[Senate Hearing 109-3]
[From the U.S. Government Printing Office]
S. Hrg. 109-3
EIA 2005 ANNUAL ENERGY OUTLOOK
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
RECEIVE TESTIMONY REGARDING GLOBAL ENERGY TRENDS AND THEIR POTENTIAL
IMPACT ON U.S. ENERGY NEEDS, SECURITY, AND POLICY
FEBRUARY 3, 2005
Printed for the use of the
Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
PETE V. DOMENICI, New Mexico, Chairman
LARRY E. CRAIG, Idaho JEFF BINGAMAN, New Mexico
CRAIG THOMAS, Wyoming DANIEL K. AKAKA, Hawaii
LAMAR ALEXANDER, Tennessee BYRON L. DORGAN, North Dakota
LISA MURKOWSKI, Alaska RON WYDEN, Oregon
RICHARD M. BURR, North Carolina, TIM JOHNSON, South Dakota
MEL MARTINEZ, Florida MARY L. LANDRIEU, Louisiana
JAMES M. TALENT, Missouri DIANNE FEINSTEIN, California
CONRAD BURNS, Montana MARIA CANTWELL, Washington
GEORGE ALLEN, Virginia JON S. CORZINE, New Jersey
GORDON SMITH, Oregon KEN SALAZAR, Colorado
JIM BUNNING, Kentucky
Alex Flint, Staff Director
Judith K. Pensabene, Chief Counsel
Bob Simon, Democratic Staff Director
Sam Fowler, Democratic Chief Counsel
Lisa Epifani, Counsel
Jennifer Michael, Democratic Professional Staff Member
C O N T E N T S
Alexander, Hon. Lamar, U.S. Senator from Tennessee............... 2
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 3
Bunning, Hon. Jim, U.S. Senator from Kentucky.................... 23
Caruso, Guy, Administrator, Energy Information Administration,
Department of Energy........................................... 7
Domenici, Hon. Pete V., U.S. Senator from New Mexico............. 1
Feinstein, Hon. Dianne, U.S. Senator from California............. 2
Logan, Jeffrey, Senior Energy Analyst and China Program Manager,
International Energy Agency.................................... 15
Martinez, Hon. Mel, U.S. Senator from Florida.................... 3
Salazar, Hon. Ken, U.S. Senator from Colorado.................... 4
Slaughter, Andrew J., Senior Economist, Shell Oil Company........ 24
Smith, Hon. Gordon, U.S. Senator from Oregon..................... 5
Verrastro, Frank A., Director and Senior Fellow, Energy Program,
Center for Strategic and International Studies................. 31
Wyden, Hon. Ron, U.S. Senator from Oregon........................ 3
Responses to additional questions................................ 71
Additional material submitted for the record..................... 73
EIA 2005 ANNUAL ENERGY OUTLOOK
THURSDAY, FEBRUARY 3, 2005
Committee on Energy and Natural Resources,
The committee met, pursuant to notice, at 10:05 a.m., in
room SD-366, Dirksen Senate Office Building, Hon. Pete V.
Domenici, chairman, presiding.
OPENING STATEMENT OF HON. PETE V. DOMENICI,
U.S. SENATOR FROM NEW MEXICO
The Chairman. The hearing will please come to order.
First, I want to thank everyone who is here and
particularly the Senators who are here. I will be brief and
then, of course, any Senators that want to comment, I will be
glad to have that occur this morning.
The three questions that we are going to focus on today at
this hearing are: first, what are the United States' current
and future energy needs? How will they be met, and how will
global energy trends impact on the United States?
With demand for energy ever increasing, the need to
understand the answers to these three questions seems to me to
be critical. In consultation with others, we have decided that
we would hear from those either in Government or in the private
sector that we thought might shed significant light on these
For example, in 2004, the United States consumed about 20
million barrels of oil a day. In 2025, the United States is
predicted to require 27.9 million barrels a day. What is oil
world demand projected to be? And oil demand would increase
from about 82 million barrels a day to 121 million barrels a
day by 2030. Now, that sounds like a very large increase, but
remember, there are large users in the marketplace whose needs
are going to increase dramatically also. So will this
additional oil be enough for America's economy, and where will
it come from? How will it affect the United States' relations
with other countries in Asia, the Middle East, Russia, Canada,
South America, et cetera?
Our natural gas situation also presents many challenges
that need our immediate attention. The U.S. consumption is
growing, mainly to meet electricity and industrial application
demands. Our production faces a number of constraints, and
natural gas importation, which I assume will be discussed here
substantially, known as LNG, faces a variety of obstacles.
According to the EIA, which is here and going to testify, we
are going to go from importing .7 trillion cubic feet of
liquified natural gas to what they estimate to be 6.4 trillion
cubic feet in 2025. Now, that sounds rather incredible, but
they will talk about it. I guess we will talk about how we can
meet that and what would be needed to do that. That means that
we would have a 20-plus increase by 2025.
Our witnesses today will share their perspectives on these
challenges and in advance we thank them, both for being here
today and for their thoughts.
Now, with that, I would like Senator Bingaman, if he cares
to, to make some comments, and then each of the Senators who is
[The prepared statements of Senators Alexander and
Statement of Hon. Lamar Alexander, U.S. Senator From Tennessee
We live in unprecedented times. If someone from Mars landed in the
United States and looked at our energy policy, they would see that it
makes no sense. We are a nation at war. We rely on energy from a part
of the world that bitterly resents our nation. World energy demand is
growing significantly. According to the World Energy Agency, world
energy demand is projected to rise by 59 percent from now until the
year 2030. Two-thirds of this new demand will come from the developing
world, especially from China and India.
China is the driver of world oil demand. Listen to these
China is adding the equivalent energy demand of one middle-
sized country every two years.
China aims to quadruple its gross domestic product by 2020.
This means that the equivalent of three more economies the size
of China could be added in less than two decades.
About 70 percent of the new power plants being built in the
world are being built in China. Last year, China built 37,000
Megawatts of new power--that's the equivalent of American
Electric Power, the largest power company in America. And they
are still short power--two-thirds of China normally experiences
Last year, China overtook Japan as the second-largest
consumer of oil. In 2004, China's fuel demand grew 15 percent.
China just completed its first LNG terminal and there are
potentially nine more in the next few years. We are competing
with China for the same LNG supply.
China is going to get its oil from the Middle East and South
America--the same places we get our oil. This dynamic will increase the
chance of resource conflicts and competition between countries, such as
China and the United States. This year's price spikes are partly a
result of China's increased thirst for oil.
The challenges here don't stop at the price that we will pay for
our gasoline and threatening our manufacturing sector's
Coal supplies about 65 percent of China's energy needs. By 2030,
China and India will account for 44 percent of worldwide coal-based
electricity generation. We need to commercialize clean coal technology,
like coal gasification--not only for use in our country--but in
developing countries as well. If the coal plants in China are dirty,
then this impacts our air quality in the United States as well.
The growing demand for energy in developing countries underscores
that we must get serious about reducing our reliance on foreign oil. We
must get serious about talking about conservation--for oil and natural
gas. We must get serious about talking about more domestic supply. We
must get serious about commercializing clean coal technology. And yes,
the United States needs to get serious in doing more on climate
change--but so does the developing world.
I look forward to this hearing and learning how we can incorporate
this important discussion into the upcoming discussions on the Energy
Statement of Hon. Dianne Feinstein, U.S. Senator From California
Thank you, Mr. Chairman, for holding this hearing today. The topic
of the hearing is of particular interest in light of the increased
global demand for energy, which will only continue to grow.
According to the Energy Information Administration, the United
States' demand for oil is expected to grow by about 40% by 2025--from
20 million barrels per day to 27.9 million barrels per day. World
demand is expected to increase from 49.2 million barrels per day in
2001 to 66.3 million barrels per day in 2025. Much of this growth is
due to growing demand for oil in Asia.
I cite these numbers to show that any energy policy considered by
this Committee must not be considered in a vacuum. We must recognize
the stress on our natural resources and our environment if we continue
to implement energy policies that only stress traditional energy
If our goal is to provide our constituents with access to low-cost,
reliable energy supplies, any energy policy must include real energy
efficiency standards and incentives, a robust renewable energy
portfolio standard, and aggressive fuel economy standards.
All choices have consequences. If we maintain our current energy
use the EIA estimates that carbon dioxide emissions are projected to
increase from 5,789 million metric tons in 2003 to 8,062 million metric
tons in 2025, an average annual increase of 1.5 percent.
As the world's largest emitter of greenhouse gases, we must act to
reduce our emissions, not increase them. While the United States is on
a path to increase emissions by 1.5 percent per year, the United
Kingdom, a Kyoto signatory, must reduce emissions by 20% by 2010.
The Kyoto Protocol will enter into effect on February 16, 2005. The
United States is the only developing nation besides Australia that has
not signed onto the treaty. Australia has not signed onto the treaty
but is expected to reduce emissions in line with Kyoto.
I am concerned that by the time we recognize that climate change is
a problem, it will be too late to change our way of life. I am also
worried that our determination to continue the status quo and to forego
any action on climate change only further isolates us in the
I look forward to hearing the witnesses' thoughts on our energy
future. Thank you Mr. Chairman.
STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR
FROM NEW MEXICO
Senator Bingaman. Thank you very much, Mr. Chairman. I
really appreciate you holding the hearing and appreciate this
excellent group of witnesses coming to advise us of their views
on future global energy trends. I will just stop with that and
wait until the question period. Thank you.
The Chairman. Thank you.
STATEMENT OF HON. MEL MARTINEZ, U.S. SENATOR
Senator Martinez. Mr. Chairman, thank you again for holding
this hearing. As a new committee member, I am looking forward
to the hearing. I think it is an important moment for me to
learn from the panel, and I look forward to hearing their
testimony and then perhaps I will have some questions.
I do believe that I share the concern that we do need to
have a comprehensive energy policy, and I look forward with the
chairman and the ranking member to move an energy bill this
The Chairman. Thank you very much.
STATEMENT OF HON. RON WYDEN, U.S. SENATOR
Senator Wyden. Thank you, Mr. Chairman. I am going to be in
and out a bit this morning. I appreciate the chance to make a
Mr. Chairman and colleagues, in terms of energy security, I
am now convinced that taxpayers are not getting the best bang
that they can get for their buck. According to the
Congressional Research Service, two of the current tax
incentives for oil exploration and production are especially
inefficient. These two subsidies cost the taxpayers alone about
$1.3 billion per year, and I would ask, Mr. Chairman, if that
Congressional Research analysis could be put into the record at
* The report (S. Rpt. 108-54) has been retained in committee files.
The Chairman. Absolutely.
Senator Wyden. Mr. Chairman and colleagues, at the same
time we are wasting taxpayer funds, our country is not
providing enough incentive for oil producers to use enhanced
oil recovery techniques that could go a long way toward
reducing our Nation's dependence on foreign oil. According to
the Congressional Research Service, it is estimated that nearly
400 billion barrels of oil remain in abandoned reserves. The
Congressional Research Service also says that 10 percent of
that oil consists of known recoverable reserves that could be
produced with the proper techniques if the appropriate
financial incentives were there.
So according to my math, that is an additional 40 billion
barrels of oil that could be produced right here in our Nation.
At the current level of about 10 million barrels per day, 40
billion barrels is roughly what the United States will import
over the next 10 years.
So I think as we go forward, with respect to this whole
discussion, Mr. Chairman and colleagues, we ought to look and
look in a bipartisan way at using, particularly, tax incentives
that are now in place and are not particularly efficient and
reconfigure those incentives so as to increase production.
One last point that I am going to want to explore with Mr.
Caruso is that I cannot understand why U.S. oil producers are
allowed to pocket more than a billion dollars in subsidies and
then are allowed to export more than 1 million barrels of U.S.-
produced oil each day. It seems to me that if taxpayers are
subsidizing an oil company's production, the United States
ought to get to keep that company's oil production in our
Mr. Chairman, again, I thank you for your thoughtfulness
and being able to make this statement. I look forward to
working with you and our colleagues.
The Chairman. Thank you very much, Senator.
STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR
Senator Salazar. Thank you, Mr. Chairman. I have a
statement for the record that I will submit, if there is no
The Chairman. It will be made a part of the record.
Senator Salazar. I want to just make a quick statement.
Your forecasts are very important to us and I very much look
forward to those forecasts. I have a particular interest in
your long-term forecasts on the role that renewable energy can
play here in our Nation and in our world. In my own State, we
have an abundance of natural resources. We are developing many
of those natural resources in coal, oil and gas. But we also
have a significant initiative underway to move forward with the
development of renewable energy, and it would be good to have
some good science with respect to where you think the renewable
energy component of our whole energy equation is going to go.
So I very much look forward to your comments, and thank you.
[The prepared statement of Senator Salazar follows:]
Prepared Statement of Hon. Ken Salazar, U.S. Senator From Colorado
Good morning Mr. Chairman, Senator Bingaman, and members of the
committee. I would like to welcome our guests who are here today to
offer their perspectives on the energy future of the United States and
of the world. This Committee will be responsible for many of the
decisions that will directly affect that future.
My own state of Colorado contributes substantially to the energy
resources of our country. We are blessed with an abundance of natural
energy resources, and the oil and gas industry plays a significant part
of our state economy. But as long as the United States is dependent on
foreign oil for a significant part of our energy needs, our economy and
our national security are at risk. We need to move rapidly toward
energy independence and energy security.
I am particularly interested in your forecasts with respect to
renewable energy sources and the effects of world energy supply and
demand on the development of renewable and alternative sources of
energy in the United States. And with respect to traditional sources of
energy, I hope you will tell us how you think this body can encourage
the development of new, cleaner, and more efficient technologies for
coal and natural gas.
I note that this year the International Energy Agency (IEA)
produced an ``Alternative Policy Scenario,'' which considers the
effects of more vigorous government efforts to combat environmental
problems and to reduce energy-security risks. According to IEA, under
such a scenario energy demand would decrease by 10% in the next 25
years and carbon emissions would decrease by 16%. At the same time,
world dependence on the Middle East for supplies of oil and gas would
be significantly reduced. These results can be achieved through
government policies that encourage more efficient use of energy in
vehicles, electric appliances, lighting and industry, as well as a
greater emphasis on the use of renewable sources of energy.
I look forward to your testimony.
The Chairman. Thank you very much, Senator.
Let us proceed then with our witnesses. Are we going to go
in this order? All right. The Administrator of the Energy
Information Administration from the Department of Energy, Guy
Caruso. We will call on you, but I note another Senator
arrived. Let us see if he wants to comment.
STATEMENT OF HON. GORDON SMITH, U.S. SENATOR
Senator Smith. Thank you, Mr. Chairman. If you would like
to proceed, I will put mine in the record and just state the
summary of what my written statement is.
And that is, from what I read of your testimony, our Nation
needs an energy bill. I think President Bush was wise to call
on us to pass an energy bill because we are clearly too
dependent upon foreign sources. I guess by 2025, according to
your testimony, 38 percent of our energy will come from abroad,
and that has dire consequences to consumers and to our national
security. Specifically natural gas and LNG terminals, we have
got to find a way to expand those. If we do not, farmers and
all consumers will continue to bear very high prices, and we
owe them better than that. We can do better than that.
Without objection, Mr. Chairman, I would like to put this
statement in the record.
The Chairman. Thank you very much. Your statement will be
made a part of the record.
[The prepared statement of Senator Smith follows:]
Prepared Statement of Hon. Gordon Smith, U.S. Senator From Oregon
Mr. Chairman, as we begin the debate on national energy policy in
the 109th Congress, I appreciate your willingness to schedule this
hearing on global energy trends, and their potential impact on this
nation's vital energy supplies--particularly oil and natural gas.
The short-term outlook is not good for consumers, as energy prices
remain at or near historic highs. While all Americans are feeling the
effects on their wallets, high prices harm our financially vulnerable
constituents the most. Low-income families and those on fixed incomes
should not have to choose between eating and paying their utility
Even more disconcerting are the projections of our growing
dependence on imported energy resources. This vulnerability will be
exacerbated in the coming decades because the United States will be
competing for energy resources against the emerging economies of other
nations, particularly China and India.
In its testimony, the Energy Information Agency indicates that net
imports of energy are expected to constitute 38 percent of total U.S.
energy consumption in 2025, up from 27 percent in 2003. This heavy
reliance on imports will deepen our trade deficits, and undercut our
economic security. There are also broad foreign policy implications of
relying on imported energy resources to sustain our economy.
The EIA now forecasts that, by 2025, the United States will be
dependent on imports for 68 percent of its oil and about 22 of its
natural gas. Liquified natural gas will make up an increasing
percentage of gas imports as the availability of Canadian gas declines.
There are only four existing U.S. LNG terminals, and three of them
are expected to be operating at capacity by 2007. Siting, permitting
and constructing new terminals will be expensive, and EIA forecasts
that delays and regulatory costs are also expected to add to the price
of natural gas for new facilities.
Higher natural gas prices are having impacts throughout our
economy. Much of the new electricity generation that has been permitted
uses natural gas-fired turbines. Chemical manufacturers need natural
gas as an input for manufacturing. Farmers are feeling the effects of
higher fertilizer prices, and will continue to bear these costs so long
as natural gas prices remaining high. There is strong correlation
between the prices of natural gas and nitrogen fertilizer.
As policymakers, we have an obligation to make the difficult
choices today to ensure this nation's economic and energy security in
the decades ahead. We must strive to put incentives and policies in
place that will enable market forces to meet the energy needs of the
united States at a reasonable cost. We must encourage increased
domestic production, coupled with energy efficiency and conservation,
to meet our future energy needs.
I look forward to hearing from the witnesses today, and to working
with my colleagues in the weeks and months ahead to enact a responsible
energy policy for our nation.
The Chairman. I thank you for your comments. I failed to
mention in my opening remarks--and I probably should have--that
last night the President in an address on far-reaching subjects
took time out to give us a significant nudge in behalf of what
he saw as our country's needs and to get a bipartisan energy
bill. I do not think we have had that significant a pressure on
the part of the President to the American people as that
statement in a State of the Union.
For myself, Senator Bingaman, I was pleased that the
President publicly--I do not know if any other President has--
mentioned nuclear power. It seems like they all go right up to
it and then go off on something else, but at least he mentioned
it. I thank you for your support in the past and the
committee's and hope we can move on that front also.
Let us go with you, Mr. Caruso, please.
STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION
ADMINISTRATION, DEPARTMENT OF ENERGY
Mr. Caruso. Thank you, Mr. Chairman, and members of the
committee. Good morning. I am pleased to be able to present the
Energy Information Administration's long-term outlook, which we
published in December. I am going to present some trends today
which are based on current policies, rules, and regulations.
These numbers are essentially where we are headed if we keep on
the path we are on. And where we are headed is toward, as has
already been mentioned, increased net import dependency.
Our total primary energy consumption is going to increase
by about one-third over the next 20 years by 2025, and because
demand is increasing more rapidly than domestic supply, imports
will meet a growing share of that demand. Net imports are
projected to reach 38 percent of total energy by 2025, up from
27 percent today. Although these are primarily petroleum, also
natural gas will play an increasingly important role in the
Our demand grows at about one-half the rate of the GDP over
the next 20 years, with the strongest growth being in the
commercial and transportation sectors. In the commercial
sector, particularly electricity for computers and electronic
equipment will lead the way. And of course, in transportation,
increasing light-duty vehicles and vehicle miles traveled in
both vehicles and aircraft will add to this growth.
With respect to oil, our net import dependency will
increase from 56 percent last year to about 68 percent in this
baseline forecast. Our oil projections do assume oil prices
will decline from their current prices to about $25 by 2010.
But we recognize that there is a great deal of uncertainty in
that price outlook, and so in our full report, we will show a
number of different alternative price cases which reflect the
concerns over uncertainty over resources, infrastructure
investment, and geopolitical trends.
Our domestic supply will increase slightly over the next
several years as deep-water oil in the Gulf of Mexico comes on
stream from new discoveries, but even that will not be enough
to keep production up, and production by 2025 will be lower
than it is today. Therefore, that nearly 8 million barrel a day
growth in demand will almost entirely be made up of increased
imports, as I mentioned. Indeed, the largest share of that
increase will have to come from the area where most of the oil
reserves are, and that is the Middle East. And there is limited
opportunity to switch out of oil because so much of it is used
in the transportation sector, about 70 percent by 2025.
The picture in natural gas, as the chairman mentioned, is
moving in that same direction. Net imports are on track to
increase sharply during the next 20 years, mainly in the form
of liquified natural gas, LNG. Demand for natural gas will
increase by about 40 percent, mainly for electric power
generation and industrial use. That is more than 8.5 tcf of
growth over this 20-year period. And our domestic supply will
not keep pace, not nearly, going only from about 19 tcf to less
than 22 by 2025, so that 6.5 additional trillion cubic feet of
gas will need to be imported, and that will be almost all in
the form of LNG. As the chairman mentioned, we look for about
6.4 tcf of LNG imports by 2025.
We were relying on Canada for much of our imports in the
1990's. That will no longer be available to us, as Canada's
depletion rates increase and their need for domestic use of
natural gas as well increases.
For electricity, both natural gas and coal will increase.
Coal will maintain its share, about 50 percent of our electric
power generation under this scenario. Natural gas will grow
rapidly from 16 percent to about 24 percent of our electric
power generation. Nuclear generating capacity will increase,
but under the existing economics, we do not foresee any new
nuclear plants built. Certainly renewables will grow, but their
share will stay at about 9 percent of our electric power
generation by 2025.
The Chairman. Included in that word ``renewable'' is hydro?
Mr. Caruso. Yes.
The Chairman. How much of that 9 is hydro?
Mr. Caruso. Of the 9 percent, 7 percent is hydro.
The Chairman. So it will be 2 percent from other than
Mr. Caruso. That is correct, Senator.
Turning to the global market, world energy consumption is
expected to grow even faster at about 54 percent over the next
20 years, and the most rapid growth will be in developing
countries, particularly developing Asia. China, for example,
will have triple the growth rate as the industrialized
countries and the developing countries of Asia will double
their consumption of energy in 20 years.
Natural gas will also grow outside of the United States,
particularly for electric power generation, but coal will
remain the dominant source of electric power generation in
developing countries, particularly in China and India, which
has important implications for carbon dioxide emissions.
In summary, Mr. Chairman, the economic growth in the
populous countries of the world, the United States, China,
India, will increase energy demand, and fossil fuels, under the
business-as-usual case I presented here, will remain the
dominant source of energy. And dependence on foreign sources of
oil and increasingly natural gas are expected to increase
significantly not only in this country but in China, India, and
elsewhere in Asia. This has a very important geopolitical
implications, which I am sure we will hear from the following
witnesses in more detail.
Mr. Chairman, members of the committee, thank you once
again for allowing me to present the EIA's latest outlook. I
look forward to the question and answer period. Thank you.
[The prepared statement of Mr. Caruso follows:]
Prepared Statement of Guy Caruso, Administrator, Energy Information
Administration, Department of Energy
U.S. ENERGY PRICES
In the AEO2005 reference case, the annual average world oil
price\1\ increases from $27.73 per barrel (2003 dollars) in 2003 ($4.64
per million Btu) to $35.00 per barrel in 2004 ($5.86 per million Btu)
and then declines to $25.00 per barrel in 2010 ($4.18 per million Btu)
as new supplies enter the market. It then rises slowly to $30.31 per
barrel in 2025 ($5.07 per million Btu) [Figure 1]* In nominal dollars,
the average world oil price is about $52 per barrel in 2025 ($8.70 per
\1\ World oil prices in AEO2005 are defined based on the average
refiner acquisition cost of imported oil to the United States (IRAC).
The IRAC price tends to be a few dollars less than the widely-cited
West Texas Intermediate (WTI) spot price and has been as much as six
dollars per barrel lower than the WTI in recent months. For the first
11 months of 2004, WTI averaged $41.31 per barrel ($7.12 per million
Btu), while IRAC averaged $36.28 per barrel (nominal dollars) ($6.26
per million Btu).
* Figures 1-16 have been retained in committee files.
There is a great deal of uncertainty about the size and
availability of crude oil resources, particularly conventional
resources, the adequacy of investment capital, and geopolitical trends.
For example, the AEO2005 reference case assumes that world crude oil
prices will decline as growth in consumption slows and producers
increase their productive capacity and output in response to current
high prices; however, the October 2004 oil futures prices for West
Texas Intermediate crude oil (WTI) on the New York Mercantile Exchange
(NYMEX) implies that the average annual oil price in 2005 will exceed
its 2004 level before falling back somewhat, to levels that still would
be above those projected in the reference case. To evaluate this
uncertainty about world crude oil prices, the complete AEO2005 will
include other cases based on alternative world crude oil prices paths.
In the AEO2005, average wellhead prices for natural gas in the
United States are projected to decrease from $4.98 per thousand cubic
feet (2003 dollars) in 2003 ($4.84 per million Btu) to $3.64 per
thousand cubic feet in 2010 ($3.54 per million Btu) as the availability
of new import sources and increased drilling expands available supply.
After 2010, wellhead prices are projected to increase gradually,
reaching $4.79 per thousand cubic feet in 2025 ($4.67 per million Btu)
(about $8.20 per thousand cubic feet or $7.95 per million Btu in
nominal dollars). Growth in liquefied natural gas (LNG) imports, Alaska
production, and lower-48 production from nonconventional sources is not
expected to increase sufficiently to offset the impacts of resource
depletion and increased demand in the lower 48 states.
In AEO2005, the combination of more moderate increases in coal
production, expected improvements in mine productivity, and a
continuing shift to low-cost coal from the Powder River Basin in
Wyoming leads to a gradual decline in the average Monmouth price, to
approximately $17 per ton (2003 dollars) shortly after 2010 ($0.86 per
million Btu). The price is projected to remain nearly constant between
2010 and 2020, increasing after 2020 as rising natural gas prices and
the need for baseload generating capacity lead to the construction of
many new coal-fired generating plants. By 2025, the average Monmouth
price is projected to be $18.26 per ton ($0.91 per million Btu). The
AEO2005 projection is equivalent to an average Monmouth coal price of
$31.25 per ton in nominal dollars in 2025 ($1.56 per million Btu).
Mr. Chairman and Members of the Committee: I appreciate the
opportunity to appear before you today to discuss the long-term outlook
for energy markets in the United States and for the world.
The Energy Information Administration (EIA) is an independent
statistical and analytical agency within the Department of Energy. We
are charged with providing objective, timely, and relevant data,
analysis, and projections for the use of the Department of Energy,
other government agencies, the U.S. Congress, and the public. We do not
take positions on policy issues, but we do produce data and analysis
reports that are meant to help policy makers in their energy policy
deliberations. Because we have an element of statutory independence
with respect to the analyses, our views are strictly those of EIA and
should not be construed as representing those of the Department, the
Administration, or any other organization. However, EIA's baseline
projections on energy trends are widely used by government agencies,
the private sector, and academia for their own energy analyses.
The Annual Energy Outlook provides projections and analysis of
domestic energy consumption, supply, prices, and energy-related carbon
dioxide emissions through 2025. Annual Energy Outlook 2005 (AEO2005) is
based on Federal and State laws and regulations in effect on October
31, 2004. The potential impacts of pending or proposed legislation,
regulations, and standards--or of sections of legislation that have
been enacted but that require funds or implementing regulations that
have not been provided or specified--are not reflected in the
projections. AEO2005 explicitly includes the impact of the recently
enacted American Jobs Creation Act of 2004, the Military Construction
Appropriations Act for Fiscal Year 2005, and the Working Families Tax
Relief Act of 2004. AEO2005 does not include the potential impact of
proposed regulations such as the Environmental Protection Agency's
(EPA) Clean Air Interstate and Clean Air Mercury rules.
The U.S. projections in this testimony are based on the December
2004 ``early release'' of the AEO2005. The entire publication will be
released later this month. In addition to the long-term U.S. forecast
of energy markets, EIA also prepares a long-term outlook for world
energy markets, which is published annually in the International Energy
Outlook (IEO). The latest edition of this report, the IEO2004, was
published in April 2004. These projections are not meant to be an exact
prediction of the future, but represent a likely energy future, given
technological and demographic trends, current laws and regulations, and
consumer behavior as derived from known data. EIA recognizes that
projections of energy markets are highly uncertain and subject to many
random events that cannot be foreseen such as weather, political
disruptions, and technological breakthroughs. In addition to these
phenomena, long-term trends in technology development, demographics,
economic growth, and energy resources may evolve along a different path
than expected in the projections. Both the full AEO2005 and the IEO2004
include a large number of alternative cases intended to examine these
uncertainties. AEO2005 and IEO2004 provide integrated projections of
U.S. and world energy market trends for roughly the next two decades.
The following discussion summarizes the highlights from AEO2005 for the
major categories of U.S. energy prices, demand, and supply. It is
followed by a discussion of the key trends in world energy markets
projected in IEO2004.
Average delivered electricity prices are projected to decline from
7.4 cents per kilowatthour (2003 dollars) in 2003 ($21.68 per million
Btu) to a low of 6.6 cents per kilowatthour in 2011 ($19.34 per million
Btu) as a result of an increasingly competitive generation market and a
decline in natural gas prices. After 2011, average real electricity
prices are projected to increase, reaching 7.3 cents per kilowatthour
in 2025 ($21.38 per million Btu) (equivalent to 12.5 cents per
kilowatthour or $36.61 per million Btu in nominal dollars).
U.S. ENERGY CONSUMPTION
Total energy consumption is projected to grow at about one-half the
rate (1.4 percent per year) of gross domestic product (GDP) with the
strongest growth in energy consumption for electricity generation and
commercial and transportation uses. Delivered residential energy
consumption is projected to grow from 11.6 quadrillion British thermal
units (Btu) in 2003 to 14.3 quadrillion Btu in 2025 (0.9 percent per
year) [Figure 2]. This growth is consistent with population growth and
household formation. The most rapid growth in residential energy demand
in AEO2005 is projected to be in the demand for electricity used to
power computers, electronic equipment, and appliances. Delivered
commercial energy consumption is projected to grow at a more rapid
average annual rate of 1.9 percent between 2003 and 2025, reaching 12.5
quadrillion Btu in 2025, consistent with growth in commercial
floorspace. The most rapid increase in commercial energy demand is
projected for electricity used for computers, office equipment,
telecommunications, and miscellaneous small appliances.
Delivered industrial energy consumption in AEO2005 is projected to
reach 30.8 quadrillion Btu in 2025, growing at an average rate of 1.0
percent per year between 2003 and 2025, as efficiency improvements in
the use of energy only partially offset the impact of growth in
manufacturing output. Transportation energy demand is expected to
increase from 27.1 quadrillion Btu in 2003 to 40.0 quadrillion Btu in
2025, a growth rate of 1.8 percent per year. The largest demand growth
occurs in light-duty vehicles and accounts for about 60 percent of the
total increase in transportation energy demand by 2025, followed by
heavy truck travel (12 percent of total growth) and air travel (12
percent of total growth).
Total petroleum demand is projected to grow at an average annual
rate of 1.5 percent in the AEO2005 forecast, from 20.0 million barrels
per day in 2003 to 27.9 million barrels per day in 2025 [Figure 3] led
by growth in transportation uses, which account for 67 percent of total
petroleum demand in 2003, increasing to 71 percent in 2025.
Improvements in the efficiency of vehicles, planes, and ships are more
than offset by growth in travel.
Total demand for natural gas is also projected to increase at an
average annual rate of 1.5 percent from 2003 to 2025. About 75 percent
of the growth in gas demand from 2003 to 2025 results from increased
use in power generation and in industrial applications.
Total coal consumption is projected to increase from 1,095 million
short tons in 2003 to 1,508 million short tons in 2025, growing by 1.5
percent per year. About 90 percent of the coal is currently used for
electricity generation. Coal remains the primary fuel for generation
and its share of generation is expected to remain about 50 percent
between 2003 and 2025. Total coal consumption for electricity
generation is projected to increase by an average of 1.6 percent per
year, from 1,004 million short tons in 2003 to 1,425 million short tons
Total electricity consumption, including both purchases from
electric power producers and on-site generation, is projected to grow
from 3,657 billion kilowatthours in 2003 to 5,467 billion kilowatthours
in 2025, increasing at an average rate of 1.8 percent per year. Rapid
growth in electricity use for computers, office equipment, and a
variety of electrical appliances in the end-use sectors is partially
offset in the AEO2005 forecast by improved efficiency in these and
other, more traditional electrical applications and by slower growth in
electricity demand in the industrial sector.
Total marketed renewable fuel consumption, including ethanol for
gasoline blending, is projected to grow by 1.5 percent per year in
AEO2005, from 6.1 quadrillion Btu in 2003 to 8.5 quadrillion Btu in
2025, as a result of State mandates for renewable electricity
generation and the effect of production tax credits. About 60 percent
of the projected demand for renewables in 2025 is for grid-related
electricity generation (including combined heat and power), and the
rest is for dispersed heating and cooling, industrial uses, and fuel
U.S. ENERGY INTENSITY
Energy intensity, as measured by primary energy use per dollar of
GDP (2000 dollars), is projected to decline at an average annual rate
of 1.6 percent in the AEO2005, with efficiency gains and structural
shifts in the economy offsetting growth in demand for energy services
[Figure 4]. The projected rate of energy. intensity decline in AEO2005
falls between the historical averages of 2.3 percent per year from 1970
to 1986, when energy prices increased in real terms, and 0.7 percent
per year from 1986 to 1992, when energy prices were generally falling.
Between 1992 and 2003, energy intensity has declined on average by 1.9
percent per year. During this period, the role of energy-intensive
industries in the U.S. economy fell sharply. Energy-intensive
industries' share of industrial output declined 1.3 percent per year
from 1992 to 2003. In the AEO2005 forecast, the energy-intensive
industries' share of total industrial output is projected to continue
declining but at a slower rate of 0.8 percent per year, which leads to
the projected slower annual rate of reduction in energy intensity.
Historically, energy use per person has varied over time with the
level of economic growth, weather conditions, and energy prices, among
many other factors. During the late 1970s and early 1980s, energy
consumption per capita fell in response to high energy prices and weak
economic growth. Starting in the late 1980s and lasting through the
mid-1990s, energy consumption per capita increased with declining
energy prices and strong economic growth. Per capita energy use is
projected to increase in AEO2005, with growth in demand for energy
services only partially offset by efficiency gains. Per capita energy
use is expected to increase by an average of 0.5 percent per year
between 2003 and 2025 in AEO2005.
U.S. ENERGY PRODUCTION AND IMPORTS
Total energy consumption is expected to increase more rapidly than
domestic energy supply through 2025. As a result, net imports of energy
are projected to meet a growing share of energy demand. Net imports are
expected to constitute 38 percent of total U.S. energy consumption in
2025, up from 27 percent in 2003 [Figure 5].
Petroleum. Projected U.S. crude oil production increases from 5.7
million barrels per day in 2003 to a peak of 6.2 million barrels per
day in 2009 as a result of increased production offshore, predominantly
in the deep waters of the Gulf of Mexico. Beginning in 2010, U.S. crude
oil production is expected to start declining, falling to 4.7 million
barrels per day in 2025. Total domestic petroleum supply (crude oil,
natural gas plant liquids, refinery processing gains, and other
refinery inputs) follows the same pattern as crude oil production in
the AEO2005 forecast, increasing from 9.1 million barrels per day in
2003 to a peak of 9.8 million barrels per day in 2009, then declining
to 8.8 million barrels per day in 2025 [Figure 6].
In 2025, net petroleum imports, including both crude oil and
refined products (on the basis of barrels per day), are expected to
account for 68 percent of demand, up from 56 percent in 2003. Despite
an expected increase in domestic refinery distillation capacity, net
refined petroleum product imports account for a growing proportion of
total net imports, increasing from 14 percent in 2003 to 16 percent in
Natural Gas. Domestic natural gas production is projected to
increase from 19.1 trillion cubic feet in 2003 to 21.8 trillion cubic
feet in 2025 in AEO2005 [Figure 7]. Lower 48 onshore natural gas
production is projected to increase from 13.9 trillion cubic feet in
2003 to a peak of 15.7 trillion cubic feet in 2012 before falling to
14.7 trillion cubic feet in 2025. Lower 48 offshore production, which
was 4.7 trillion cubic feet in 2003, is projected to increase in the
near term (to 5.3 trillion cubic feet by 2014) because of the expected
development of some large deepwater fields, including Mad Dog, Entrada,
and Thunder Horse. After 2014, offshore production is projected to
decline to about 4.9 trillion cubic feet in 2025.
Growth in U.S. natural gas supplies will depend on unconventional
domestic production, natural gas from Alaska, and imports of LNG. Total
nonassociated unconventional natural gas production is projected to
grow from 6.6 trillion cubic feet in 2003 to 8.6 trillion cubic feet in
2025. With completion of an Alaskan natural gas pipeline in 2016, total
Alaskan production is projected to increase from 0.4 trillion cubic
feet in 2003 to 2.2 trillion cubic feet in 2025.
Three of the four existing U.S. LNG terminals (Cove Point,
Maryland; Elba Island, Georgia; and Lake Charles, Louisiana) are all
expected to expand by 2007, and additional facilities are expected to
be built in the lower-48 States, serving the Gulf, Mid-Atlantic, and
South Atlantic States, including a new facility in the Bahamas serving
Florida via a pipeline. Another facility is projected to be built in
Baja California, Mexico, serving a portion of the California market.
Total net LNG imports in the United States and the Bahamas are
projected to increase from 0.4 trillion cubic feet in 2003 to 6.4
trillion cubic feet in 2025.
Net Canadian imports are expected to decline from 2003 levels of
3.1 trillion cubic feet to about 2.5 trillion cubic feet by 2009. After
2010, Canadian natural gas imports in AEO2005 increase to 3.0 trillion
cubic feet in 2015 as a result of rising natural gas prices, the
introduction of gas from the Mackenzie Delta, and increased production
from coalbeds. After 2015, because of reserve depletion effects and
growing domestic demand in Canada, net U.S. imports are projected to
decline to 2.6 trillion cubic feet in 2025.
Coal. As domestic coal demand grows in AEO2005, U.S. coal
production is projected to increase at an average rate of 1.5 percent
per year, from 1,083 million short tons in 2003 to 1,488 million short
tons in 2025. Production from mines west of the Mississippi River is
expected to provide the largest share of the incremental coal
production. In 2025, nearly two-thirds of coal production is projected
to originate from the western States [Figure 8].
U.S. ELECTRICITY GENERATION
In AEO2005, generation from both natural gas and coal is projected
to increase through 2025 to meet growing demand for electricity.
AEO2005 projects that 1,406 billion kilowatthours of electricity
(including generation in the end-use sectors) will be generated from
natural gas in 2025, more than twice the 2003 level of about 630
billion kilowatthours [Figure 9]. The natural gas share of electricity
generation is projected to increase from 16 percent in 2003 to 24
percent in 2025. Generation from coal is projected to grow from about
1,970 billion kilowatthours in 2003 to 2,890 billion kilowatthours in
2025, with the share decreasing slightly from 51 percent in 2003 to 50
percent in 2025. Between 2004 and 2025, AEO2005 projects that 87
gigawatts of new coal-fired generating capacity will be constructed.
Nuclear generating capacity in the AEO2005 is projected to increase
from 99.2 gigawatts in 2003 to 102.7 gigawatts in 2025 as a result of
uprates of existing plants between 2003 and 2025. All existing nuclear
plants are projected to continue to operate, but EIA projects that no
new plants will become operational between 2003 and 2025. Total nuclear
generation is projected to grow from 764 billion kilowatthours in 2003
to 830 billion kilowatthours in 2025 in AEO2005. The share of
electricity generated from nuclear is projected to decline from 20
percent in 2003 to 14 percent in 2025.
