Global Energy 2010: Emerging Trends, Changing Landscapes, Uncertain Times Frank Verrastro

Senior Vice President and Program Director

Energy & National Security

February 3, 2010

www.csis.org |

US Energy Snapshot

70% Energy Self Sufficient

Largest natural gas producer

3rd largest oil producer

Largest global reserves of coal, but….

Transport sector tied to petroleum based fuels,

Oil imports still problematic

Need to improve efficiency and promote cleaner alternatives but transformation will take time, technology and dollars

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Basic Tenets of Obama E&E Policies

- Reduce/Reverse Trend of Rising Imports

- Improve Balance of Payments Outflow for Energy

- Address the Threat of Climate Change by promoting Efficiency & Renewables; Decouple GDP from Fossil Fuel Use (System Reset)

- Promote New Tech “Green” Jobs

- Address Changing Geopolitical Landscape

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Security & Foreign Policy Objectives

Promotes/Supports

Sustainable

Environment

DefensibleNatural

GasOil

Energy Efficiency

Nuclear

Renewable

Energy

Coal

Economic Objectives

Environmental Objectives

Policy Model

Affordable/Accessible

Supports

Economic Growth & Employment

Environmentally

Benign

Low/no

emissions

Reliable and Secure

Carbon Capture

and

Storage

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Key Features of the Changing Energy LandscapeKey Features of the Changing Energy Landscape

� Continued but uneven demand growth – driven by population & GDP

growth, and living standards, particularly in emerging economies;

� Concern over concentration of conventional resources, reliability of

delivery systems and wealth transfers (2007-08 experience);

� “Peak Oil” concerns more a function of “Above Ground” issues than

resource endowment;

� New Players Emerging with new agendas, business models, leverage and

alliances – New Rules/Institutions?

� Impact of the Economic Crisis, Price Volatility & Regulatory Uncertainty;

� Projected Impacts of Climate Change & Carbon Constraints as Game

Changers;

� Broader issue of the “Commons,” Transnational Threats

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Global Energy Consumption

Source: EIA/IEO 2008

Source: EIA/IEO 2009

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Energy Demand: Driven by Emerging Economies

Source: EIA/IEO 2009

OECD

Non-OECD

241

231

278

400

U.S.

China

100

74

114

156

World Marketed Energy Use

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Developing World is Still Dependent on Fossil Fuels

Source: EIA/IEO 2008

Source: EIA/IEO 2009

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Growth in oil demand is also projected to come from the developing world

-2 0 2 4 6 8 10

China

Middle East

India

Other Asia

Latin America

E. Europe/Eurasia

Africa

OECD North America

OECD Europe

OECD Pacific

mb/d

Source: IEA, WEO 2008

Global Oil Demand Growth, 2006-2030

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Source: IEA Monthly Oil Market Report

Seasonality of Demand

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Beyond Peak Oil: Global resource endowment is enormous, but conventional distribution is uneven and unconventionals

have environmental challenges

11CONVENTIONAL RESOURCES

UNCONVENTIONAL RESOURCES

AGGREGATE DEMAND,

2006-2030Source: Based on 2008 proved reserves (BP Stat

Review) and 2006-2030 demand trends (EIA)

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Non-OPEC Oil Production Looks Flat

Source: EIA, STEO December 2009

(change from previous year)

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OPEC Surplus Production Capacity

Source: EIA STEO December2009, Bloomberg, IEA OMR

Algeria Angola

Iran

Kuwait

Libya

Qatar

Saudi Arabia

UAE

Surplus Capacity, by Country

Total Current (est.): 5.1 mmb/d

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Natural decline rates of oil and gas fields will require massive investment to replace and expand supply

14

Source: CSIS, EIA

Conventional OPEC

Conventional non OPEC

Unconventional and biofuels

Global Liquids (Oil and Biofuels) Replacement

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Massive investments are needed to replace, maintain, improve, and expand the energy system – but when, how and by whom

will $ be spent?

Power

generation

50%

Transmission

& distribution

50%Mining

91%

Shipping &

ports

9%

Exploration and

development

80%

Refining

16%

Shipping

4%

Exploration &

development

61%LNG chain

8%

Transmission

& distribution

31%

Power52%

$13.6 trillion

Oil24%

$6.3 trillion

Gas21%

$5.5 trillion

Coal3%

$0.7 trillion

Biofuels

<1%

$0.2 trillion

Sources: IEA WEO 2008

Required Investments, 2007-2030Total: $26.1 trillion

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15 of the Top 20 Largest Oil Companies are NOCs;NOCs control 80-90% of conventional oil and gas reserves;

Will play an increasing role in managing resources going forward6 %6 %

11 %

77 %

Sources: PFC Energy, HFHS

International Oil Companies

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Supply Chain Risks are Accumulating

