[Senate Hearing 109-3]
[From the U.S. Government Printing Office]

                                                          S. Hrg. 109-3

                     EIA 2005 ANNUAL ENERGY OUTLOOK



                               before the

                              COMMITTEE ON
                      ENERGY AND NATURAL RESOURCES
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION




                            FEBRUARY 3, 2005

                       Printed for the use of the
               Committee on Energy and Natural Resources


20-004                      WASHINGTON : 2005
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                 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

                       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

                               Appendix I

Responses to additional questions................................    71

                              Appendix II

Additional material submitted for the record.....................    73

                     EIA 2005 ANNUAL ENERGY OUTLOOK


                       THURSDAY, FEBRUARY 3, 2005

                                       U.S. Senate,
                 Committee on Energy and Natural Resources,
                                                    Washington, DC.
    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.

                  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 
three issues.
    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 
    Senator Bingaman.
    [The prepared statements of Senators Alexander and 
Feinstein follow:]
     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 
international community.
    I look forward to hearing the witnesses' thoughts on our energy 
future. Thank you Mr. Chairman.

                        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.
    Senator Martinez.

                          FROM FLORIDA

    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.
    Senator Wyden.

                          FROM OREGON

    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 
brief statement.
    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 
this point.*
    * 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.
    Senator Salazar.

                         FROM COLORADO

    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.
    Senator Smith.

                          FROM OREGON

    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.


    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 
million Btu).
    \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 
in 2025.
    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.


    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 
natural gas.
    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?


    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 
gas emissions.
    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


    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.


    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 
accurate data.
    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 
and China.


    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 
exploring this.

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 
have learned.

Demand-Side Measures
    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 
crude volumes.

                           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.


    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, 
Paris 2002.
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 
natural gas.
    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 
planning body.


    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.


    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 
referred to.
    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 
pricing mechanism.
    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 
this scenario.
    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 
        supplies, and
   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 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.


    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 
        demand growth.
   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 
valid option.
    Thank you.
    The Chairman. Thank you very much.
    Now, let us see. We have one last witness, Frank Verrastro.


    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 
logistical support.
    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, 
                             Washington, DC

    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, 
November 2004.
    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 


    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 
sea-borne tankers.
    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 
improve efficiency.


    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 
unwelcome complication.
    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, 
sometimes not.
    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 
years ago.
    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 
price cases.
    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
    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 
been removed.
    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 
open question.
    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 
and sabotage.

Other Suppliers
    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 SUPPLIES

    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 
as robust.
    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 
domestic coal.

                          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 
this interest.
    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 

                         GEOPOLITICAL CONCERNS

    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?


    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 mid-1990s).
    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 
        producing nations;
   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.


    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 
from bidders.
    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 
        distribute oil;
   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 
        crude oil;
   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 
        production concentration;
   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 
    Thank you.

    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.
    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.
    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.
    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, 
Mr. Chairman?
    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 
2 decades.
    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 
less costly.
    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 
market reform.
    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 
from Iran.
    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 
be brief.
    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 
wonderful thing.
    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 
soon here.
    Senator Alexander.
    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 
exactly right.
    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 
would think?
    Mr. Logan. Yes.
    The Chairman. Now, that is not a big part of China's needs 
is it?
    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, 
something important?
    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 
might be?
    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 
obviously wrong.
    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 
very much.
    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 
the problem?
    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 
to it.
    We thank you very much for your time. The hearing is 
    [Whereupon, at 12:18 p.m., the hearing was adjourned.]



                               Appendix I

                   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 
following link:


    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 
reference case.
    A complete discussion of the reference and PTC extension cases is 
provided in the Issues In Focus section of the AEO2005 at:


                              Appendix II

              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.


    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.


    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 
        additional details).

    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 
of ChevronTexaco
            Energy Policy Recommendations from ChevronTexaco

                       DOMESTIC ENERGY STRATEGY: 

    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 
        Energy Resources.''
   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 
and Use.''

                       ENVIRONMENTAL PROTECTION: 

  ``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 
        unintended consequences
   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:

   Open markets
   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 
        energy supplier.
   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 
business environment.

   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: 

    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
   Corporate Governance
   Multilateral Organizations
   Tax policy

    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-
        corruption lawsuits.
   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 
        transitioning nations.

    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 
        low bidders)

    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 
        sustainable development.
   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 
        investment barriers.
   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.

                        LEVERAGING TECHNOLOGY: 

    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 
        alternative fuels.

    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 
        mitigation requirements
   Partner with the energy industry to develop economically and 
        environmentally sustainable policies regarding carbon capture 
        and storage.

    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.

                       CORPORATE RESPONSIBILITY: 

    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 
sustainable development.
    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: 

    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 
economic expansion.

                       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 
gas imported.
    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.


    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 


    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 
committee's convenience.
     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.

    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.


    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 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]
                                                  [in Euro/MWh]
                                                         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.
Source: TVO

    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 
United States.
    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 
Energy Outlook.
    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 
prices continue.\3\
    \1\ Import spending estimates based on 2004 petroleum supply and 
price data provided by 
Energy Information Administration, January 2005 Short Term Energy 
Outlook, http://www.eia.doe.gov/emeu/steo/pub/steo.html.
    \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, 
http://www.eia.doe.gov/emeu/international/petroleu.html#IntlTrade and 
http://www.eia.doe. gov/oil_gas/petroleum/info_glance/
    \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.

    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.


    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 
Week 9/29/04.
    \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.


    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 
        new jobs;
   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 
        idling; and
   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, 
        Washington, DC.

Hon. Jeff Bingaman,
Ranking Member, Committee on Energy and Natural Resources, U.S. Senate, 
        Washington, DC.
    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 
Committee's deliberations.

                                           Amory B. Lovins,
                        Winning the Oil Endgame 
               Innovation for Profits, Jobs, and Security

                           EXECUTIVE SUMMARY

    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 
        spin-off benefits.
   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.''
                                              Time magazine

    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 
foreign policy.
    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 
energy efficiency.
    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, 
                          ChevronTexaco Corp.


    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 
economic growth.
    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 
Middle East.
    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 
projected demand.
    (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.