Renewable technologies are projected to grow slowly because they
are relatively capital intensive and they do not compete broadly with
traditional fossil-fired generation. Where enacted, State renewable
portfolio standards, which specify a minimum share of generation or
sales from renewable sources, are included in the forecast. AEO2005
includes the extension of the Federal production tax credit for wind
and biomass through December 31, 2005, as indicated in H.R. 1308, the
Working Families Tax Relief Act of 2004. Total renewable generation in
AEO2005, including combined heat and power generation, is projected to
increase from 359 billion kilowatthours in 2003 to 489 billion
kilowatthours in 2025, increasing 1.4 percent per year.
U.S. CARBON DIOXIDE EMISSIONS
Carbon dioxide emissions from energy use are projected to increase
from 5,789 million metric tons in 2003 to 8,062 million metric tons in
2025 in AEO2005, an average annual increase of 1.5 percent [Figure 10].
The carbon dioxide emissions intensity of the U.S. economy is projected
to fall from 558 metric tons per million dollars of GDP in 2003 to 397
metric tons per million dollars of GDP in 2025, an average decline of
1.5 percent per year. Projected increases in carbon dioxide emissions
primarily result from continued reliance on coal for electricity
generation and on petroleum fuels in the transportation sector.
THE INTERNATIONAL OUTLOOK TO 2025
IEO2004 includes projections of regional energy consumption, energy
consumption by primary fuel, electricity consumption, carbon dioxide
emissions, nuclear generating capacity, and international coal trade
flows. World oil production and natural gas production forecasts are
also included in the report. The IEO2004 projects strong growth for
worldwide energy demand over the projection period ending in 2025.
Total world consumption of marketed energy is expected to expand by 54
percent, from 404 quadrillion Btu in 2001 to 623 quadrillion Btu in
2025 [Figure 11].
World Energy Consumption by Region. The IEO2004 reference case
outlook shows strongest growth in energy consumption among the
developing nations of the world [Figure 12]. The fastest growth is
projected for the nations of developing Asia, including China and
India, where robust economic growth accompanies the increase in energy
consumption over the forecast period. GDP in developing Asia is
expected to expand at an average annual rate of 5.1 percent, compared
with 3.0 percent per year for the world as a whole. With such strong
growth in GDP, demand for energy in developing Asia is projected to
double over the forecast, accounting for 40 percent of the total
projected increment in world energy consumption and 70 percent of the
increment for the developing world alone. Energy demand increases by
3.0 percent per year in developing Asia as a whole and by 3.5 percent
per year in China and 3.2 percent per year in India.
Developing world energy demand is projected to rise strongly
outside of Asia, as well. In the Middle East, energy use increases by
an average of 2.1 percent per year between 2001 and 2025; 2.3 percent
per year in Africa, and 2.4 percent per year in Central and South
In contrast to the developing world, slower growth in energy demand
is projected for the industrialized world, averaging 1.2 percent per
year over the forecast period. Generally, the nations of the
industrialized world can be characterized as mature energy consumers
with comparatively slow population growth. Gains in energy efficiency
and movement away from energy-intensive manufacturing to service
industries result in the lower growth in energy consumption. In the
transitional economies of Eastern Europe and the former Soviet Union
(EE/FSU) energy demand is projected to grow by 1.5 percent per year in
the IEO2004 reference case. Slow or declining population growth in this
region, combined with strong projected gains in energy efficiency as
old, inefficient equipment is replaced, leads to the projection of more
modest growth in energy use than in the developing world.
World Energy Consumption by Energy Source. Oil continues to be the
world's dominant energy source. Oil's share of world energy remains
unchanged at 39 percent over the forecast period. China and the other
countries of developing Asia account for much of the increase in oil
use in the developing world and, indeed, in the world as a whole
[Figure 13]. Developing Asia oil consumption is expected to grow from
14.8 million barrels per day in 2001 to 31.6 million barrels per day in
2025, an increase of 16.9 million barrels per day, representing 63
percent of the increment in oil use in the developing world and 39
percent of the total world increment in oil use over the forecast
period. In the industrialized world, increases in oil use are projected
primarily in the transportation sector. In the developing world, demand
for oil increases for all end uses, as countries replace non-marketed
fuels used for home heating and cooking with diesel generators and for
industrial petroleum feedstocks.
Natural gas demand is projected to show an average annual growth of
2.2 percent over the forecast period [Figure 14]. Gas is seen as a
desirable option for electricity, given its efficiency relative to
other energy sources and the fact that it burns more cleanly than
either coal or oil. The most robust growth in gas demand is expected
among the nations of the developing world, where overall demand is
expected to grow by 2.9 percent per year from 2001 to 2025 in the
reference case. In the industrialized world, where natural gas markets
are more mature, consumption of natural gas is expected to increase by
an average of 1.8 percent per year over that same time period, with the
largest increment projected for North America at 12.9 trillion cubic
feet. China and the other nations of developing Asia are expected to
see among the fastest growth in gas use worldwide, increasing by 3.5
percent per year between 2001 and 2025.
Coal remains an important fuel in the world's electricity markets
and is expected to continue to dominate fuel markets in developing
Asia. Worldwide, coal use is expected to grow slowly, averaging 1.5
percent per year between 2001 and 2025 [Figure 15]. In the developing
world, coal increases by 2.5 percent per year and will surpass coal use
in the rest of the world (the industrialized world and the EE/FSU
combined) by 2015. Coal continues to dominate energy markets in China
and India, owing to the countries' large coal reserves and limited
access to other sources of energy. China and India account for 67
percent of the total expected increase in coal use worldwide (on a Btu
basis). Coal use is projected to increase in all regions of the world
except for Western Europe and the EE/FSU (excluding Russia), where coal
is projected to be displaced by natural gas and, in the case of France,
nuclear power for electric power generation.
The highest growth in nuclear generation is expected for the
developing world, where consumption of electricity from nuclear power
is projected to increase by 4.1 percent per year between 2001 and 2025.
Developing Asia, in particular, is expected to see the largest
increment in installed nuclear generating capacity over the forecast,
accounting for 96 percent of the total increase in nuclear power
capacity for the developing world as a whole.
Consumption of electricity from hydropower and other renewable
energy sources is expected to grow by 1.9 percent per year over the
projection period. Much of the growth in renewable energy use is
expected to result from large-scale hydroelectric power projects in the
developing world, particularly among the nations of developing Asia.
World Carbon Dioxide Emissions. In the IEO2004 reference case,
world carbon dioxide emissions are projected to rise from 23.9 billion
metric tons in 2001 to 27.7 billion metric tons in 2010 and 37.1
billion metric tons in 2025 [Figure 16].
Much of the projected increase in carbon dioxide emissions is
expected in the developing world, accompanying the large increases in
energy use projected for the region's emerging economies. Developing
countries account for 61 percent of the projected increment in carbon
dioxide emissions between 2001 and 2025. Continued heavy reliance on
coal and other fossil fuels, as projected for the developing countries,
would ensure that even if the industrialized world undertook efforts to
reduce carbon dioxide emissions, there still would be substantial
increases in worldwide carbon dioxide emissions over the forecast
Continuing economic growth in populous countries of the world, such
as China, India, and the United States, is expected to stimulate more
energy demand, with fossil fuels remaining the dominant source of
energy. Dependence on foreign sources of oil is expected to increase
significantly for China, India, and the United States. These three
countries alone account for 45 percent of the world increase in
projected oil demand over the 2001 to 2025 time frame. A key source of
this oil is expected to be the Middle East.
Furthermore, although natural gas production is expected to
increase, natural gas imports in these three countries are expected to
grow faster. In 2001, India and China produced sufficient natural gas
to meet domestic demand, but by 2025, gas production in these two
countries will only account for around 60 percent of demand. In the
United States, reliance on domestic gas supply to meet demand falls
from 86 percent to 72 percent over the projection period. The growing
dependence on imports in these three countries occurs despite
efficiency improvements in both the consumption and the production of
This concludes my testimony, Mr. Chairman and members of the
Committee. I will be happy to answer any questions you may have.
The Chairman. Well, thank you, Mr. Caruso. I want to take
this opportunity to say to you, and through you, to all those
who work for you, it used to be, 10 years or so ago, we did not
know whether we believed you all, but you have become a very
formidable organization. And we are glad to have you and we
have great trust in what you tell us. So we hope you will keep
the professionalism up because you are pretty important to us.
Mr. Caruso. Well, as I promised to then Chairman Bingaman,
I would do my best to keep EIA a strong and independent
organization, and I hope I have been able to achieve that.
Thank you, Senator.
The Chairman. Thank you.
Our next witness is Jeffrey Logan, China Program Manager,
International Energy Agency. Why do we have you here today?
STATEMENT OF JEFFREY LOGAN, SENIOR ENERGY ANALYST AND CHINA
PROGRAM MANAGER, INTERNATIONAL ENERGY AGENCY
Mr. Logan. That is a very good question, Mr. Chairman.
The Chairman. No. I mean China must be important. Right?
That is why we have you here?
Mr. Logan. Originally the IEA planned to send someone----
The Chairman. I did not mean you personally. I mean the
issue. I like you. You are fine.
Mr. Logan. Thank you, Mr. Chairman and members of the
The IEA is very appreciative of the chance to testify here
this morning about China's energy sector. What I hope to
primarily discuss this morning are the oil and gas sectors in
China. Clearly there are many other topics in the Chinese
energy sector that are vitally important to the global energy
sector, but I would like to restrict most of my remarks to
those topics. And I would be happy to try to answer any
questions you might have on other topics.
But before I begin with oil and gas issues, I would like to
say just a few words about a more general energy trend in China
that could have very important long-term implications, and that
general energy trend is related to the amount of energy that is
needed to drive economic growth in China.
From 1979 until the late 1990's, China's average reported
energy consumption grew only half as quickly as the rate of
GDP. This is called the energy elasticity. In other words, the
energy elasticity was 0.5. For every 1 percent growth in GDP,
the energy consumption would grow by .5 percent. So I think
there remains a healthy degree of skepticism about energy and
economics statistics that are published by China, but even
taking those uncertainties into account, the energy elasticity
in China is still below 1.0, meaning that the energy growth
rate was not exceeding the growth rate of GDP. For a developing
country, this was a remarkable achievement, and it resulted in
significant savings of both energy consumption and greenhouse
However, since the new millennium has begun, energy
consumption in China has surged and the elasticity in 2004, for
example, was 1.5, meaning that for every 1 percent growth in
GDP, energy consumption was now growing by 1.5 percent. Still,
there are some data uncertainties related to these numbers, but
the general trend is clearly visible.
No one, as of yet, has come up with a sufficiently
satisfactory answer for why this sudden change has happened in
the Chinese energy-economic relationship, and we think it is
vitally important that we understand why over the past 5 years,
the Chinese economy has been consuming so much more energy to
drive its economy. Indeed, this changing energy-economic
relationship in China caught many Chinese planners off guard
and largely explains the very severe shortages that exist in
many of the energy sectors in China right now.
This change in behavior could be just a short-term
phenomenon, but the impact of such a change over a longer
period of time would have very profound impacts on global
markets, energy security, and greenhouse gas emissions. So I
think we should strive to more fully understand just what is
happening in China's economy right now because it will have
long-term implications for everyone on the globe.
China's opaque oil sector has attracted immense attention
over the past few years. Oil demand in China grew by 27 percent
over the past 2 years, while domestic production has been
largely stagnant. As a result, crude imports have climbed by 75
percent since 2002. China now relies on imported crude for 4 of
every 10 barrels it consumes. Perhaps surprisingly, China's oil
demand in 2004 still only equalled one-third the level of
consumption in the United States. IEA forecasts envision
Chinese demand to continue growing through the year 2030 when
it reaches nearly 14 million barrels per day. At that time,
Chinese crude imports would roughly equal those of the United
States today. Still, total Chinese demand then would be about
one-third less than what the United States consumes right now.
Three drivers account for much of the recent growth in
China's oil sector: increasing vehicle ownership, which we have
all heard about, the growing industrial demand for
petrochemical feedstocks, and most unusually, the surge in oil-
fired backup power generation that is needed due to severe
electricity generating shortages in China right now.
The vehicle and petrochemical sectors are likely to
continue growing steadily in the future, but we anticipate a
fall-off in the amount of oil that is needed for this backup
power generation using oil as more coal and hydroelectric
plants come on line.
Now, as this oil demand falls off the from power generation
sector, we do anticipate that some of that will be replaced by
the stockpiling of oil in China in the strategic petroleum
reserves which they are now developing, but we believe that
those amounts put into the stockpile will be less than what is
currently being assumed for power generation using oil.
Rising imports in China have alarmed government
The Chairman. Where do they put their petroleum reserve?
What is it?
Mr. Logan. They have just started construction of their
strategic petroleum reserves. There are four sites where they
are building the reserves. Currently only the Chinese oil
companies hold commercial stockpiles, but not strategic
government stockpiles. Those government stockpiles will begin
being filled later this year.
The Chairman. I mean how do they do it. We know what we do.
What do they do?
Mr. Logan. Above-ground steel tanks.
Rising imports in China have alarmed government
policymakers. They have developed a multi-pronged approach to
help address the country's looming oil insecurity. The measures
include promoting state-owned oil companies to purchase
overseas equity oil, diversifying sources of oil supply,
launching construction of strategic petroleum reserves, and
enacting demand-side efficiency measures. I have outlined each
of these measures in my written testimony.
The IEA continues to believe that global oil reserves are
sufficient to accommodate global demand through 2030 and
beyond. More important uncertainties relate to maintaining
stable output among major producers, dealing with environmental
issues like climate change, and marshalling the necessary
investment in each link of the oil supply chain.
China has taken major steps to boost the use of natural
gas, primarily to improve urban air quality, but China's
natural gas policy is fragmentary and development occurs on a
project-by-project basis rather than by focusing on the needs
of the entire gas chain.
But developments in China's gas sector have surprised many
critics. The first gas pipeline to Beijing in the late 1990's
was widely predicted to be an economic failure, the main
criticism being that the government focused only on a supply
push strategy and seemed to ignore the needs of potential end-
use consumers. Gas demand has developed fairly quickly,
however, and a second pipeline to Beijing is now under
The new cross-country west-east pipeline faces similar
criticism. Potential users have little incentive to switch from
coal. The pipeline started commercial operation in late 2004, 1
year ahead of schedule, and will slowly ramp up to design
capacity in 2007. The pipeline faces potential competition from
imported LNG in cities like Shanghai, and it will be very
interesting to see how the competition between pipeline gas and
LNG imports develops in China.
In my mind, promoting natural gas use in China is the most
cost-effective supply side measure to simultaneously eliminate
local pollution, slash greenhouse gas emissions, and promote
efficient industrial technology use. U.S. assistance to China
focusing on natural gas policy, project development, and
capacity building would advance our mutual interests.
In conclusion, although Chinese energy companies will face
increasing challenges in global energy markets, they have
demonstrated a growing capacity to compete. More than ever,
U.S. policies should be focused on engaging China on energy
issues because the security, commercial, and environmental
implications are too great to ignore.
Thank you for your attention, and I would be happy to take
any questions you might have.
[The prepared statement of Mr. Logan follows:]
Prepared Statement of Jeffrey Logan, Senior Energy Analyst and
China Program Manager, International Energy Agency
ENERGY OUTLOOK FOR CHINA: FOCUS ON OIL AND GAS
China has charted a bold course of economic reforms over the past
25 years, achieving mixed, but often remarkable results given the
development challenges it faces. Reported average annual GDP growth of
over nine percent has improved living standards for hundreds of
millions of Chinese people to a level unmatched in any point of Chinese
history. China now plays a key role in the supply and demand of many
global commodity markets including steel, cement, and oil. (See Figure
1.)* If sustained, China's development will likely create the world's
largest economy, as measured in purchasing power parity, in about two
or three decades. Per capita wealth, however, will remain far below
OECD levels. Enormous opportunities and challenges await commercial,
governmental and social interests across the globe as China develops.
* Figures 1-4 have been retained in committee files.
This document provides an update on current oil and natural gas
trends in China, and looks at future growth projections. It is based
largely on the International Energy Agency's dialogue and collaboration
with China as a Non-Member Country participant. It begins with an
overview of recent changes in the Chinese energy-economy relationship.
A CHANGING ENERGY-ECONOMIC RELATIONSHIP
Chinese energy demand has surged since the arrival of the new
millennium, when a new round of investment-driven economic growth
began. Preliminary Chinese data indicate that the energy elasticity of
demand (the growth rate of energy consumption divided by that of GDP)
surpassed 1.5 in 2004. In other words, for every one percent increase
in GDP, energy demand grew by over 1.5 percent. The shift reverses
China's recent historical trend of maintaining energy elasticity below
1.0. (See Figure 2.) For most developing countries, including India,
Brazil, and Indonesia, energy elasticities greater than 1.0 are normal,
but for China it is a groundbreaking change.
Many analysts rightly question the validity of Chinese economic and
energy statistics; GDP is likely underreported right now, although from
the late 1970s until the end of the 1990s, it was probably overstated.
Likewise, Chinese energy consumption, coal in particular, is tracked
poorly. Coal use from 1996-1999 is now regarded as massively
underestimated by analysts both inside and outside of China due to
untracked output from small coal mines. One of the contributing factors
behind China's current energy crunch is indeed these poorly tracked
energy statistics: good energy policy and energy planning require
Despite the problems with data quality, the general trend raises
concern. Is this new energy-economy relationship in China temporary or
does it indicate a deeper structural change within the economy? The
difference could have a profound impact on future global energy
markets, energy security, and environmental quality. Almost no
authoritative research has been published to explain the surging
elasticity. A clearer understanding of what is happening in Chinese
energy markets may never be uncovered, but more research into the new
energy-economic relationship would benefit the international community
OIL SECTOR: THE SEARCH FOR SECURITY
China surpassed Japan in late 2003 to become the world's second
largest petroleum consumer. In 2004, Chinese demand grew 15 percent
annually to 6.37 million barrels per day (b/d), about one-third the
level in the United States. Domestic crude output in China has grown
only very slowly over the past five years. At the same time, oil demand
has surged, fueled by rapid industrialization. (See Table 1.) Imports
of crude oil grew alarmingly in 2003 and 2004 to meet demand,
increasing nearly 75 percent from 1.38 million barrels per day (b/d) in
2002 to 2.42 million b/d in 2004. Imports now account for 40 percent of
Chinese oil demand.
Table 1.--GLOBAL OIL DEMAND BY REGION
[in millions of barrels per day]
Demand Annual Change Annual Change (%)
2004 2003 2004 2005 2003 2004 2005
North America................................... 25.14 0.47 0.57 0.23 1.9 2.3 0.9
Europe.......................................... 16.47 0.20 0.26 0.10 1.2 1.6 0.6
China........................................... 6.37 0.55 0.85 0.36 11.0 15.4 5.7
Other Asia...................................... 8.54 0.22 0.44 0.21 2.8 5.4 2.5
FSU............................................. 3.69 0.12 0.11 0.14 3.5 3.1 3.9
Middle East..................................... 5.88 0.20 0.32 0.26 3.7 5.7 4.5
Africa.......................................... 2.81 0.04 0.07 0.09 1.7 2.4 3.3
Latin America................................... 4.89 -0.09 0.16 0.10 -1.9 3.5 2.1
World....................................... 82.45 1.85 2.66 1.44 2.4 3.3 1.7
Source: Oil Market Report, December 2004, IEA.
As described in the IEA's December 2004 Oil Market Report, a
significant driver of recent oil demand growth in China--perhaps on the
order of 250-300 thousand barrels per day--has been the need for oil-
fired back-up power generation in the face of serious electricity
shortages. Other contributing factors are the rise in personal car
ownership and growing industrial petrochemical needs, which are likely
to continue growing fairly steadily. However, the amount of fuel oil
and diesel used for back-up power generation will likely decline, as
China closes the generation shortage by installing new coal, natural
gas, hydro, and nuclear power plants. It has also promised to institute
tougher new demand-side efficiency measures.
Chinese policymakers and state-owned oil companies have embarked on
a multi-pronged approach to improve oil security by diversifying
suppliers, building strategic oil reserves, purchasing equity oil
stakes abroad, and enacting new policies to lower demand.
Diversifying Global Oil Purchases
Over the past decade, Chinese crude imports have come from a much
wider and more diverse set of suppliers. In 1993, almost all of China's
crude imports came from Indonesia, Oman, and Yemen. By 2004, Saudi
Arabia was China's largest supplier accounting for 14 percent of
imports, with Oman, Angola, Iran, Russia, Vietnam, and Yemen together
supplying another 60 percent, and the remainder which came from a long
list of other suppliers.
Establishing Strategic Oil Reserves
China's 10th Five-Year Plan (2001-2005) called for the construction
and use of strategic petroleum reserves by 2005. Construction has begun
at one of four sites slated to store government-owned supplies. Chinese
officials plan to gradually fill up to 100 million barrels of storage
by 2008 (equivalent to 35 days of imports then). Original plans called
for boosting stocks to 50 days imports in 2010, but this may be
slightly delayed. On the other hand, the recent surge in imports has
led Chinese policymakers to consider an even more aggressive long-term
plan for 90 days of stocks, perhaps by 2020.
The IEA has shared experiences with China on member country
stockpiling practices since 2001. Chinese officials have stated their
intent to slowly fill their new stocks depending on global conditions.
They have demonstrated less concern, however, in coordinating release
of their future stocks as part of a larger global system. In other
words, China may be more inclined to use strategic stocks to influence
prices even without the threat of severe supply disruptions. We are
Overseas Equity Oil
Chinese state-owned oil companies have accelerated their hunt for
overseas oil assets as part of the country's larger ``going out''
strategy. Growing foreign exchange holdings fuel the general outward
drive of Chinese companies. While a significant number of oil-related
announcements have been made in the press since 2001, much of this
activity is still waiting to be finalized. The lack of transparency
over investment amounts, production sharing contract details, and
proven petroleum reserves may create a more successful image of Chinese
companies than is actually the case.
Until recently, Chinese companies seemed most comfortable operating
in locations not dominated by the oil majors. This meant countries like
Sudan, Angola, and Iran. For example, over half of Chinese overseas oil
production currently comes from Sudan. Activity has picked up in other
areas recently, however, including Russia, Kazakhstan, Ecuador,
Australia, Indonesia, and Saudi Arabia to name just a few. Chinese
companies appear to be improving their ability to purchase assets
without overpaying, as earlier reports suggested, but this conclusion
is only supported with anecdotal information.
In 2003, Chinese state-owned oil companies pumped 0.22 million b/d
of equity oil. The figure is projected to rise by 8 percent annually
thru 2020 when it hits 1.4 million b/d. Leading the drive among Chinese
state-owned companies, China National Petroleum and Gas Company (CNPC)
claims to have petroleum assets in 30 countries. It plans to spend $18
billion in overseas oil and gas development between now and 2020. Most
of CNPC's overseas production currently comes from Sudan, Kazakhstan,
and Indonesia. Many speculated that CNPC would take a share in the
restructured assets of Yukos; rumors in late January 2005 foresaw a $6
billion ``loan'' to Rosneft for long-term oil purchases, but no equity
A disappointment for China during the year included the Russian
decision to build an oil pipeline to Nakhodka with Japanese
contributions, rather than to Daqing in northeast China with CNPC's
participation. Discussions are still ongoing regarding a potential spur
line that would feed China's northeast. In contrast, China and
Kazakhstan made rapid progress in negotiating and starting construction
on a cross-border pipeline that will initially deliver 0.2 million b/d
of crude and products to Xinjiang province, and possibly later doubling
to 0.4 million b/d. China appears to have made a geopolitical decision
to secure its oil supplies with this line as costs would probably not
pass a commercial test.
China Petroleum Company (SINOPEC) is newer to the international
game than CNPC and hopes to start pumping smaller quantities of equity
oil in 2005 from activities in Yemen, Iran, and Azerbaijan. Perhaps the
largest story in 2004 was SINOPEC's agreement in Iran to spend $70
billion over 25 years to purchase LNG cargoes and participate in
upstream oil activities there. Many uncertainties remain, however,
before the investment is sealed.
China National Overseas Oil Company (CNOOC), the most progressive
and outwardly-oriented of the Chinese state-owned oil companies, has
been very active in Australia and Indonesia. In 2004, it succeeded in
securing significant natural gas stakes in both countries. CNOOC
surprised the global community in early 2005 when it was rumored to
want to purchase Unocal for roughly $13 billion. Little additional
information has appeared in the press since then. These types of
announcements tend to create an image of Chinese companies wearing
bigger shoes than they actually do.
In summary, Chinese companies are increasingly active abroad and
appear to be improving their business skills. They have not yet
demonstrated that they can improve long-term oil security in a cost
effective manner, however, as other Asian state-owned oil companies
Per capita oil consumption in China is only one-fourteen the level
in the United States, indicating that strong growth could continue for
many years. The transport sector in China will likely experience the
strongest demand for oil over the mid- to long-term. Currently, there
are roughly 24 million vehicles in China, with projections anticipating
90-140 million by 2020. This would push transport demand from 33
percent of total Chinese petroleum demand to about 57 percent (from 1.6
million b/d in 2004 to roughly 5.0 million b/d in 2020).
To partially address this problem, China enacted new automobile
efficiency standards in late 2004. In Phase I, running from mid-2005
until January 2008, no increase in fleet fuel consumption will be
allowed without penalties. Phase II would then begin and require a 10
percent reduction in fleet fuel consumption.
Another measure that has gained renewed attention is the imposition
of a vehicle fuel tax. This policy would ban all road use fees
instituted at the local level and replace them with a nationwide tax
ranging from 30-100 percent of the current price of vehicle fuel.
Gasoline prices in most Chinese cities, for example, are currently the
equivalent of about $1.60 per gallon. The fuel tax, if enacted, would
raise gasoline prices to $2-$3 per gallon. The initiative has been
discussed for years but lacked uniform support from policymakers. It
has gained new steam over the past year with the surge in imported
THE LONG-TERM VIEW
Without measures to limit demand or create alternative fuels,
Chinese oil consumption appears set to grow rapidly for the foreseeable
future. The World Energy Outlook 2004 forecasts Chinese petroleum
demand in 2030 at just under 14 million bpd, about one-third less than
current demand in the United States. (See Figure 3.) China's import
dependency will continue to grow, however, reaching 75 percent. In
2030, China would be importing as much oil as the United States did in
2004. China itself forecasts a lower figure in the future, but we will
wait until the necessary policies are in place and in effect before we
adjust our number down.
The IEA believes there are enough worldwide petroleum reserves to
meet global demand through 2030 and beyond. More important uncertainty
relates to marshalling the necessary upstream investments, maintaining
stable petroleum output in major producer countries, mid and downstream
infrastructure among consumers, and dealing with environmental issues
like climate change.
THE PROMISE OF NATURAL GAS IN CHINA: WHITHER POLICY?
China has taken major steps since 1997 to boost natural gas use,
mainly as a way to improve urban air quality. But gas was largely
ignored for most of China's modern history and new market-oriented
measures are needed to fully encourage natural gas use.
Domestic gas production currently stands at 40 billion cubic meters
(BCM) and accounts for roughly 3 percent of the country's total energy
demand. Chinese policymakers envision gas use rising substantially
through 2020, when demand would reach 200 BCM and account for 10
percent of total energy demand. Baseline IEA estimates are currently
less optimistic of future gas markets in China,\1\ but the potential
for dramatic change in China cannot be discounted. With the right
policy framework, gas use could be significantly higher than even
Chinese government forecasts.
\1\ The World Energy Outlook 2004 forecasts natural gas accounting
for 6 percent of China's total final energy consumption in 2030.
Chinese policymakers increasingly view natural gas as the fuel of
choice for its environmental, security, and industrial advantages. But
the gas industry is in its infancy and many barriers must be overcome
before this relatively clean energy source can make a significant
impact. The International Energy Agency recently completed a detailed
study of China's gas sector and delivered important recommendations to
the Chinese government.\2\ Provided below is a summary of why China is
promoting development of the gas sector, the challenges it faces, and
how some of these barriers could be addressed.
\2\ Interested readers should consult this IEA publication for more
complete information: ``Developing China's Natural Gas Market: Policy
Framework and Investment Conditions,'' International Energy Agency,
Drivers for Natural Gas
China is taking new measures to promote the use of natural gas for
three reasons. First, natural gas used in place of coal can help China
address environmental problems that have become urgent economic and
social issues. Replacing coal with natural gas basically eliminates
emissions of sulphur oxides and particulates, the two most serious
local and regional pollutants. Gas also offers steep reductions in
nitrogen oxide and greenhouse gas emissions.
Second, natural gas can help China diversify its energy resources
and address growing concerns over energy security. Imported crude oil
now accounts for 40 percent of annual demand and will likely continue
to grow rapidly. Additionally, coal demand has soared since 2002,
resulting in localized transportation bottlenecks. China could help
alleviate these energy security concerns by increasing reliance on
Finally, natural gas has the potential to accelerate modernization
of the country's industrial facilities. Most of China's industry is
based on coal-burning technology, which is inherently less efficient
than gas-fired equipment. Modern natural gas boilers, for example,
convert about 92 percent of the energy contained in natural gas to
useable heat. Coal boilers on the other hand, waste 20 percent or more
of the input energy in the process. Similarly, advanced combined-cycle
gas turbines used to generate electricity are nearly 60 percent
efficient, while coal-fired steam turbines convert only about 40
percent of the energy in coal into useful electricity.
Developments and Hurdles
Important gas projects have been launched to support China's
ambitious development targets for natural gas. A 3,900 kilometre, $24
billion West-East Pipeline started commercial operation in late 2004.
(See Figure 4.) Throughput will slowly ramp up to 12 BCM in 2007 as
downstream projects and distribution networks are completed. The fact
that CNPC completed the pipeline one year ahead of schedule, and
without participation from its planned investment partners (Shell,
Exxon-Mobil, and Gazprom), is testament to the drive and ability of
Chinese energy companies. Although many outside observers question the
economics of the pipeline, similar doubts were raised when China built
its first gas pipeline to Beijing. The economics were shaky at the
time, but that line is now oversubscribed and a second line will begin
delivering gas to the capital in 2006.
Two LNG terminals are also under construction in southeastern
China, with perhaps a dozen more under discussion and consideration.
LNG imports in China became an extremely hot topic in 2004 as coal
prices rose substantially, along with incomes and air pollution. If
even half of the LNG terminals currently under discussion are built,
China could be importing 30-35 BCM of natural gas by 2015.
Talks continue on international natural gas pipelines with Russia
and Kazakhstan as well, but progress has been slow. A joint feasibility
study funded by Russia, China, and South Korea that would deliver 20
BCM of Russian gas to China and 10 BCM to South Korea is currently
under evaluation. This pipeline may also have been ahead of its time,
but Russia's Gazprom blocked any further discussion of the deal.
Important hurdles exist for natural gas market development,
Natural gas is expensive compared to coal if environmental
costs are not included;
China is not believed to be endowed with abundant and cheap
gas reserves, and known supplies are often located far from the
main centers of demand;
Gas supply infrastructure is fragmented and huge investment
is needed to finance its expansion;
China lacks a legal and policy framework to encourage
investment in the gas sector; and
There is a lack of knowledge over how to best develop
natural gas technology and markets.
Perhaps the weakest link in China's current natural gas chain is
the perception of high costs that results in weak demand for gas.
Without stronger market pull for gas, the entire natural gas chain will
remain weak, no matter how much the government tries to development the
market by administrative dictate.
Recommendations from the IEA Study
General recommendations from the IEA study to improve the situation
in China include:
1. Publishing a ``White Paper'' on natural gas policy as part of a
coherent national energy policy framework;
2. Establishing a legal basis for natural gas;
3. Making environmental protection a component of energy pricing;
4. Creating a central administration for energy.
Policy Framework for Natural Gas
To realize the ambitious target for gas market development in
China, there is a need for the government to go beyond the ``project-
by-project'' approach by publishing a comprehensive national natural
gas policy. Such a policy could address issues of gas exploration,
development, distribution, pricing, marketing as well as imports. It
should be part of a coherent national energy policy, as China's gas
industry is intertwined with the coal and the electrical power
industry, and with environmental policy.
Through the elaboration of the ``White Paper'', the government can
make a clear and formal statement of its policy objectives and long-
term strategy for natural gas in China. The process of elaboration and
consultation is critically important: the government should consult as
many actors as possible within and outside the central administration.
Legal Framework for Natural Gas
Preparation of a national natural gas law is an urgent priority.
Such a framework would provide a clear legal expression of the
government's policy and strategy for gas industry development and the
ground rules for operation of the gas industry.
Almost every country where a natural gas industry has been
established, whether based on indigenous resources or imports, has
adopted a gas law in the early stages of market development. Adopting
such a law would help create a more stable environment for investment
and operation, reduce uncertainty and investment risk, and consequently
lower the cost of capital.
It should codify the roles, rights and responsibilities of
different players as well as regulatory principles in the industry to
reduce conflicts of interest and to ensure a level playing field for
all. It should provide the legal basis for short-term gas market
development activities, such as gas contract negotiations and
enforcement. It should also be flexible enough to cope with market
evolution over the medium and long-term.
Price Energy to Account for the Economic and Environmental Costs
Theoretically, environmental protection, in particular the
reduction of local atmospheric pollution, is the key driving force for
increased gas use in China. However, important challenges remain in
turning this theoretical driver into a real market mover. China has put
in place a whole set of environmental laws and regulations on air
pollution, but a lack of adequate means for enforcing implementation
makes most of them ineffective.
In power generation and industrial boilers, in addition to
strengthening the enforcement of existing regulations, the use of
economic instruments must be extended. To start with, the price penalty
per ton of emissions (SO2, NOX, particulates)
should fully reflect the market value of emission permits and take into
consideration the health damage to the public. Many OECD countries
include the price of environmental externalities in power generation,
at least in planning exercises to determine the best choices for future
power plant additions.
A Central Administration for Energy
At the time of the IEA study, China lacked a central body to
address the country's overall energy strategy. Since the abolition of
the Ministry of Energy in 1992, China did not have a single central-
government entity in charge of energy policy and regulatory matters.
Energy sector responsibilities were spread across several ministries.
As the government is strongly committed to removing the policy-making
and regulatory functions from state-owned companies, it needs to
strengthen its own resources for governing them.
This recommendation by the IEA was recently implemented by the
Chinese, although the newly formed Energy Bureau within the National
Development and Reform Commission does not have enough staff or
resources to perform all the necessary functions. There are roughly 30
employees at the Energy Bureau in China, while most OECD countries
would have hundreds, if not thousands, of employees to create the
policy framework and oversight needed to steer a modern energy
industry. Given the current shortages of electricity and coal, Chinese
planners are again considering restructuring of the central energy
China's rapid economic growth is creating dislocations both at home
and, increasingly, around the globe. These changes create both
challenges and opportunities. China's rapid growth over the past few
years should also be kept in perspective: China's 1.3 billion people
currently consume only one-half the energy as the 290 million citizens
in the United States, and Chinese oil demand is only one-third as
large. While Chinese policymakers have done a laudable job of steering
economic reform, a huge number of challenges--from population
imbalances and environmental pollution to corruption and AIDS--await
solutions before the country can raise individual standards of living
to anywhere near current OECD levels. The international community must
engage China in order to minimize the challenges and maximize the
opportunities that lie ahead.
The Chairman. Thank you very much. I want to just clarify
one. It seems to me that you were saying the future for them is
natural gas in China, and we should be interested in pursuing
with them how that might happen. What kind gas and where would
they get it? Are you speaking of LNG or just straight natural
Mr. Logan. I am speaking about both the domestic natural
gas that is available in China and pipeline gas from Russia,
from Kazakhstan, and LNG imported from a host of potential
The Chairman. Thank you.
I note that Senator Thomas from Wyoming is here. Senator,
there were brief remarks by each Senator. Would you like to
make some? Oh, Senator Bunning, you are first.
Senator Bunning. I will put mine in the record.
Senator Craig. Thank you very much, Senator.
[The prepared statement of Senator Bunning follows:]
Prepared Statement of Hon. Jim Bunning, U.S. Senator From Kentucky
Mr. Chairman, I am pleased we are having this hearing today.
Understanding our energy needs is important so that our country can
plan for its future.
As we have seen in recent years, energy prices can have a
tremendous impact on our economy. Many businesses and consumers are
begging for some relief from the current high energy prices.
I hope that we are able to pass an energy bill this year that will
provide an energy policy that we have need for some time now.
Coming from a coal state, I want to work to make sure that coal
continues to be a vital energy source. It produces fifty percent of our
electricity today and should play a large role as a cheap energy source
for our future.
I hope that we can continue to work to bring new clean coal
technology quickly into the commercial sector.
I thank the witnesses for appearing before us today. I look forward
to hearing their testimony.
Thank you, Mr. Chairman.
Senator Thomas. I will not comment right now, sir.
The Chairman. Thank you very much.
Please proceed. Tell us what you do please.
STATEMENT OF ANDREW J. SLAUGHTER, SENIOR ECONOMIST, SHELL OIL
Mr. Slaughter. Good morning, Mr. Chairman and members of
the committee. My name is Andrew Slaughter. I am a senior
economist with the Shell Oil Company here in the United States,
and I would like to thank you for the opportunity to come to
this morning's hearing. I am here to give you some insights
about Shell's most recent global scenarios. They are in my
written statement, and I will summarize the main points to you
this morning. I am going to focus on the global scenarios, not
so much on specific policy recommendations for the short term.
We have used global scenarios for over 30 years in Shell,
and they are a means for us to explore the future for the world
and for the industry. They are not predictions. They are really
frameworks for thinking, used to challenge our conventional
wisdom, and characterize plausible alternative future paths for
the world. I think they are of interest to you, as you look at
the future of U.S. energy markets, and we find them useful when
we are looking at options to deal with really the two major
challenges for the global industry in the 21st century.
Mr. Caruso and Mr. Logan have referred to the pace of
energy demand growth globally and the United States, how do we
meet that, once both growing very fast and shifting in nature,
but also how will be responsive to the impact of energy use on
natural systems not only here in the United States, but around
the world. I think we have to consider those two points.
If I can set the stage for where we started with these
scenarios. In the 1990's, the world was characterized by the
forces of market liberalization, globalization, and
technological progress both in energy and in many other
sectors. As expected, the role of governments around the world
shrunk in that environment. They had a smaller role to play.
However, today since 2 years ago, the role of governments is
increasing in response to the two crises we have faced: the
security crisis following 9/11 and the market trust crisis
following Enron and other corporate scandals. So governments
have a greater role to play both in energy markets and in the
general policy than we might have anticipated a couple of years
ago. And that creates tensions between society's aspirations
for security, market efficiency, and social cohesiveness.
Each of the three new global scenarios we have developed at
Shell explores the tradeoffs between these three aspirations,
only two of which can really be satisfied at any one time. The
scenarios are called: Open Doors, Low Trust Globalization, and
Flags. I am going to outline the main points from each of these
three scenarios and suggest some energy market implications we
need to think about when we are facing the challenges that I
In Open Doors, the first scenario, the drive for market
efficiency and society's desire for social cohesion are
satisfied, giving security more of a back seat. Governments
choose to operate via incentives. Markets are open. Trade
barriers globally are lowered, leading to strong economic
growth in energy demand above historical trend rates. In Open
Doors, energy markets evolve following free market principles
and respond to consumer preference for cleaner fuels and
equitable resolution of environmental externalities using the
U.S. energy policy in this scenario would be driven by
market efficiency. The United States would become more open to
international gas trade, allowing market-based development of
import infrastructure. Enhanced access to domestic gas would be
acceptable if economic and balanced with environmental
objectives. In this scenario, LNG imports would grow the most
rapidly because of the connections to international markets.
