source: Baker Institute Working Paper: The International Oil Companies

Figure 3: Selected Outlays (Big 5)
0
10,000
20,000
30,000
40,000
50,000
60,000
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Millions of Dollars
Purchases of Equity
Dividends
Exploration
Development
Property Acquisitions
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.

Source: Baker Institute Working Paper: The International Oil Companies

Figure 6: Exploration Expenditues
-
2,000
4,000
6,000
8,000
10,000
12,000
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
$ Millions
Next 10 US
Big 5
Next 20 US
The Largest Five IOCs are struggling to replace reserves.

Source: Baker Institute Working Paper: The International Oil Companies

Reserve Replacement Ratio
0
50
100
150
200
250
300
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
100% Replacement
Big 5
Next 20
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.

Source: Baker Institute Working Paper: The International Oil Companies

Share Price Performance
Indexed, October 2002 equals 100
0
100
200
300
400
500
600
700
800
Oct-02
Apr-03
Oct-03
Apr-04
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
NOC's + 531%
Majors's + 113%
CNOOC
Eni
Gazprom
Indian Oil
MOL
Norsk Hydro
OMV
ONGC
Petrobras
PetroChina
Sinopec
Statoil
NOC's used for Index:


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
China
US
GDP per Capita
Fuel Use per Capita
Vehicles per Capita
Source: Medlock and Soligo (2003)

Note: Series are plotted on
different scales in order to depict
them in the same chart

IEA Reference Scenario:

Increase in World Primary Energy Demand, 2005
-
2030

China & India will contribute about 45% of the increase in
global energy demand to 2030 on current trends

0%

20%

40%

60%

80%

100%

Coal

Oil

Gas

Nuclear

Hydro

Rest of

renewables

Total

Rest of the world

India

China

Cap
-
and
-
Trade

Higher CAFE

Renewable
Energy
Standard

Drill Offshore?

Tax on Big Oil

Tax Credits


Yes: reduce
emissions 80%
from 1990 levels
by 2050



100% permit
auction



Supports Low
Carbon Fuel
Standard




Increase fuel
economy
beyond 35mpg


52 mpg by
2025


25% by
2025



Supports limited
offshore drilling
(1Aug2008)



Prioritize the
Construction of
the Alaska
Natural Gas
Pipeline




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)


Proposes $7,000 tax credit
on the purchase of fuel
-
efficient cars



Proposes that new
vehicles sold in US are flex
-
fuel 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


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.


Opposes windfall
profits on oil
companies



Suspend 18.4
-
cent
-
a
-
gallon federal tax
during summer



Strongly opposes
the use of the
government oil
reserves


$5,000 tax credit for
purchase of zero carbon
emission cars



Opposes extending corn
ethanol tax credit: opposes
tariff on imports of ethanol
produced from sugarcane



Proposes tax credit to
companies investing in
R&D for clean, alternative
energy (equal to 10% of
wages spent on R&D)

McCain versus Obama on energy policy

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
Consumers
Technical &
Business
Innovation
Future
Fuel Mix
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

Climate
change
Energy
security
Increased energy
efficiency
Increased non-fossil
energy
Damage mitigation
and remediation
CO
sequestration
2
CO emission
constraints
2
Directly restrict use
of coal and unconventional oil
Range of effect
uncertain

Some policies can further both
goals:


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

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

S.Arabia

Iraq

Iran

Other

0

5

10

15

20

25

OPEC conventional

Non
-
conventional

Non
-
OPEC

conventional

mb/d

CO
2

intensity of fossil fuels




B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
B
J
J
J
J
J
J
J
J
J
J
J
J
J
J
J
J
J
J
J
J
J
J
J
J
J
J
H
H
H
H
H
H
H
H
H
H
H
H
H
H
H
H
H
H
H
H
H
H
H
H
H
H
0
2
4
6
8
1 0
1 2
0
20
40
60
80
1 00
1 20
1 40
1 60
1 80
200
CO
2
(10
9
metric tons)
Ener gy (1 0
18
joules)
B
Petr oleum
J
Natural gas
H
Coal
Source: EIA

US electricity generation

Generation by source 2006

Generating capacity 2005

Average annual net capacity growth 2005
-
2030 in the
EIA Annual Energy Outlook, 2008 reference case


Coal (49%)
Petroleum (2%)
Natural Gas (20%)
Nuclear (19%)
Hydroelectric (net) (7%)
Other Renewables (2%)
Other (1%)