Russia:Policy

Russia:Policy

US: Climate Policy, access, storms

US: Climate Policy, access, storms

Caspian:Transit

Security

Caspian:Transit

Security

Europe:Gas

Supplies

Europe:Gas

SuppliesIran:

Nuclear Ambition

Iran:Nuclear

AmbitionIraq: Instability

Iraq: Instability

Nigeria:Civil Unrest

Nigeria:Civil Unrest

Latin America:Resource

Nationalism

Latin America:Resource

Nationalism

N-Korea:Nuclear

Ambition

N-Korea:Nuclear

Ambition

Canada: climate policy

Canada: climate policy

China:Demand increase

China:Demand increase

Aden, Malacca: Piracy

Aden, Malacca: Piracy

Pakistan:Political Turmoil

Pakistan:Political Turmoil

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Additional Considerations

• Downturn in economic growth means lower energy consumption,

reduced prices and lower GHG emissions – for how long?

• But lower prices also mean reduced supply and investment

• Regulatory uncertainty can freeze needed investment

• Climate action requires scalable technologies that largely do not exist

today

• Emphasis on renewables and efficiency is laudable but won’t solve the

problem anytime soon

• Conventional system must remain robust during the transition – which

is decades long

• New global alliances may fundamentally restructure markets

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The Shape of the Economic Recovery Matters

-4

-2

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015An

nu

al G

DP

Gro

wth

(%

)

Emerging and Developing Economies

World

Advanced Economies

Source: IMF data, 2000-2009

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The Impact of Climate Change The Impact of Climate Change

& Carbon Constraints& Carbon Constraints

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Climate Change as a Game Changer

• Affects supply & demand

• Alters fuels choices, increases prices

• In the extreme, raises security concerns

• New investment & technologies applied on a global scale

• Concept of “Sustainable Development” challenges traditional view of economic prosperity

• Requires long-term global policy solutions and trade-off balances

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Food

Water

Ecosystems

ExtremeWeather

Warming

Risk of Irreversibleor Abrupt Changes

Falling crop yields in developing regions first, then developed regions later

Mountain glaciersdisappear; Decreasedwater in some areas

Many more areas sufferfrom low water availability

Sea level risethreatens major cities

Rising numbers of species extinctions

Rising intensity of storms, wildfires, droughts, floods, heatwaves

Rising risk of dangerous positive feedbacks,Rapid SLR and collapse of Atlantic conveyor

Extensive damage to coral reefs

Today

E3G, Adapted from Stern 2006

450ppm

550ppm

650ppm

750ppm

850ppm

950ppm

Assessing Risk

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What does a “Low Carbon Revolution” Look Like?

“Scale of economic transformation on par with

industrial revolution but must be achieved within one third of

the timeframe.”~McKinsey Global Institute

“US$45 trillion between now and 2050”

~ IEA, Technology Prospectus

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But Recent Studies indicate….

� Even if we are successful at Reducing GHG Emissions from peak, the impacts of higher concentrations and temperatures will be with us for centuries

� There is increasing concern that achieving a 450 ppm level will not guarantee stemming temperature rise to 2-3 degrees

� 350 may be the new 450 so “front end” action is needed

� Technology solutions limited at global scale until post-2020

� Achieving 450 level requires reduction of 48 Gigatonnes by 2050

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Build 130 new (1GW) nuclear power plants in lieu

of new coal-fired power plants without CO2

capture and storage

CO2 CaptureIn Forestry

Nuclear

Coal-Fired Generation

Improved Efficiency

Double fuel efficiency; Deploy 290 million new cars at

40mpg rather than 20mpg

Build 320 new zero-emission 500MW coal-fired power

plants in lieu of coal-fired plants without CO2 capture

and storage (none exist now)

Convert 100 million acres of barren area to new forest

(equiv of Spain, 2.5 times the size of Washington

state)

Technology Each option would save one gigatonne of CO2 per year

Source: DOE Climate Change Technology Program,

http://www.climatetechnology.gov/stratplan/final/index.htm 25

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Climate Change as a Threat Multiplier

Water Scarcity Demography Crop Decline Hunger Coastal RisksRecent Conflicts

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A schematic overview of inter-relationships between adaptation, mitigation and impacts.

Cost o

f Mitig

ation

Cost

of Im

pac

ts

Cost of Adaptation

AllMitigation

No Action All Adaptationmore

more

less

less

less

more

What is Optimal?

There Will Be Costs

The Questions: How We Choose to Pay, Who Will Pay, How will the $ be spent?