Renewable energies and unconventional fuels would be
developed subject to the discipline of the market and not duly
inhibited by regulation. Environmental costs will be
internalized in energy pricing via market mechanisms like
CO2 permit trading. And technological progress would
drive the penetration of new energies such as hydrogen fuel
This would be an efficient world in terms of development of
energy supplies, but it is not without risk. If the United
States or major consuming markets like Europe follow an Open
Doors philosophy and other major actors in the energy world do
not, that is a risk. Most of the new oil and gas production is
coming from non-OECD countries. Fossil fuel extraction is
increasingly dominated by State-run national oil companies who
have sometimes completely different drivers from the
international oil companies in the western hemisphere. So that
poses a potential risk to international energy security.
In the second scenario, Low Trust Globalization, we still
have a drive for market efficiency, but governments play a
stronger role in terms of security and influencing choices.
Government regulation and oversight guarantee public safety and
investment security. But there are institutional barriers from
that position which slow innovation, resulting in lower
economic growth and energy demand growth. So energy markets
have to respond to the security imperative in a greater way in
The U.S. policy here would use market incentives and
increased regulation for long-term energy security. The need to
proceed with caution with regard to public security and
environmental protection could delay or reduce the scope of
development of import infrastructure and the access to domestic
gas resources. The United States would need to look to its
neighbors for help in developing unconventional resources on a
continental basis, and that might be an attractive solution.
You could also envisage renewable and unconventional energy
resources being subject to more favorable, proactive government
policy like tax credits, investment subsidies, or R&D support,
but it is still unlikely that the pace of take-up will be
sufficient to offset lower availability of gas supply. You
might, therefore, have to consider demand-side initiatives, for
example, efficiency standards or energy taxation, to bring down
overall price levels.
In the third scenario, Flags, the role of government is
even stronger, focusing on social cohesion and security.
Regulation is more fragmented, tailored purely to national
concerns. Bilateral trading arrangements are the norm. You
still have tensions in international relations. These lower
economic growth to below historical trends, with energy demand
correspondingly slower. Domestic energy sources will be
promoted, and competition for access to resources in markets
could favor energy companies which are state controlled will
have strong support from their host governments. There would be
a greater focus on indigenous supply and demand of energy in
this scenario, even at the expense, potentially, of cost
competitiveness or environmental standards. The increasing
challenges of balancing supply and demand could risk driving up
U.S. energy prices and lead to stronger pressure to open up
more domestic resource areas, such as moratoria areas or
Federal lands, and again move to alternatives, such as
unconventionals, biofuels, and nuclear. And there might have to
be more stringent demand-side measures.
Over all the scenarios, I think there are four big risks
and constraints our industry will follow now and into the
future: resource depletion and access to new resources, rapid
energy demand growth, increasing State control of resource
development, and climate change. We cannot predict which
direction the world will develop over the next 20 years.
Therefore, we think U.S. energy policy should be prepared to
envisage multiple possible outcomes, build bridges to
international markets, develop pragmatic domestic energy
policies over the full range of supply and demand in
partnership between legislators, regulators, private companies,
and other stakeholders.
Very long lead times are necessary to shift the structure
of energy supply and consumption in a mature energy market.
There are sufficient warning signs now that we need to take
precautionary policies for the future of energy security for
our children and grandchildren.
Thank you, Mr. Chairman, members of the committee. That
concludes my statement.
[The prepared statement of Mr. Slaughter follows:]
Prepared Statement of Andrew J. Slaughter, Senior Economist,
Shell Oil Company
Andrew Slaughter represents Shell as a member of the global
scenario and strategy team and as Shell's specialist on North American
energy markets. The views expressed here are intended as contributions
to a discussion on possible long-term energy security alternatives for
the U.S., from the perspective of Shell's current scenario thinking.
This submission is focused on the frameworks provided by Shell
scenarios and does not discuss specific policy proposals that Shell
might support or that Congress might consider.
Shell's Global Scenarios are developed to provide a challenging
framework for thinking about longer-term political, societal and
economic trends and their potential impact on the global energy system.
The main purpose of this is to test our business strategies and
robustness of business plans. For over 30 years, successive Shell
scenarios have been the source of powerful insights for the Shell
Group. We hope these frameworks provide multiple perspectives on the
choices available to develop U.S. energy security.
The world's energy system will face two key challenges in the 21
meeting expanding and shifting energy needs with secure
responding to the impact of our energy use on the natural
systems on which we all depend.
Energy security is increasingly becoming a factor of concern to
major energy-consuming countries, such as the U.S., under the pressures
of accelerating demand growth, anticipated constraints on future supply
growth, and environmental objectives. This global issue can only be
resolved over the long-term, taking full account of international
interdependencies the rising needs of developing economies, and trust
and cooperation between private and public sectors.
The scenarios explore a number of different paths to energy
security--depending in which direction our world will develop--whether
through opening markets and facilitating international free energy
trade, establishing diversity of supply in conjunction with pragmatic
demand and market policies, or the continuation of the old ways of bi-
lateral political agreements securing point to point long term supply
lines and markets.
Perhaps the most underestimated threat to domestic energy security
would be an assumption by policy makers that all countries are heading
towards the same scenario and at a similar pace, and design policies on
that basis, even though reality may be more complex.
A focus on supply and demand measures is critical. In the U.S., the
supply side is heavily impacted by policies that allow or deny access
to new resources. A scenario that allows greater access to resources
will benefit supply, especially for natural gas. But energy systems can
only evolve slowly, due to the longevity of capital stock; energy
security of 2015 and beyond requires planning and policy today.
Demand measures can have a much faster impact than changes on the
supply side and need not result in adverse impacts on the economy,
consumer welfare or lifestyles.
For over thirty years Shell has regularly prepared scenarios
exploring potential future developments of our society, our business
environment and the energy industry in which we work. These scenarios
are not forecasts, preferences or the description of deterministic
cause and effect patterns; rather, they are frameworks in which to
challenge conventional wisdom, identify plausible alternative futures
for our societal and business environment and bring critical
uncertainties into the open, such that our business leaders can think
through appropriate strategies and responses. Shell uses these
scenarios both to think about the future and to test, in a very
practical way, current strategies, plans and projects.
We develop Global Scenarios that focus on societal, political,
economical and institutional trends and key uncertainties, Long-Term
Energy Scenarios that look at energy resources, supply and demand, and
specific regional or sectoral scenarios to meet particular business
Over the past 30 years or so, scenario thinking has enabled the
Shell Group to identify in advance some of the major turning points in
our industry--the oil price shocks of the 1970s, the periods of low oil
prices in the mid 1980s and late 1990s, the emergence of global
concerns regarding sustainable development, and the radical
acceleration of market liberalization, globalization and technological
progress through most of the 1990s.
We have recently completed a new round of Global Scenarios. I would
like to review the principal themes and draw out some of the main
implications for global and U.S. energy markets. Over the next twenty
years or so development of energy markets may be facing increasing
pressures. We need to prepare for a world in which continuing growing
energy demand from rapidly developing countries, such as India, China
and Brazil, as well as continued demand growth in North America creates
more competition for traditional energy sources and might require
faster penetration of new energy sources. A second challenge involves
the sustainability of traditional energy, particularly oil and gas, in
the face of the accelerating pace of demand growth. We can characterize
these challenges in terms of energy security--not energy security as a
function of short-term supply disruptions, changing stock levels or our
ability to cope with extreme weather, but energy security in terms of
sustaining a growing demand for energy over the long-term in a system
where shifts in the market are incremental at best and lead times to
build new alternatives can be very long.
Scenarios are a useful framework for thinking about these issues,
both informing us about potential directions of change and helping to
initiate the debate today about actions we need to set in motion to
secure a long-term sustainable energy future for our children, our
grandchildren and ourselves.
Today's testimony will focus solely on Global Scenarios and will
not include any specific policy recommendations. Last month, Shell
shared specific policy recommendations with the Committee in response
to Senator Domenici's request for public input on the natural gas
supply and demand situation.
THE NEW SHELL GLOBAL SCENARIOS
The new Shell Global Scenarios build on the worldviews developed in
previous scenario rounds, in particular the onward march of market
liberalization, globalization and technological progress (trends
epitomized by former UK prime minister Margaret Thatcher's rallying
call ``There is No Alternative''). In the 1990s, these trends led to a
diminishing role for the state as an actor in societal and market
development. However, over the past four years, we have seen a
resurgence in the activism and aspiration of states, with wide support
from the public at large, as a response to the dual crises of security
(9/11, Bali, Madrid) and weakening of trust in markets (Enron,
WorldCom, Tyco). Our new scenarios describe a world in which there are
constant tensions between the aspirations for economic efficiency,
social cohesion and security. Since these three aspirations cannot all
be completely satisfied concurrently, the world operates via trade-offs
in which two of the aspirations become more dominant relative to the
third. We have therefore described three possible worlds in which these
tensions play out:
1. Our first scenario, named Open Doors, explores a world in which
the drive for market efficiency is in balance with civil society's
ongoing concerns to maintain or improve social cohesion, inclusiveness
and access to equity. In this world the state prefers to operate via
incentives. Pragmatic regulatory harmonization, strong independent
media, voluntary best-practice codes and close links between investors
and civil society support open markets, cooperation, high innovation
and rapid economic development. Open markets combined with strong free
trade growth facilitated by multilateral lowering of trade barriers
allow world economic growth to follow a strong path, just above the
historical average, and consequently requiring a high energy demand
growth path. Energy markets in this scenario evolve following free
market principles, responding to consumer preference for cleaner fuels
and equitable resolution of environmental externalities via the pricing
mechanism. International natural gas trade would expand most rapidly in
this world allowing greater access to a cleaner fuel. Renewable energy
and clean coal technologies also become more prominent in response to
societal preference, but need to be competitive as well. Take-up is
consequently slower than in the other scenarios.
2. Our second scenario, named Low Trust Globalization, is a world
in which the aspiration for market efficiency remains strong but in
which the state exerts a strong role in providing the public good of
security, influencing choices, via regulation and other oversight
instruments aiming to guarantee public and investor security.
Institutional barriers and slower innovation would result in somewhat
lower economic growth, slightly below the historical average, with
world energy demand growing at about the same rate as has historically
been the case. Energy markets in this scenario are more clearly focused
on responding to policy objectives of achieving energy security, e.g.
by proactively pursuing diversity of supply, being of the same
commodity or alternative fuels, and by supporting interconnection of
infrastructure networks, increasing regulation to accommodate cleaner
fuels, like renewables, in the market and by demand policies.
3. Our third scenario, named Flags, describes a world in which the
strong role of the state focuses more on social cohesion than on market
efficiency. Here national preference is more prominent; regulation
tends to be more fragmented and tailored purely to national concerns;
trade is conducted on a bilateral basis; and latent tensions in
international and inter-community relations are sustained. The more
fragmented nature of international economic relations in this scenario
leads to a low annual economic global growth rate, almost a percentage
point below historical averages, and consequently a low rate of world
energy demand growth. For energy markets, this would mean a reversion
to national policies promoting domestic energy sources and securing
imports by bilateral contracts; global environmental initiatives would
lose impetus with the focus shifting back to local pollution issues,
leading to fragmentation of approaches to mitigation; and competition
for access to energy resources and markets could favor energy companies
which are either state-controlled or which receive strong support from
their home governments.
The dynamic tensions between these three worlds are present today
and will continue for the foreseeable future. We can expect conflicting
pointers indicating that we may be heading for one world or another. We
need therefore to monitor the multiple developments in societies,
markets, the legal system, regulation and international relations to
determine whether we are moving in a particular direction. It is also
possible that different regions of the world, including countries and
regions of vital importance in supplying energy markets, operate in
different scenario worlds, inevitably leading to misunderstanding,
confusion and the inability of actors to achieve their objectives. For
example, if Europe acts in an Open Doors way, North America views the
world through the lens of Low Trust globalization and the Middle East
or Russia follows the path of Flags, and the parties do not recognize
the different positions of the others, there will be little chance of
any region achieving its objectives with regard to energy supply or
access to markets in full. Energy security, in its broadest sense, will
be at risk.
SCENARIO IMPLICATIONS FOR U.S. ENERGY SECURITY
Over the next 25 to 30 years, global energy demand could rise by
over two thirds. Although much of the demand growth will come from
developing countries such as China and India, most projections also see
fairly significant energy demand growth here in the United States. For
example, the recently released EIA Annual Energy Outlook 2005 projects
total U.S. energy consumption to be over 35% higher in 2025 than it was
in 2003. Oil, gas and coal are projected to remain the dominant fuels,
growing by 39%, 40% and 34% respectively. The developing economies
expect to see even faster energy consumption growth rates over a
similar period as their economies expand. Our scenarios encompass these
growth projections within a wider range of possibilities. Before going
into that, let me first highlight some current trends and indicators:
Increasing global oil and gas demand is resulting in faster
depletion of existing resources. Although the overall global
resource base is thought to be reasonably robust for the near
future, issues of remoteness, increasing technical difficulty
and therefore cost, and regulatory or fiscal uncertainties, may
constrain development of these resources below the pace of
Global oil and gas exploration success rates are decreasing.
The recent trend for oil and gas companies to return cash to
shareholders via share buybacks rather than reinvest in core
activities may be perceived to indicate a declining set of
accessible resource development opportunities.
The OPEC capacity squeeze in 2004 may have been a temporary
phenomenon, but for the longer term several recent statements
coming out of Saudi Arabia indicate a reluctance, or perhaps an
inability, to expand its oil production capacity to much over
15 million barrels per day over the next two decades.
Assumptions of old on the expandability of OPEC capacity to
balance the oil market at almost any level of demand may
therefore need reassessment.
Natural gas production in the U.S. has essentially stagnated
over the past three years despite consistently higher wellhead
gas prices and correspondingly elevated drilling activity
levels. Despite the cost to U.S. industry and consumers and the
lost opportunity for oil and gas companies this situation has
not yet led to action to improve access to potentially rich new
resources, currently off limits.
The pace of introduction of new sources of non-fossil fuel
energy into the U.S. energy mix has remained slow and patchy,
such that these alternative energies are not yet positioned to
rapidly take up a more significant share of the market should
the growth in the supply of fossil fuels to the U.S. fall below
expectations, either through pressure on the resource base or
through increased competition from fast-growing markets
The above factors are all signposts for potential vulnerability of
global and U.S. energy markets in coming years. Responses and outcomes
may be very different, according to the different ways the world
evolves. Scenario thinking can help us in portraying these very diverse
choices and outcomes. Each of the scenarios considers the full range of
energy options in terms of fuel mix, policies and market solutions--
with the differences being mainly a question of scale and timing.
The Open Doors world emphasizes resolution of these tensions
through open markets and free trade, in energy as well as most other
traded goods and services. In such a world an incentives based system
with a minimum of state interference or conflicts, a stable regulatory
framework and efficient competition and financial markets would deliver
new production and infrastructure in a timely fashion. Such a system
would need high trust, but would have the highest economic efficiency.
U.S. energy policy in this scenario would likely be driven by the
desire to deliver sufficient energy at an affordable cost to the user
consistent with consumer preferences for a clean and safe environment.
The U.S. would become more open to international gas trade by allowing
market-based development of import infrastructure while enhanced access
to domestic gas resources would be acceptable in balance with
environmental objectives. LNG imports grow most rapidly under this
scenario, and more LNG would delay the need to develop some of the more
remote, higher cost domestic gas resources. Renewable energies and
unconventional fuels would be subject to the discipline of the market,
but would not be unduly inhibited by conflicting and onerous
regulation, especially as true environmental costs could be
internalized in energy pricing via market mechanisms, like CO2
permit trading. Technological progress reducing the cost of new energy
sources such as hydrogen fuel cells for distributed power would be the
prime driver behind accelerating market penetration.
Such a world would lead to efficient development of energy supplies
consistent with demand and consumer willingness to pay. However,
pursuit of such an open markets policy in energy by the U.S. on its own
bears the risk that other actors in international energy markets may
not have the same assumptions nor follow similar models. With new oil
and gas production coming increasingly from non-OECD countries, and
where fossil fuel extraction is increasingly dominated by state run
National Oil Companies with completely different drivers, this may be a
real risk to energy security (see Flags below).
The Low Trust Globalization world achieves energy security by
proactively seeking to diversify supply and ensuring sufficient
interconnection between energy networks to ensure back-up and
alternative supply routes. Supply diversity here includes both
geographical diversity of supply source to avoid over dependency on
regions with high geopolitical risk and diversity of fuel mix such that
the total energy system is not overexposed to shocks related to one
particular fuel. The state steps in to ensure these objectives are met,
even if they are not the most efficient in purely economic terms.
U.S. energy policy in this scenario would likely encompass a
mixture of market incentives and increased regulation to enhance long-
term energy security. However, the perceived need to proceed with
caution with regard to public security and environmental protection
delays or reduces the scope of the development of import
infrastructure, such as LNG terminals, and access to more domestic gas
resources, either offshore or on federal lands onshore. The U.S. will
certainly look at its immediate neighbors for help and the development
of the unconventional resource base will look an attractive solution.
While renewable and unconventional energy sources could be subject to
more favorable and proactive government policies, through tax credits,
investment subsidies or R&D support, it is unlikely that the scale of
take up would be sufficiently strong or fast to compensate for lower
availability of gas supply. Government policy will therefore have to
shift somewhat towards demand-side initiatives, encompassing, for
instance, efficiency standards or energy taxation, if overall price
levels are to be contained.
The Flags world would involve a return to the ``old order'' in
international energy markets, involving bi-lateral long term contracts,
point to point connections and political horse trading to secure
imports--in conjunction with strong government control on domestic
demand and stimulation of indigenous supply--even if other objectives
like cost competitiveness or environmental pollution are compromised.
In such a world, it will be the national energy companies that will be
favored in the producing as well as the consuming nations, and they
have a different set of objectives and investment criteria, strongly
driven--and backed-up--by their governments. Competition from these
companies to access oil and gas resources may not result in delivery of
greater volumes on to world markets but in capture of resources to meet
domestic demand in their home countries. In this scenario, despite
lower economic growth and consequent energy demand growth, the
increasing challenge of balancing supply with demand in the U.S. would
risk driving up domestic energy prices--and leads to strong pressures
for the government to open up more domestic resources, bring access to
moratoria areas and federal lands, or move to alternatives such as
unconventional fuels, biofuels or nuclear. The portfolio of policy
options in this scenario may also have to include stringent demand side
measures. To the extent that the U.S. is forced to remain connected to
international energy markets, a much closer link between energy policy
and foreign policy would develop, in conjunction with policies for the
energy industry structure.
No one can predict in which direction the world will develop over
the next twenty years. As of today, some would argue that the world is
somewhere between Low Trust Globalization and Flags with at times
aspirations towards Open Doors, but directional signposts are often
unclear or seem conflicting. We therefore believe it is sensible for
U.S. energy policy to consider and be prepared for multiple possible
outcomes--build bridges to international markets through infrastructure
development and international cooperation, in conjunction with
pragmatic domestic energy policies over the full range of supply and
demand and with partnership and cooperation between legislators,
regulators and private companies.
CLIMATE CHANGE--A WILD CARD
Scenarios explore trends, as well as ``critical uncertainties'', by
raising the ``what-if'' question. The Shell scenarios do not take a
particular position with regard to the possibility of climate change
caused by increased greenhouse gas emissions. However, one could
consider the possibility that a real threat to energy security may not
be the availability or access to hydrocarbon resources, high demand
growth from the Far East, terrorist acts, regulatory uncertainty, or
foreign policy, but climate change. The world's CO2
concentration is already more than a third higher than in all its
history. We can therefore safely say that we are already in uncharted
waters. What if the world accepts tomorrow that we can no longer afford
to take a free rider on nature and must internalize the external costs
by for example sequestering CO2? This is possible, but will
require a new infrastructure, which takes decades to build. But also
wind, temperature and rain patterns may change, which could put the
already built renewable infrastructure in the wrong place. Whether or
not the Kyoto Treaty is an appropriate or successful response to these
risks, the pace of change in our energy systems, particularly in mature
markets such as the U.S. or Europe, is such that it is prudent to take
preparatory steps earlier rather than later to prepare for a shift to a
lower carbon-intensive energy future.
The Chairman. Thank you very much. I do not know if I want
to really thank you for what you told us, but I guess we have
to hear it.
The Chairman. We have had a new Senator arrive. Senator
Alexander, everybody has been offered an opportunity to make
some comments. Would you like to?
Senator Alexander. Thank you, Mr. Chairman. I will listen.
I have more of a question than a comment. Would you like me to
do that later?
The Chairman. Yes, please. You will do it later when you
get your turn.
Senator Alexander. Thank you very much. The area that I
would be interested in hearing more about is one we have
discussed on both sides here, which is the extent to which coal
gasification and carbon sequestration offers an option for us
worldwide as we think about energy independence and
environmental policy. I will listen for a while to that. When
my turn comes, I will ask questions on that. I would be
interested in what the private sector is doing and what they
suggest we do to encourage that or if they even think that is a
The Chairman. Thank you very much.
Now, let us see. We have one last witness, Frank Verrastro.
STATEMENT OF FRANK A. VERRASTRO, DIRECTOR AND SENIOR FELLOW,
ENERGY PROGRAM, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES
Mr. Verrastro. Mr. Chairman, members of the committee, I
too appreciate the opportunity to appear before you today to
discuss emerging global energy trends and their implication for
U.S. energy security, energy needs, and policy choices.
The events of the past year have, once again, focused
attention on the critical role which energy plays in our global
economy. It is truly a strategic commodity, and consequently, I
commend you and the committee for convening this hearing today.
You already have copies of my testimony, which I submitted,
so I will take my time and summarize highlights and emerging
trends, which we have developed at CSIS. I do this with the
caveat that identifying such trends is always easier in
hindsight than in forecasting, but nonetheless, we go forward.
We have identified 10 trends worth noting. Beginning with
the demand side of the ledger, one of the most striking
trends--and Andrew and Guy have both referenced this--is the
acceleration in the growth of global energy and oil demand,
especially that exhibited in Asia, principally in China, but
also in the United States. It took the world almost 18 years,
from 1977 to 1995, to increase demand for oil from 60 million
to 70 million barrels a day, yet less than 8 years to grow from
70 million to in excess of 80 million where it stands today.
EIA projects that in 2010, only 5 years from now, global oil
consumption will again increase to over 90 million barrels a
Current demand for the first quarter of this year is
forecast to range between 83 and 84.5. Given the limitations on
near-term OPEC and non-OPEC production capabilities, that range
could well be the difference between a repeat of last year's
price volatility and a more predictable rise. The primary
question is, however, is that growth sustainable? Is it worthy
of a designation as a trend or is it simply a short-term
Demand growth for oil in Asia has, for the past few years,
accounted for between 30 and 40 percent of all new global
demand growth. Forecasts predict that global oil demand will
continue to grow to between 120 million and 125 million barrels
a day by 2025. That is 50 percent more than we currently
consume. If true, the implications for world economies,
infrastructure, and transport requirements, wealth transfers,
the environment, and global geopolitics are indeed enormous.
In this context, I would also draw your attention to
America's increasing reliance on imports of crude oil, refined
products, and natural gas, and Guy referred to this earlier. To
fill the gap between growing energy demand and declining
production, EIA projects net oil imports to grow to almost 28
million barrels a day in 2025, with refined product imports
accounting for a growing proportion of that demand. Absent the
adoption of measures to increase domestic output, to improve
efficiency, to ensure the construction of needed facilities and
infrastructure, rationalize our fuel specification
requirements, promote conservation, and pursue technological
advancement, we run the risk of putting our transportation and
power generation sectors, our economic well-being, and our
national security at increased risk.
An added complication to last year's demand increase was
that this growth surge came at a time when global inventories
were low by historic standards and spare productive capacity,
both in terms of crude quantity and quality, especially for
lighter, sweet crudes, were both in support supply. In
addition, the absence of spare capacity or properly configured
U.S. and global refining capability made converting those
available crudes into needed products more difficult, if not
impossible. Global spare capacity at about 1.5 million barrels
a day is at its lowest level in 30 years, declined from an
average of about 2.5 million barrels a day in the 1990's and
from over 5 million barrels a day only 2\1/2\ years ago.
The confluence of these conditions, coupled with the
concerns over increased global instability and supply
disruptions in disparate parts of the world, ranging from
strikes in Nigeria and Norway to concern over output from
Venezuela and Russia, from the loss of U.S. gulf supplies as a
result of Hurricane Ivan, and sabotage in Iraq, and for at
least a portion of the summer when prices clearly exceeded
levels that are attributable to market fundamentals, we saw an
increased role of market speculators. Together, they combined
to create a kind of perfect storm for oil prices in 2004.
As a consequence of these factors, assuming continued
strong demand and limited supply, it is highly likely that we
have moved to a higher price environment, especially for oil,
substantially above the levels experienced over the last 20
Against this backdrop, let me add three additional
considerations that may well prove to be trend-worthy as we go
forward, and those are the changing face of the global energy
map, with distinct geographic separations between market givers
and takers. We are also increasing concentration of supply
clusters and demand centers which are not proximate to one
another. As we go forward, the major supply centers look to be
Russia and the Caspian, the Middle East, Africa, and
unconventional supplies from Canada and Venezuela. When you
pair that up against emerging demand centers, the United
States, Europe, and Asia, mainly China, you can see that we
have huge problems with transportation, security, and
We also have the evolving role of the national oil
companies--and Andrew has already highlighted that effect--and
the substantial challenges faced by the international majors,
both with regard to access to resource-rich areas, reserves
replacement, and competition from nations rather than
businesses. National oil companies currently control 72 percent
of proven oil reserves worldwide, 55 percent of gas reserves,
and over half of the oil and gas that is produced today.
Finally, the growing influence and power of non-state
actors and the transformation of political governance, changes
which have the potential for remaking global energy markets by
refocusing nations' priorities around more centralized,
ideologically justified policies, often at the expense of
traditional free market forces and foreign investment. In this
regard, the increased significance of oil and energy will
invariably mean that those sectors are quite likely often to be
in play politically.
Let me close with one final thought. Though it is too early
to be identified as a trend, clearly a wild card issue as we go
forward is global climate change and the follow-through
activity with respect to Kyoto.
With that comment, let me thank you for your attention, and
I too would be pleased to answer any questions.
[The prepared statement of Mr. Verrastro follows:]
Prepared Statement of Frank A. Verrastro, Director and Senior Fellow,
Energy Program, Center for Strategic and International Studies,
Mr. Chairman, Members of the Committee, I appreciate the
opportunity to appear before you today to discuss emerging global
energy trends and their implications for U.S. energy needs, security
and policy choices. I currently serve as Energy Program Director and
Senior Fellow at the Center for Strategic and International Studies
(CSIS). My remarks this morning are the result of analysis conducted at
CSIS as well as from impressions and personal experience gleaned from
my prior government service in a variety of energy policy positions and
over twenty years experience in the private sector as an executive for
domestic and international oil and gas companies.
OUR EVOLVING ENERGY WORLD
Mr. Chairman, the events of the past year have once again focused
attention on the critical role which energy plays in our global
economy. Rising global oil demand, concern over the adequacy,
reliability, and pricing of energy supplies, the environmental
implications of increased use of fossil fuels, the cost of those
supplies for developed and developing economies alike, global
geopolitics, trade and capital flows are issues that preoccupy business
and governments around the globe. Consequently, I commend you and the
committee for convening this hearing.
Given the critical importance of energy as a strategic commodity, a
pivotal question is raised as to whether or not we should be managing
its production, delivery and use differently as part of a larger effort
to return to the consumer more acceptable control of his energy future.
I would submit that as a consequence of having worked off the surpluses
of spare global oil production and United States and worldwide refining
capacity, witnessing the emergence of aggressive new players in the
market, increased concentration of supply sources that are not co-
located with future demand centers, and taking into account the
environmental, security and foreign policy implications of these
changes, a new global energy map may well be emerging and a new
geopolitical game afoot.
U.S. consumers have come to both enjoy and expect a healthy
domestic economy, which is underpinned by an energy supply that is at
once available, affordable, secure, and environmentally benign. In this
new world are those criteria unattainable or just beyond reach of
current energy paradigms and policies?
While the focus of my remarks here today necessarily highlight the
importance of oil and natural gas, it is important to note that coal
continues to play a significant role for many countries, particularly
with respect to power generation. In addition, continuing energy supply
concerns and high prices will encourage increased coal production as a
reliable, diverse, and cost competitive fuel source. Coal gasification,
coal liquefaction, and clean coal technologies, all currently
available, if applied on a sufficiently broad scale offer coal-rich
countries such as the United States, India, and China an opportunity to
minimize those concerns deriving from an increasing reliance on
imported liquid fuels.
In addition, while not minimizing the contribution made by
alternative energy forms, including nuclear and renewables, in the
global picture for at least the next several decades these alternatives
will remain cast in the roles of significant but clearly supporting
I should also note that CSIS has not constructed a model of its own
for forecasting future energy supply and demand. Consequently, my
comments today draw heavily on forecasts and data from CSIS, 2/3/05,\1\
a number of private sector and governmental sources, most notably those
produced by the International Energy Agency (IEA) and the U.S. Energy
Information Administration (EIA).
\1\ International Energy Outlook 2004 (IEO 2004), Energy
Information Administration, U.S. Department of Energy, Washington, DC,
April 2004; World Energy Outlook 2004 (WEO 2004), International Energy
Agency/Organization for Economic Cooperation and Development, Paris,
After analyzing the various factors that could affect global and
regional supply and demand as well as policy issues that could alter
the direction and timing of the various projections, it is our
contention that sustained high prices, environmental challenges,
foreign policy developments, and technological advancements invariably
will produce an oil future different from that portrayed by either the
EIA or IEA. We believe, for example, that the demand growth and
production required to meet the forecasted demand of 120-126 million
barrels of oil per day (mmb/d) in the next few decades are unrealistic,
in part owing to the belief that production and delivery of 50 percent
more oil than currently done today will strain existing resources,
infrastructure, delivery systems, and the environment so as to be
PUTTING THE FUTURE IN CONTEXT--ENERGY CONSUMPTION TRENDS
The world of energy is changing and moving in directions that
further complicate the tasks that lie ahead. If the world does not
respond appropriately to these challenges, we risk confronting a future
that is increasingly uncertain and defined by factors beyond our
control or influence. At its present pace, the world population is
growing by almost 10,000 an hour almost a quarter million per day.
These people will need food, housing and other products and services
which invariably require energy to produce and deliver.\2\
\2\ ``The Outlook for the World Oil Market,'' Lord John Browne,
Group Chief Executive, BP, Speech given at the Empire Club of Canada,
Toronto, December 10, 2004.
For the next twenty years, most forecasts predict that the world
will continue to rely on the same energy forms that fueled the past
century--oil, natural gas, coal, nuclear and a broad grouping of
renewables, including solar, hydro, biomass and wind energy forms.
Indeed, although global energy demand is forecast to double between
2001 and 2025, little change is expected in the relative shares of the
major fuel sources (Figure 1).*
* Figures 1-8 have been retained in committee files.
In 2001, 85 percent of global fuel needs were met with fossil
fuels, with oil (39 percent) being king, and renewables (8 percent) and
nuclear (6 percent) playing supporting, but nonetheless important,
roles. This global energy makeup, as expressed in percentage terms, was
remarkably consistent even within disparate regions. Energy usage in
North America, which currently comprises about 30 percent of worldwide
consumption, essentially mirrored larger global trends.
Increased reliance on nuclear energy in Europe, in contrast,
slightly altered the total energy mix by reducing demand for coal and
natural gas. In the developing countries, those often least able to
afford or employ best available technology, the use of fossil fuels
exceeded 90 percent.
Given the long lead times necessary to develop and introduce new
conventional supplies and alternative energy forms, absent an economic,
foreign policy, or environmental crisis or a major technological
breakthrough, demand for fossil fuels (oil, natural gas, and coal) is
expected to continue to dominate the global energy mix for at least the
next two decades.
In the case of the developing world, this trend is particularly
dramatic. The IEA projection calls for developing Asia, including China
and India, to continue its current economic expansion with GDP growth
(5 percent annually over the forecast period), several percentage
points greater than global growth as a whole.\3\ As a consequence, the
energy demand accompanying such robust economic growth is expected to
double over the next 2 decades (Figure 2), accounting for 40 percent of
the total increase in projected world energy consumption over that
\3\ See IEA forecast for developing Asia, ``Chapter 8--Regional
Outlooks,'' WEO 2004, IEA.
Although sustained high oil prices may ultimately moderate energy
growth in Asia, the pace and level of the region's energy consumption
could place serious strains on global oil markets and consequently
raises significant concerns for both capital flows and emissions
growth. Between now and 2025, over 60 percent of new growth in
CO2 emissions is projected to result from energy use in the
developing world (Figure 3). The problem only gets worse with
hyperurbanization. By 2025, CO2 emissions from the
developing world will exceed those of the industrialized world, and by
2015 will achieve parity with the developed nations.
Of the total energy consumed worldwide, approximately 40 percent
serves power generation needs and another 20 percent goes to
transportation. Half the world's oil half of an 82 million barrel-a-day
market is dedicated to transportation. In the absence of a substitute
liquid fuel or changes to the gasoline combustion engine, this demand
is becoming increasingly inelastic, especially in the United States,
the world's largest oil consumer. Without improved efficiency and fuel
capability changes made to the power and transportation sectors, energy
demand cannot materially be reduced.
THE ROLE OF THE UNITED STATES
The United States is currently the world's largest producer,
consumer, and importer of energy. The United States has roughly 5
percent of the world's population and produces 17 percent of the total
energy supplied. Yet in the process of generating almost a third of
global GDP, the United States consumes nearly a quarter of the world's
The 2004 EIA forecast projects that overall energy usage in the
United States will continue to increase at an annual growth rate of 1.5
percent for the next 20 years. Total U.S. demand for oil is projected
to increase by 40 percent from current levels (slightly in excess of 20
mmb/d) to almost 28 mmb/d in 2025. Demand for all forms of petroleum
fuels except for the bottom of the barrel increase, but total gasoline
demand increases dramatically after growing slowly for the past 15
years, largely as a result of fuel efficiency standards adopted in the
Assuming a continued decline in domestic crude oil production, and
with U.S. refineries running at or near capacity, absent substantial
new investment, increased domestic demand means expanding reliance on
imported oil, both crude and, increasingly, refined products. U.S. oil
import reliance is expected to grow from the current level of 58
percent to between 65 and 75 percent of demand by 2025, depending on
assumptions about price and economic growth.
The rise in oil import levels, both in absolute and relative terms,
carries important infrastructure, logistical, environmental, financial,
trade, security, and foreign policy implications. In particular, Carbon
Dioxide Emissions 1990-2025 the projected rise in refined petroleum
product imports increases U.S. vulnerability to supply disruptions and
potentially undermines the value of the Strategic Petroleum Reserve
(SPR), assuming investment continues to lag in the creation of
additional refining capacity.
A similar picture emerges for domestic natural gas. After an era in
which gas was undervalued and in surplus supply, domestic production
has plateaued and now begun to decline. As demand continues to grow and
the EIA projects increased use of gas domestically primarily for power
generation the United States will rely increasingly on nonconventional
domestic production (e.g., tight sands and coal seam gas), gas from
Alaska, on increased imports of pipeline gas from Canada (to the extent
they are available), and on LNG from sources in Latin America, the
Caribbean, Africa, the Middle East, Australia, and Russia.
Projected supplies of LNG imports assume that additional
regasification capacity will be permitted and constructed either within
the United States or in areas proximate to U.S. borders an uncertain
assumption. In addition to environmental, safety, competition, and
siting issues, opponents of additional LNG regas projects increasingly
name security and foreign policy concerns about exposing the U.S.
electric grid system to reliance on imports from countries, many of
whom are oil exporters found in troubled regions of the world.
GLOBAL ENERGY RESERVES
Government owned or controlled companies control 72 percent of the
world's oil reserves, 55 percent of the gas reserves, and more than
half of the current world production.\4\ While two-thirds of the
world's proven oil resources belong to OPEC members and 60 percent are
found in the Middle East (Figure 4), non-OPEC producers, including the
United States, Russia, Mexico, and Norway, currently provide
significant global volumes, and will likely continue to do so for
decades to come. As these resources are depleted, however, the world
increasingly will come to rely on OPEC sources, in part as a function
of their substantial reserves bases and partly the result of more
favorable economics. Yet, these are sources where transparency issues
and reserve numbers have been questioned and where production is
generally controlled by national ministries or national oil companies
(NOCs). Except under limited circumstances, these resources are
currently inaccessible to international oil companies (IOCs).
\4\ James Boxell and Kevin Morrison, ``Oil Majors Find New Rivals
Snapping at Their Heels,'' Financial Times, December 8, 2004.
Russia, Iran, and Qatar, the three top countries for natural gas
reserves, contain almost 60 percent of the world's total (Figure 5). By
contrast, the United States, Canada, and Venezuela account for just
over 6 percent. OPEC member countries contain about half of global gas
Examining the list of major gas reserve holders highlights two
facts: first, natural gas reserves throughout the world are ample; and
second, much of this supply is ``stranded,'' that is, far removed from
major consumption centers. As a consequence, gas transportation becomes
a prime consideration one that is accomplished either through overland
pipeline routing or by cooling and liquefying the gas to move it in
The United States, Russia, and China hold over half of the world's
proven coal reserves (Figure 16). The advent of truly ``clean coal''
technology and the world's ability to deal effectively with the
environmental concerns related to mining and mining waste, could
substantially improve coal's role in power generation, reduce natural
gas demand (possibly freeing up supplies for transport uses), and
RECONFIGURING THE GLOBAL ENERGY MAP--A NEW GAME FOR OIL
In the future, technology advancements and policy choices which re-
rank security, environmental impacts, and foreign policy considerations
could substantially alter the global energy mix and promote different
fuel choices over traditional forms. That possibility may also have the
impact of reconfiguring the global energy map, creating new regional
and international commercial and strategic alliances, altering the
environment, and changing the way in which the world generates,
transmits, transports, and consumes its energy resources.
The emergence of new regional and international commercial and
strategic alliances may similarly mark the beginning of a ``new game''
in the geopolitics of oil. Although the implications for IOCs and
especially for U.S. oil companies are not yet fully evident, this
change comes at a time when access to new opportunities is a principal
driver behind most corporate plans. That coincidence presents an
Evidence of this new game may be found in the activities of the
national oil companies of China and India, exploring the globe in
search of equity oil. Deals are struck on a bilateral basis, often
secured through the granting of considerable foreign aid to host
governments. Moreover, political commitments between the representative
governments, sometimes hidden, sometimes not, add a worrisome element.
China currently receives 6 percent of its oil imports from Sudan
and 15 percent from Iran. It is entirely conceivable that as a
consequence of this oil dependence China could be expected to use its
Security Council veto should the United States or other UN members
attempt to impose oil-related sanctions on either nation.