Coal (33%)
Oil & Natural Gas Steam (13%)
Combined Cycle (18%)
Turbine or Diesel (14%)
Nuclear (11%)
Pumped Storage (2%)
Renewables (10%)

-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
2.0%
Coal
Oil & Natural Gas Steam
Combined Cycle
Turbine or Diesel
Nuclear
Pumped Storage
Renewables
Concern about future CO
2

regulation
already is delaying new coal plants

Source: Wood
Mackenzie


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

Restricting CO
2

emissions


Natural gas, as the least CO
2
-
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

QuickTime™ and a
TIFF (LZW) decompressor
are needed to see this picture.
Outline of restricted areas

Sources: NPC Supply Task Group Report, MMS

Planning Region/Basin

Resource Off
-
limits (Tcf)

Rocky
Mountains

Montana

9.4

Wyoming Thrust Belt

0.8

Green River

39.5

Powder River

6.0

Uinta
-
Piceance

8.4

San Juan

5.3

OCS

Eastern Gulf of Mexico

22.1

North Atlantic

18.0

Middle Atlantic

15.1

South Atlantic

3.9

Washington/Oregon

2.3

North/Central
California

6.0

Southern California

10.0

Total Lower 48

146.8

Alaska

ANWR

8.6

North Aleutian Basin

8.6

Total

164.0

Reduced emissions: Changes in demand


2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
-2
-1
0
1
2
3
4
5
6
Tcf per year
USA
Canada, Mexico
EU15
Other Europe
Japan, Korea
Other Asia/Pacific
Russia
Other FSU
Middle East
Africa
India
China
ASEAN
South/Central America
Increased access & reduced emissions:

Changes in demand


2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
-2
-1
0
1
2
3
4
5
6
7
8
Tcf per year
USA
Canada, Mexico
EU15
Other Europe
Japan, Korea
Other Asia/Pacific
Russia
Other FSU
Middle East
Africa
India
China
ASEAN
South/Central America
Reduced emissions: Changes in supply


2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
-1
0
1
2
3
4
5
6
Tcf per year
North America
Europe
Australia, NZ, PNG
Qatar
Iran
Iraq
Saudi Arabia
UAE
Other Middle East
Russia
Other FSU
North Africa
Other Africa
ASEAN
China
Other Asia
Central/South America
Reduced emissions: Changes in imports


2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
Tcf per year
EU15
North America
Japan, Korea
China
Other Asia/Pacific
Other FSU
Increased access & reduced emissions:
Changes in imports


2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
Tcf per year
EU15
North America
Japan, Korea
China
Other Asia/Pacific
Other FSU
Reduced emissions: Changes in exports


2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
Tcf per year
Russia
Saudi Arabia
Iran
Iraq
UAE
Other Middle East
North Africa
Other Africa
ASEAN
Australia, NZ, PNG
Other Europe
Central/South America
Increased access & reduced emissions:
Changes in exports


2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
Tcf per year
Russia
Saudi Arabia
Iran
Iraq
UAE
Other Middle East
North Africa
Other Africa
ASEAN
Australia, NZ, PNG
Other Europe
Central/South America
Reduced emissions: Changes in LNG imports


2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
Tcf per year
USA
Canada
Mexico
Spain, Portugal
Italy
Netherlands
UK
France
Rest of Europe
Japan
South Korea
China
India
Rest of World
Increased access & reduced emissions:
Change in LNG imports


2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
-1.5
-1
-0.5
0
0.5
1
1.5
2
Tcf per year
USA
Canada
Mexico
Spain, Portugal
Italy
Netherlands
UK
France
Rest of Europe
Japan
South Korea
China
India
Rest of World
Reduced emissions: Changes in LNG exports


2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
Tcf per year
Iran
UAE
Saudi Arabia
Qatar
Other Middle East
North Africa
Nigeria
Other Africa
Russia
Australia
Indonesia
Other SE Asia
South America
Rest of World
Increased access & reduced emissions:
Change in LNG exports


2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
2035
2037
2039
-1
-0.5
0
0.5
1
1.5
2
Tcf per year
Iran
UAE
Saudi Arabia
Qatar
Other Middle East
North Africa
Nigeria
Other Africa
Russia
Australia
Indonesia
Other SE Asia
South America
Rest of World
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