Choices Must Be Made in Context of Balancing “E3” Goals of

• Energy Security

• Economy

• Environment

Source: Holdridge, M.L. Parry

Balancing Costs of Impacts, Mitigation, and AdaptationBalancing Costs of Impacts, Mitigation, and Adaptation

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Recognized Challenges – But How to Respond?

• Must transform the way we produce, deliver and consume energy

• Energy efficiency is key, but investments often have a long termpayout, so focus on information and incentives

• Renewables are increasingly competitive, but intermittency and grid connection problems remain; they also are unable to replace conventional fuels at scale anytime soon

• Preservation of role for coal requires solution on carbon capture and storage, but CCS not demonstrated on commercial scale, requires new infrastructure and is likely not a long term solution

• Nuclear energy requires large up front capital investment and faces safety, waste and proliferation concerns – management on global scale is key

• During transition, we must ensure the viability of conventional fuel system

• Must engage internationally, both to solve climate change and tomaintain relationships with important partners that offer energysupplies and security

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So, Now for the Good News:

…same as saving a

barrel of oil on the Beltway

Saving a Barrel of Oil in Bangkok or Beijing…

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Plenty of Opportunity for Improving Energy Intensity

10,508 11,367 13,08618,646 19,825

28,686

73,032

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

North

America

Western

Europe

Africa Asia &

Oceania

Central &

South

America

Middle

East

Eastern

Europe &

FSU

En

erg

y In

ten

sit

y, 1000 B

TU

/$ o

f G

DP

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Changing the Trajectory of Energy Growth in Non-OECD is Crucial to Our Future

0

50

100

150

200

250

300

350

400

450

0 5 10 15 20 25 30 35 40

GDP/Capita (Thousand $)

En

erg

y C

on

su

mp

tio

n, M

MB

TU

/Cap

ita

USA

China

Russia

Japan

Germany

India

Canada

France

UK

Brazil

S. Korea

Italy

Mexico

Ukraine

Spain

Iran

Australia

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What could the 21What could the 21stst Century Energy Network look like?Century Energy Network look like?

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The Natural Gas Dilemma

Global gas demand to grow, especially in a carbon

constrained world; 40% cleaner than coal but not emission

free

Conventional supply sources become more concentrated

geographically

Concentration can affect leverage, supply and prices,

geopolitics, etc.

Delivery System Under Greater Stress

Price rise + increased import dependence recreates balance

of payments concerns

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What’s New?: Substantial growth in U.S. natural gas production through 2030 led by unconventionals…

History Projections

Associated/Dissolved

Non-associated Offshore

Nonassociated

Onshore Conventional

Onshore Unconventional

Alaska

trillion cubic feet

Source: EIA Annual Energy Outlook 2009

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Conventional vs. Continuous Resources

Source: USGS

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Game-Changing Potential: Estimates of US Shale Gas Resources

EIA Annual Energy Outlook 2009: 267 tcf undiscovered technically

recoverable shale gas resources (mean)• Based on 2007 U.S. Geological Survey assessment and 2006 Mineral

Management Service data

Navigant Consulting Inc. 2008: 274 tcf undiscovered technically

recoverable shale gas resources (mean)• Based on aggregated data from numerous studies

Navigant Producer Reports 2008: up to 842 tcf undiscovered technically

recoverable shale gas resources (max reported)• Ascertained by Navigant in 2008 study (accounts for Marcellus and Haynesville)

Potential Gas Committee 2009: 616 tcf undiscovered technically

recoverable shale gas resources (mean) • Estimated total U.S. gas resources of 2,074 tcf (mean undiscovered tech

recoverable + reserves)

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The Magnificent 7 – No. American Shale Gas

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Shale Resources and Natural Gas Pipeline Network

Source: R Hefner

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Implications of Global Shale Gas Exploitation

• Development of US shale formations would free up LNG for use elsewhere

• Significant shale prospects likely in China, Turkey, Australia and Europe

• Development of indigenous gas sources, coupled with LNG, efficiency, renewables and interconnects could reduce EU reliance on Russian gas

• Increased gas use to displace coal reduces GHG emissions

• Global gas surplus could revamp price/contract structures

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BUT …realizing the full promise of shale resources is not a certainty and US domestic policy is important!

Technical/Economic Challenges

• All shales are not alike; application of drilling/reservoir fracturing

technology & operational experience matters

• Steep decline rates require ongoing investment and drilling; and repeated

fracturing

• Up front investment (lease acreage and pilot wells) not insignificant vs.

cost basis relative to commodity price/value

Environmental/Regulatory/Societal Challenges

• Uncertain regulation (fracturing, HOH, land use, permits),

“industrialization” of areas unfamiliar with development plans and

associated impacts; scale of water use/disposal are challenging

• Location, location, location – shale resources are, at times, proximate to

and distant from delivery infrastructure and demand centers – both

present problems