Similarly, in Russia where it is widely believed that oil and gas
development will serve as the engine for broader economic growth,
President Putin appears committed to ensuring that control over those
resources rests in state hands. While Russia, in the past, has declined
to play politics with the export of oil and gas to the West, it is not
implausible to assume that those resources may now be used in a manner
that advances the country's national interests, sometimes discreetly,
The viability of OPEC is questioned from time to time. While
cooperation is easy to achieve during times of high oil prices,
declining prices have member-countries concerned over their continued
ability to meet internal budgetary requirements, taking actions that
serve their own national interests rather than that of OPEC as a whole.
Three factors may shape the future of OPEC. First is the
conventional wisdom that oil prices have moved to a new level, above
the $22-28 target; and that, absent any precipitous drop in demand,
they are likely to stay high for some time.
Second, the disappearance of OPEC spare producing capacity
(currently at its lowest level in 30 years), and the unwillingness or
inability of member-countries other than Saudi Arabia to expand
measurably producing capacity beyond expected market requirements,
supports continued oil price volatility.
Third, in the coming decade, Libya, Iran, and Iraq are expected to
be in a position to substantially ramp up production volumes and
consequently seek higher OPEC export quotas. If global demand is
insufficient to accommodate those incremental volumes without
disturbing other member quotas, how will OPEC as an institution react?
EIA forecasts global oil supply in 2025 to exceed current
production by some 46 percent or over 38 mmb/d. To achieve this level,
production increases are required from both OPEC and non-OPEC sources.
In the near to mid-term, increases in non-OPEC volumes will likely come
from Canada, Mexico, Angola, Azerbaijan and Kazakhstan. Meeting this
target will also require OPEC volumes to substantially increase. While
there is a high level of confidence that the region contains reserves
adequate to meet these targets, the strain on resources, supporting
infrastructure and political governance should not be underestimated.
In forecasting future OPEC output, considerable attention must be
paid to the pace and success of expansion efforts in Iraq, Iran, and
Libya three countries in which the oil sector has largely been
neglected for decades as a consequence of political upheaval, war,
nationalization, and sanctions. In 1979, combined OPEC production
capacity exceeded 38 mmb/d. Twenty-five years later capacity had
declined to around 31 mmb/d (Figure 7). Two-thirds of that capacity
loss can be traced directly to declines in those three countries. At
the same time, Saudi capacity is roughly the same today as it was 25
The growth in oil production from non-OPEC sources has
significantly contributed to the marked erosion in OPEC market share
since the late 1970s, as have gains in energy efficiency. That trend
may be changing. Despite the emergence of a wider variety of producer
nations, including new production from Latin America, the Caspian,
Australia, West Africa, and nonconventional oil from Venezuela and
Canada, plus the sharp rebound in Russian oil production, future
growth, especially by 2020 and beyond, is likely to be overshadowed by
production gains from the resource-rich Middle East.
It is here that the question of sustained demand looms particularly
large. In 2003, both OPEC\6\ and the IEA projected that the average
growth in global demand for oil over the next several years would
approximate 1.6 percent per year. If true, worldwide incremental demand
for oil would increase by almost 10 mmb/d by 2010. At that pace,
virtually all new production from both OPEC and non-OPEC sources would
be needed to keep pace with demand.
\6\ Monthly Oil Market Report, December 2003, OPEC.
Assuming, however, that sustained higher prices may reduce that
growth to 1.1-1.2 percent annually over the same period, additional
worldwide production of only about half that much would be required.\7\
\7\ Extracted data from IEA and EIA reference and low economic/high
Under those conditions, non-OPEC oil production, including output
from Russia, the Caspian, West Africa, and others, coupled with renewed
efforts in Iraq and Libya, for example, would undoubtedly produce
downward price pressure on other OPEC members and OPEC as an
institution (in terms of quota enforcement). This could result in a
particularly difficult time for Saudi Arabia during a period in which
the Kingdom is expected to face substantial challenges in terms of
population growth, governance, and political succession issues--a time
during which sustained high revenues generated by oil exports will
likely be needed.
MAJOR GLOBAL OIL PLAYERS
We can identify six key players in today's world oil market: Saudi
Arabia, Russia and Iraq as ``Givers'' to the market, and the U.S.,
China and India as major consumers or ``Takers.''
Saudi Arabia is likely to continue as world's largest oil exporter
for at least the next few years, though Russia could pose a challenge
in terms of gross production. Saudi Arabia is one of the few countries
which possesses additional spare production capacity and is capable of
expanding that capacity (at least on a temporary ``surge'' basis) in
the near term.
Notwithstanding this enviable position, or possibly because of it,
concerns surrounding Saudi output continue to abound. Terrorist threats
to Saudi production and export facilities have increased upward
pressure on crude oil prices and the Kingdom's aging leadership with no
clear succession beyond the current Crown Prince, who is 80 years old,
remain cause for concern.
In addition, the Kingdom's growing and youthful population, the
tension between religious conservatives and more reform minded
factions, high unemployment, and the increasing need for ever higher
earnings to pay for health care, education, and infrastructure will
require all the skills of the royal family to maintain social order.
Even with its then substantial oil export revenues, the Kingdom ran
budget deficits until as recently as 2002. Notwithstanding current high
production and prices, Saudi officials remain concerned that with the
rise of Russian and Iraqi oil production and the re-emergence of Libya,
in the absence of continued robust oil demand, OPEC producers and Saudi
Arabia in particular could face reduced output and/or lower prices in
the next several years.
Terrorism is the most public and immediate threat to the Kingdom
and the royal family, not to mention the world oil market. Asset and
personal security have improved over the year, in part due to
collaboration and assistance from the government's foreign partners.
While public support for terrorism is low and improved security may
have reduced the chances of a successful attack, the threat has not
Political reform, despite its seemingly glacial pace, is also
underway. The government is pursuing an announced process with specific
markers, although it is not prepared to offer the ultimate democratic
objectives sought by some in the West. In many ways, the U.S.
declaration of bringing a wave of democracy to the Middle East may have
exactly the opposite effect in terms of the pace and direction of
reform in the Kingdom.
The Soviet Union entered the world market as a small net exporter
in the late 1950s. During the next decade as production and export
volumes grew, application was made for membership in OPEC. That
gesture, however, was rebuffed although at OPEC's invitation, Russia
now attends the cartel's official meetings with observer status.
Over 30 years, Soviet oil production increased from 2.3 in 1958 to
more than 12 mmb/d in 1988, but export volumes remained relatively low,
partly as a result of low domestic prices that encouraged wasteful
consumption, and partly due to system loss. With the collapse of the
oil sector in the late 1980's-early 1990's, Russian oil production
declined rapidly from its 1988 peak to a low of some 6 mmb/d in
1996.\8\ This decline was unprecedented in world oil history, in that
it was brought about not by developments in the market place, but
rather by oilfield mismanagement and the lack of investment capital.
\8\ ``Russia Country Analysis Brief,'' EIA, May 2004,
Following a decade of difficulty and turmoil, new investment has
produced a marked increase in Russian oil output to about 9.2 mmb/d in
2004, allowing Russia to challenge Saudi Arabia as the world's leading
oil producer. Internal consumption of approximately 2.4 mmb/d limits
current exports to 6.7 mmb/d.
More importantly, until the recent crackdown on Russian producers,
especially the embattled company Yukos, and the reassertion of Kremlin
control over energy policy, output and exports (via infrastructure),
estimates for future Russian production indicated continued and
substantial growth possibly reaching as high as 12 mmb/d in 2025\9\--
assuming continued high prices and successful exploration and oilfield
development in the intervening years.
\9\ Tables D5: World Oil Production Capacity by Region and Country,
High Oil Price Case, 1990-2025,'' International Energy Outlook 2004,
EIA, p. 217.
Russia's ability to continue to increase production rests on
several considerations. Existing oil production, in part, reflects
Soviet technology and practices. Production practices are suspect and
the ability of the existing fields to sustain increased output is an
The Putin government's strategy of restoring state control if not
ownership of the oil and gas producing and infrastructure sectors,
including its effort to insert favored companies into existing joint
ventures, reflects a restoration of greater centralized direction.
Overall, there is a widespread perception in the industry that large
Russian producers desire foreign partners for financial reasons but are
unwilling to relinquish control or ownership. Smaller Russian
companies, on the other hand, hope to attract foreign partners as they
provide the only available option for growth and new capital.
These developments raise the prospect that Russian production from
existing fields may be nearing a temporary peak. Without additional
incentives or early development of additional prospects, the recent
history of rapid increases may not be sustainable. Future increases in
the export of oil and gas in large part will depend on the timely
discovery and development of new deposits in Eastern Siberia and
offshore, on the availability of supporting infrastructure, and on IOC
involvement contributing funding, technical and managerial know-how.
Moreover, and of equal importance, the investment climate must be
attractive and the rule of law must be in place, and honored. Risk-
averse management may look elsewhere, while other corporations may
value access over what is normally viewed as acceptable risk.
The timing and success in stabilizing Iraq may well be one of the
largest wild card issues with respect to global oil supply and prices.
Iraq currently holds the world's second largest proven reserves of oil
(at 115 billion barrels) and most industry observers speculate that
with renewed investment directed to oilfield exploration and
development, plus access to advanced technology and infrastructure
improvements, the country could become a major oil producer/exporter.
Realizing that future, however, will require substantial improvements
in infrastructure and security, rule of law, and a thorough examination
of the state of the major producing reservoirs in both the north and
south (soon to be undertaken as a result of recently awarded contracts
to Shell and BP). In addition, while the country is saddled with
significant external debt, including billions in compensation claims
resulting from the invasion of Kuwait, these financial obstacles are
not expected to prevent investment from going forward.
Infrastructure security is especially important. Pipelines in Iraq
have been blown up over 170 times since the President Bush's
declaration of the cessation of major hostilities in May 2003. These
incidents disrupt oil production and export schedules and bring about
considerable financial loss to the country. This week's elections,
while a significant step forward in the march toward democracy and
nation (re)building are not expected to bring an end to the violence
There are also other groups of emerging producers. Over the last
ten years substantial new exploration has taken place in the Caspian
region, where significant production and exports are about to become a
reality. Kazakhstan and Azerbaijan possess substantial resources, but
as domestic consumption is quite limited, the timely development of
these resources has depended on the availability of export pipelines to
move oil and natural gas to hard currency markets.
A pipeline to carry Kazakh oil to an export site on the Black Sea
has been available for several years now and is key to production
reaching the stated goal of 3.5 mmb/d by 2015.\10\ Later this year, the
Baku-Tblisi-Ceyhan (BTC) export pipeline will become operational,
allowing expansion of fields offshore Baku.
\10\ See official statement by Uzakbai Karabalin, President of
Kazmunaigaz National Oil Company, October 2003, www.kazakhembus.com/
100203.html, and Kazakhstan Country Analysis Brief, EIA, November 2004,
Libya has recently proposed terms for production sharing agreements
(PSAs). While expansion plans out to 2010 are comparatively modest, the
removal of sanctions in a tight global oil market has made the country
more attractive to investors. Even facing difficult contract terms,
companies are still anxious to re-enter Libya.
West African oil provinces, at first glance, seem well-positioned
to respond to U.S. oil import needs. The relatively short, direct route
across the Atlantic Ocean to East Coast ports combined with superior
crude quality lead many to suggest that West African exports can help
the United States reduce its dependence on Middle East oil. Investment
in heavy oil processing globally, however, may change the dynamics of
West African marketing. Wide spread corruption, a personalized
political system, lack of reform, and the failure to equitably
redistribute the financial benefits of oil export revenues have created
conditions conducive to civil unrest that often interferes with oil
production and export schedules.
Nonconventional energy supplies (heavy oil and tar sands) in Canada
and Venezuela hold considerable promise, but also face substantial
obstacles. Development of the Canadian oil sands requires tremendous
amounts of water and natural gas and is very labor intensive.
Extraction is largely a mining operation and two tons of oil sands are
needed to produce one barrel of oil. At present, these oil sands yield
roughly 1 mmb/d.
The heavy oils of Venezuela face their own challenges. Yet given
the enormity of the resource base, even in the face of the recent
announcement of hefty royalty increases, investors still look favorably
(albeit cautiously) on prospects for development.
GLOBAL GAS & LNG
Global gas reserves are abundant and given recognition of natural
gas as an environmentally friendly fuel and the desire of resource
holders to monetize their resource, it is not surprising that forecasts
for gas supply and demand over the next decade are frequently described
Unfortunately, much of this gas is considered stranded as it is
located in areas geographically distant from major consuming areas. In
some cases, overland piping of gas is economic, but for transiting
great distances, including across ocean expanses, liquefying the gas
and shipping it in sea-borne tankers is becoming an increasingly
attractive option. IEA projections for gas demand growth indicate that
natural gas will overtake coal as the second leading energy fuel source
sometime in the next decade. By 2030, more than 50 percent of all
inter-regional gas trade will be comprised of LNG shipments.
In 2002, twelve countries (Algeria, Libya, Qatar, Nigeria, United
Arab Emirates, Oman, Australia, Brunei, Indonesia, Malaysia, the United
States, and Trinidad and Tobago) shipped some 5.4 trillion cubic feet
(tcf) of gas to about the same number of countries worldwide. Supplying
markets in just three countries Japan, South Korea, and Taiwan
accounted for two-thirds of the total LNG demand. Three additional
exporters (Russia, Norway, and Egypt) are constructing liquefaction
facilities and at least seven additional producer/exporters (Iran,
Yemen, Equatorial Guinea, Angola, Venezuela, Bolivia, and Peru) are
waiting in the wings.\11\
\11\ ``Natural Gas,'' IEO 2004, EIA. pp. 47-74.
Unlike oil investments, however, LNG financing and project success
ultimately are tied to consumer markets. Siting and permitting
approvals, especially in the United States, are not guaranteed.
Environmental, safety, and security concerns remain largely unanswered
and policy issues surrounding the prudence of exposing the domestic
electric grid to the same or similar price and supply volatility
recently experienced in the oil-based transportation sector may dampen
enthusiasm for needed natural gas imports, possibly to the benefit of
CONSUMER WILD CARDS
The United States
The role of the United States as an energy producer, consumer, and
importer has already been noted in some detail. The energy future of
the country seems at once very clear but very worrisome: declining
domestic production and rising domestic demand, with the gap to be
covered by imports from suppliers whose national interests may not and
historically have not coincided with U.S. interests.
This almost inevitable growth in reliance on foreign supplies
would, to the casual observer, seem to be a call to action, to define
and implement policies that would concomitantly expand domestic
supplies while setting demand management efforts in motion. To do so,
however, requires a certain political will on the part of both the U.S.
consumer and the government. And, to date, despite higher energy
prices, threats of shortage, environmental damage and blackouts, that
critical ingredient remains lacking.
All energy producer/exporters and consumer/importers are bound
together by a mutual interdependency. All are vulnerable to any event,
anywhere, at any time, that impacts on supply or demand. This means
that the U.S. energy future likely will be shaped, at least in part, by
events outside of its control and beyond its influence. Calls for
energy independence, absent major technological breakthroughs and a
national commitment, ring hollow and in the near term are both
unrealistic and unachievable. In the absence of decisive political will
to undertake those steps necessary to improve efficiency, promote
conservation, the increased use of domestic energy resources and
renewable energy forms, learning to manage the risks accompanying
import dependency may be the only reasonable course of action.
Further, it should be noted that while the United States currently
imports roughly 23 percent of its crude oil needs from the Persian
Gulf, if total reliance also took into account the indirect imports of
manufactured goods from other nations that also purchase Middle East
oil, the resulting figure might be 30-40 percent higher.\12\
\12\ Anthony Cordesman, Saudi Petroleum Security: Challenges &
Responses, CSIS draft, Washington, DC, November 2004, p. 7.
The analytical community is in almost universal agreement regarding
the size and nature of Chinese energy demand growth over the next three
decades. It will lead the world with growth rates substantially above
the world average. All sectors of the energy producing economy are
predicted to grow between 2.3 and 9 percent while generally maintaining
the current share of each within the total fuel mix. Coal would retain
its dominant position in this scenario.
Growth rates of this magnitude would drive world oil and, to a
lesser extent, natural gas markets as imports of both are projected to
increase substantially. Foreign investors and suppliers are eager to
exploit this potential and Chinese officials are taking advantage of
As demonstrated by almost 30 years of economic reform and growth,
Chinese decisionmakers are likely to proceed incrementally in further
reforming the energy sector. The result is an existing energy sector
containing a mix of market signals and government direction. For
example, power stations pay close to market prices for coal but are
unable to pass on the full cost to consumers.
China's mixed economic system complicates introducing new market
related policies for a variety of reasons. Any decision may worsen
existing distortions. Equally important, any decision is guaranteed to
diminish the authority of those directing the system as well as those
who benefit from the status quo. This latter problem may prove
particularly intractable if both producers and consumers benefit from
the status quo.
China's current five-year plan ends in 2005. A group of senior
advisors, comprised of academics, senior statesmen, and business
leaders is considering a revised energy strategy to cover the period to
2020. There are undoubtedly differences within the group over how to
meet the announced goals of energy supply security, environmental
protection, economic efficiency, and rural development, not to mention
the implied need to maintain domestic tranquility.
Energy investors have a vested interest in any decisions made.
There is for example a need to rationalize and modernize the refining
sector while ensuring the delivery of product to rural or underserved
areas. Similarly, there is a need to rationalize the domestic energy
pricing system not just for consumers but also to effect market
competition for competing energy sources.
India contains 16 percent of the world's population, a growing
thirst for energy in support of its expanding economic growth, but only
a very limited resource base to call upon. Oil use rose by a bit more
than 1 million b/d during the 10-year period 1993 to 2003, but domestic
oil production was able to cover just one-third of that increment. The
gap could only be filled by expanding the importation of foreign oil,
which now accounts for some 70 percent of the country's current oil
needs. There is little reason to believe that any import relief can be
secured, and the IEA places India's oil import dependence at 80 percent
as early as 2010.
This high degree of dependence on foreign oil troubles the Indian
government. As a consequence, the country is seeking to diversify its
energy base while undertaking a broad-ranging and aggressive search for
equity oil around the world. Interestingly, this search has on several
occasions put India in direct competition with China. Limited
opportunities worldwide confirm that this competition likely will
Competition for access to oil supplies typically occurs between
private companies. When governments, through national oil companies,
increase their involvement in competition, both the nature of the
issues and transparency regarding the terms may be sacrificed.
The natural gas resource base of India is equally limited, and for
both oil and natural gas, the ever-increasing gap between domestic
supply and demand will have to be covered by imports. India must look
abroad for incremental supplies production currently determines how
much natural gas can be made available, and these volumes fall well
short of the country's realistic needs. In this effort to search out
and find acceptable sources of natural gas outside India, pollution
abatement is just as much a driver as is diversity among fuels
Does this new oil ``map,'' the emergence of China as a major
competitor (the number 2 importer and consumer, behind the United
States), and threat of realignment and bilateral arrangements threaten
traditional global supply network? Should the U.S. government be
concerned if China and Russia or China and the Middle East form
diplomatic alliances and bilateral relationships? How would such action
affect U.S. foreign policy options, especially regarding Sudan and
Iranian sanctions? How plausible? Is the recent Saudi decision to
supply China and reduce exports to the United States purely economic
(given demand, crude quality and price differentials) or something more
political in nature? Can a change in U.S. policy toward the Middle East
peace process improve the U.S. Saudi relationship? How will the
upcoming elections in Iraq affect the region?
More importantly, under all forecasts, energy import dependence in
Japan and China will increase. Part of this supply will come from
Russia and part from Africa, but the bulk will come from the Middle
East. Seeking security of supply through diversity of suppliers, in the
past several months, the Chinese government has discussed commercial or
diplomatic arrangements with Russia, Kazakhstan, Saudi Arabia, Iran,
Venezuela, Canada and Argentina. Should this be a wake up call and
cause for concern?
PRICE VOLATILITY AND THE CURRENT OIL MARKET
Crude oil prices have increased by over 60 percent since the
beginning of 2004. As a consequence, the past few months have also seen
near record prices for refined petroleum products (gasoline and
distillates) in the United States. While oil price volatility is seen
often as a recent phenomenon, evidence over the past thirty years
(Figure 8) suggests that price volatility has been the rule rather than
the exception. Most of the upward price movements have been tied to oil
supply disruptions and political upheaval. The 1973 spike was the
result of a targeted embargo against the United States.
Conversely, when prices drop precipitously, it is usually the
result of intentional or unintended oversupply. At times this has been
caused by deliberate Saudi efforts to regain control of the market.
Other price collapses were caused by demand reductions resulting from
high prices (early 1980s) or economic recessions (Asian recession of
The current oil market, however, has been driven by a number of
specific factors, including:
Unexpected high demand growth in the United States and Asia,
particularly in China;
The marked absence of adequate commercial inventories
(supplemental sources of supply);
Limited spare production capacity on the part of the major
Uncertainty in the ability of producers to continue to
deliver needed oil volumes to the market--a situation
exacerbated by actual disruption in supply from Venezuela,
Norway, Nigeria, the U.S. Gulf Coast, Iraq, and the concern
over further losses from Venezuela as well as a potential loss
of supply from Saudi Arabia and Russia; and
The role of speculators.
A decided mismatch between the types of crude available for sale
and those needed by refiners and buyers to produce consumer products
has complicated the supply picture. This crude quality issue was most
evident in the price spread between light sweet crudes and heavier,
sour oil and in the request for light oil swaps or loans from the SPR
that followed the loss of domestic production from the Gulf of Mexico
as a result of Hurricane Ivan in September 2004.
Looking ahead into 2005, market fundamentals are likely to change
very little. Sizable new (incremental) production is not expected until
the latter half of this year at the earliest. Owing largely to the lag
time between investment and output, additional production growth is not
expected until 2007 and beyond. Consequently, if global demand
continues to grow, albeit a bit more slowly than in 2004, partly as a
result of weakened economic activity reflecting higher prices, supply/
demand balances can be expected to remain tight but manageable for at
least the near term. In this scenario, barring any significant and
protracted loss of oil output, oil prices are likely to recede from
current high levels but remain in the $35-45/barrel range, while
exhibiting continued volatility in reaction to specific events.
Alternatively, should sustained high prices result in a regional or
global economic slowdown, demand reductions will have to be countered
by OPEC production cuts to maintain price levels. Conversely, if prices
moderate, we expect a corresponding increase in demand, continued
tightness in supply availability and the prospects for substantial
price increases if supply shortfalls become evident.
Increasingly, economic forecasters are projecting a reduction in
U.S. and global GDP growth for 2005-06 as a result of sustained high
oil prices. Regional economic impacts vary depending on the level of
oil dependence of particular countries, their ability to substitute or
reduce their oil consumption, and calculations based on achieved energy
efficiency. At the very least, higher oil prices will have the effect
of dampening the cyclical upturn in global economic activity.
oil in the financial market, inter-regional trade and choke points
There may be no clearer indicator of energy's role as a strategic
commodity and the interdependency of participants in energy markets
than an examination of oil's role in global trade and finances. In
today's global oil market, after netting out volumes produced and
consumed in the same country, somewhere on the order of 35-37 million
barrels are actually transferred internationally on a daily basis. At
an average price of $45 per barrel, that adds up to slightly more than
a billion and a half dollars a day. Daily U.S. crude oil imports cost
more than $450 million or over $160 billion annually.
The transfer of wealth from the industrialized world to oil
producer/exporters is without precedent. During the past 30 years
OPEC's (net) export revenues have increased tenfold from under $30
billion to almost $340 billion (estimate for 2004). In the last ten
years, oil export revenues have doubled for every OPEC member, and
tripled in the case of Qatar.
More importantly, given rising global oil demand, the IEA's World
Energy Outlook 2004 projects that inter-regional trade in oil shipments
will increase sharply by 2030, reaching 65 mmb/d, accounting for more
than half of global oil production and roughly double current
shipments. As a result of growing concentration in production and
exports from the Middle East, increased tanker traffic to major
consumption centers around the world will necessarily increase routing
through recognized ``choke points,'' major transport channels through
which much of the world's oil (and LNG) currently flows. As these
routes are highly trafficked and pose navigational challenges, they are
also areas susceptible to piracy, terrorist attacks, or accidents.
EIA and IEA sources have identified six such strategic maritime
choke points and several major pipeline systems. Those that affect oil
and LNG tanker traffic are:
The Straits of Hormuz, located at the mouth of the Persian
Gulf, currently the world's most critical maritime oil-shipping
The Straits of Malacca, located between Indonesia, Malaysia
and Singapore, and the principal route for oil shipments to
The Suez Canal, which connects the Red and Mediterranean
The Bab el-Mandab passage, connecting the Red Sea and the
Gulf of Aden;
The Bosporus and Turkish Straits, connecting the
Mediterranean and Black Seas and a major waterborne shipping
route for Caspian and Russian oil; and
The Panama Canal.
Collectively, over 34 mmb/d of oil is shipped through these
channels every day. Disruptions at any of these choke points would
undoubtedly have a dramatic impact on crude deliverability and prices.
More importantly, as global oil trade expands, these major arteries
will become even more critical and heavily utilized. In fact, IEA
projections forecast that tanker traffic through the Straits of Hormuz
and Malacca and the Suez Canal alone will more than double by 2030.
CHALLENGES FOR INTERNATIONAL OIL COMPANIES (IOCS)
When confronted with the prospects of continued near-term tightness
in conventional oil markets and corresponding high prices, instability
in major oil producing areas, heightened sensitivity to national
security concerns, the need to improve environmental conditions while
continuing to offer reliable energy choices to developed and developing
economies alike, IOCs are now faced with a spectrum of strategic
investment choices. These include pursuing access to conventional
energy resources and/or moving to develop nonconventional fuel forms,
including LNG, GTL, renewables, and biofuels, in concert with
traditional and emerging energy suppliers.
Since the majority of today's proven oil reserves are located in a
handful of countries with access controlled by national ministries or
national oil companies, the ability of the IOCs to successfully pursue
access opportunities is currently severely limited. This situation is
exacerbated by current high prices as these translate to high export
revenues for major producer countries and undermine the need for
outside assistance. Flush with the income from higher oil prices, host
country producers are less likely to require or desire the assistance
of foreign oil firms, except in the instance of acquiring technology-
specific aid enhanced oil recovery efforts, for example. Higher prices
and profits generally also translate into tougher commercial terms for
entrants as host governments look to extract additional concessions
Assuming that companies are denied access to conventional oil
reserves in OPEC nations, IOCs are left to choose among investment
options in non-OPEC countries and frontier areas (e.g., ultra-deep
water and the Arctic), pursue nonconventional fuel choices, focus on
research related projects to develop renewable sources and/or pursue
technology and demand reduction initiatives that preserve the
continuity or expansion of their product line. This alternative
strategy is not without risk, however, and even large IOCs are expected
to experience difficulty in replacing reserves in the coming years.
POLITICAL AND OTHER TRENDS
International politics and the political environment within which
companies operate are also undergoing fundamental change. For companies
looking to invest or trade, an issue of paramount concern is the
country's governing structure and the locus of political authority. And
the predominant, emerging political ideology of this century has become
autonomy, with its increasing emphasis on unique identities around
shared ethnic, cultural, or religious values. This new ideology poses a
challenge to the old system of nationalism and the traditional nation-
state. As a consequence, investors are witnessing the growing power of
non-state actors and the increasing likelihood of precipitating events
leading to the overthrow/overhaul of ruling regimes. In energy
producing countries, the importance of the energy sector invariably
means that it is almost always in play politically.
Governments facing political threat or transformation respond in
varying degrees with a combination of coercion, co-option and
cooperation. Some resist claims for autonomy by reasserting central
control and direction often at the expense of market efficiency. States
in which political authority and economic control is shared among a
small group of individuals and interests resist threats to their
control most vigorously. Consequences for investors are most severe in
instances where the domestic confrontation results in an abrupt and
violent political transition as occurred in the past in Iran, Iraq,
Libya, and Venezuela. Under those circumstances, oil production
declines dramatically, usually failing to regain its pre-crisis levels
for a decade or more. Further, in most cases, private assets are taken
by the state.
On the economic front, market capitalism appears to be losing
ground to economic ideology. The appeal of economic efficiency and
reliance on the market, which resulted in the rapid spread of domestic
market reforms and global financial, trade and investment integration
in the 1980s and 1990s, has stalled. For the oil sector, domestic
economic reforms were welcomed as they permitted foreign investment and
even some limited privatization.
Citing justifications of security, jobs, environmental concerns,
economic competition and the narrow need for securing energy supplies,
certain nations have slowed reforms and are beginning to pursue more
centralized ideologically-justified, interventionist economic policies,
often with widespread domestic public support.
The confluence of these political and economic changes holds
several major implications for energy investors. First, to the extent
that IOCs continue to be denied access to those few select resource-
rich nations under competitive terms comparable to those offered
elsewhere, their E&P investment opportunities are likely to become more
complicated, causing investors to continually rebalance their portfolio
risk, including the addition of less attractive opportunities, with
potentially longer payout periods. Portfolios of the future will likely
include fewer commercially attractive exploration opportunities in
frontier areas, workover acreage offered by nations attempting to
forestall production declines by offering more attractive terms to new
entrants, and possibly a few lower return but highly prospective areas.
Coupled with the difficulty in obtaining access to proprietary
reserves is the emergence of significant competitors pursuing
investments in the most attractive exploration and production markets.
As previously discussed, the most aggressive of these new competitors
is China, and to a lesser extent, India. And this raises a third
challenge, namely dealing with the reemergence of security inspired,
politically driven foreign investment.
Over the past few years, Chinese state companies, in particular,
have aggressively gained access to prime production opportunities using
their lower cost of capital and the financial and political support of
the Chinese financial institutions and government. These companies tend
to make uneconomic bids, use Chinese state bilateral loans and
financing, and spend wildly. Chinese investors pursue market and
strategic objectives, rather than commercial ones.
In strategic terms, the Chinese government has artfully exploited
the reduced U.S. political standing among oil producers (and its
overuse of economic sanctions) to assert its strategic interest in the
Middle East. Since China is unable to project significant military
forces in the Gulf, it employs economic, commercial and political means
instead. It is also seeking access to higher quality crudes that better
match the configuration of its refining sector.
China also offers the attractiveness of its rapidly expanding
energy consuming sector to leverage suppliers and investors to accept
lower returns and to provide desired technology as the price for entry
to both the downstream and LNG markets. In this way, China is
redefining market competition.
The consequences of the Chinese strategy are to reduce investment
opportunities for commercial entities and ultimately reduce the
flexibility of the global crude trading market. While the implications
of this strategy have not gone unnoticed, the United States has been
slow to recognize the dynamics of this potentially changing market.
IMPLICATIONS FOR U.S. POLICY
Over the past 50 years, U.S. energy policy has been faithfully
diverse, often internally inconsistent, amazingly flexible in adjusting
to public, market and commercial pressures, and incomprehensible to
most observers. It is likely to retain many of these unique elements.
The 1970s provided the last clear articulation of an attempted
national energy strategy and this was largely in response to global
energy events. The 1973 Arab Oil Embargo prompted the development of
the SPR, the adoption of CAFE (Corporate Average Fuel Efficiency)
standards, and the formation of the IEA. Domestic natural gas shortages
and the prospects for declining oil supplies produced the Carter
Administration's decision to lift oil price regulation and pursue
energy sector transformation, ushering in a new era in U.S. policy
driven by the market. The combined effect of these actions has produced
the following results:
Consumers pay market prices for oil and gas and market
responses are favored to adjust to price distortions and to
With some narrow exceptions, economic regulation is a policy
of the past;
The United States remains the largest and most attractive
import market for suppliers of all types of oil and gas,
ensuring oil supply diversity and relatively robust levels of
natural gas imports. A policy inclination for regional or
Western hemisphere oil supplies has been largely discredited,
but nonetheless remains alive; and that policy may be revived
in the face of global security threats;
Refiners have successfully responded to environmental
legislation by closing inefficient refineries and investing in
increased capacity to produce new products, using lower quality
The SPR is nearing capacity and a heating oil reserve in New
England now exists;
All administrations have been committed to the multilateral
political arrangements contained in the IEA. International
cooperation in oil is enshrined, if not always practiced, in
the face of world market shortages; and
On a bipartisan basis, successive administrations have
supported U.S. investors negotiating contracts, particularly in
non-OPEC countries and with natural gas producers.
In short, economics has prevailed over the past 25 years. Oil
prices have remained relatively low and U.S. energy efficiency has
increased. However, changing market and political conditions may
complicate America's policy agenda going forward, and these include:
Energy security, broadly defined in terms of attacks on
infrastructure, and greater vulnerability to imported oil
supply threats, either physical or financial, due to growing
Market developments, particularly in alternative fuels and
with respect to climate change. In the future, markets may
drive policy more than policy drives markets;
Less multilateral cooperation in the international oil
trading and investment market places as governments pursue
specific narrow interests;
Increased vulnerability to supply disruptions due to growing
natural gas import dependence in the power sector; and
Political hostility to U.S. policy in specific regions as
allies and friends abandon the United States to ensure their
own political survival.
It is against this backdrop that future U.S. energy and security
policies must be fashioned. But that is likely the topic for another
The Chairman. Thank you very, very much.
First, let me say how pleased I am that so many Senators
have attended. I cannot think of any hearing that could be
taking place here in the Senate where more important and vital
information would be available to Senators than what we have
heard here today. I know you all are going to have a lot of
questions and thoughts, and I am going to yield after a story.
I just want to tell you what these four people remind me of.
You will understand this very well, Mel.
When I was growing up, my father, who did not speak English
very well, used to look out the window of his little office,
and usually about once a week, a little bicycle would come up
the sidewalk with a little driver. On the front of the bike, he
had a little knapsack. In that knapsack, were whatever that
fellow was bringing back to his business from the banks. He had
sent something to the bank. They were sending something back.
What they were sending back were the bad checks, the checks
they had taken and deposited that were no good. And he
nicknamed that little bike. He called it the pajaro de mala
suerte. He laughed. You understood what it was. He called that
little fellow the bird of bad luck, or bad luck bird. It sort
of reminds me of these witnesses.
The Chairman. They are bad luck birds. If we pay attention
to what they have said, anybody that does not think that they
are at least that or more was not listening.
I have just two questions. Since LNG is so much in the wind
here, would somebody tell me where is most of the basic
resource for LNG? Where is it in the world, and how much is
Mr. Caruso. Well, the main LNG suppliers today are Algeria,
Trinidad and Tobago, and Nigeria, as well as the Asian
suppliers, Malaysia and Indonesia. But there will be
substantial increases, as you can imagine, from the demand
numbers you have just heard, and they will come from Russia,
Norway, Qatar, and Australia, and there could be others such as
Iran, for example. So they are similar, but not identical to
the oil sources.
The Chairman. What is the effect going to be of the
competition for LNG among large consumers like the United
States, China, on the ultimate cost of natural gas? And could
you describe some of the progress that we are making in
developing LNG regasification terminals in other countries?
Mr. Caruso. Well, the United States, of course, would be a
major player. As you pointed out in your opening remarks, net
imports of LNG in 2003 of .4 tcf to potentially 6.4. So we will
clearly be a dominant player as you look out over the next 2
decades. Right now there is a regional market for gas.
The Chairman. My question is what effect will that have on
the price of natural gas?
Mr. Caruso. Yes. We think that with the kind of LNG exports
that are projected in our outlook, as well as the IEA's
outlook, that the price pressures on natural gas will be
downward. We do think that by 2010, when a large component of
new LNG comes into the United States, that the average wellhead
price of gas in this country will go below $4 a 1,000 cubic
feet. It is about $5.50 today. So we do think increased LNG
supplies will provide some increased competitiveness in the
United States, as well as on a global basis.
The Chairman. My last question has to do with nuclear
power. Whoever talked about nuclear as part of the mix, I
notice it did not account for very much by 2025. Is it possible
that it could play a bigger role if the process for the
development and licensing of nuclear power plants was
substantially different than history has revealed?
Mr. Caruso. Yes. Our outlook is for there to be no new
nuclear plants in our 2025 outlook, and that is mainly because
the economics are unfavorable relative to combined-cycle
natural gas or pulverized coal. It certainly is possible that
that could change, but it would require both improvement in the
economics, as well as some of the structural issues that you
have mentioned. Clearly the potential is there. Some of the
suppliers of nuclear plants do believe they can bring the cost
down substantially, and our scenario that we will release next
week shows that if they bring the capital cost of a nuclear
plant down to about $1,450 a kilowatt, that nuclear would be
quite competitive particularly in the decade after 2015 to
The Chairman. Thank you very much.
Senator Bingaman. Thank you very much. Thank you to all the
I would like to try to sort of disaggregate some of the
information we have heard here. First, just to talk about oil.
The growth in demand for oil, as I understand it, at least in
this country is primarily a result of increased demand in the
transportation sector. Is that accurate?
Mr. Caruso. That is absolutely correct, sir.
Senator Bingaman. And is that true worldwide? Is that what
is driving the growth in demand for oil that we are seeing in
China and these other developing countries? Is that a fair
Mr. Caruso. Well, in our outlook it is a bit different
outside of the United States in that it is more shared across
sectors. So the industrial sectors in, particularly, China and
other parts of Asia also show substantial growth, in addition
to transportation. So it is more spread across the commercial
and industrial sectors, as well as transportation.
Senator Bingaman. But is it fair to say in your opinion
that any serious effort to reduce the demand for new oil, the
increased demand for oil over the next decade or two will have
to have as a central component reducing the demand in the
transportation sector? Is that fair?
Mr. Caruso. Yes, sir. It is our view.
Senator Bingaman. Now, the growth in the demand for natural
gas, as far as I can understand it, here in the United States
at least, is a result of the demand for gas to generate more
electricity. So that is where that growth is coming from?
Mr. Caruso. Yes, sir.
Senator Bingaman. Is that true worldwide also? Is the
primary increased demand for natural gas worldwide coming from
more and more plants being constructed to produce electricity
with that gas?
Mr. Logan. It is partially true in China, but there are a
whole number of emerging industrial and residential sectors
that are, for the first time, using natural gas. So in China,
and in India I think to some extent, it is more of a new
playing field that is emerging.
Senator Bingaman. So I guess policies that would encourage
or facilitate generation of electricity from sources other than
natural gas would be helpful in reducing the future demand for
natural gas. Is that a fair conclusion?
Mr. Caruso. It is definitely true in this country, as well
as in Asia.
Senator Bingaman. I think Senator Alexander was asking
about the various proposals that are floating around and that
we heard at this conference that we had a week or so ago about
coal gasification and carbon sequestration as a way to
facilitate the use of more coal in power generation. I guess
just to try to understand the size of that problem, my
impression is that given current plans, there are going to be a
tremendous number of additional coal-fired power plants
constructed over the next 10 or 20 years. China is planning
another 500-and-some-odd, as I understand it. India has got
several hundred. I do not know exactly how many, but the figure
that I saw was that there were over 800 known, planned coal-
fired power plants on the books somewhere, on the drawing board
somewhere for construction.
It would strike me that on the global warming issue, which
I think just about each of you has mentioned in passing, there
is no way to deal with that issue in any meaningful way without
trying to change the technology that is used in those new coal-
fired power plants. Is there?
Mr. Verrastro. Senator, if I might. Just to put your
comments in context, globally 40 percent of total energy
consumed goes to power generation. It is the single biggest
factor. About 20 percent goes for transportation and half the
world's oil. So if we have an 82 million barrel a day world,
about 40 million barrels a day goes to transportation. If you
do not attack transportation and power generation, you cannot
even expect to make a dent in reducing demand or controlling
Having said that, on the power generation side in the
United States, half of the power is generated from coal, 50
percent. About 20 percent comes from nuclear. 13 or 14 percent
comes from natural gas. It is unbelievably inefficient. It
takes three units of primary energy to produce one unit of
electricity out the back end. If you could conserve or find
alternatives to reduce the amount of total electricity
consumption by improving efficiency, you obviate the need for
three primary units at the front end, and that is a significant
Your point on coal I think is extremely important. The
United States is frequently identified as the Saudi Arabia of
coal in terms of resources. There are many things you can do
with coal, gasify it, liquefy it. Our transportation sector
right now, the gasoline combustion engine runs on a liquid
fuel. It is very hard to do and replace gasoline unless you
have another liquid. If you can liquefy coal or gasify it with
a clean coal technology and scrubbers, you can appreciably
improve the environment and also change your energy mix.
Mr. Slaughter. I would just like to comment on coal
gasification, if I may, very briefly. At Shell, we believe in
opening up options for the future use of energy by maturing
technology, and I think coal gasification is certainly one we
need to look at not only for the United States but for major
coal-consuming countries like China which has both the resource
and a need. We are actually developing technology in one of our
units, Shell Global Solutions, which we are looking to license
to utilities and electric power producers as it matures.
I think basically this fits into the whole concept that
energy markets and energy market structures take a very long
time to shift, and you have to take action early to mature new
technologies to get them into the portfolio of choices. I think
it is an ongoing process and we need to work on it.
Senator Thomas [presiding]. Thank you.
Senator Martinez. I have concerns--and I would like for Mr.
Logan perhaps to address this--in the area of the geopolitical
world in which we live and the concerns that you expressed with
the instability in some parts of the world. I know that there
have some concerns that Venezuela could decide to sell their
oil elsewhere. I do not know that that is necessarily practical
in the short term, but I do know that there is an increasing
interest in Venezuela and China in doing business with one
What would be the impact? How do we prepare for the
possibility of a disruption of supply from Venezuela?
Mr. Logan. Well, I think that is a difficult question when
you ask about one particular country. Our forecasts call for,
in the future, more of a surplus, I guess, in the supply demand
balance than has existed over the last year or so. So hopefully
there would not be an immediate global catastrophe if, for
example, Venezuela happened to shut off its output.
But in a larger economic sense, Venezuela is very closely
tied into the global market, and it would not really serve
their interests to stop selling oil at the market price. So in
a sense, they are tied into the system as it exists right now.
Senator Martinez. So the likelihood of that occurring you
do not think is a realistic possibility.
Mr. Logan. Well, it is very difficult to say. It is
something we have to be prepared for certainly, but the
likelihood I do not think is very high.
Senator Martinez. That is all I have.
The Chairman [presiding]. Thank you, Senator.
Senator Wyden. Thank you, Mr. Chairman.
Mr. Caruso, in the last analysis that you all did, you
indicated that the United States is exporting 1 million barrels
per day of petroleum in 2003. Does that not make us something
like 10 percent less secure every single day because we are,
according to your figures, 9.6 million barrels per day
dependent on foreign oil? And if we are exporting 1 million
barrels out of the country, are we not 10 percent less secure
every single day because of the conduct of the oil companies?
Mr. Caruso. You are absolutely correct, we are exporting
about 1 million barrels a day, according to our latest numbers,
which go through 11 months of 2004. That is because, of course,
we have free trade and we do not have restrictions other than
some on crude. But about 950,000 barrels a day or more is in
the form of refined products.
A large portion is petroleum coke, which is residue from
refineries. I think last year we exported close to 400,000
barrels a day of petroleum coke which was excess. It was not
really a critical component of our consumption mix. Most of
that went to Asia.
The other big part of that million is about 150,000 barrels
a day for cross-border trade with Canada. There are some
markets that are on the border that would be more efficiently
served by movement across the border.
So of the 1 million, maybe a little over 500,000 is
explained by those two phenomena. The rest of it, of course, is
just the market determining where those products could best be
utilized. But, indeed, we calculate our import dependency on a
net basis, and the figure I mentioned, 56 percent net import
dependency, includes that million barrels per day.
Senator Wyden. I would like you to supply for the record a
list of the companies that are exporting these products outside
the United States and the amounts they are exporting.
Obviously, you have got it because you calculated it. Can you
make that available to us?
Mr. Caruso. Yes, sir.*
* See Appendix I.
Mr. Verrastro. Senator, if I might.
Senator Wyden. Let me just ask one question of Mr.
Slaughter, and then I am happy to take yours, sir.
My question to you, Mr. Slaughter, is why is industry tying
up scarce refining capacity in this kind of way? Because you
all have made the case that we do not have adequate refining
capacity. It is something I happen to be fairly sympathetic to.
But why are we using refining capacity now in a fashion that is
apparently being used to export all these products rather than
figuring out a way to make sure that the products stay in our
country, gas and diesel? Why is this going on?
Mr. Logan. First, I am not a refining expert or do not
represent the refining part of our company. But when you refine
a barrel of crude oil in any particular refinery, you get a
particular yield of products which come out of it, and that has
to be balanced among all the available markets in accordance
with the demand in those local markets by the refinery. And
there is never a perfect correlation between end-use demand and
the refinery output. So balancing trade actually makes the
market work more efficiently.
Senator Wyden. Well, it might make sense in some fanciful
trade theory, but to me, anyway you look at it, we are 10
percent less secure. Mr. Caruso has told us that we are looking
at 9.6 million barrels per day in terms of our dependence on
foreign oil and we are shipping 10 percent of it out of the
country because of some fanciful notions about trade.
I want to get into one other area, but I want to give you,
sir, a chance to make your comment.
Mr. Verrastro. Thank you, Senator. Just to follow up on
Andrew's point, I think there are two things when you talk
about refining capacity and exports. One is that companies
typically work our swap arrangements. They will supply a
certain area that is geographically proximate to where they
have refineries in terms of refined products and take product
elsewhere. So some of that is netted out. It might just be a
market switch where you move product and you get product back
in return in some other market.
The second piece of that is when refineries produce a slate
of products, some are usable in the market that they serve,
some are not and they are excess to that market. And in the
case of resid, for example, there are a lot of shipments in
bunker fuels and asphalt.
Senator Wyden. Do I have time for one additional question,
The Chairman. Yes.
Senator Wyden. Thank you for your thoughtfulness, Mr.
Mr. Caruso, you can hear in my opening statement--I also
serve on the Finance Committee--I am interested in changing the
tax incentives for oil production. The Congressional Research
Service considers the existing tax credit for enhanced oil
recovery to be, in their words, a relatively inexpensive way to
add additional oil reserves. Now, they estimate that nearly 400
billion barrels of oil remain in abandoned reservoirs, and that
10 percent of that oil consists of known recoverable reserves
that could be produced with EOR techniques if the incentives
were there. So we would be talking then about 40 billion
barrels of oil that is in the ground that is not being
recovered today that could be produced in the United States if
there were the right incentives.
Would it be your view that an additional 40 billion barrels
of oil would make a significant difference in reducing our
dependence on foreign oil?
Mr. Caruso. Certainly it would make a big difference. We
have used enhanced oil recovery very effectively in this
country, but even with that latest technology, we only recover
about 30 percent of the oil in place.
Senator Wyden. Thank you, Mr. Chairman.
The Chairman. Senator Smith.
Senator Smith. Mr. Caruso, did I understand your testimony
correctly that you project significantly lower prices in the
future in constant dollars than we are paying today? Is that
what you said?
Mr. Caruso. That is correct, Senator.
Senator Smith. And is that true even in light of the rapid
growth in China and other emerging nations?
Mr. Caruso. That is our reference case and we have, as I
mentioned, looked at several other cases which will be released
next week in which we say, well, given the uncertainties that
some of the other witnesses have referred to this morning, what
if we are living in a higher oil price world, what difference
would that make? Clearly it does make a substantial difference
in things like coal gasification, for example, and coal
liquification. So, yes, we have done that.
Senator Smith. Your testimony indicates that about 70
percent of U.S. petroleum demand in 2025 will be for
transportation uses. What assumptions did you make about CAFE
standards, fuel cell vehicles, and hybrids that are emerging as
very high demand vehicles among consumers?
Mr. Caruso. The assumptions were the existing rules and
regulations. So, therefore, any standards would be those that
are in place as of November 2004 when we finished our analysis.
Senator Smith. But the ones that are in the energy bill we
almost passed, that are likely to pass in this Congress, those
would improve the situation quite dramatically or would they be
Mr. Caruso. The ones that were in the bill--there were no
substantial changes, as I recall, in the vehicle efficiency
Senator Smith. No, I think actually there were. They were
left to the Government agency to figure out what those need to
Mr. Caruso. Okay.
Senator Smith. But did you calculate what those----
Mr. Caruso. We did not include that because----
Senator Smith. That picture actually might brighten in
terms of conservation.
Mr. Caruso. That is correct. We did not include that in our
analysis because it was left to be determined and therefore we
could not put the specific changes in our model.
Senator Smith. Can you tell me how many LNG terminals are
going through the permitting process right now on the west
Mr. Caruso. On the west coast, there are several. I do not
know the exact number. There are about 20 on a nationwide
basis, and my recollection is there are several on the west
Senator Smith. Are they proceeding? Are they having
permitting difficulties, or do you know that kind of detail?
Mr. Caruso. I know that there are five on a national basis
that have received either Coast Guard or FERC approval, but
none of them are on the west coast.
Senator Smith. How rapidly do you think Canada's exports to
us of natural gas will decline? Quite significantly or?
Mr. Caruso. We have them gradually declining over the next
Senator Smith. Mr. Logan, will China turn to nuclear power
for its electricity needs? Do you factor that in at all?
Mr. Logan. We do anticipate that new nuclear power plants
will be built in China, but we also note that Chinese policy
has gone through up and down stages of predicting heavier
reliance on nuclear power. And then as the market either
becomes over-supplied or then under-supplied, the forecasts
will dramatically change, and it will depend on who in the back
room is making the decisions at the time.
Senator Smith. Is the Three Gorges dam just about fully
operational? And what does that portend for China's energy?
Mr. Logan. The Three Gorges dam, when fully completed, will
have about 18 gigawatts of generating capacity. Of that,
roughly 60 percent is now complete. In 2009, the scheduled
completion date, when it is fully operating, that 18 gigawatts
will only account for about maybe 2 or 3 percent of the
country's total installed capacity.
Senator Smith. And will it be sufficient to get rid of all
of their backup petroleum generators?
Mr. Logan. No.
Senator Smith. Mr. Slaughter, U.S. refineries are operating
at full capacity. Will oil companies be forced to import
refined petroleum products in the U.S. future, and are ports
prepared to accept these refined products?
Mr. Slaughter. If U.S. demand continues to grow along the
projections we have seen and new refinery capacity is not
added, then the market has to be balanced with imports. What
you do see, though, on a year-on-year basis is more efficient
operations in existing refineries as maintenance schedules are
carried out, which actually give some small percentage of
incremental capacity each year, maybe a half a percent of
incremental capacity, without building new facilities. But if
market demand increases at a higher rate than that, then we are
exposed to international trade in products. Yes.
Senator Smith. Thank you all for you testimony. It has been
very informative and I am glad I was here this morning, Mr.
Chairman. Thank you.
The Chairman. Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman.
Mr. Caruso, EIA forecasts that by the year 2025, two-thirds
of all coal production will originate from the Western States.
Why do you believe this is the case? Why cannot the Eastern
coal companies and Eastern States--what do they have to do stay
Mr. Caruso. Well, I think that is exactly the answer; your
statement is accurate. The main reason is the west coast is
Senator Bunning. Even with the shipping costs?
Mr. Caruso. Yes, sir. It is more competitive to the point
of its consumption even with the transportation costs and, of
course, it has a lower sulfur content. Those are the two main
factors. So we see east of the Mississippi coal production
staying relatively flat over the next 2 decades with most of
the growth, which will be considerable given the outlook for
electricity generation, to come from the West.
Senator Bunning. Even with the clean coal burning
technologies that were in the energy bill that almost got
through the Senate last time? It did not quite make it but it
almost did. Even with those incentives for cleanup of Eastern
coal, do you still see that same project?
Mr. Caruso. The forecast does not include the bill
provision, since it was not enacted. But my recollection is
that even analyzing that component of the bill, it did not make
a large change in that, but I would certainly be able to supply
you that for the record.
Senator Bunning. There was about $4.5 billion worth of
incentives to clean up with new technology coal that would burn
cleaner and more efficiently, and that included coal from east
of the Mississippi, as well as coal from west of the
Mississippi. So you do not think that that would make a
Mr. Caruso. I would prefer to provide that for the record
because my recollection of our analysis--we did an analysis of
those components of the conference energy bill that we could
model that had enough specificity and funding requirements
outlined that could be analyzed in our model. So I would be
happy to supply that for the record, Senator Bunning.*
* See Appendix I.
Senator Bunning. In light of recent developments in Russia
and the virtual nationalization of the Yukos Oil Company
facilities and assets, what actions should we take in the
Congress to ensure that our companies can be competitive with
foreign companies in developing oil and natural gas
infrastructure and resources? Anybody.
Mr. Verrastro. Senator, I think in the case of Russia and
Yukos, it would probably be helpful if at every opportunity,
using diplomatic as well as commercial pressure, that we talk
about incentivizing and market reform and proceeding with
Senator Bunning. For them?
Mr. Verrastro. For Russia, for Venezuela, for a lot of
other places. If national oil companies control the vast
majority of the resources, increasingly international companies
are going to have a difficult time with access. To the extent
that state players decide now that you are going to use energy
as a strategic commodity and things that you cannot do
economically you will do in a bilateral fashion, a diplomatic
fashion, to put pressure on other countries and form new
alliances--one of the concerns we have with China, for example,
is that get 5 percent of their supply from Sudan and 15 percent
Senator Bunning. I understand that but the problem is OPEC
and their ability to ignore or deal with nationally held oil
Mr. Verrastro. I think it is because they view those oil
resources and energy commodities now as so strategic that it is
part of the patrimony of the country. This map is changing.
Senator Bunning. Would it make more sense to the United
States of America to develop their own natural resources that
are available and not being used now?
Mr. Verrastro. I think the two most important things the
United States can do in terms of policy is to develop our
natural resources that we have, as well as do something on
demand management, and reduce our reliance that way. That is
actually the more effective response in the short term because
the lead time to develop new resources takes time.
Senator Bunning. Are we going to have a second round, Mr.
The Chairman. Indeed, we will if you are here.
Senator Bunning. Thank you. My time is up.
The Chairman. I am going to go to Senator Dorgan on this
Senator Dorgan. Mr. Chairman, thank you very much. I will
I was testifying before a commission this morning and
missed the testimony of this panel, but I have read much of it
and think that you have added a great deal to the discussion.
I want to ask just a question about hydrogen fuel cells.
The chairman and I and President Bush and many others feel that
a hydrogen fuel cell future is something that we ought to
aspire to create. About every quarter century or so, based on
my reading, people with blue suits come and sit at this
committee table and people with blue suits come and testify,
and we essentially talk about how important it is for us to
continue to dig and drill. And while I think we have to dig and
drill, I think that is a yesterday-forever policy. I really
believe that the only way we are going to find a way out of
this is to move toward a different future. Now, that is
complicated and not easy to do.
But, Mr. Slaughter, your company with some fanfare opened a
hydrogen service station or a service station distribution of
hydrogen in this town. I thought it was a nice thing for you to
do. I am sure part of it was publicity, but part of it was also
a practical first baby step in a direction that I am fully
supportive of. Tell us about your experience there.
Mr. Slaughter. Well, it is not quite a first step. We are
already quite a long way down the road of thinking about a
hydrogen future. We instituted a hydrogen business, Shell
Hydrogen, several years ago because we believe in developing
technologies for the long term, as I mentioned in respect to
coal gasification, increasing the options available for markets
to develop. So we see hydrogen as very much a viable energy
source for the long term. When we think about the energy
systems futures, we are thinking about a 50-60 year time
horizon. It will be many years before it matures into something
which has a very important role in an energy system.
But to get there, to get hydrogen into a significant place
in the market in 30 years, we need to be thinking about these
initiatives now, maturing the technology, thinking about the
most efficient way of distribution, thinking about the most
efficient way of sourcing the hydrogen. And we are actually
spending quite a lot of money on that and developing it.
It is not just important for the United States It is
important also for these developing economies, China, India.
Open up the options and they will become less dependent on one
particular energy source.
Senator Dorgan. Well, I think the marketplace, including
participants like Shell, are moving and doing things. I also
agree that there needs to be some public policy initiatives
because the kind of movement to this is so expansive and
requires so many different issues, production of hydrogen,
distribution, storage, and so on. Would you agree that there
needs to be public policy initiatives in order to aspire to get
to a certain point?
Mr. Slaughter. I believe the public sector and the private
sector can very effectively work together in creating a level
playing field for these new technologies. Part of it is not so
much legislative policy but purely educating the public and the
consuming market that the more choice there is, the better it
is for consumers. I think that part of the process needs to be
Senator Dorgan. You know, there is the old saying: wherever
you find yourself, there you are. If we do not set some way-
points out there and some objectives to say, by 2050, here is
what we would like to see, we are not going to get there.
It is interesting to me that, for example, last night the
President talked about Social Security, and we gnash our teeth
about what is going to happen in 2042 or 2052, depending on the
actuaries or CBO. You know, I asked the Energy Department, I
guess, about 4 years ago. I said, what kind of plans do you
have for energy, particularly production in 50 years? The
answer, we really have not thought out that far. Well, we
really should. If we are talking about Social Security in 50
years, let us think about what kind of an energy mix, what kind
of an energy future do we want as a country in 50 years because
that is a critically important issue.
Let me make one final point to you. We have the Nation's
only coal gasification plant on the prairies of North Dakota.
It was built, thanks to Federal support, and then changed hands
a couple times. It is a technological marvel. It is
extraordinary. It is producing beyond anyone's expectation. We
now have a relationship with the Federal Government in which we
share profits with the owner, the regional cooperative that
owns this plant, but we produce synthetic natural gas from
lignite coal. Interestingly enough, from the Nation's only coal
gasification plant, as we produce synthetic natural gas, we are
also piping CO2 to Canada to put into tertiary wells
in oil wells in Canada, which is sequestration. I mean, what a
The reason I mention that is you talked about coal
gasification. We all ought to take a look at the only plant
that exists and what a marvel it is and how we are producing
this synthetic gas from lignite coal.
Mr. Slaughter. I think that is a great example. The
difficulty right now you have in generalizing using the
CO2 for injection for recovery is that often the
markets in which you want to put the power plant are not the
geographical places where you can use the CO2 for
exploration and production activities. That limits that option.
But we should be looking at others.
The other point I would make about coal gasification is
that right now it needs some momentum. Right now, until you
have sufficient scale in the pilot plants, the demonstrations
at a commercial level, you cannot get commercial financing for
them. So it is risk capital for the investors.
Senator Dorgan. The chairman made the point that that came
from a public policy initiative, the synthetic fuels
initiative, and I think the result was only one plant was
built. And frankly, in the early stages, we had some problems
with it because the cost of the investment was higher than the
market clearing price for natural gas. But that has all changed
at the moment.
Well, Mr. Chairman, thank you for recognizing me and thank
you all very much for your participation today. It was very
The Chairman. I was just going to say the Synthetic Fuels
Corporation built that and spent a lot of money. It was the tar
baby for those who did not think the Government ought to get
involved in advanced projects. We are coming around to
wondering how we are going to get some of those kind of way-out
technologies, and that ought to be a question that comes along
Senator Alexander. Thank you, Mr. Chairman.
First, I think Senator Dorgan's comments suggest to me that
there is a great deal of consensus in our committee on major
objectives toward long-term energy needs. One is the hydrogen
fuel cell, and we are going to work on that. It seems to me
that the private sector may be moving a good deal faster than a
30-year horizon. I was at a fuel cell filling station in
Yokohama where nine major automobile companies each have their
own vehicle, and I put hydrogen in the Nissan prototype. And
Carlos Ghosn, the CEO of Nissan, drives it around Tokyo every
weekend. Nissan is putting $700 million a year of its own money
into hydrogen fuel cells. The Toyota chief executive told me
they have a horizon a good deal shorter than 30 or even 20
years for having cars on the road. So that is a promising
But that leads me to the second area of growing consensus
here, which is about what can we in the Government most
appropriately do about coal. The staff has pointed out to me
that the China state environmental protection administration
recently ordered 26 coal-fired power plants halted, an
estimated 120 megawatts, because developers did not complete
the required environmental impact assessments. Now, when we
think about the fact that China might be generating 650
gigawatts of coal-based energy in the next 25 years, that is
650,000 1,000-megawatt plants, roughly. We mentioned earlier--
Senator Bingaman brought it up--maybe India is another 800. It
is obvious it will not matter much what we do in the United
States about capturing carbon or global warming if that level
of coal production is going on around the world without
appropriate environmental restrictions.
So it seems to me that one thing we can do in the United
States for ourselves and the rest of the world is accelerate
any way we can think of to explore whether it is commercially
viable to gasify coal and sequester carbon.
Now, we may get to a hydrogen fuel cell economy, but we are
going to have to make the hydrogen somehow. That means it is
either natural gas, coal, or oil to make the hydrogen.
The Chairman. Or nuclear.
Senator Alexander. Or nuclear, yes. Excuse me. That is
So what can you suggest to us that we could appropriately
do here with making minimum interference in the marketplace,
which we do not want to do, that would accelerate our
understanding and the market's movement toward coal
gasification and carbon sequestration as a way of energy
independence and as a way of solving the problem of too much
carbon in the air?
Mr. Slaughter, help us out here, and any of the rest of you
who can comment on that. What would you do if you were in our
Mr. Slaughter. Well, I think one of the most important
things you can do immediately is create a long-term energy
vision for the country, which includes these new options and
say as a Nation we need to have a wider mix. We need to develop
new technologies. We need to develop cleaner burning fuels.
Coal gasification is one of those options. And we need to think
beyond the 20- or 30-year----
Senator Alexander. But now we have gotten that far. But in
terms of those options, do we just sit back and wait for it to
happen, or are there ways that we can encourage that?
Mr. Slaughter. I think having that public debate will be a
strong stimulus for the private sector to look at it very
seriously perhaps on a bigger scale than it is doing right now.
Senator Alexander. Well you mentioned, or someone did, that
the market itself was slow to react to such big changes. It
needed to be receptive. Even if the cost of coal gasification
was at a competitive rate and carbon sequestration were
reliably invented at this point, we still have got a great, big
market out there that is slow to react. Specifically what can
we do to encourage the market to be open to this specific set
of ideas about coal?
Mr. Verrastro. Senator, I think there are two things
initially that we ought to be looking at. One is to engage in
this public debate because if we are actually looking at energy
transformation, it takes public policy to set that in place.
And then the second piece is to stimulate through incentives
for technology development and also for demonstration projects
to show that these new technologies actually work.
Senator Alexander. May I ask one more question, Mr.
The Chairman. Sure, absolutely.
Senator Alexander. Do I understand that a demonstration
project, a pilot plant is an appropriate next step? And if so,
how big a plant? And if so, how many? And what sort of support
would it require for major companies to make the investment
they would need to make in a coal gasification plant or in
technology that would lead us toward effective carbon
Mr. Slaughter. It is difficult for me to respond on behalf
of Shell because we are not very big in the power generation
business. I think--it is very difficult for me to respond to
that. We can get back to you on that.
Senator Alexander. I would be grateful for any written
suggestions that any of the four of you would have to us on
that subject. There are a number of Senators on this committee
who are very interested in the subject and we are looking for
an innovative, prudent way to understand what we should do.
The Chairman. Senator, let me say you are absolutely
correct in everything you said about the enthusiasm and
interest. While they have some knowledge, we are going to go
beyond that, as you know, and we are going to have a forum on
coal, and it will include this issue. Hopefully we will be
prudent enough to invite some people who are in the business of
generating who will talk about will the private sector do this
if we just sit back and talk about it, or could we do something
to push it. We certainly are going to do that.
Senator Alexander. Thank you.
The Chairman. Senator Murkowski. Thank you for coming,
Senator. I know you have a lot of other commitments, and we are
glad to have you.
Senator Murkowski. Thank you, Mr. Chairman. I was presiding
this morning and I was unable to get out of that. I would
rather have been here.
It was interesting, though, because we were talking about
Social Security on the floor, but I come in here and, again, it
is the energy security that I am convinced we need to be
talking about just as much as we are talking about Social
Security. So I appreciate, Mr. Chairman, your leadership on
I wish that I had had an opportunity to listen to you,
gentlemen. I have quickly gone through some of your written
testimony, and so if my questions are a bit haphazard, I
apologize. If I do not ask the right person, please do not
hesitate to jump in.
I guess this would be initially directed to you, Mr.
Caruso. In the natural gas assumptions where you referenced the
growth in U.S. natural gas supplies dependent on specific items
and you also mention production from natural gas in Alaska and
anticipate gas coming on line by 2016, how do your figures
change? How does your analysis change for the need for imported
LNG if our time line on that slips? And I do not want to send
out any negative signals here, but we recognize that this is a
massive project. We are working very earnestly up in the State
right now to get this thing moving, but the reality is it is a
very complex project. What happens if that date slips?
Mr. Caruso. Well, as things stand right now in our modeling
efforts, any slippage in domestic supply--and that would, of
course, be the case of Alaska natural gas--virtually all of
that would need to be supplied by new LNG. And that is why we
have LNG going from .4 tcf in 2003 to 6.4. So if, indeed, there
was slippage, I am sure that would mean more LNG requirement.
Senator Murkowski. When you looked at the Alaska natural
gas picture, was there any taking into account the opportunity
for the gas hydrates? We had a presentation just last week
before the committee and we had the director of the Oil and Gas
Division from the State of Alaska come and give some pretty
remarkable statistics about the vast potential for gas hydrates
in the State, some 520 tcf on land directly underneath where we
are already drilling and we could just tap right in, and then
the incredible potential offshore. Do you look at those
unconventional natural gas estimates in your calculations?
Mr. Caruso. Yes. We share the optimism that ultimately gas
hydrates can be a large supplier of natural gas. Our view is
that given the technology development and the current
knowledge, it is beyond the 2025 time horizon of our outlook.
So I would share we share the resource optimism but we are
still, I guess you could call it, technology pessimists with
respect to deliverability of those gas hydrates.
Senator Murkowski. So you do not assume those reserves in
your calculations for available domestic supply.
Mr. Caruso. There are no gas hydrates in the 2025 outlook.
Senator Murkowski. We want to talk to you next year and see
that in there. We want to move forward on it.
Looking at the U.S. energy prices and where you see the
price of oil in 2010 and then down the road, obviously a better
scenario for a State like mine that derives revenue from oil,
tough on the economy. But in terms of making folks like Shell
and other producers more interested in exploration, does this
up the amount of what we would consider economically
recoverable oil, and does that then factor into your
calculations for the availability of domestic reserves?
Mr. Caruso. Yes. There is clearly a relationship between
the price assumptions and the reserve development. We do have
in our reference case prices coming down, as you pointed out,
by 2010, but we have also looked at about four other cases,
including prices staying about where they are now in real
terms, which would be a substantial change. And we feel that at
those higher prices, there would be substantially more
incentive to drill not only in this country but in other
countries as well. So it does make a big difference. And there
are also changes. The technology for what we call
unconventional liquids would bring on a lot more unconventional
liquids as well. And those scenarios will be available next
Senator Murkowski. I cannot let you go without mentioning
ANWR. If ANWR and the potential for oil reserves, discoverable,
economically recoverable, which under your scenario we feel
really ups the ante in terms of what will be available coming
out of ANWR, is that included anywhere in your calculations?
Mr. Caruso. No, because the outlook is based on current
rules, regulations, and policies. ANWR is not included, but we
have done a number of cases or service reports for, among
others, Senator Frank Murkowski, and last year for Congressman
Pombo, which indicate that if the ANWR were to be opened for
development, within a 7-to-12-year timeframe, the median USGS
resource estimate is that it could be producing at its peak
rate of about 800,000 to 900,000 barrels a day. At the high
end, the USGS resource assessment could be as much as 1.6
million barrels a day.
The Chairman. What percent is that?
Mr. Caruso. Well, right now crude oil production in this
country is about 5.5 million barrels a day. So as a share of
U.S. production, it would be substantial. And as you know,
Alaskan production right now is about 1 million barrels a day.
Senator Murkowski. Now, you have indicated that you ran
those numbers last year or a couple years ago. How do those
numbers change as we are looking at higher prices of oil and
recognizing what is now economically recoverable is increased?
Mr. Caruso. As you stated, those numbers were based on
prices that existed 2 years ago in the analysis done for
Senator Frank Murkowski and last year for Congressman Pombo. So
I think they would be roughly the same because they were
already economic. The biggest issue is the pace of development,
and that includes permitting as well as other planning.
So the price itself probably would not change those numbers
much, but it is possible that you would get slightly increased
recoverability at a higher price and that would extend the
production profile. But I think the peak numbers--and I am just
going from memory now--would be about the same, but I would
certainly be willing to look into that and report back to you.
Senator Murkowski. I would appreciate an update as to where
we are now based on the numbers, based on the anticipated price
per barrel. If you could supply that to us, I would appreciate
Mr. Caruso. I would be happy to do that.*
* See Appendix I.
Senator Murkowski. Thank you, Mr. Chairman.
The Chairman. Mr. Caruso, just as a factoid, would you once
again, if you have it in your head--if not, put it in the
record--at its peak what percent of American production would
ANWR be if all the laws were passed and it was at the peak that
you just described? What percent might that be of American
Mr. Caruso. I would be happy to supply that for the record,
The Chairman. It is a rather substantial portion.
Mr. Caruso. Yes, because we anticipate American production
to be relatively flat on average over the next 20 years, so
that clearly an additional 800,000 to 1 million barrels a day
would make a substantial difference.
The Chairman. So for those who say it is not very much, we
might ask what percent does Texas produce? Do you know?
Mr. Caruso. Well, I think Texas now is under 1 million
barrels a day.
The Chairman. So if it is not very much, we could say,
well, we do not need Texas production either. Right?
The Chairman. Anyway, I look at it that way.
With reference to renewables, there is an enormous desire
to produce energy that is clean and does not affect global
warming, and so we are constantly asked let us maximize
renewables so we can solve our problem. Could I make sure we
Renewables in the United States already has a big component
which some choose not to call that, but it is hydro. And I do
not think anybody assumes we are going to add any significant
hydro generation on that renewable side. So when you say
renewables over the next 25 years will be 2 percent--that is
what you said--because 2 and 7 is 9, and 7 is hydro; the total
is 9--does that assume we have put in the incentives for
renewables that exist now, or do you assume they are not going
to be there?
Mr. Caruso. We include all the incentives that are in place
now. Of course, the production tax credit does expire on
December 31st of this year.
The Chairman. So your current assumptions would include
that it expires.
Mr. Caruso. Yes, sir.
The Chairman. Could you quickly for the record tell us what
it would be if we continue it indefinitely? So we would answer
the question for everybody, okay, we have continued that, now
here is what our experts tell us. It would be 2.4 percent or
whatever it is.
Mr. Caruso. It would increase, certainly, and I do not have
that number off the top of my head. I would be happy provide it
for the record.*
* See Appendix I.
The Chairman. Can you do that? I think that would be good
to have. Would you specifically tell us what is renewables
under that definition? Because whatever we say, somebody is
going to say you did not put everything in. So if you do not
put everything in, we are going to ask you to put everything
Mr. Caruso. I will and I can tell you just off the top of
my head that the largest components are biomass, wind, and
The Chairman. With reference to China, we now know that
China plans to add two new nuclear power plants a year--that is
their indication--for the next 16 years. So current plans would
be 32. I assume they are 1,000 megawatts. Is that what you all
Mr. Logan. Yes.
The Chairman. Now, that is not a big part of China's needs
Mr. Logan. If indeed China added 2 gigawatts of new nuclear
capacity each year for 16 years, it would be approximately, at
that time, 4 percent of their generating capacity.
The Chairman. Is that big? Is that a big component,
Mr. Logan. Currently it is about 1.6 percent in China. It
is not very big, no.
The Chairman. So the point is that we all go back to the
fact that it is either going to be oil, natural gas, or the big
one, or some form of coal that is going to be used for
generation, even for China.
Mr. Logan. Well, China also has ambitious plans to develop
their remaining hydropower resources that are there, but yes,
you are right.
The Chairman. Well, you told us about it and I just assumed
that even with that giant one they are adding, it is much like
nuclear. It is not going to be that big even when finished.
Mr. Logan. There are many others also under development
that are smaller than the Three Gorges dam but are
substantially large. So it will pay a role, but it will not----
The Chairman. For the record, would you tell us about
those? Even though they are just planned, would you put it in a
statement for the record, what they are and what their capacity
Mr. Logan. Sure.
The Chairman. I wanted to ask a question with reference to
OPEC. This is for Mr. Slaughter and Mr. Verrastro. You
discussed a reluctance or inability of OPEC to expand its oil
production capacity. Do you think OPEC purposely created
inventory tightness in 2001 and 2002 and is now working to
deprive the market of the ability to build inventory?
Mr. Slaughter. I think OPEC relies on a team of analysts
and forecasters like many organizations to predict what is
happening in oil markets. I think pretty much across the board
most organizations under-estimated global demand growth, not
just in 2001 and 2002 but right through until last year. So I
think there was a certain element of surprise in the strength
of global demand over the last few years for OPEC and for the
consuming countries. So I do not agree that it was a conspiracy
to drive inventory levels down.
OPEC has a dilemma in terms of the pace and the extent to
which it adds production capacity because many of the producing
countries do not have very diversified economies. So investment
capital they put into oil-productive capacity is investment
capital that does not go into diversifying the economy to
reduce their dependence on oil. So it is a real dilemma. They
also have pressing social needs in terms of their growing and
youthful populations. So I believe that balancing all that is
very difficult and perfect knowledge is not available to OPEC
as it as not available to us.
Mr. Verrastro. I think I would echo Andrew's sentiments on
that. If you go back and look at the second quarter of last
year, the IEA projected total demand to be about 77.5 million
barrels a day. They made eight revisions in 8 months, and it
turned out to be over 81 million.
OPEC, like everyone else, looks back at their history in
deciding future policy, and coming out of the late 1990's, they
had excessive spare capacity, so much so that they had to cut
production in certain areas.
If you look at the price--and this is the other piece of
it--what these revenue needs are for these individual countries
over the last 25 years, their total export revenues have gone
from about $30 billion to $300 billion. So for planning
purposes, it has been a very difficult planning period.
I was with a minister last February after the OPEC meeting
and his sense was exactly what Andrew said, that coming out of
the OPEC meeting, they were looking at second quarter demand
crashing. No one knew what China was going to do. They were
concerned about Iraq coming on, the prospect of Libya coming on
in the future, and Russian production being healthy, and the
call on OPEC looked to be a lot less. And those forecasts were
The Chairman. My last observation, and then if Senator
Alexander would not mind, if he has time, if he could finish
the hearing with the last two Senators, I would appreciate that
I want to say for the record and to the four of you--and if
you have an observation, that would be fine--I think we
understand how the diversification ought to occur over the next
10 or 15 years to create a bit more security for us. Obviously,
we have got to find a way to use coal and still not have a
terrific impact on global warming. Others may not care about
the latter, but we are going to have to.
The dilemma we have is that we believe in a free market and
capitalism, and yet, when it comes to projects that are way out
that involve a lot of capital, it is not very easy for the
private sector to do that. First of all, it is not very good
business for the bottom line so as to speak, and stockholders
are not very interested in it. If you say we are going to issue
some bonds and put out $1.5 billion to do two pilot projects in
coal gasification, including reduction of carbon, how are they
going to do that?
One of the problems is do we have any business, any reason
as a Congress to do something about that or do we sit by and
wait and say at some point in time, it really will come on when
we are really hurting. To me it seems like that is way too late
because it seems we will be in an international crisis, the
likes of which we do not even understand, at that time.
Could you just talk about this? Particularly you, Mr.
Slaughter, you would know from the business standpoint. You all
are very big and the rest of you have some feeling. Is my
assessment sort of right, or will those things just happen even
if we do not do anything about it?
Mr. Slaughter. Well, there is capacity in the private
sector to invest for the very long term, in the major
companies, the international oil companies like Shell. I had
mentioned several of the things we are doing for the very long
term in terms of hydrogen and renewables and technology on coal
gasification. So there is the capacity to invest.
Basically it involves putting in seed capital at a fairly
low level and then maturing the technology over a number of
years until the market is ready, but we do need a stable market
environment and a receptive consuming public. That involves
making the country very conscious of the energy choices and the
energy futures that are available and open to it. So I believe
a public education process in this is very important.
The second point I would make is that energy markets, by
their very nature, are global. Not only are they global in
terms of traded goods, but they are global in terms of
technology development. So we are going to go ahead in maturing
these technologies. And maybe it will not happen in the United
States. Maybe it will happen in other markets. But when a
technology is developed, it is available for all markets
typically and will migrate to where it has the most value. So
it is not something the U.S. has to take on on a unilateral
The Chairman. Does anybody else have a thought?
Mr. Verrastro. Again, I would echo Andrew's comments. I
think there are two things that you pointed out, Senator, that
are extremely relevant. One is the difference between public
policy and private sector investment cycles. I was a senior
vice president at Pennzoil for about 17 years, and when you
look at things as they come across the board in the management
committee, you look at the cost to shareholders and you look at
your rate of return and you look at expending capital versus
other prospects that you have. So it is extremely difficult for
companies. Even in the current environment, there is the
expectation that with high prices a lot more drilling, a lot
more exploration will go on.
But, in fact, what you would probably look to do is if you
cannot find a good commercial deal around the world because a
lot of these host countries you cannot have access, or you are
in the situation where you cannot negotiate good commercial
terms because the commodity is so attractive to these
countries, that you tend to stand back a little bit and watch
and wait what happens. As a result, in terms of quarter-to-
quarter projections, your expenditures go down. Your income
rises just as a result of current production with higher
prices, and you look good on Wall Street. Your shareholders are
very pleased. But you have to take a longer-term perspective.
I was also fortunate enough, I think, to be part of the
Carter administration in the first energy plan and we developed
the Syn Fuels Corporation. And it did get lambasted and prices
dropped in 1981 and people walked away from it because at $10
or $15 a barrel, it made no sense to develop 15 years out a
backstop technology that was $40 or $50. But I do think it
takes both the private and the public sector in combination to
push this thing forward.
The Chairman. Thank you very much.
Senator Alexander, you are in charge.
Senator Alexander [presiding]. Senator Bunning.
Senator Bunning. Thank you.
I want to get a handle on additives and how much we can
rely on their ability to help our supply. We have the ability
in the United States on ethanol, biodiesel, and other things to
add what percentage to the overall supply of what we are using
now mainly for our gasoline and other things and to drive our
trucks and to drive our cars? How much of that can be added or
increased to keep the price of those and the purity or the
better conditions for the United States into the immediate
Mr. Caruso. We did look at, when the bill was being debated
last year, the ethanol requirement of 5 billion gallons by, I
think, 2012 or so and looked at what that would imply, as well
as we also have done some work in terms of biodiesel. It is
still relatively small. It is a big number, but when we are
talking about a gasoline consumption that is headed toward well
over 10 million barrels a day in our outlook----
Senator Bunning. In other words, the capacity to produce is
Mr. Caruso. It is the capacity to produce, plus it is the
economics under existing laws and regulations. It is both.
Senator Bunning. So if, in fact, we change the existing
laws and regulations--that is something that we can do--it
might assist in the production of more ethanol, more biodiesel
fuel, which in my opinion is a viable alternative to what we
have if we are not going to use our natural resources that we
have available in ANWR and other places.
Mr. Caruso. That is correct.
Senator Bunning. So we can look forward in our energy bill,
Senators, to incentivize those things a little better than we
did the last time so that there is a larger production.
I want to thank you all because our energy policy in the
United States of America has been on hold for so long that we
are ground to a halt in trying to make it better. Now, when you
get within two votes of a major energy bill and incentives to
make it better, whether it be liquified coal or hydrogen or new
sources of energy, and incentivizing the use of coal for
different purposes other than just the production of
electricity and those things, we need help, and we need to be
able to sell this to the American people as something that is
absolutely necessary if we are going to survive as a Nation. No
matter how hard we try to move that number from 55 to 58 to 60
to 65, dependency on foreign resources is unacceptable. It is
totally and completely unacceptable for our national defense,
for our national security. So please help us. We need your
help. Thank you.
Senator Alexander. Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman.
I want to talk just real quickly about two of Alaska's
neighbors, Canada and Russia. A very quick question on Canada,
and this is probably to you again, Mr. Caruso. I came in at the
end where you were talking about Canadian exports of natural
gas and your assumption that there would really not be much
coming to the United States from Canada because of their
consumption. I am assuming you factor in the gas coming down
from Mackenzie and that line.
Mr. Caruso. Yes.
Senator Murkowski. But it is your assessment that the
Canadians will use what they currently have in addition to the
new source coming out of Mackenzie.
Mr. Caruso. That is correct. We made our latest forecast
taking into account the National Energy Board of Canada's
forecast for Canadian production as well as consumption and, of
course, bringing on stream the Mackenzie Delta valley gas
toward the latter part of this decade, I think 2009, 2010. We
have it in our outlook. But even with that, we have less gas
coming from Canada over this outlook period over the next 20
Senator Murkowski. So you do not view the two projects, the
Mackenzie line and the Alaska natural gas line, as competing
Mr. Caruso. Definitely not. They will both be needed.
Senator Murkowski. Absolutely. Thank you.
And then a question about Russia. Just reading through the
background, recognizing that Russia is currently the second
largest exporter, how much do we import from Russia?
Mr. Caruso. Not very much.
Senator Murkowski. So it is negligible.
Mr. Caruso. 100,000 barrels a day or so out of our more
than about 11 million.
Senator Murkowski. I was reading, Mr. Verrastro, your
comments about the future for Russia and a very tentative
assessment of where you think they are going. You state that
the developments raise the prospect that they may be nearing a
temporary peak because of a multitude of reasons that you cite.
You also indicate that the inability to continue to increase
production rests on several considerations. Production
practices are suspect. What do you mean by that statement?
Mr. Verrastro. I think two things. The resource base. Most
people believe that Russia has substantial resources. The
question is whether they have been producing for rate or
actually exploring new territories that they can produce for
over the long term. There is concern that Yukos, in particular,
over the last several years, while they were very successful in
moving oil to market and increasing production, that it was
what we call step-out drilling. It was the easy oil to get to,
least expensive, and you are actually depleting the reservoirs
faster. There has not been new exploration. And the
infrastructure, quite honestly, is also suspect in terms of
pipelines and delivery systems.
Senator Murkowski. It is old or when you say it is suspect?
Mr. Caruso. Yes. When we were in the Caspian, the rated
capacity of some of the Russian lines that were at 200,000
barrels a day, if you put 200,000 barrels a day through them,
they would burst at the seams. So part of the reason that they
were running at about 50 percent capacity was just because they
were concerned about infrastructure breakdown.
Senator Murkowski. Where do you see them going then? You
recognize they have got the resources. They are somewhat like
Alaska. We have definitely got the resources. With us it is
absolutely access, and to a certain extent, the Russians are in
the same situation. But how do you see them moving forward?
Mr. Caruso. I think the three restrictions are in terms of
infrastructure, policy, and investment, and also the
introduction of new technologies. Where they go from here, some
people are projecting 10 million to 12 million barrels a day,
in terms of increased production. Others are looking at a
plateau and then a decline if new investment is not brought in
soon. I think the Yukos episode kind of froze people in place,
at least for a time, just to see what policies would be
emanating from the Kremlin. Prior to that, Russia looked like a
great place to go explore and invest, but increasingly--and you
saw it with Conoco-Phillips that the way to do business in
Russia, at least at this particular time, is to go to the
Kremlin first, get the approval from the president, and then go
do your side deals to do investment or equity participation in
projects or with other companies in Russia. Right now it is
probably not the way to go.
Senator Murkowski. You used the term ``it needs to happen
soon,'' and I am assuming because of all the reasons that you
have cited, whether it is the infrastructure or the policies.
But we recognize that when you build a pipeline of any size, it
is going to take some time to bring on. It seems that there is
a lot of expectation or hope coming out of Russia that they are
going to be able to keep the levels of production that they
have, that they will continue to be the second largest oil
exporter. But your assessment is, as I say, somewhat hesitant
here. Do you think that they can maintain that status?
Mr. Verrastro. I think a lot depends on where the policies
go forward. I think President Putin recognizes that oil and gas
are the engine that is going to fuel economic growth in Russia.
The point is that I think he is looking to centralize control,
whether it is in state-owned companies or government mandates.
Gazprom and Transneft control the distribution networks. So
even if you produce, you have to find a way to export. The oil
is there. It is just a question of how you get it out and move
it to market.
Senator Murkowski. I struggle with what we are able to do
on the North Slope of Alaska. As I say, we have got the
resources up there, but we have got some issues in terms of
getting them out. And some of those that would look at
extraction up north and production opportunities instead go to
our neighbors right across the water. I would like to think
that we offer them a little more stability, a little more
security in terms of policies and in terms of opportunities. So
I am curious to hear your perspective on Russia.
Mr. Slaughter, I would love your comments.
Mr. Slaughter. May I jump in on a couple of things there? I
think it is not a question of Russian resources getting
developed in competition with Alaskan or Canadian resources. I
think over the next 20 or 30 years, the world will need
additions from both and be very capable of absorbing all the
production that both regions can give.
Russian production will fluctuate year to year as policy
changes, as capacity gets built or gets delayed, but over the
long term, we are very optimistic the resource base will be
developed. We have got some very big investments in Russia.
Some of our competing companies do as well, and we have to work
with them on a company-to-country basis and on a country-to-
country basis to ensure a stable and fair fiscal and regulatory
environment over the long term. I think it has to become clear
to all the big players in world energy markets that we need
that stable environment to develop resources.
Senator Murkowski. Are things getting better as you engage
in the dialog with the Russians as it relates to your business
Mr. Slaughter. I am sorry. I did not quite----
Senator Murkowski. Well, is it getting easier to deal with
them or is it still complicated?
Mr. Slaughter. We deal with them on a project-by-project
basis, based on our particular investment profile. I think it
has been challenging at times, but we get things done and it is
moving on and we would like to have more of the opportunities.
In terms of the Mackenzie Delta and Alaska gas, I would
like to say that the assumptions on those are largely based on
current outlooks for production in both areas, both in Alaska
and MacKenzie. There are step-out opportunities offshore, for
example, which are very interesting, which could actually
supplement the Canadian supplies and it could also supplement
the Alaskan supplies long term. I think we need to look at
those as well as focusing on the existing proved resource.
Senator Murkowski. Absolutely.
I want to thank you all for your time here this morning. I
certainly learned a lot and appreciate the information.
Thank you, Mr. Chairman.
Senator Alexander. Thank you, Senator Murkowski.
A lot of the talk this morning has been about new
technologies and the solutions to the challenges of energy
independence. And the environmental challenges of producing so
much new energy depend, to a great deal, on new technologies.
There are a number of forecasts that suggest that many of the
new technologies might come from somewhere other than the
United States, other parts of the world, China, India, Brazil,
Korea, Thailand. We see a concern in this country long term
about the smaller number of scientists and engineers who are
homegrown who are going to our colleges and universities.
So I am wondering if we are looking over the next 10-20
years at the twin challenges of energy independence and a clean
environment, should we be cooperating internationally on
technologies, or are we already doing that?
I think of the example of fusion, which is an advanced
technology far down the road, but we are now cooperating with
two or three other countries, Japan and France I believe, in
So my question is, are we now cooperating in terms of
technology with other countries when it is a matter not so much
of us protecting our own intellectual property rights but
getting access to others'? Can we combine efforts with China,
for example, on clean coal technology or with India or with any
other country? What is being done now, and would you suggest
any policy changes that we ought to consider that would
accelerate technological development that would permit more
energy independence and a cleaner environment?
Mr. Slaughter. In terms of private sector research and
development and technology, yes. That certainly happens
internationally and it is done across units in different
countries and different markets. I cannot comment so much on
the public sector cooperation because I am not so familiar with
it, but I think it is positive. Markets are interconnected and
it spreads the risk and opens up opportunity if you can
cooperate on technology development.
Senator Alexander. Does anyone else have a comment on that?
Mr. Logan. From the IEA's perspective, the 26 members of
the International Energy Agency do have a number of technology
exchange agreements amongst our members, but also with
participation from countries like China and India. My general
feeling is that it is useful but that much more could be done
in venues such as the IEA.
But I also believe that at the bilateral level, the United
States could play a much larger role in international
cooperation to develop technologies and that it would be
extremely useful for our interests, not only commercial
interests but also national security and environmental
interests as well. For example, if you look at the amount of
spending that the U.S. Government contributes to countries like
China, for example, on cooperative technology research, it is,
I think, much smaller than, for example, what Japan, at least
until the recent past, had been spending in China.
Mr. Verrastro. Senator, one other point. When we talk about
energy independence, I like to think of the world as more
energy interdependent. As you travel and you try to deal with
issues of reliable energy supply going forward in the future
and environmental benign-ness, it would be good for not only
technological exchange and technology transfer--and I think the
Department of Energy and the IEA are doing some of that, as
well as the private sector. But I do think intellectual
property rights is a hurdle that companies have to get over as
Senator Alexander. Well, would you agree that in this case
that it may be a matter of us getting access to other
countries' intellectual property rights than ours, or is still
almost all the new technology coming out of the United States?
Mr. Verrastro. No. I think that is true. I think in the
case of nuclear, for example, we have not built a new nuclear
facility in this country for a long, long time, but other parts
of the world have. So we may be falling behind because we have
not been able to develop certain technologies and apply them.
Senator Alexander. Might we learn something from the France
about the storage of spent fuel rods?
Well, there are a variety of other questions that we could
ask, but this has been a very interesting subject. I think you
and the audience can tell by the attendance of a large number
of Senators on a day when there were a lot of other important
events going on in the U.S. Senate.
Senator Domenici has several questions for the record that
ask for additional information. Please be assured that if you
will take the time to provide that to us, we will pay attention
We thank you very much for your time. The hearing is
[Whereupon, at 12:18 p.m., the hearing was adjourned.]
Responses to Additional Questions
Responses by Guy Caruso to Questions From the Committee
Question 1. Provide the Committee with a list of companies
exporting crude oil and refined products outside the U.S. and the
Answer. The Energy Information Administration (EIA) does not
collect petroleum export data. EIA's petroleum export statistics are
based on aggregate export data obtained from the U.S. Bureau of the
Census on a monthly basis. Those data are sufficient to meet the
analytical and dissemination needs of EIA. We have been advised by
officials at the Census Bureau that, while we could obtain its company-
level information under an inter-agency Memorandum of Understanding
(MOU), we would not be authorized to release it to a third party.
Senator Wyden's office has been apprised of this situation, and we
understand that his office has contacted the Census Bureau directly.
Question 2. Analysis of Conference Energy Bill's Clean Coal
Incentives. What are impacts of the clean coal incentives in the energy
Answer. In response to a request received from Senator John Sununu
on February 2, 2004, EIA performed an assessment of the Conference
Energy Bill (CEB) of 2003. The full analysis is available at the
This report summarizes the CEB provisions that can be modeled using
the National Energy Modeling System (NEMS) and have the potential to
affect energy consumption, supply, and prices. The impacts are
estimated by comparing the projections based on CEB provisions with the
Annual Energy Outlook 2004 (AE02004) reference case.
There were several provisions in the CEB that provide incentives to
develop clean coal technologies. Section 1351 of the CEB provides a
17.5-percent investment tax credit (ITC) for new coal-fired generating
units employing advanced clean coal technologies, such as advanced
pulverized coal, fluidized bed, or coal integrated gasification
combined cycle (IGCC). The tax credit applies to facilities placed in
service before January 1, 2017, and is limited to 6 gigawatts. The 6-
gigawatt cap is to be divided evenly between advanced IGCC plants and
advanced pulverized coal plants. To qualify as an advanced clean coal
technology, a plant must meet a minimum technology-specific energy
conversion efficiency and carbon dioxide emission rate.
The ITC for advanced IGCC units is expected to increase this
capacity by about 22 gigawatts above the Reference Case level. While
the ITC is only available to the first 3 gigawatts of IGCC capacity, it
causes plants to be built earlier than otherwise expected, making the
technology more competitive in later years of the projections. An ITC
is also specified for 3 gigawatts of advanced pulverized coal capacity,
but more than 3 gigawatts are expected without the ITC, so the CEB does
not cause more advanced pulverized coal capacity to be built. Overall,
EIA found that the total pulverized coal capacity is actually lower in
the CEB case because other provisions in the CEB package affecting
natural gas supply, and nuclear and renewable energy, result in lower
natural gas prices that make natural gas capacity more economical and
also bring on more nuclear and renewable capacity that dampens the
additions of new pulverized coal capacity.
Question 3. Peak Alaska crude oil production contribution. What
percentage of total U.S. crude oil production does Alaska represent
today and would represent in the future with ANWR?
Answer. According to the Monthly Energy Review, Alaska represented
16.7 percent of total U.S. crude oil production in 2004. That is
projected to decline to 11.0 percent by 2025 without production from
the Arctic National Wildlife Refuge (ANWR). Based on a March 2004
service report for Congressman Pombo incorporating ANWR production at
the earliest possible date and assuming the mean USGS resource estimate
is realized, it was found that Alaska crude oil production would peak
in 2019 at 1.524 million barrels per day and represent 25.8 percent of
total U.S. production.
Question 4. Peak ANWR crude oil production contribution. What
percentage of total U.S. crude oil production would ANWR represent at
the peak year?
Answer. Based on a March 2004 service report for Congressman Pombo
incorporating ANWR production at the earliest possible date, it was
found that, under the assumption that the mean USGS resource estimate
is realized, peak incremental Alaska crude oil production would occur
in 2024 at 876,000 barrels per day and represent 15.6 percent of total
U.S. production. On a percentage basis, peak incremental production
occurs in 2025 at 15.9 percent, due to falling lower-48 production.
Question 5. Impact of extending renewable production tax credit.
What would be the impact if the renewable production tax credit (PTC)
were extended beyond its current expiration date?
Answer. Consistent with current laws and regulations the reference
case in the Annual Energy Outlook 2005 (AEO2005) assumes that the
production tax credit (PTC) for renewables will expire in December
2005. However, an additional case is included in the AEO2005, which
assumes that the PTC is extended for 10 years, through 2015. In both
these cases, the PTC is assumed available to wind, biomass, geothermal,
and solar facilities.
In the reference case, electric power sector non-hydroelectric
renewable capacity is projected to grow from 14 gigawatts in 2003 to 25
gigawatts in 2025. The increase is expected to come from wind, biomass
and geothermal, with wind accounting for about half. Approximately 2.4
percent of total electric sector generation is projected to come from
non-hydroelectric renewable sources in 2025 in the reference case.
In the PTC extension case, electric power sector non-hydroelectric
renewable capacity is projected to grow from 14 gigawatts in 2003 to 78
gigawatts in 2025. New wind plants are projected to benefit most from
the PTC extension. Between 2003 and 2025, electric power sector wind
generating capacity is projected to grow from 7 gigawatts to 63
gigawatts. In 2025, electric power sector non-hydroelectric renewable
sources are projected to account for 5.7 percent of total electric
power sector generation, more than double the level expected in the
A complete discussion of the reference and PTC extension cases is
provided in the Issues In Focus section of the AEO2005 at:
Additional Material Submitted for the Record
Statement of ChevronTexaco Corporation
The New Energy Equation: Wise Energy Use at Home and Global Access,
Diversification and Security
ChevronTexaco thanks the Committee for holding this hearing on
global energy trends and their impact on U.S. energy security and
policy. We are pleased to share our recommendations for U.S. energy
policy in light of these global trends.
ChevronTexaco brings significant experience on global energy
issues--we are the fifth largest integrated energy company in the world
and second largest in the U.S. We have global oil and gas exploration,
production, refining, marketing and transportation activities. Our
worldwide crude oil and natural gas production is 2.5 million oil-
equivalent barrels per day.
THE NEW ENERGY EQUATION DEMANDS A STRATEGIC, GLOBAL ENERGY POLICY
Energy is quite literally the lifeblood of the U.S. and global
economy and a critical determinant of human progress at home and
abroad. Today, America and the world face a new equation on the
stability of the supply and price of energy. This new equation results
from increased and sustained demand particularly from China and India,
declining sources of supply from traditional energy sources, and
increased geopolitical risk in areas where energy is produced. The
result of this new equation so far is tighter and more vulnerable
energy supplies, and sustained higher energy prices.
The Federal Reserve recently concluded that higher energy costs are
constraining consumer and business spending in the United States. The
International Energy Agency has also acknowledged that higher oil
prices are dampening global economic growth. America's energy policy
can no longer stop at the water's edge. We need to develop a strategic,
global energy policy based on two fundamental precepts:
Aggressive policies at home to reduce consumption, increase
energy efficiency and develop alternative supply sources, and
International engagement to ensure continued access to
diverse international energy supplies, particularly as
competition for these supplies intensifies.
Trade and investment issues, tax policy, foreign policy, bilateral,
regional and multilateral relationships, and U.S. Government
international advocacy efforts must be more effectively and
strategically integrated with our traditional domestic energy agenda.
CHEVRONTEXACO RECOMMENDATIONS FOR AN ENERGY-INTERDEPENDENT WORLD
There has already been much debate in Congress on the domestic
energy policy agenda, and on the domestic front we respectfully ask
Congress to enact the energy bill debated in the past two Congresses.
However, there needs to be more discussion on international engagement,
and will be the focus of the rest of our testimony. We need to
recognize that the United States and the world are energy
interdependent. The U.S. consumes more oil and gas than we produce, and
the Energy Information Agency's forecast is that we will continue to do
so. ChevronTexaco's energy policy recommendations have specific ideas
on how the U.S. government can improve our energy security through
constructive international engagement. Included are recommendations for
developing a strong investment framework for energy investments around
the globe by:
Opening markets and reducing trade barriers to foster
market-driven investment climates for increased energy
Protecting energy investments by assisting transitioning
economies to develop institutions and systems of good
governance and support for the rule of law,
Improving the business climate for U.S. energy investments
overseas through improved international trade rules, and
Working through multilateral organizations such as the IMF
and WTO to help liberalize trade, and develop good policy mixes
to sustain responsible economic growth.
(See Global Energy Security Paper and Global Business Climate Paper for
It is time for U.S. business to work with the U.S. government and
recognize energy as a strategic--and global--issue. Corporate America
can no longer treat energy as merely an expense item, and government
can not afford to focus on energy as simply a domestic issue. U.S.
energy policy in the 21St century must reflect our interdependence with
producing countries, and encourage bilateral relationships that
recognize the importance of energy development and promote the flow of
investment in energy resources. The end of easy energy may mean the end
of easy choices, but recognizing the new energy equation is a strong
first step towards working on constructive ways to meet the new
1. ChevronTexaco's Energy Policy Recommendations
2. Opinion Editorial: The New Energy Equation by Dave O'Reilly, CEO
Energy Policy Recommendations from ChevronTexaco
DOMESTIC ENERGY STRATEGY:
``IMPROVING U.S. ENERGY CONSERVATION, SUPPLY AND USE''
Energy is the lifeblood of the American economy, affecting the
competitiveness of virtually every sector and touching nearly every
aspect of American life. Over the past several years, domestic
production of energy resources has matured and declined while, at the
same time, U.S. and world demand have continued to increase. With these
changes has come recognition that energy is a key strategic issue
important to U.S. consumers and businesses alike. Providing diverse,
reliable and affordable sources of energy is paramount to a national
energy policy that will stand the test of time.
ChevronTexaco stands ready to work with the Administration,
Congress, policy makers, and other stakeholders to develop a
comprehensive U.S. energy strategy for the 21st century. One important
aspect is how the U.S. manages energy domestically. ChevronTexaco
believes our energy strategy should:
Ensure sufficient and diverse energy supplies
Encourage responsible use of energy
Enhance regulatory certainty to improve the investment
climate for energy
Support basic and applied scientific research to improve
energy availability and use
ChevronTexaco strongly supported the energy bill (H.R. 6 conference
report) in the 108th Congress, and is committed to work towards a
comprehensive domestic energy strategy consistent with the above
Ensuring Increasing and Diverse Energy Supplies--With energy demand
continuing to rise, the United States will need a diversity of supplies
to meet our future energy needs. Specific steps the U.S. government
(USG) can take to ensure such diversity include:
Promote Increased U.S. Exploration, Production and
Refining--The USG should encourage the responsible development
of oil and natural gas resources in the Gulf of Mexico, the
Rocky Mountains and elsewhere in the United States. Further,
the USG needs to work with local communities to overcome
opposition to energy projects and help streamline permitting
efforts in order to allow for new and expanded refining
capability to meet growing U.S. needs.
Diverse Fuel Supplies--The USG should promote performance
standards and not mandate or subsidize specific types of fuels
or energy. This will allow all energy sources to compete on a
level playing field. ChevronTexaco is ready to work with the
USG to reduce ``balkanization'' resulting from boutique fuels
while protecting the environment.
Natural Gas--USG should support construction of a pipeline
(without subsidies) to bring additional supplies of gas from
Alaska and Canada. It should also help facilitate the efficient
growth of liquefied natural gas (LNG) to meet the increased
natural gas demand. ChevronTexaco is poised to provide new
supplies of LNG to help meet growing energy needs on the U.S.
Gulf and West coasts.
Electric Power--The USG should set standards to improve the
reliability of electric power, facilitate the development of
open and transparent markets, and support the use of efficient
electric power generation--e.g. cogeneration.
Responsible Use of Energy--The U.S. government should support
continuous improvement in the responsible use of energy to further
goals of energy security, environmental performance, conservation, and
energy efficiency. Specific steps the USG should take include:
Conservation and Energy Efficiency--In the near-term,
conservation is the easiest, most reliable ``new'' source of
energy. The USG, as a large consumer of energy, should lead the
way in becoming more energy efficient. The USG should continue
to support its Performance Management Contracting program.
ChevronTexaco has also reduced its energy use by 22 percent in
the past 12 years through conservation and improved energy
efficiency. ChevronTexaco has a subsidiary called Chevron
Energy Solutions business whose sole function is to help both
private and public sector customers save energy in their
Gasoline and Diesel Fuel Reformulation--As federal, state
and local governments have adopted new fuel standards to
improve environmental performance and reduce emissions,
ChevronTexaco has worked with regulators, the auto and oil
industry, researchers, and others to reduce sulfur content of
fuels, and to help reformulate gasoline and diesel to reduce
tailpipe emissions from vehicles. ChevronTexaco will continue
working constructively with the USG to see that new fuel
requirements are fully implemented.
Enhance Regulatory Certainty--The United States government can
improve the investment climate for energy projects by decreasing
regulatory uncertainty. Specific steps the USG should take include:
Permit Streamlining for Energy Infrastructure--The USG needs
to assist in assuring timely permitting, and working with local
communities to overcome obstacles so that necessary LNG re-
gasification and distribution facilities can be constructed in
a timely fashion. Additionally, with U.S. refineries running
at/near capacity, the USG needs to help streamline permitting
processes for refinery expansions. More specific
recommendations on how to streamline the permitting of energy
infrastructure are included in the paper on ``Environmental
Protection: Responsible Stewardship of the Environment and
Avoid Rule Changes--Once federal or state governments
establish new requirements (e.g., new fuel standards), those
governments should avoid making last-minute changes that create
market uncertainty. It can take 3 to 4 years for a refinery to
plan and complete plant modifications to meet new requirements.
Last-minute waivers that allow noncomplying refiners/marketers
to avoid or defer compliance penalize companies that have made
good-faith investments to comply with the rules on the books.
The EPA needs to develop a variance process, with per-gallon
penalties for noncomplying fuels, to maintain a level playing
field with those companies who play by the rules and make the
necessary investments in a timely manner.
Support for Basic and Applied Research--The USG, in conjunction
with other governments and the private sector, has a fundamental role
in advancing basic scientific research related to energy. The private
sector thrives on partnerships between companies, national
laboratories, universities and public agencies to strengthen the
nation's technical capabilities. ChevronTexaco has developed specific
recommendations for the USG role in research and development in its
paper on ``Leveraging Technology--Ensuring Sustainable Energy Supply
``responsible stewardship of the environment and energy resources''
Protecting the environment is a key value in the ChevronTexaco
Way--which describes ChevronTexaco, what we believe, and what we plan
to accomplish. We are proud of our reputation and work everyday to
improve it. We must. Standards for environmental protection are growing
tougher. Society, including our customers, shareholders and the
communities in which we do business, expect us to continuously improve.
At the same time, the ChevronTexaco Way encourages us to
constructively engage in public policy debates, including those around
the environment, in ways that are solutions-oriented and lead to
environmental stewardship improvements. We are eager to work with the
Administration to develop effective, creative, approaches to progress
environmental performance and care.
We believe environmental public policy should:
Lead to improvement in environmental quality and minimize
Prioritize environmental problems in order of risk, and
solutions in order of cost-effectiveness
Apply sound science to all phases of decision-making
Develop requirements in a manner that considers economic
growth, allows flexibility for the regulated community to
respond to market conditions, and provides regulatory certainty
to encourage investments
Climate Change--We recognize and share the concerns that
governments and the public have about climate change. In addressing
climate change, we support flexible, market-driven and economically
sound policies and mechanisms that protect the environment. Our
recommendations to the USG are:
One national program for voluntary greenhouse gas (GHG)
reporting--the DOE program 1605(b) currently under revision.
Increased government support for R&D of advanced
technologies to separate, capture and geologically store
CO2. Also, the government needs to continue its
international dialogue on carbon sequestration, particularly
the Carbon Sequestration Leadership Forum program.
Encouraging the use of near-term cost-effective voluntary
actions to reduce GHG intensity in the U.S. The government
should recognize and publicize voluntary industry actions to
reduce GHG. In addition, the government should increase its
efforts to encourage energy efficiency by consumers and others.
The Kyoto Protocol, the international treaty to reduce greenhouse
gases, is expected to shortly be approved by Russia and enter into
force. We will work constructively with governments to implement treaty
provisions wherever we have operations in countries that are
signatories. ChevronTexaco will continue to manage our greenhouse gas
emissions by taking 4 types of actions: 1) reducing emissions of
greenhouse gases and increasing energy efficiency; 2) investing in
research, development and improved technology; 3) pursuing business
opportunities for promising technologies; and 4) supporting flexible
and economically sound policies and mechanisms to protect the
Permit Streamlining for Energy Projects--Permit streamlining will
encourage energy infrastructure, such as refineries, to implement
projects that build capacity and/or increase efficiency and
reliability. The permitting process should be clear, and simple, with
agency roles and responsibilities well defined. One lead agency should
be designated with the responsibility for meeting overall permitting
deadlines and coordinating with other agencies to eliminate
bottlenecks. The process should allow for public input and applicant
appeals and ensure date-certain resolutions.
New Source Review (NSR)--Uncertainties surrounding NSR
permit requirements can stall important energy projects and
environmentally beneficial projects such as cleaner-burning
fuels. Refining and producing operations within the oil
industry are interrelated, continuous and very complex. A
permitting delay or loss of operational flexibility due to NSR
could impact our ability to supply our markets. We strongly
support streamlining and clarifying these rules to provide
regulatory predictability and de-bottlenecking. Issues of most
importance include interpretations of ``routine repair and
maintenance'' and other permitting triggers.
National Ambient Air Quality Standards (NAAQS)--The EPA
recently announced areas in the U.S. which are in non-
attainment for ozone and particulates. We urge EPA,
particularly for ozone attainment plans, to recognize that the
timeline for benefits of control measures already on the books
(e.g. low sulfur gasoline and diesel) will not be fully
realized until well after the attainment deadlines for state
implementation plans. The administration needs to consider ways
to recognize the benefits from full implementation of these new
control measures to avoid unintended consequences--such as
another generation of boutique fuels that can lead to supply
Remediation and Water
Natural Resource Damages--We support NRD reforms that focus
on remediation of ecological services using generally accepted
scientific and economic methods. Unfortunately, some trustees
view natural resources damages as a means to generate funds to
offset budget shortfalls and generate private attorney fees.
Program reforms should focus priorities on natural resources by
limiting the potential for highly inflated damage claims,
reducing incentives to use these claims to offset budget
shortfalls and speeding remediation of resources for the
Cleanup Program Reform--We support ways to safely return
contaminated properties into productive use and make them an
asset to the surrounding community. In fact, ChevronTexaco won
an award from EPA in 2002 for being one of the first companies
to pledge expedited cleanups of our remediation sites. We
believe successful approaches from one regulatory program
should be allowed in all EPA cleanup programs. For example,
isolating a source of contamination is acceptable in Superfund
and should be used, when appropriate, in RCRA as well.
Regardless of the statutory authority on which the programs are
based, clean-up decisions should be risk-based, use sound
science and consider the intended end use of the property.
MTBE Remediation Success--ChevronTexaco strongly believes
that those responsible for releases of gasoline containing MTBE
should be held accountable for clean-up efforts, and that
existing laws are sufficient to compel those responsible. MTBE
remediation efforts are best handled under the clean-up
authorities of the respective state regulatory agencies.
Current litigation against manufacturers only serves to
distract parties from necessary remediation efforts and, if
required, delay the return of those resources to beneficial
reuse. ChevronTexaco supports a national MTBE phase-out and
limited liability protection for manufacturers.
Water--We support development of a consistent,
scientifically-based policy to identify and remediate
``impaired'' water bodies. Responsibility for remediation
should be assigned to dischargers in an amount that is in
proportion to their contribution to the problem. Stormwater
controls should rely on ``best management practices'' rather
than strict end-of-pipe limits since stormwater is variable,
unpredictable, and impossible to treat reliably.
GLOBAL ENERGY SECURITY:
``FUELING THE GLOBAL ECONOMY''
Globalization is making the world's economies increasingly energy
interdependent. Rising world demand for all forms of energy means that
our nation will face increased competition for secure sources of
energy. U.S. energy policy needs to reflect a new reality where global
oil consumption is forecast to rise nearly 2% annually over the next
two decades. ChevronTexaco looks forward to working with the
Administration to reinforce partnerships that sustain our country's
energy interdependence and to codify strong investment frameworks
around the globe that are built upon three foundations:
Sanctity of contracts
Transparent Application of Rule of Law
Energy Interdependence--USG foreign policy must reflect the
critical role of energy interdependence in sustaining healthy
USG should seek bilateral policies that allow commercial
stability and security of energy supply. Active dialogue with
key suppliers and users, such as Russia and China, will need to
be ongoing to help ensure stable markets.
USG relationships with key energy suppliers, such as Canada,
Mexico, Saudi Arabia, and Venezuela are essential to maintain
reliable energy supplies. Foreign investment through
collaborative partnerships will be necessary if these supplier
countries are to make the requisite investment in energy
infrastructure to maintain and expand production, while at the
same time adequately provide for their local social
expenditures, e.g. in education and health care.
The USG should seek to expand its natural gas collaborations
with suppliers such as Australia and Canada. With global
natural gas demand projected to grow by 2.2% annually through
2025, Australia is ideally positioned to become a major global
The USG should explore how to create a mutuality of
interests with key energy producers where foreign investment is
currently limited, e.g. Mexico.
Open Markets--Reduced trade barriers, price deregulation, and
market-driven public investing are all prerequisites of a transparent
The USG needs to support active participation in rules-based
international institutions like the World Trade Organization
(WTO), and should work actively with major energy suppliers
such as Russia, Kazakhstan, and Saudi Arabia to ensure that
they recognize the benefits of WTO membership and can take the
necessary steps for accession requirements.
Our public/private sector coalitions should support strong
investment protection provisions that are modeled in the
Central American Free Trade Agreement.
Open markets provide level playing fields for U.S. companies
and our competitors. Engagement with countries is more
effective as a way promote acceptance into the global community
than unilateral sanctions. The stepwise U.S.-Libya
rapprochement that is exposing Libya to international best
business practices (by re-engaging with U.S. companies and the
U.S. educational system to develop its next generation of
leaders) can serve as a model for other sanctioned countries.
Liquefied Natural Gas (LNG) is growing in importance as a
fuel. The U.S. should seek ways to facilitate efficient growth
of LNG utilization by: a) encouraging/ streamlining approval
processes for import/regasification terminals, b) seeking
leadership opportunities in regional organizations (e.g. APEC)
to facilitate policy development in permitting, transport,
customs, and other areas that impact LNG production and
shipping and c) engaging in a public education campaign on LNG.
Sanctity of Contracts--Contracts are the keystones for investments,
and all contractual parties must be confident of agreed-upon
A coordinated interagency process that leverages the
strengths of individual USG agencies to partner with U.S.
companies can provide maximum support for U.S. commercial
As new opportunities arise, the USG should encourage
countries to develop contracts that provide fair rates of
return for all parties, commensurate with risk.
U.S. companies are looking to develop broad partnerships to
ensure reliable energy supply to U.S. markets. Some specific
ChevronTexaco opportunities to support future demand include:
award of the Kuwait Northern Fields
contract extension for the Saudi Partitioned Neutral Zone
timely expansion of Kazakhstan's Tengiz and the Caspian
Pipeline Consortium (CPC) to facilitate moving new crude
supplies to market.
We note that failure to honor contractual terms, as has
occurred in Ecuador (with unfair legal claims against our
company), will discourage new investment or re-investment in
energy resources by any company.
Transparent Application of Rule of Law--The USG should assist
transitioning economies to develop the institutions and systems of good
governance and support for the Rule of Law. This assistance provides an
appropriate environment for ensuring the protection of investments,
provisions for worker safety and security, and the environmentally
sound development of energy resources.
Public/private sector cooperation can be an effective method
of delivering such assistance. For example, we participate with
our host-government partners in the voluntary U.S.-U.K.
Extractive Industries Transparency Initiative (EITI) and the G-
8 Transparency Initiatives. These initiatives are making
demonstrable progress to ensure that oil revenues are invested
wisely and utilized for the benefit of a country.
Good governance should extend to physical as well as fiscal
security in the transparent development of energy resources.
USG technical assistance to the Nigerian government to improve
the way it provides security in areas such as the Niger Delta
is critical not only for regional development, but to help calm
jittery energy markets through secure production capacity.
Critical signposts for new investment opportunities in high
risk areas will be progress in judicial reform and recognition
of property/shareholder rights. USG technical assistance is an
important component to this progress.
THE GLOBAL BUSINESS CLIMATE:
``KEEPING THE BAR HIGH AND THE PLAYING FIELD LEVEL''
The globalization of commercial ties provides an important vehicle
to enhance economic growth, promote understanding, reinforce alliances
and, where necessary, help build political bridges. To be effective and
mutually beneficial, global enterprise needs a level playing field
where the same rules apply to all participants, and the standards of
behaviors are maintained at the highest levels. We urge the
Administration to foster a favorable global investment climate. With
the U.S. as one of the world's leading economies, the USG needs to
develop innovative and collaborative approaches to promote sustainable
economic growth, and it has a responsibility to ensure high standards
and a level playing field. These approaches will need to focus on the
rules of engagement for businesses around the world:
International Trade Rules
International Trade Rules: We urge the Administration to continue
to ensure high standards of protection for U.S. investments and
property rights overseas. The USG should demand non-discriminatory
treatment, free transfers of profits and capital, protection from
expropriation, and international arbitration in dispute resolution.
We urge the USG to push forward on Bilateral Investment
Treaties (BIT) that offer strong investment protection and
serve as models for host country governments to design
favorable investment environments. Where BITs have been
negotiated, but are still pending ratification, (e.g. Russia),
we encourage the USG to continue to work to bring these
agreements into force.
Free Trade Agreements (FTAs), both bilateral and regional,
are excellent tools to encourage rules-based behavior and USTR
is to be commended on its efforts to extend these agreements to
governments who recognize the value of rules-based trade
We urge the USG to ensure that Article 35 of the draft UN
Convention Against Corruption is defined to prevent the use of
U.S. courts as major forums for frivolous, private anti-
Judicial expansion of the scope of the Alien Tort Claim Act
encouraging U.S. adjudication of foreign grievances creates a
non-level playing field and undermines U.S. relations with
Corporate Governance: The USG should identify and expand programs
that encourage good governance. It should work to promote fiscal
responsibility and transparency--through voluntary programs such as the
U.S.-U.K. Extractive Industry Transparency Initiative and the G-8
Transparency Compact. These and related efforts are discussed in more
detail under the Issue Paper: ``Corporate Responsibility: Developing
Innovative Partnerships to Promote Corporate Responsibility.''
In addition the USG should do the following:
Promote the links between transparency, investment flows and
economic performance by publishing the results of international
surveys (e.g. GovernanceMetrics).
Continue the State Department's Corporate Excellence awards
and invite other countries to establish similar programs.
Award, and encourage others to award, contracts on an
evaluation of the total value proposition and competency of
bidders and the transparency of their bid to provide a
requested service (as opposed to simply awarding contracts to
Multilateral Organizations: Multilateral organizations such as the
World Bank, the International Monetary Fund and the World Trade
Organization (WTO) should help governments establish good policy mixes.
The WTO must push for trade liberalization particularly in the
agricultural sector. Debt relief must also be tackled in a systematic
We ask the USG to actively participate in the multilateral
organizations to ensure that policies actually support
responsible growth through regular monitoring and feedback to
the multilateral organizations. The USG should participate in
new policy initiatives to bolster governance frameworks,
insisting that the private sector be included as a critical
stakeholder and client.
Nongovernmental organizations (NGOs) and community groups
should help local populations make lasting, sustainable
improvements in their own economies. They, like all
stakeholders, should be held accountable for their actions, and
participate constructively in working with stakeholders,
including corporations, to identify collaborative approaches to
ChevronTexaco's Angola Partnership Initiative, working with
USAID and the UN Development Program, is focusing on a relief-
to-development strategy that will allow this war-torn country
to move beyond humanitarian relief efforts and spur sustainable
investment in diverse sectors, e.g. in agriculture, to help
Angola rebuild itself. We are pleased to share our learnings
with other potential partnerships.
Tax Policy: U.S.-based businesses compete throughout the world with
non-U.S. based businesses for market access, and exploration and
production opportunities. The USG should promote tax policy which
enables U.S.-based businesses to compete with its non-U.S. peers. This
Foreign tax credit rules which prevent double taxation.
Tax treaties which reduce withholding taxes and other
Avoiding unnecessarily complex tax rules and tax reporting.
These activities create U.S.-based jobs and ensure availability of
energy resources to the U.S. If U.S.-based businesses are subject to a
higher tax burden than their competitors these benefits can be lost.
ENSURING SUSTAINABLE ENERGY SUPPLY AND USE
The energy industry is technology intensive. Applied research and
development (R&D) and complex engineering have always been essential to
finding, developing, and using energy resources. While energy companies
have historically met the technical challenge, industry consolidation
has narrowed the R&D base. At the same time, industrial R&D has become
globalized. These trends threaten to challenge U.S. technology
leadership, unless we create new options for supporting research and
development. The private sector needs increased partnerships between
companies, national laboratories, universities, and public agencies to
broaden its technical capabilities. The USG should encourage public-
private partnerships to maintain U.S. leadership in energy technology
and promote competitively bid partnerships between government and
industry to advance and demonstrate technology.
Sustaining U.S. Technology Leadership--The technologies that will
secure America's energy future require a strong scientific and
engineering base. In the face of growing challenges, the USG should
build America's intellectual capital by vigorously participating in
energy-related R&D and by bearing a reasonable share of costs for
energy programs that serve the national interest but are not yet
commercially viable. The USG should continue to support science and
engineering education to keep American business, universities and
government laboratories technologically competitive as other countries
increase their own technological capability.
Energy companies apply technology to provide diverse, secure energy
supplies that are economically and environmentally sustainable.
Technology is generally leveraged in three key areas: accessing
hydrocarbon resources, providing clean fuel and power, and managing
emissions and waste products.
Accessing Hydrocarbon Resources--The challenge for our industry is
maximizing oil and gas recovery from existing production areas while
extending the frontiers for exploration and development. Enhanced
recovery technologies allow more oil and gas to be recovered from
existing fields, while precision techniques such as horizontal drilling
allow production with smaller environmental footprints.
The USG should:
Encourage responsible development of resources both offshore
and continental U.S., and work to inform the media and local
communities about new technical capabilities that enhances
production while minimizing environmental impact.
Partner with the private sector to develop precision
technologies for finding and producing hydrocarbon resources.
ChevronTexaco's joint projects with National Laboratories in areas
such as advanced computing and seismic imaging demonstrate the public-
private collaboration needed to advance exploration and development
technology. Technologies for arctic development, deepwater production,
heavy oil commercialization, and oil sands development will diversify
hydrocarbon resources while adding significant new reserves.
Providing Clean Fuel and Power--The energy industry is actively
developing technologies for cleaner burning fuels, high performance
fuels, and alternative fuels. While some technology is proprietary, the
work is highly collaborative between regulators, the auto industry,
energy companies and others. In addition to vehicle fuels, technology
is advancing for cleaner power generation, particularly from natural
gas or gasification of other hydrocarbons. The USG should:
Avoid mandating or subsidizing consumer use of specific
Cooperate with local communities and authorities to ensure
timely construction and operation of re-gasification and
distribution facilities such as LNG plants.
Continue public-private research partnerships for clean
energy systems such as hydrogen fuel cells and other advanced
Looking further to the future, numerous public-private research
projects are testing the feasibility of hydrogen and other alternative
fuels. ChevronTexaco participates in these projects, including
leadership of a DOE-industry consortium to demonstrate hydrogen
infrastructure and fuel cells.
Managing Air and Water Emissions and Waste Products--Both
greenhouse gas and water issues transcend company and industry
boundaries. Acting domestically and internationally, the USG should:
Continue its research activities with other organizations to
establish the scientific basis for policy decisions and
Partner with the energy industry to develop economically and
environmentally sustainable policies regarding carbon capture
Energy companies have vigorous engineering programs to reduce our
own emissions and waste streams and the emissions from our products. On
the global issue of greenhouse gases, for example, we pursue technology
to reduce emissions at the source (e.g., more efficient use of fuel) as
well as remove them from the environment once produced (e.g., CO2
sequestration in oil and gas fields). For example, oil field injection
of CO2 is a key feature of ChevronTexaco's activities in
Western Australia and in other projects for enhanced oil recovery.
ChevronTexaco also participates in the Department of Energy's Carbon
Capture Project, which is now entering Phase 2 of a multi-year program.
Water remediation and re-use is a major, parallel area of technical
focus in production operations and refining. Since technology for water
issues is in its early stages, government and industry have an
opportunity to collaborate in mapping technology pathways and
developing policies. In addition to its own technology programs,
ChevronTexaco is in exploratory discussions with the National
Laboratories about joint programs for water treatment and use.
``DEVELOPING INNOVATIVE PARTNERSHIPS TO PROMOTE CORPORATE
Over the past decade, corporations have addressed a range of
corporate responsibility issues, ranging from corporate governance and
transparency to environment and human rights. Corporations, either
through their own initiatives or through public-private partnerships,
have focused their attention on how they can be a positive force for
society and contribute to economic growth, social stability and
ChevronTexaco is an acknowledged leader in corporate
responsibility. Indeed, we see corporate responsibility and business
success as mutually reinforcing--the success of our business is
directly linked to the economic, social and environmental health of the
communities where we operate. ChevronTexaco stands ready to work with
the Administration, policymakers and other stakeholders to develop
effective and innovative approaches to promote corporate
responsibility. ChevronTexaco believes that a sound USG approach to
corporate responsibility should:
Encourage voluntary efforts that offer creative solutions
and allow for flexibility in implementation given the complex
operating environments facing companies in different sectors
around the globe.
Contribute to sustainable solutions to enable communities
and stakeholders, including civil society, to build their
capacity and contribute to economic growth.
Support efforts for voluntary partnerships to increase
revenue transparency (e.g. Extractive Industry Transparency
Encourage Voluntary Efforts. The USG should support voluntary
public-private efforts rather than pursue regulatory mandates. Unlike
regulatory mandates which impose one-size-fits-all approaches,
voluntary efforts permit the flexibility necessary to adapt to local,
often complex and diverse, operating conditions. They also provide
corporations and their employees with ownership over implementation.
Voluntary approaches can also stimulate creative discussions and
innovative solutions that leverage individual organizational
capabilities and commitment. Incentives and recognition for
performance, such as the State Department's Award for Corporate
Excellence, should be used to encourage corporate efforts.
Human Rights. The USG should continue its leadership role in
supporting human rights around the globe through bilateral and
multilateral diplomatic channels. Continued USG funding of
programs that build the capacity of civil society, the media,
and the judiciary are key to supporting human rights. Our
commitment to this issue is demonstrated in our conduct,
through our participation in the Voluntary Principles for
Security and Human Rights dialogue process, and support for the
Global Sullivan Principles. ChevronTexaco pledges to work
collaboratively with the USG, host governments, and local
communities to support universal human rights.
HIV-AIDS. The USG should support public-private partnerships
to combat HIV-AIDS. With programs in nearly 100 countries
totaling over $3.2 billion since 1986, the U.S. government is
at the forefront of responding to the global pandemic of AIDS.
USG support for public-private partnerships could offer an
additional opportunity to leverage resources and expertise.
ChevronTexaco, with our strong presence in Africa, currently
works with host governments, NGOs, multilateral agencies and
international initiatives on HIV-AIDS and stands ready to
explore partnership opportunities with the USG.
Contribute to Sustainable Solutions. The 2000 World Summit for
Sustainable Development was a watershed event that highlighted the need
to build both public-private partnerships and local capacity to enable
sustainable development. The USG should support public-private
partnerships that promote economic growth, social development and
environmental stewardship. ChevronTexaco stands ready to work with the
USG on innovative and progressive approaches to sustainable
Community Engagement. The USG should support public-private
efforts to stimulate economic growth through education, focused
health programs and the development of small and medium sized
businesses through training, business development services and
micro-credit programs. USAID's Global Development Alliance
should receive continued support. Combining public resources
with those of business to leverage complementary skills and
resources can lead to sustainable results. ChevronTexaco stands
ready to work with the USG to partner on programs, such as our
Angola Partnership Initiative with USAID which is helping
people improve their lives by building the human and
institutional capacity necessary to support economic growth.
Stakeholder Engagement. The USG should use its convening
power and diplomatic resources to lead multi-stakeholder
dialogues on corporate responsibility issues. The USG can
provide a neutral forum to address tough issues and exchange
best practices. Its convening role on the Voluntary Principles
on Security and Human Rights is a good example. The USG should
also work with existing mechanisms, such as the OECD, to
encourage greater dialogue on corporate responsibility.
Support Transparency Efforts. The USG should continue its support
for voluntary partnerships to increase revenue transparency. The U.S.-
U.K. Extractive Industry Transparency Initiative (EITI) and the G-8
Transparency Compacts are two good examples of these efforts. The USG
should also use its diplomatic leverage to encourage governments to
participate in these efforts. ChevronTexaco was proud to have
participated in the constructive discussions that launched the EITI and
remains supportive of the process.
Opinion Editorial: The New Energy Equation
by Dave O'Reilly, CEO of ChevronTexaco
THE NEW ENERGY EQUATION:
WISE ENERGY USE AT HOME AND GLOBAL ACCESS, DIVERSIFICATION AND SECURITY
Energy is essential to economic health and the quality of life
everywhere in the world. Energy is, quite literally, the lifeblood of
the U.S. and the global economy.
Today, America and the world face a new equation in terms of both
the stability of the supply and the price of energy. This new equation
results from increased and sustained demand particularly from China and
India, declining sources of supply from traditional energy sources, and
increased geopolitical risk in areas where energy is produced.
America's energy policy must recognize the new reality and acknowledge
that while our nation strives to become more energy self-sufficient,
our policies must recognize that America will continue to rely on
international energy supplies to meet domestic needs.
America's energy policy can no longer stop at the water's edge. We
need a global, strategic approach to ensure continued access to diverse
international energy supplies, particularly as competition for these
supplies intensifies. At the same time we need to implement more
aggressive policies at home to reduce consumption, increase energy
efficiency and develop alternative supply sources. Trade and investment
issues, tax policy, foreign policy, bilateral, regional and
multilateral relationships, and U.S. Government international advocacy
efforts must be more effectively and strategically integrated with our
traditional domestic energy agenda.
The Federal Reserve recently concluded that higher energy costs are
constraining consumer and business spending in the United States. The
International Energy Agency has also acknowledged that higher oil
prices are dampening global economic growth. Given the changed
circumstances we face today, it is critical to begin to explore new
ways of approaching the energy debate, to develop a more robust and
coordinated set of policy options and to organize strategically the
U.S. Government's energy policymaking apparatus to ensure that America
has stable, predictable and affordable energy to fuel sustained
WE MUST RECOGNIZE THAT THE UNITED STATES AND THE WORLD
ARE ENERGY INTERDEPENDENT
Today, America relies on energy from countries around the globe,
and will continue to do so in the future. Almost two-thirds of the
total U.S. energy consumed comes from oil and natural gas. And with
U.S. energy consumption expected to increase by 27% over the next 15
years, the nation will continue to rely heavily on oil and natural gas
to meet that growing demand (Chart 1)--with much of the oil and natural
The United States consumes much more oil than it produces (26
percent of the world's consumption verses 10 percent of world oil
production), and consumption is high relative to proven reserves (Chart
2). While U.S. natural gas production is much closer to consumption,
there will be an increasing need for supplies of imported natural gas.
The U.S. consumes 25 percent of the world's natural gas, but has only 3
percent of the world's reserves (Chart 3). This means that over time
the United States will be more dependent on natural gas in the form of
Liquefied Natural Gas (LNG), the form of natural gas that can be
transported around the globe.
As U.S. domestic oil production has declined, the United States has
relied more and more on imported crude oil and products (Chart 4).
While the United States needs to conserve oil and increase its domestic
supply, it is apparent that the United States will continue to
significantly rely on imports. Thus, for both natural gas and oil, the
United States needs to recognize it is interdependent with the rest of
the world for supply of these two important fuels. We need a
comprehensive policy that reflects this reality.
A NEW GLOBAL, STRATEGIC APPROACH TO AMERICA'S ENERGY SECURITY IS
ChevronTexaco hopes to be part of the solution to the energy
challenges America faces. Our ability to do so depends upon working
with the Administration and Congress to build support for and consensus
around a shared national goal of American businesses and consumers
having stable, predictable and affordable energy supplies. To advance
this goal, requires us to look at three critical sets of issues.
Wise management of energy resources within the United
States, including ensuring sufficient and diverse supplies, the
responsible use of energy (conservation) and the responsible
stewardship of the environment.
To meet America's energy security needs, we need to
diversify and improve access to international energy supplies
through constructive international engagement.
Finally, we need to support those enablers that promote the
wise use of energy and ways to responsibly manage energy
resources around the globe through leveraging technology to
ensure sustained energy supply and use and developing effective
and innovative public-private partnerships to promote corporate
ORGANIZING FOR SUCCESS TO MEET THE CHALLENGE OF THE NEW ENERGY EQUATION
How America organizes to address the energy challenge we face is
critical going forward. For the United States to be able to develop and
implement a global and truly strategic energy policy requires
consideration of new organizational models. Today, U.S. energy policy
is managed through a number of federal agencies including the
Department of Energy, Department of the Interior, Department of
Commerce, Department of State, and Department of the Treasury, as well
as agencies and groups such as EPA, OMB, USTR, NSC, and the NEC. There
are not institutional mechanisms to ensure that these important
components of the broader policy--our environmental policy, our foreign
policy, our trade policy, our security policy and our domestic energy
production, access and use policy--are brought together to advance the
common goal of reliable and affordable energy supplies. The global
nature of the challenge and the domestic and international components
of the solution require us to develop organizational models that will
ensure a strategic, seamless approach.
The enclosed papers provide concrete and practical recommendations
that we believe, if taken together, will help safeguard America's
energy security for year's to come. All of us at ChevronTexaco stand
ready to work with the Administration and Congress on this critical
Statement of Dr. R. Neal Elliott,
American Council for an Energy-Efficient Economy
The American Council for an Energy-Efficient Economy (ACEEE)
appreciates the opportunity to provide comments regarding global energy
trends and their potential impact on U.S. energy needs, security and
policy. ACEEE is a non-profit organization dedicated to increasing
energy efficiency as a means for both promoting economic prosperity and
environmental protection. We were founded in 1980 and have developed a
national reputation for leadership in energy efficiency policy
analysis, research and education. We have contributed in many ways to
congressional energy legislation adopted during the past 20 years,
including the current energy bills, the Energy Policy Act of 1992, the
National Appliance Energy Conservation Act of 1987, and the Energy
Title of the 2002 Farm Bill. We are also an important source of
information for the press and the public on energy efficient
technology, policies, and programs.
ACEEE remains concerned about the continuing imbalance between
energy supplies of natural gas, oil and electricity, and rapidly
growing domestic and foreign demands for these energy resources. ACEEE
research has shown that energy efficiency is the most viable near-term
strategy for rebalancing energy markets. Energy efficiency is the only
near-term option for moderating energy prices, and is also vital to
stabilizing longer-term energy markets. Additional energy supplies,
either domestic or imported require at least three years to bring to
the market, with many resources, such as additional Alaska gas and oil,
taking on the order of a decade to bring to market.
Recent ACEEE analysis of the impact of energy efficiency on natural
gas markets shows that if we can reduce gas demand by as little as 4%
over the next five years, we can reduce wholesale natural gas prices
more than 20%. These savings would put over $100 billion back into the
U.S. economy, at a cost of $30 billion in new investment, of which less
than one-quarter would be public funds at a combination of the federal
and state levels.
Moreover, this investment would help bring back U.S. manufacturing
jobs that have been lost to high gas prices, and would help relieve the
crushing burden of natural gas costs experienced by many lower-income
households. Importantly, much of the gas savings in our analysis come
from electricity efficiency measures, because so much electricity is
generated by natural gas, often inefficiently.
It is important that assessments of energy resource options fairly
treat energy efficiency in national energy forecasts. Efficiency
resources are more flexible and in most cases less costly than are new
supply resources. In the past, the National Energy Modeling System
(NEMS) used by the Energy Information Administration (EIA) has not
adequately characterized the potential for energy efficiency. While
significant improvements have been made in recent years, such as the
more robust characterization of combined heat and power (CHP) and
electric motors in the Industrial Demand Module, ACEEE feels additional
work needs to be done to bring energy efficiency resources into parity
with supply resources across all the modules. Also, major structural
changes are taking place in U.S. energy markets. EIA needs updated
modeling capability to reflect adequately these new market realities.
However, for EIA to better characterize energy efficiency, it is
important that they have adequately detailed consumption data available
and sufficient staff resources to modify the NEMS model to capture
these market effects. Unfortunately, budget cuts in recent years have
reduced the sample size of the three important consumption energy
surveys--Manufacturing, Residential and Commercial Buildings. In
addition, as a result of limited resources, the questions asked in
these surveys are now less detailed and the reports are taking longer
to issue. It is important that funding be restored to the real dollar
levels from the mid-1990s if not increased.
It is not just quality consumption data that is needed for
supporting sound energy policies. The supply data collected by EIA is
also critical to functioning energy commodity markets. In particular
the frequency and reliability of natural gas market data has become a
problem for smoothly functioning natural gas markets. The natural gas
storage and consumption data collected and reported by EIA on a weekly
basis is neither frequent nor reliable enough to allow natural gas
markets to function smoothly, and has contributed to price volatility.
ACEEE supports providing EIA additional resources so that they can
collect and report natural gas data more frequently and in greater
Finely, policy makers in Washington need new capabilities to do
policy analysis to explore the various options presented to them.
Unfortunately, NEMS is a forecasting, not a policy assessment tool. The
program is ill suited to exploring various policy scenarios. Congress
should support EIA in developing a robust suite of policy analysis
tools to complement their forecasting ability. Failing that,
consideration should be given creating this policy analysis capability
somewhere else within the federal government, either at another agency
or within the National Laboratory system.
Thank you for the opportunity to provide these comments. We would
welcome the opportunity to explore them in greater detail at the
Statement of Marvin S. Fertel, Senior Vice President, Nuclear
Generation, and Chief Nuclear Officer, Nuclear Energy Institute
The Energy Information Administration (EIA) will release the Annual
Energy Outlook 2005 (AEO 2005) next week, and the Senate Energy and
Natural Resources has requested testimony about EIA's forecasting
through 2025. Although EIA's forecasting of nuclear power's
contribution to U.S. electricity supply has improved in recent years,
the Nuclear Energy Institute (NEI) \1\ believes that EIA's outlook,
particularly with respect to new nuclear plant construction, is based
on erroneous assumptions.
\1\ The Nuclear Energy Institute (NEI) is the organization
responsible for establishing nuclear industry policy on matters
affecting the nuclear energy industry. NEI's members include all
companies licensed to operate commercial nuclear power plants in the
United States, nuclear plant designers, major architect-engineering
firms, fuel fabrication facilities, materials licensees, and other
organizations and individuals involved in the nuclear energy industry.
NEED FOR ACCURATE ANALYSIS AND FORECASTING
There is increasing evidence that the United States faces serious
energy supply and delivery problems. Even assuming successful
conservation and efficiency programs, U.S. dependence on imported oil
is at a historic high. Natural gas prices across the country have
increased dramatically. The transportation infrastructure for delivery
and natural gas requires significant expansion. The transmission
infrastructure necessary to move electricity within and between states
and regions is seriously overloaded, placing reliability at risk.
The imminent threat to reliable supplies of energy at stable,
predictable prices is generating interest in new national energy policy
legislation. The appropriate authorizing committees in both the Senate
and House are holding hearings. At times like these, policymakers in
the Administration and the Congress must have access to the most
accurate analysis and forecasting possible. In the case of nuclear
energy, the EIA's forecasts are not accurate, appear based on
hypothetical speculation, and do not reflect realistic analysis of the
current status of nuclear energy in the United States.
EIA'S FORECAST FOR NUCLEAR ENERGY
Each year, EIA's Office of Integrated Analysis and Forecasting
publishes an annual forecast of U.S. energy supply and demand called
the Annual Energy Outlook (AEO). AEO 2005 provides projections of
energy supply and demand in all consuming sectors and for all fuels
through 2025. This year's Outlook projects that total nuclear
generation will grow from 764 billion kilowatt-hours in 2003 to 830
billion kilowatt-hours in 2025.
This EIA projection contrasts sharply with EIA's forecasts several
years ago. AEO 1999 predicted that 50,800 megawatts of nuclear capacity
would be retired by 2020. The following year, the publication predicted
that 42,700 megawatts would be retired. AEO 2001 forecast shutdown of
28,100 megawatts, and AEO 2002 forecast shutdown of 9,700 megawatts of
nuclear generating capacity. These wildly divergent results were
produced through a combination of analytical errors, including use of
out-of-date data, imposition of arbitrary additional costs, and
``double-counting'' of additional costs.
EIA's assessment of the outlook for the existing U.S. nuclear power
plants nonetheless has improved dramatically. AEO 2005 predicts nuclear
generating capacity will increase from 99.2 gigawatts in 2003 to 102.7
gigawatts in 2025 as a result of uprates of existing plants. It
projects that all existing nuclear plants will continue to operate.
The Nuclear Energy Institute commends EIA for recognizing that the
103 nuclear operating reactors that supply 20 percent of U.S.
electricity will continue to operate to the end of their initial 40-
year license terms and, in virtually all cases, will renew their
licenses and continue to operate for an additional 20-year period.
However, NEI believes there is substantial room for improvement in
EIA's outlook for new nuclear plants in the United States.
THE OUTLOOK FOR NEW NUCLEAR UNITS
The Annual Energy Outlook 2005 assumes no new nuclear power plants
will be built before 2025 in the United States. The NEMS (National
Energy Modeling System) model reaches this conclusion because EIA
analysts have assigned an unrealistically high, and inflated, capital
cost to new nuclear generating capacity. The EIA assumes new nuclear
plants would have an overnight capital cost of $1,928 per kilowatt of
NEI commends EIA for its initiative, during 2003, to conduct a
series of workshops on the issue of new nuclear plant capital cost. AEO
2004 included a summary of those workshops, which reflected industry's
view that new nuclear plants in the United States could be built for
$1,400 to $1,500 per kilowatt (including first-of-a-kind costs for the
initial reactors of a series) and $1,100 to $1,200 per kilowatt (for
the nth of a kind). Unfortunately, these cost estimates, which have a
strong factual basis, were not reflected in either AEO 2004 or AEO
The summary of the 2003 workshops in AEO 2004 acknowledged that
``there is reason to believe that new reactors will be less costly to
build than those currently in operation in the United States. Over the
past 30 years, there have been technological advances in construction
techniques that would reduce costs. In addition, the simplified,
standardized, and pre-approved designs clearly result in cost
EIA then ignored this finding and assumed that new nuclear plants
would experience the same delays, lengthy construction periods and high
costs experienced by some of the plants built in the 1980s and 1990s.
Consequently, it estimated that a new plant would face overnight
capital costs in the range of $1,928 per kilowatt.
The industry believes there is ample evidence to demonstrate that
EIA's approach is flawed, and that there is a reasonably solid basis
for industry's capital cost estimate. Two examples are cited here: the
AP1000 design developed by Westinghouse, and the Advanced Boiling Water
Reactor (ABWR) developed by GE Nuclear Energy.
THE WESTINGHOUSE AP1000
Westinghouse is currently pursuing Nuclear Regulatory Commission
design certification of its AP1000 nuclear power plant. The AP1000 is a
1,117-megawatt advanced light water reactor. It is essentially a higher
power version of Westinghouse's 600-megawatt design, the AP600, which
the NRC certified in 1999. Over $400 million was invested in developing
and licensing the AP600 design, including an extremely detailed cost
database comprising more than 1,900 commodity categories and 25,000
specific items. The cost estimate was verified by Westinghouse, several
international architect-engineers, the Electric Power Research
Institute, and several utilities. A comparably detailed cost estimate
was prepared for the AP1000 by modifying the AP600 estimate to reflect
the design changes.
In 2002, an industry team--comprised of Westinghouse, seven major
U.S. power companies and architect-engineer Bechtel--completed a $1-
million re-evaluation of the AP1000 reactor design. As part of that re-
evaluation, Bechtel performed a thorough review of the modifications
made to the original cost estimate and, after making some minor
adjustments, endorsed the AP1000 cost estimate.
Although the specific numbers are proprietary information, the
overnight capital cost for building the first two AP1000 reactors at
one site is less than $1,400 per kilowatt. This includes all of the
first-time costs for completing design, engineering and licensing of
the first project. After the first few projects have been completed,
the capital cost for later plants will be approximately $1,000 per
kilowatt, which is competitive with other sources of baseload
electricity. Once those first reactors are built and capital costs
reach the $1,000-per-kilowatt range, all future plants would be
financed and built without federal government financial assistance.
The Westinghouse-Bechtel estimate of less than $1,400 per kilowatt
has a solid analytical basis, has been peer-reviewed, and reflects a
rigorous design, engineering and constructability assessment.
THE GE NUCLEAR ENERGY ABWR
GE Nuclear Energy and its partners have built several ABWRs in
Japan, and are building two reactors in Taiwan (the Lungmen project).
In 2002, GE and Black & Veatch (B&V) completed an independent cost
estimate of the ABWR. This study resulted in volumes of data, including
quantities, vendor costs and construction labor rates. The source of
information for every piece of data is referenced. Most references for
quantities of materials are to the Lungmen project database, and thus
accurately reflect what would be required to build a plant.
This cost estimate was reviewed and re-reviewed by GE, B&V and a
U.S. utility. As the estimate was based on actual experience from
current and previous ABWR projects, it is considered to be solid.
The bottom line: a single unit ABWR could be built in the U.S. for
$1,445 per kilowatt on an overnight basis. Two units on the same site
roughly one year apart would have an average cost of $1,300 per
kilowatt. These estimates are for a 1,450-megawatt reactor and include
owner's costs, supplier profit and contingency. These costs are
slightly higher than the estimates for the AP1000 because the
Westinghouse reactor incorporates a number of so-called passive safety
features that reduce the total capital cost. GE Nuclear Energy also is
developing a boiling water reactor design that incorporates similar
advanced passive safety features.
FINLAND: COMPARISON OF GENERATING OPTIONS
[With Emissions Trading]
Fuel O&M Capital Allowances Total
Nuclear............................................. 2.7 7.2 13.8 23.7
Gas................................................. 23.4 3.5 5.3 7.0 39.2
Coal................................................ 13.1 7.4 7.6 16.2 44.3
Peat................................................ 17.9 6.5 10.2 19.6 54.2
Wood................................................ 23.1 8.2 13.0 45.3
Wind................................................ 10.0 40.1 50.1
Note: All generating technologies at 8,000 hours per year; wind at 2,200 hours per year.
The company expects that overnight capital cost for this design
will be approximately 20 percent lower than the ABWR.
In addition, EIA ignores real experience from overseas, which
demonstrates clearly that new nuclear power plants are the most
economic option for new generating capacity and not, as EIA suggests,
the least economic. The chart above shows the results of the economic
assessment conducted by TVO, the Finnish electric power company, which
led to its decision in 2004 to order and build a fifth nuclear power
plant. This analysis shows that a new nuclear power plant is markedly
more economic than the other alternatives and lends credence to the
capital cost estimates developed by the U.S. nuclear industry.
The Nuclear Energy Institute believes EIA would better serve the
policy community by using real-life analysis and cost information
rather than its own hypothetical assumptions, which prejudice its
forecasts against nuclear power.
The continuing prejudice against new nuclear plant construction
reflected in EIA's Annual Energy Outlook has serious negative
consequences. Once such example of erroneous EIA data used in the
energy policy debate occurred in 2003 when the Senate evaluated whether
a federal production tax of $18 per megawatt-hour for the first eight
years of operation for the first 6,000 megawatts of new nuclear
capacity built would stimulate new nuclear generating capacity in the
The EIA report (SR/OIAF/2004-02) concluded that the production tax
credit would, in fact, stimulate construction of 6,000 megawatts of new
nuclear power capacity, but that further expansion beyond 6,000
megawatts would not occur because new nuclear plants still would not be
economic. The EIA analysis was incorrect because EIA again used
inflated assumptions about the capital cost of new nuclear power plants
and rejected the logic that, as more plants are built, capital costs
would decline making the next units less expensive.
It is not difficult to predict what the EIA's NEMS model would
forecast if EIA staff used more reasonable and realistic cost estimates
for new nuclear plants. In 2002, the Electric Power Research Institute
used the NEMS model to forecast the amount of new nuclear capacity that
would be built using more reasonable capital cost assumptions than EIA.
The result: At $1,250 per kilowatt, 23,000 megawatts of new nuclear
capacity would be built by 2020. At $1,125 per kilowatt, 62,000
megawatts of new nuclear capacity would be built by 2020.
Given the potential importance attached to the Energy Information
Administration's forecasts, NEI believes it is important that these
forecasts have a sound factual and analytical basis. At a minimum, NEI
urges that EIA's forecasting function would benefit from rigorous peer
review of all EIA's nuclear-related assumptions and methodologies, and
peer-reviewed development of new economic models better able to
simulate the dynamics of competitive electricity markets, the
performance of existing nuclear power plants and the timing for
construction of new nuclear units.
Statement of Deron Lovaas, Vehicles Campaign Director, Natural
Resources Defense Council (NRDC) and Ann Bordetsky, Policy Analyst
On behalf of the Natural Resources Defense Council (NRDC), a
conservation organization with more than 700,000 members, thank you for
the opportunity to submit testimony to the Senate Energy and Natural
Resources Committee for the February 3rd hearing on the 2005 Global
The bottom line is simple and alarming--America's dependence on oil
is a threat to our national security, our economy as well as our
environment. Growing demand and shrinking domestic production means
America is importing more and more oil each year--much of it from the
world's most unfriendly or unstable regions. In 2004 the United States
spent more than $18 million per hour on foreign oil\1\ and more than
$36 billion on Persian Gulf imports alone.\2\ Last year Federal Reserve
Chairman Alan Greenspan called the higher cost of imported oil a tax on
U.S. residents that has cut into our national GDP, warning that
geopolitical tension is a serious concern and that adverse economic
impacts for the U.S. will intensify if current trends in oil demand and
\1\ Import spending estimates based on 2004 petroleum supply and
price data provided by
Energy Information Administration, January 2005 Short Term Energy
\2\ Import spending calculated based on EIA 2004 data on U.S.
monthly crude oil imports (excluding SPR), crude oil WTI spot price,
and percent U.S. imports from the Persian Gulf,
\3\ Federal Reserve Chairman Alan Greenspan, October 15, 2004 and
statement before the National Italian American Foundation in
Washington, DC, on Oct. 15, 2004.
And there is increasing evidence that the era of cheap oil is over,
with $20-to $25-per-barrel oil becoming a thing of the past. Global
consumption is quickly outpacing spare production capacity and
investment in future capacity is struggling to keep up with rising
demand. The United States must face the prospect of oil prices
remaining at $40 per barrel.\4\ This is especially likely as OPEC,
whose oil export revenues grew by 42 percent to $338 billion in 2004,
shifts its supply policy to lock in the higher prices.\5\
\4\ Energy Information Administration, Short Term Energy Outlook,
January 2005. EIA projects 2005-06 crude oil prices of $42 to $43 per
\5\ Mouawad, Jad, ``Saudis Shift Toward Letting OPEC Aim Higher,''
New York Times, January 28, 2005.
Our oil dependence also exacts a heavy toll on the environment. It
helps make the United States the world's largest emitter of carbon
dioxide, responsible for one-fourth of the world's total global warming
pollution.* It causes serious air and water pollution, and it is the
source of constant pressure to exploit our last precious wild lands. As
our petroleum demand intensifies, Americans will remain exposed to the
environmental costs and the harmful public health impacts associated
with our dependence on oil.
* Carbon Dioxide Information and Analysis, Oak Ridge National
Laboratory, http://cdiac.esd.ornl.gov/trends/emis/top98.tot accessed on
January 31, 2004.
Recent attacks on global oil infrastructure and subsequent spikes
in domestic oil and gasoline prices provide clear evidence of the
vulnerability that comes with extreme dependence on petroleum.
Furthermore, terrorist organizations now recognize that oil is a
lifeline of the United States and are well aware that one successful
strike could take a million barrels per day or more of Saudi oil off
the global market for months. That is just one possible event that
could send oil prices soaring to $80 per barrel in today's dollars, as
the U.S. experienced at the height of the second oil crisis. Today, oil
price spikes easily send jitters through the U.S. market, while our
military expenditures in oil supplying regions continue to grow and our
dependence is quickly becoming a key target for those who wish us harm.
That is why Congress must act immediately by making a national
commitment to save at least 2.5 million barrels per day by 2015--an
achievable and important first step toward a more secure energy future.
There is burgeoning, bi-partisan support for taking such a step. For
example, the National Commission on Energy Policy (NCEP)--composed of
industry, government, conservation and academic officials--just
completed an important report which identifies some opportunities for
possible consensus on challenging energy policy questions.\6\ And NRDC
recently joined an energy freedom initiative with security hawk groups,
including the Institute for the Analysis of Global Security (TAGS), the
Center for Security Policy and the National Defense Council Foundation
(NDCF), focused on relieving the United States of our intense
dependence on oil.
\6\ Ending the Energy Stalemate: A Bipartisan Strategy to Meet
America's Energy Challenges, December 2004.
current demand trends
Here at home, while domestic production peaked in the 1970s, our
consumption continues to grow at break-neck speed. According to last
year's Annual Energy Outlook (AEO 2004), in 2025 the United States is
projected to consume 44 percent more oil than we do today or 28.3
million barrels of oil per day; domestic production will meet a mere 30
percent of the total need (see graph below).*
* All graphs have been retained in committee files.
Other growing nations will increasingly compete with the U.S. for
the oil on the global market. Oil consumption by industrializing
nations is expected to double over the next 25 years, from 15 to 32
million barrels a day. To meet projected world demand of 118 million
barrels a day in 2025, global oil output would have to expand by 40
million barrels per day or 51% between 2002 and 2025.
Oil demand in China is especially likely to heat up. While per
capita petroleum consumption is just six percent of the U.S. figure,
rapid industrialization and a growing consumer culture mean China's
demand for imported oil is projected to grow from less than 2 million
barrels per day in 2004 to nearly 8 million barrels per day by 2020
(see graph below).\7\ While U.S. import dependence will rise to nearly
70 percent by 2025, India already imports 70 percent of its oil and the
import share in China is expected to grow from 40 to 75 percent over
the same time period.\8\ Business as usual keeps the United States on a
path fraught with increasingly tight competition with other oil-needy
\7\ International Energy Agency cited by Interfax, ``Foreign
Investment to Play Key Role in Development of China's Oil and Gas,''
China Weekly Energy Report, May 22-28, 2004.
\8\ Manjeet Kripalani, Dexter Roberts, Jason Bushm, India And
China: Oil-Patch Partners?, Businessweek, February 7, 2005.
This challenge is not lost on the Chinese government. In recent
years China has been scouring the globe for oil supplies, including the
Western Hemisphere (most notably in Canada and Venezuela).\9\ With its
oil demand growing 18 percent in 2004, China is moving quickly to
secure exclusive access to future oil supplies by financing
strategically located pipelines, expanding its oil companies, and
contracting with the key oil producing regions across the globe.\10\
Fortunately, China recognizes that its energy needs must also be met
through efficiency, and in 2004 it took an important step towards
reducing booming demand by setting vehicle fuel economy standards that
are more stringent than those in the United States.\11\
\9\ Luft, Gal, ``In Search of Crude: China Goes to the Americas,''
Institute for the Analysis of Global Security, http://www.iags.org/
\10\ Romero, Simon, ``China Emerging as U.S. Rival for Canada's
Oil,'' New York Times, December 21, 2004.
\11\ Bradsher, Keith, ``China Sets its First Fuel Economy Rules,''
New York Times, September 29, 2004.
So business as usual means rapidly growing global consumption and
intensifying competition for oil that will boost prices and increase
the potential for conflict between nations addicted to this resource.
THE GRIM SUPPLY PICTURE
Even in the context of higher prices, it is clear that drilling for
oil in the United States will not address the challenges of petroleum
dependence, as the graph below shows. For example, while some argue
that there are 16 billion barrels of ``technically recoverable'' oil
under the Arctic National Wildlife Refuge's coastal plain, the U.S.
Geological Survey's estimate of the amount that could be recovered
economically--that is, the amount likely to be profitably extracted and
sold--is much smaller and represents less than a year's oil supply.
Moreover, it would take 10 years for any Arctic Refuge oil to reach the
market, and even when production peaks--in the distant year of 2027--
the refuge would produce less than 3 percent of Americans' daily oil
demand. Whatever oil the refuge might produce is simply irrelevant to
the larger issue of meeting America's future energy needs.
Furthermore, today's global oil use outpaces new oil discoveries,
with the world using about 12 billion more barrels per year than it
finds.\12\ OPEC is quickly exhausting excess production capacity,
allowing for little relief of demand, and despite Saudi Arabia's
efforts to cushion the market, global capacity utilization remains at
99 percent in 2005.\13\
\12\ PFC Energy, Global Crude Oil and Natural Gas Liquids Supply
Forecast, September 2004.
\13\ Id. 2
Given booming demand projections and high prices that already pinch
the economy, what are the prospects for increasing oil supply? The
reality is that the United States is inexorably headed towards greater
dependence on hostile regions of the world to slake our thirst for oil.
The Middle East has two-thirds of the world's proven oil reserves.\14\
Persian Gulf OPEC states already supply the United States with 2.5
million barrels per day--25 percent of our daily imports.
\14\ Mouawad, Jad, ``Irrelevant? OPEC Is Sitting Pretty'', New York
Times, October 3, 2004.
The future looks to bring more of the same: Last year's AEO
projects that the Middle East will produce 36 percent of the world's
oil in 2025 and together with other OPEC nations would control 46
percent of the global oil market.\15\ To meet demand, OPEC production
is expected to grow by 80 percent to 54 million barrels per day in
2025, while non-OPEC production must rise 43 percent to 63.9 million
barrels per day in 2025.\16\ However, this is easier said than done--
the International Energy Agency estimates the expected expansion of
production will require enormous investments in global oil
infrastructure of $3 trillion.\17\
\15\ Energy Information Administration, Annual Energy Outlook 2004.
\16\ Energy Information Administration, Annual Energy Outlook 2004,
\17\ International Energy Agency, World Energy Investment Outlook
2003, Paris: IEA, 2003, Executive Summary, p. 29.
UNREALISTIC, RISKY ALTERNATIVES TO THE MIDDLE EAST
Looking beyond OPEC to fill our needs offers no comfort--investment
in new production wells continues to lag in non-OPEC countries,
limiting any near-term growth in production.\18\ In short, the system
has reached its limit. In May 2001 the Administration recognized the
need for a new direction when it released its National Energy Policy
but proposed a strategy that would only exacerbate the existing threats
of petroleum dependence. The Administration proposes to avoid the
Scylla of Middle East dependence by targeting the Charybdis of
alternative oil-supplying nations for government investment and closer
alliances, including Angola, Azerbaijan, Colombia, Kazakhstan, Mexico,
Nigeria, Russia and Venezuela (see graph below). Yet the total proven
reserves of these alternative oil suppliers, 198 billion barrels, is 70
percent lower than Persian Gulf reserves, and at current production
levels offer only 30 more years of capacity.\19\ In comparison, the
Persian Gulf has almost 100 years of proven reserves at 2003 production
levels. Furthermore, all of the nations on the Administration's list
face significant political and social instability and remain porous to
global terrorism, making it difficult to attract the foreign
investments necessary to finance future production.\20\ Most
importantly, increasing U.S. reliance on these states--many of which
are unstable and undemocratic--would do little to address the security
and economic threats of petroleum dependence.
\18\ Federal Reserve.
\19\ British Petroleum, Statistical Review of World Energy 2004,
\20\ Klare, Michael T., Blood and Oil: The Dangers and Consequences
of America's Growing Dependence on Imported Petroleum, Metropolitan
Books, New York, New York, 2004.
While global market trends necessitate a new a direction for U.S.
energy choices, shifting our imports to non-OPEC states is a risky,
short-term solution at best. The Middle East holds most of the supply
cards and looking elsewhere may well intensify the threats of
dependence by continuing to expose the U.S. to the unpredictable
political future and domestic tensions of oil supplying states.
DEPENDENCE ON OIL UNDERMINES U.S. ECONOMIC AND NATIONAL SECURITY
The high costs of oil have already been passed on to consumers
through higher prices at the pump, more expensive goods and services,
and a weaker job market and lower stock prices.\21\ In 2004 alone
Americans spent roughly $270 billion to feed our oil appetite, nearly
half of last year's trade deficit.\22\ Sadly, this is just the latest
chapter in the saga of oil dependence sapping our economy. Economist
Philip Verleger finds that oil price spikes have cumulatively sapped 15
percent of our economy's growth, resulting in $1.2 trillion in direct
losses.\23\ The total economic penalty of our oil dependence, including
loss of jobs, output, and tax revenue is estimated to be $297 to $305
billion annually.\24\ The most recent estimates suggest that during
peacetime the U.S. spends an additional $20 to $40 billion per year in
military costs to secure access to Middle East oil supplies (estimates
predate current military operations in Iraq). At $20 billion a year the
American taxpayer is paying an additional $4 to $5 a barrel for crude
oil beyond its market price.\25\ And despite the already elevated oil
prices, over the next 25 years the U.S. will also have to shoulder a
substantial portion of the $105 billion a year global investment
necessary to finance additional oil production capacity.\26\
\21\ Stone, Amey, ``$50 Oil: A Spreading Slick of Pain,'' Business
\22\ Odessey, Bruce. ``U.S. Trade Deficit Surges as Exports Fall,
Oil Imports Rise'', January 12, 2005. U.S. Consulate trade statistics,
Estimate calculated based on 2004 trade deficit data and EIA petroleum
spending data in Id. 4.
\23\ As quoted in Roberts, Paul, The End of Oil: On the Edge of a
Perilous New World, Houghton Mifflin, New York, NY, 2004.
\24\ National Defense Council Foundation. ``The Hidden Cost of
Imported Oil'', September 2003, as cited by the Institute for the
Analysis of Global Security, Energy Security Bi-Weekly, October 30,
\25\ Jaffe, Amy Myers. United States and the Middle East: Policies
and Dilemmas. Analysis commissioned by the National Commission on
Energy Policy, www.energycommission.org.
\26\ International Energy Agency. World Energy Outlook 2004, (119-
121). Organization for Economic Cooperation and Development, 2004.
Looking into the next few decades, the security costs and the risks
of petroleum dependence will only increase as the global oil market
tightens and geopolitical tensions play out in the arena of
international trade. The International Energy Agency recently
emphasized in its annual World Energy Outlook that current market
trends suggest serious concerns for energy security and that the short-
term risks to energy security will continue to grow as the flexibility
of oil supply and demand diminishes, oil use becomes concentrated in
the transportation sector in the absence of petroleum alternatives, and
the growing oil demand is met by a small group of countries.\27\ For
example, today 26 million barrels of oil flow every day through just
two critical choke points, the Straits of Hormuz in the Persian Gulf
and the Straits of Malacca in Asia. By 2030 net inter-regional oil
trade is expected to grow to 65 million barrels per day--over half of
total oil production.\28\ Traffic through these channels is expected to
more than double over the next few decades--one of the many trends that
will increase the vulnerability and security costs to oil-dependent
\27\ Ibid (29)
\28\ Ibid (32)
In short, petroleum dependence imposes an incalculable price tag on
American consumers and the U.S. economy, and is quickly becoming the
Achilles heel of our national security.
TRUMPING INSECURITY WITH AMERICA'S STRONG SUIT: EFFICIENCY, INNOVATION
The real solution that Americans can count on for a healthy economy
and greater national security is a lifeline of technology and efficient
energy choices supplied by industries and workers here at home, not a
lifeline of oil. The U.S. must begin immediately to ease our intense
oil addiction, first by making a national commitment to save 2.5
million barrels of oil per day by 2015.
A key component of such a plan would increase the efficiency of
cars and trucks, since the transportation sector will be responsible
for 80% of the growth in oil demand through 2020. We did it before:
Passenger car and light truck fuel efficiency increased 70 percent
between 1975, when the fuel economy law was originally enacted, and its
peak in 1987. Since then we've been moving backward. Overall mileage of
our new cars and trucks has steadily dropped. Today it's at its lowest
level in 20 years.
The reason is simple: While automotive engineering has advanced
over the last decade to offer a wide variety of fuel-saving
innovations, stagnant policies have fostered sluggish fuel economy and
failed to harness technological potential to curb our massive oil
demand. To re-energize policies, Congress must:
provide automakers and their suppliers with incentives to
retool factories to produce more efficient vehicles and create
raise fuel efficiency standards;
expand the market for gasoline-electric hybrid vehicles
through tax incentives;
invest in alternative fuels, such as biofuels or hydrogen;
encourage the adoption of fuel-efficient tires and motor oil
in passenger vehicles;
increase the efficiency of heavy-duty trucks and reduce
provide transportation choices, such as public transit, that
use significantly less oil per passenger.
However, this important national commitment requires contributions
from sectors besides transportation. Specifically, the measures above
can and should be complemented by:
industrial efficiency techniques;
fuel-savings steps in aviation management;
reduced heating oil use in homes across America (for
example, through weatherization).
NRDC believes that a healthy environment goes hand in hand with a
healthy economy. We believe this country can continue to have strong
economic growth and a high standard of living, while reducing our oil
dependence and cutting global warming pollution. This can be achieved
by investing in America, as called for by the bipartisan NCEP. Some of
their recommendations mirror ours: $3 billion in tax credits to
manufacturers that build and to consumers who buy efficient vehicles,
an increase in fuel-efficiency standards, and a national oil savings of
at least 3 to 5 million barrels per day by 2025.
As a nation we must blaze a new path, one that will set the United
States apart as an innovator and leader in efficiency, rather than a
weak competitor and needy consumer of the world's energy. But steps
won't be taken without leadership from Congress, and NRDC looks forward
to working with Senators and staff to reduce dependence on oil and make
our nation more secure through efficiency and innovation.
Rocky Mountain Institute,
Snowmass, CO, February 2, 2005.
Hon. Peter Domenici,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Hon. Jeff Bingaman,
Ranking Member, Committee on Energy and Natural Resources, U.S. Senate,
Dear Senators Domenici and Bingaman: As testimony to the record of
the 10:00 a.m., 3 February 2005 Hearing on ``Global energy trends and
their potential impact on U.S. energy needs, security and policy,''
Rocky Mountain Institute hereby submits for the consideration of the
U.S. Senate Committee on Energy and Natural Resources the Executive
Summary and the Forewords (by George P. Shultz and Sir Mark Moody-
Stuart) of our independent, peer-reviewed, Pentagon-cosponsored
analysis entitled Winning the Oil Endgame, published 20 September 2004.
Our study details how to eliminate U.S. oil dependence over the next
few decades, and revitalize the economy, led by business, for profit.
Please permit us to highlight four key implications:
The most important energy choices before the U.S. are not
about which energy forecast or policy to adopt, but rather
about industrial and technological strategy. Will America
import efficient cars to displace foreign oil, or make
efficient cars to displace both foreign oil and foreign cars?
China's energy policy focuses on major efficiency improvements
and leapfrog technologies, linked with her industrial policy to
become a major exporter of [efficient] cars, so America's lack
of such strategies puts the Big Three at risk. In contrast, we
believe Boeing's bet on efficiency with the 787 Dreamliner will
prove a winning strategy in its rivalry with Airbus.
EIA's 2004 forecast implies that the U.S. will use
approximately 100% more oil in the long run than we found is
cost-effective for providing the assumed services. That is,
compared with EIA's January 2004 Reference Case, our analysis
showed how to save half of the United States' forecast 2025 oil
use at an average cost of $12 per barrel of crude oil (2000 $),
and how to displace the other half with robustly competitive
supply-side substitutions, while delivering the same services
that underlie the EIA forecast. This would save the U.S. $70
billion per year net from avoided fuel costs (at EIA's 2025
forecast price of $26/bbl in 2000 $). Biofuels production in
the Midwest would boost rural incomes by $40 billion per year.
A million net new jobs would be created and a million more
Why can't EIA's forecasting methodology--conventional,
capably applied, and useful for reference--reveal such
fundamental opportunities? Why can't EIA's forecast come close
to defining the limits of profitable choice? EIA's slate of
technologies for both end-use efficiency and supply-side
substitutions doesn't reflect the current state of the shelf in
cost or performance. EIA forecasts only 5% of new light
vehicles are hybrids by 2025, and they're far less efficient
than today's market offerings. Yet we found that under a
slightly different policy scenario, 77% could be far more
efficient than today's hybrids, and cost no more. This matters
a lot. If, for illustration, all new light vehicles in 2025
were only as efficient as today's best-on-the-market hybrids,
total U.S. oil consumption would be one-sixth lower than in
EIA's 2004 Reference Case--equivalent to saving twice today's
net oil imports from the Persian Gulf.
EIA's Annual Energy Outlook models business-as-usual with
minor variations. It only shows what might happen if policies
and business strategies didn't change. Thus AEO is not fate; it
is not a mandate that one must fulfill; and it absolutely does
not illuminate the true range of national choice. Rather than
striving to meet current EIA forecasts, policymakers need to
choose national goals and ask EIA to model the full range of
ways to achieve them. This requires a different modeling
methodology. Changes in EIA's current model are driven only by
shifts in relative prices or in enacted public-policy mandates.
Yet, as our study showed, the biggest shifts in energy patterns
can come from private-sector innovation driven by competitive
strategy--by the kinds of business models we analyzed for the
car, truck, plane, and oil industries. EIA should be permitted
and encouraged to model these business drivers to develop
meaningful policy paths and outcomes. Policymakers should
appreciate that those drivers may be more important than prices
or public policies, so lighthanded policies tailored to support
these business drivers may be more attractive and effective
than fuel taxes, subsidies, and mandates. Our study proposed
just such an innovative approach, and EIA's modeling mandate
should be extended to illuminate those kinds of drivers and
Our full analysis and its technical backup, including all models,
spreadsheets, documentation, reviews, and commentaries, are posted for
free download at www.oilendgame.com. We hope they will inform the
Amory B. Lovins,
Winning the Oil Endgame
Innovation for Profits, Jobs, and Security
Winning the Oil Endgame offers a coherent strategy for ending oil
dependence, starting with the United States but applicable worldwide.
There are many analyses of the oil problem. This synthesis is the first
roadmap of the oil solution--one led by business for profit, not
dictated by government for reasons of ideology. This roadmap is
independent, peer-reviewed, written for business and military leaders,
and co-funded by the Pentagon. It combines innovative technologies and
new business models with uncommon public policies: market-oriented
without taxes, innovation-driven without mandates, not dependent on
major (if any) national legislation, and designed to support, not
distort, business logic.
Two centuries ago, the first industrial revolution made people a
hundred times more productive, harnessed fossil energy for transport
and production, and nurtured the young U.S. economy. Then, over the
past 145 years, the Age of Oil brought unprecedented mobility, globe-
spanning military power, and amazing synthetic products.
But at what cost? Oil, which created the sinews of our strength, is
now becoming an even greater source of weakness: its volatile price
erodes prosperity; its vulnerabilities undermine security; its
emissions destabilize climate. Moreover the quest to attain oil creates
dangerous new rivalries and tarnishes America's moral standing. All
these costs are rising. And their root causes--most of all, inefficient
light trucks and cars--also threaten the competitiveness of U.S.
automaking and other key industrial sectors.
The cornerstone of the next industrial revolution is therefore
winning the Oil Endgame. And surprisingly, it will cost less to
displace all of the oil that the United States now uses than it will
cost to buy that oil. Oil's current market price leaves out its true
costs to the economy, national security, and the environment. But even
without including these now ``externalized'' costs, it would still be
profitable to displace oil completely over the next few decades. In
fact, by 2025, the annual economic benefit of that displacement would
be $130 billion gross (or $70 billion net of the displacement's costs).
To achieve this does not require a revolution, but merely consolidating
and accelerating trends already in place: the amount of oil the economy
uses for each dollar of GDP produced, and the fuel efficiency of light
vehicles, would need only to improve about three-fifths as quickly as
they did in response to previous oil shocks.
Saving half the oil America uses, and substituting cheaper
alternatives for the other half, requires four integrated steps:
Double the efficiency of using oil. The U.S. today wrings
twice as much work from each barrel of oil as it did in 1975;
with the latest proven efficiency technologies, it can double
oil efficiency all over again. The investments needed to save
each barrel of oil will cost only $12 (in 2000 $), less than
half the officially forecast $26 price of that barrel in the
world oil market. The most important enabling technology is
ultralight vehicle design. Advanced composite or lightweight-
steel materials can nearly double the efficiency of today's
popular hybrid-electric cars and light trucks while improving
safety and performance. The vehicle's total extra cost is
repaid from fuel savings in about three years; the
ultralighting is approximately free. Through emerging
manufacturing techniques, such vehicles are becoming practical
and profitable; the factories to produce them will also be
cheaper and smaller.
Apply creative business models and public policies to speed
the profitable adoption of superefficient light vehicles, heavy
trucks, and airplanes. Combined with more efficient buildings
and factories, these efficient vehicles can cut the official
forecast of oil use by 29% in 2025 and another 23% soon
thereafter--52% in all. Enabled by a new industrial cluster
focusing on lightweight materials, such as carbon-fiber
composites, such advanced-technology vehicles can revitalize
these three strategic sectors and create important new
Provide another one-fourth of U.S. oil needs by a major
domestic biofuels industry. Recent advances in biotechnology
and cellulose-to-ethanol conversion can double previous
techniques' yield, yet cost less in both capital and energy.
Replacing fossil-fuel hydrocarbons with plant-derived
carbohydrates will strengthen rural America, boost net farm
income by tens of billions of dollars a year, and create more
than 750,000 new jobs. Convergence between the energy,
chemical, and agricultural value chains will also let versatile
new classes of biomaterials replace petrochemicals.
Use well established, highly profitable efficiency
techniques to save half the projected 2025 use of natural gas,
making it again abundant and affordable, then substitute part
of the saved gas for oil. If desired, the leftover saved
natural gas could be used even more profitably and effectively
by converting it to hydrogen, displacing most of the remaining
oil use--and all of the oil use if modestly augmented by
competitive renewable energy.
These four shifts are fundamentally disruptive to current business
models. They are what economist Joseph Schumpeter called ``creative
destruction,'' where innovations destroy obsolete technologies, only to
be overthrown in turn by ever newer, more efficient rivals. In The
Innovator's Dilemma, Harvard Business School professor Clayton
Christensen explained why industry leaders often get blindsided by
disruptive innovations--technological gamechangers--because they focus
too much on today's most profitable customers and businesses, ignoring
the needs of the future. Firms that are quick to adopt innovative
technologies and business models will be the winners of the 21st
century; those that deny and resist change will join the dead from the
last millennium. In the 108-year history of the Dow Jones Industrial
Average, only one of 12 original companies remains a corporate entity
today--General Electric. The others perished or became fodder for their
What policies are needed? American companies can be among the quick
leaders in the 21st century, but it will take a cohesive strategy-based
transformation, bold business and military leadership, and supportive
government policies at a federal or at least a state level. Winning the
Oil Endgame charts these practical steppingstones to an oil-free
Most importantly, revenue-and size-neutral ``feebates'' can
shift customer choice by combining fees on inefficient vehicles
with rebates to efficient vehicles. The feebates apply
separately within each vehicle-size class, so freedom of choice
is unaffected. Indeed, choice is enhanced as customers start to
count fuel savings over the vehicle's life, not just the first
few years, and this new pattern of demand pulls superefficient
but uncompromised vehicles from the drawing-board into the
A scrap-and-replace program can lease or sell super-
efficient cars to low-income Americans--on terms and with fuel
bills they can afford--while scrapping clunkers. This makes
personal mobility affordable to all, creates a new million-car-
a-year market for the new efficiency technologies, and helps
clean our cities' air.
Military needs for agility, rapid deployment, and
streamlined logistics can drive Pentagon leadership in
developing key technologies.
Implementing smart government procurement and targeted
technology acquisition (the ``Golden Carrot'') for aggregated
buyers will accelerate manufacturers' conversion, while a
government-sponsored $1-billion prize for success in the
marketplace, the ``Platinum Carrot,'' will speed development of
even more advanced vehicles.
To support U.S. automakers' and suppliers' need to invest
about $70 billion to make advanced technology vehicles, federal
loan guarantees can help finance initial retooling where
needed; the investments should earn a handsome return, with big
Similar but simpler policies--loan guarantees for buying
efficient new airplanes (while scrapping inefficient parked
ones), and better information for heavy truck buyers to spur
market demand for doubled-efficiency trucks--can speed these
oil-saving innovations from concept to market.
Other policies can hasten competitive evolution of next-
generation biofuels and biomaterials industries, substituting
durable revenues for dwindling agricultural subsidies, and
encouraging practices that protect both topsoil and climate.
What happens to the oil industry? The transition beyond oil is
already starting to transform oil companies like Shell and BP into
energy companies. Done right, this shift can profitably redeploy their
skills and assets rather than lose market share. Biofuels are already
becoming a new product line that leverages existing retail and
distribution infrastructure and can attract another $90 billion in
biofuels and biorefining investments. By following this roadmap, the
U.S. would set the stage by 2025 for the checkmate move in the Oil
Endgame--the optional but advantageous transition to a hydrogen economy
and the complete and permanent displacement of oil as a direct fuel.
Oil may, however, retain or even gain value as one of the competing
sources of hydrogen.
How big is the prize? Investing $180 billion over the next decade
to eliminate oil dependence and revitalize strategic industries can
save $130 billion gross, or $70 billion net, every year by 2025. This
saving, equivalent to a large tax cut, can replace today's $10-billion-
a-month oil imports with reinvestments in ourselves: $40 billion would
pay farmers for biofuels, while the rest could return to our
communities, businesses, and children. Several million automotive and
other transportation-equipment jobs now at risk can be saved, and one
million net new jobs can be added across all sectors. U.S. automotive,
trucking, and aircraft production can again lead the world, underpinned
by 21st century advanced-materials and fuel-cell industries. A more
efficient and deployable military could refocus on its core mission--
protecting American citizens rather than foreign supply lines--while
supporting and deploying the innovations that eliminate oil as a cause
of conflict. Carbon dioxide emissions will shrink by one-fourth with no
additional cost or effort. The rich-poor divide can be drastically
narrowed at home by increased access to affordable personal mobility,
shrinking the welfare rolls, and abroad by leapfrogging over oil-
dependent development patterns. The U.S. could treat oil-rich countries
the same as countries with no oil. Being no longer suspected of seeking
oil in all that it does in the world would help to restore U.S. moral
leadership and clarity of purpose.
While the $180-billion investment needed is significant, the United
States' economy already pays that much, with zero return, every time
the oil price spikes up as it has done in 2004. (And that money goes
into OPEC's coffers instead of building infrastructure at home.) Just
by 2015, the early steps in this proposed transition will have saved as
much oil as the U.S. gets from the Persian Gulf. By 2040, oil imports
could be gone. By 2050, the U.S. economy should be flourishing with no
oil at all.
How do we get started? Every sector of society can contribute to
this national project. Astute business leaders will align their
corporate strategies and reorganize their firms and processes to turn
innovation from a threat to a friend. Military leaders will speed
military transformation by promptly laying its foundation in
superefficient platforms and lean logistics. Political leaders will
craft policies that stimulate demand for efficient vehicles, reduce R&D
and manufacturing investment risks, support the creation of secure
domestic fuel supplies, and eliminate perverse subsidies and regulatory
obstacles. Lastly, we, the people, must play a role--a big role--
because our individual choices guide the markets, enforce
accountability, and create social innovation.
Our energy future is choice, not fate. Oil dependence is a problem
we need no longer have--and it's cheaper not to. U.S. oil dependence
can be eliminated by proven and attractive technologies that create
wealth, enhance choice, and strengthen common security. This could be
achieved only about as far in the future as the 1973 Arab oil embargo
is in the past. When the U.S. last paid attention to oil, in 1977-85,
it cut its oil use 17% while GDP grew 27%. Oil imports fell 50%, and
imports from the Persian Gulf by 87%, in just eight years. That
exercise of dominant market power--from the demand side--broke OPEC's
ability to set world oil prices for a decade. Today we can rerun that
play, only better. The obstacles are less important than the
opportunities if we replace ignorance with insight, inattention with
foresight, and inaction with mobilization. American business can lead
the nation and the world into the post-petroleum era, a vibrant
economy, and lasting security--if we just realize that we are the
people we have been waiting for.
Together we can end oil dependence forever.
Quotations about Winning the Oil Endgame
``This exciting synthesis of how to eliminate America's oil
dependence could be the most important step in many years toward secure
and affordable energy. Its novel but persuasive ideas, which hold
promise of revitalizing American industry and agriculture, should
appeal to conservatives and liberals alike.''
President Jimmy Carter
``We can, as Amory Lovins and his colleagues show vividly, win the
oil endgame. . . . [A]n intriguing case that is important enough to
merit careful attention by all of us, private citizens and business and
political leaders alike.''
George P. Shultz, Distinguished Fellow at the Hoover
Institution, Stanford University; former Secretary of
State, the Treasury, and Labor
``[T]his compelling synthesis . . . demonstrates that innovative
technologies can achieve spectacular [oil] savings . . . with no loss
of utility, convenience and function. It makes the business case for
how a profitable transition for the automotive, truck, aviation, and
oil sectors can be achieved. . . . The refreshingly creative government
policies suggested . . . merit serious attention, . . . and I suspect
they could win support across the political spectrum. . . . This report
will help to launch, inspire, and inform a new and necessary
conversation about energy and security, economy and environment. Its
outcome is vital for us all.''
Sir Mark Moody-Stuart, Chairman, Anglo American plc;
former Chairman, Royal Dutch/Shell Group
``Amory Lovins has had more impact on our energy use than any
single person in the world. Now his team has produced one of the most
important energy studies in decades. It merits careful examination as a
profitable strategy for achieving energy security, economic prosperity,
and environmental quality through smart business strategies accelerated
by efficient government policy.''
William Martin, Chairman, Council on Foreign Relations,
Energy Security Group
``One of the best analyses of energy policy yet produced.''
For the full report and more information, please visit
Foreword to Winning the Oil Endgame by George P. Schultz
Crude prices are rising, uncertainty about developments in the
Middle East roils markets and, well, as Ronald Reagan might say, ``Here
we go again.'' Once more we face the vulnerability of our oil supply to
political disturbances. Three times in the past thirty years (1973,
1978, and 1990) oil price spikes caused by Middle East crises helped
throw the U.S. economy into recession. Coincident disruption in
Venezuela and Russia adds to unease, let alone prices, in 2004. And the
surging economies of China and India are contributing significantly to
demand. But the problem far transcends economics and involves our
national security. How many more times must we be hit on the head by a
two-by-four before we do something decisive about this acute problem?
In 1969, when I was Secretary of Labor, President Nixon made me the
chairman of a cabinet task force to examine the oil import quota
system, in place since 1954. Back then, President Eisenhower considered
too much dependence on imported oil to be a threat to national
security. He thought anything over 20 percent was a real problem. No
doubt he was nudged by his friends in the Texas and Louisiana oil
patches, but Ike was no stranger to issues of national security and
The task force was not prescient or unanimous but, smelling
trouble, the majority could see that imports would rise and they
recommended a new monitoring system to keep track of the many
uncertainties we could see ahead, and a new system for regulating
imports. Advocates for even greater restrictions on imports argued that
low-cost oil from the Middle East would flood our market if not
By now, the quota argument has been stood on its head as imports
make up an increasing majority, now almost 60 percent and heading
higher, of the oil we consume. And we worry not about issues of letting
imports in but that they might be cut off. Nevertheless, the point
about the importance of relative cost is as pertinent today as back
then and applies to the competitive pressures on any alternative to
oil. And the low-cost producers of oil are almost all in the Middle
That is an area where the population is exploding out of control,
where youth is by far the largest group, and where these young people
have little or nothing to do. The reason is that governance in these
areas has failed them. In many countries, oil has produced wealth
without the effort that connects people to reality, a problem
reinforced in some of them by the fact that the hard physical work is
often done by imported labor. The submissive role forced on women has
led to this population explosion. A disproportionate share of the
world's many violent conflicts is in this area. So the Middle East
remains one of the most unstable parts of the world. Only a dedicated
optimist could believe that this assessment will change sharply in the
near future. What would be the impact on the world economy of terrorist
sabotage of key elements of the Saudi pipeline infrastructure?
I believe that, three decades after the Nixon task force effort, it
is long past time to take serious steps to alter this picture
dramatically. Yes, important progress has been made, with each
administration announcing initiatives to move us away from oil.
Advances in technology and switches from oil to natural gas and coal
have caused our oil use per dollar of GDP to fall in half since 1973.
That helps reduce the potential damage from supply problems. But
potential damage is increased by the rise of imports from 28 percent to
almost 60 percent of all the oil we use. The big growth sector is
transportation, up by 50 percent. Present trends are unfavorable; if
continued, they mean that we are likely to consume--and import--several
million barrels a day more by 2010.
Beyond U.S. consumption, supply and demand in the world's oil
market has become tight again, leading to many new possibilities of
soaring oil prices and massive macroeconomic losses from oil
disruptions. We also have environmental problems to concern us. And,
most significantly, our national security and its supporting diplomacy
are left vulnerable to fears of major disruptions in the market for
oil, let alone the reality of sharp price spikes. These costs are not
reflected in the market price of oil, but they are substantial.
What more can we do? Lots, if we are ready for a real effort. I
remember when, as Secretary of the Treasury, I reviewed proposals for
alternatives to oil from the time of the first big oil crisis in 1973.
Pie in the sky, I thought. But now the situation is different. We can,
as Amory Lovins and his colleagues show vividly, win the oil endgame.
How do we go about this?
A baseball analogy may be applicable. Fans often have the image in
their minds of a big hitter coming up with the bases loaded, two outs,
and the home team three runs behind. The big hitter wins the game with
a home run. We are addicted to home runs, but the outcome of a baseball
game is usually determined by a combination of walks, stolen bases,
errors, hit batsmen, and, yes, some doubles, triples, and home runs.
There's also good pitching and solid fielding, so ball games are won by
a wide array of events, each contributing to the result. Lovins and his
coauthors show us that the same approach can work in winning the oil
endgame. There are some potential big hits here, but the big point is
that there are a great variety of measures that can be taken that each
will contribute to the end result. The point is to muster the will
power and drive to pursue these possibilities.
How do we bring that about? Let's not wait for a catastrophe to do
the job. Competitive information is key. Our marketplace is finely
tuned to the desire of the consumer to have real choices. We live in a
real information age, so producers have to be ready for the competition
that can come out of nowhere. Lovins and his colleagues provide a huge
amount of information about potential competitive approaches. There are
home run balls here, the ultimate one being the hydrogen economy. But
we don't have to wait for the arrival of that day. There are many
things that can be done now, and this book is full of them. Hybrid
technology is on the road and currently increases gas mileage by 50
percent or more. The technology is scaleable. This report suggests many
ways to reduce weight and drag, thereby improving performance. A big
point in this report is evidence that new, ultralight-but-safe
materials can nearly redouble fuel economy at little or no extra cost.
Sequestration of effluent from use of coal may be possible on an
economic and comfortable basis, making coal a potentially benign source
of hydrogen. Maybe hydrogen could be economically split out of water by
electrolysis, perhaps using renewables such as windpower; or it could
certainly be made, as nearly all of it is now, by natural gas saved
from currently wasteful practices, an intriguingly lucrative option
often overlooked in discussions of today's gas shortages. An economy
with a major hydrogen component would do wonders for both our security
and our environment. With evident improvements in fuel cells, that
combination could amount to a very big deal. Applications include
stationary as well as mobile possibilities, and other ideas are in the
air. Real progress has been made in the use of solar systems for heat
and electricity. Scientists, technologists, and commercial
organizations in many countries are hard at work on these issues.
Sometimes the best way to get points across is to be provocative,
to be a bull in a china closet. Amory Lovins loves to be a bull in a
china closet--anybody's china closet. With this book, the china closet
he's bursting into is ours and we should welcome him because he is
showing us how to put the closet back together again in far more
satisfactory form. In fact, Lovins and his team make an intriguing case
that is important enough to merit careful attention by all of us,
private citizens and business and political leaders alike.
Foreword to Winning the Oil Endgame by Sir Mark Moody-Stuart
In this compelling synthesis, Amory Lovins and his colleagues at
Rocky Mountain Institute provide a clear and penetrating view of one of
the critical challenges facing the world today: the use of energy,
especially oil, in transportation, industry, buildings, and the
military. This report demonstrates that innovative technologies can
achieve spectacular savings in all of these areas with no loss of
utility, convenience and function. It makes the business case for how a
profitable transition for the automotive, truck, aviation, and oil
sectors can be achieved, and why they should embrace technological
innovation rather than be destroyed by it. We are not short of energy
in this world of ours; we have large resources of the convenient
hydrocarbons on which our economies are based, and even greater
resources of the coal on which our economies were originally built. But
there are two serious issues relating to its supply and use.
First, some three fourths of the reserves sit in a few countries of
the Middle East, subject to actual and potential political turmoil.
Second, there are the long-term climatic effects of the burning of
increasing amounts of fossil fuels. While the normal rate of change of
technology is likely to mean that we will be on one of the lower impact
scenarios of climate change and not at the apocalyptic end favoured by
doom mongers, it is reasonably certain that our world will have to
adapt to significant climate change over the next century. These two
factors mean that, unless there is a change of approach, the United
States will inexorably become increasingly dependent on imported
energy--be it oil or natural gas. At the same time, on the
international scene, the United States will be criticised by the rest
of the world for profligate use of energy, albeit to fuel an economy on
whose dynamism and success the rest of the world is also manifestly
dependent. Furthermore, thoughtful people wonder what we will do if the
booming economies and creative people of China and India have energy
demands which are on the same development curve as the United States.
The RMI team has approached this economic and strategic dilemma
with technical rigour, good humour, and common sense, while addressing
two key requirements often overlooked by energy policy advocates.
First, we have to deliver the utility, reliability and convenience
that the consumer has come to expect. As business people we recognise
this. It is no good expecting people in the United States to suddenly
drive smaller, less convenient or less safe vehicles. We have to supply
the same comfort and utility at radically increased levels of energy
efficiency. Most consumers, who are also voters, have only a limited
philosophical interest in energy efficiency, security of supply, and
climate change. Most of us have a very intense interest in personal
convenience and safety--we expect governments and business to handle
those other issues on our behalf. There is a very small market in this
world for hair shirts. Similarly, we cannot expect the citizens of
China and India to continue to ride bicycles in the interests of the
global environment. They have exactly the same aspirations to comfort
and convenience as we do. This book demonstrates how by applying
existing technologies to lightweight vehicles with the use of
composites, by the use of hybrid powertrains already in production, and
with the rapid evolution to new technologies, we can deliver the high
levels of convenience and reliability we are used to at radically
increased levels of energy efficiency, while also maintaining cost
The second critical requirement is that the process of transition
should be fundamentally economic. We know in business that while one
may be prepared to make limited pathfinding investments at nil or low
return in order to develop new products and markets, this can not be
done at a larger scale, nor indefinitely. What we can do, and have seen
done repeatedly, is to transform markets by delivering greater utility
at the same cost or the same utility at a lower cost, often by
combining more advanced technologies with better business models. When
this happens, the rate of change of markets normally exceeds our
wildest forecasts and within a space of a few years a whole new
technology has evolved.
A good example of the rapid development and waning of technology is
the fax machine. With astonishing rapidity, because of its functional
advantages over surface mail, the fax machine became globally
ubiquitous. The smallest businesses around the world had one and so did
numerous homes. The fax has now become almost obsolete because of e-
mail, the email attachment and finally the scanned e-mail attachment.
The connectivity of the Internet, of which e-mail is an example, has
transformed the way we do business. What this book shows is that the
delivery of radically more energy-efficient technologies has dramatic
cost implications and therefore has the potential for a similarly
economically driven transition.
The refreshingly creative government policies suggested here to
smooth and speed that transition are a welcome departure from
traditional approaches that often overlook or even reject the scope of
enterprise to be an important part of the solution. These innovative
policies, too, merit serious attention, especially as an integrated
package, and I suspect they could win support across the political
The technological, let alone policy, revolution has not been quick
in coming to the United States. Yet as has happened before in the
automobile industry, others are aware of the potential of the
technology. Perhaps because of Japan's obsession with energy security,
Toyota and Honda began some years ago to hone the electric-hybrid
technology that is likely to be an important part of the energy
efficiency revolution. As a result, U.S. automobile manufacturers who
now see the market opportunities of these technologies are turning to
the proven Japanese technology to deliver it rapidly.
I believe that we may see a similar leapfrogging of technology from
China. China is fully aware of the consequences on energy demand,
energy imports, and security of supply of its impressive economic
growth. Already China is using regulation to channel development into
more energy-efficient forms. The burgeoning Chinese automobile industry
is likely to be guided down this route--delivering the function and
convenience, but at greatly increased levels of efficiency. And it is
not just in the automobile industry--by clearly stated national policy
it applies to all areas of industrial activity. This has great
implications both for the participation by U.S. firms in investment in
China, and also in the impact of future Chinese manufactures on a
global market that is likely to be paying much greater attention to
As a businessman, I am attracted by the commercial logic and keen
insight that this report brings to the marketplace struggle between oil
and its formidable competitors on both the demand and the supply sides.
Indeed, during my time in both Shell and Anglo American, RMI's
engineers have helped ours to confirm unexpectedly rich deposits of
mineable ``negawatts'' and ``negabarrels'' in our own operations--an
exploration effort we're keen to intensify to the benefit of both our
shareholders and the environment.
As a lifelong oil man and exploration geologist, I am especially
excited to learn about the Saudi Arabia-size riches that Amory Lovins
and RMI's explorers have discovered in what they term the Detroit
Formation--through breakthrough vehicle design that can save vast
amounts of oil more cheaply than it can be supplied. And as a citizen
and grandparent, I am pleased that RMI proposes new business models to
span the mobility divide that separates rich and poor, not just in the
United States, but in many places in the world. Concern about such
opportunity divides is increasingly at the core not just of
international morality but also of stability and peace.
This book points the way to an economically driven energy
transformation. And its subtitle ``Innovation for Profit, Jobs, and
Security'' is both a prospectus for positive change and a reminder that
both the United States and other countries can be rapid adapters of
innovative technologies, with equally transformative economic
consequences. As someone who has spent a lifetime involved in energy
and changes in energy patterns, I find the choice an easy one to make.
The global economy is very much dependent on the health of the U.S.
economy, so I hope that the U.S. indeed makes the right choice.
This report will help to launch, inspire, and inform a new and
necessary conversation about energy and security, economy and
Its outcome is vital for us all.
Statement of David J. O'Reilly, Chairman and Chief Executive Officer,
PUBLISHED NOVEMBER 28, 2004, IN THE WASHINGTON TIMES
The late economist Herbert Stein once said, if something cannot go
on forever, it will stop. The time when we could count on cheap,
abundant oil is clearly approaching that point. Prices are not likely
to stay in the $50 range as they have in recent months. But it is even
more unlikely they will retreat to late 20th-century levels as low as
$10 a barrel.
The reasons are complex, but it is critical we understand them so
we can move to drive volatility out of the energy markets and replace
it with predictability and stability, two prerequisites for sustained
A basic reason for price volatility is surging demand. China alone
accounted for roughly 30 percent of this year's total growth in world
oil demand. Global energy demand is expected to jump 40 percent over
the next two decades. It took the world 125 years to consume the first
trillion barrels of oil. We'll consume the next trillion within 35
But demand is not the only factor. Supply is also an issue.
Simply put, the age of easy oil and gas is over, partly because we
are seeing the convergence of geological difficulty with geopolitical
instability and hard-to-reach supply with rising demand. In essence, we
face a new energy equation.
Many of the world's large oil fields outside the Organization of
Petroleum Exporting Countries are maturing just as demand is growing.
Increasingly, future supplies must be found in areas more difficult to
access and develop, such as ultra-deep water and oil sands. Developing
these new frontiers will require trillions of dollars of investment in
new infrastructure and innovative technology. And the world oil
increasingly comes from areas with stability concerns, such as the
As the Bush administration heads into its second term, we need to
recognize this new equation's realities and align our policies and
actions to address them. Here are four pragmatic steps we can take in
the short-term to do that.
(1) We should maximize the value of the resources we have now, on
both the supply and the demand side. Simply put, over the next 20 years
we will need all the energy we can develop. We should allow access for
responsible development of promising resource regions in the Arctic,
the Rocky Mountains and offshore. In resource-rich countries in the
developing world, we should promote enhanced contract sanctity and
transparency, which will encourage more investment and access, while
helping expand the economic and social benefits of oil production for
local communities. At the same time, we need to moderate demand by
pushing for more energy efficiency in everything from consumer
appliances to automobiles and aircraft. In the near-term, conservation
is our easiest, cheapest and most reliable ``new'' energy source.
(2) We need to create a regulatory climate that encourages energy
production. In the U.S., some key operating rules should be revised for
refineries, now operating at virtually full capacity. If the government
streamlines the permit process, industry can proceed to add capacity or
improve efficiency without increasing emissions. We should rationalize
state and regional gasoline standards that have effectively
``balkanized'' gasoline supplies. We now have 18 different gasoline
blends in the U.S. to comply with these standards, making it difficult
to move supplies around the country to even out supply disruptions and
moderate pump prices. Natural gas, clean-burning and plentiful globally
but in tight supply in the United States, needs to be commercialized
sensibly but aggressively. The United States has only four terminals
capable of receiving liquefied natural gas, while most forecasts
estimate a need for 10 to 14 new import terminals by 2015 to meet
(3) We should increase investments in viable alternative energy
sources for the future. Renewable sources like solar, wind and water
will continue playing a greater role, growing to about 7 percent of our
total energy needs by the year 2020. We need to continue investing in
renewables and, at the same time, invest in understanding the potential
of new alternative sources such as hydrogen. Although hydrogen'
viability as a widely used fuel is years away, investment today will
help assess its practicality and potentially accelerate its commercial
(4) The U.S. business community must recognize energy as a
strategic--and global--business issue. Corporate American can no longer
treat energy as an expense item or solely as a domestic issue. It is
time for business to act on the knowledge that access to sufficient,
predictable energy supplies is a strategic issue for every company in
every sector of the U.S. economy. The business community should educate
the public about the indelible link between reliable energy and
economic growth, while helping policymakers draft a comprehensive
national energy policy to let us balance volatility with stability and
increasing consumption with greater efficiency.
Moreover, U.S. energy policy in the 21st century cannot stop at the
water's edge. It must reflect our interdependence with producing
countries and encourage bilateral relationships that recognize the
importance of energy development and promote the flow of capital and
Sensible, pragmatic development of new energy supplies is not just
a business issue. Energy development is ultimately a fundamental
element of human progress, particularly in the developing world whose
population is expected to grow more than 1.5 billion in the next 15 to
20 years. Access to energy, like employment and education, is a
building block of stable and prosperous societies. It is our collective
responsibility to provide that access.
The end of easy energy may mean the end of easy choices. But
recognizing the new energy equation is a strong first step toward
resolving it in our favor.