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Transcript of 0 The Emerging U.S. Natural Gas & Electricity Crisis – How You Can Help Andrew D. Weissman Senior...
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The Emerging U.S. Natural Gas & Electricity Crisis – How You Can Help
Andrew D. WeissmanSenior Managing Director
FTI Consulting, [email protected]
University of North Carolina/Duke UniversitySeptember 28, 2005
Energy Challenges Seminar
2
Major Threat Major Threat
U.S. faces serious energy crisis
– Natural gas & electricity as much or more than oil Supplies of fuel & feedstock no longer sufficient to sustain
normal growth of U.S. economy– Major dislocation point; due to long-term structural imbalance
between supply and demand Already has resulted in serious economic harm
– At least $ ½ trillion bite from U.S. economy over past 2 ½ years Could quickly become far more severe
– In BTU equivalent terms, by 2015 potential natural gas supply gap = 1 ½ X current U.S. oil imports from Middle East
Potentially = greatest threat to health of U.S. economy over next 10 to 15 years
Could also thwart efforts to achieve major environmental goals, significantly affect careers of current UNC and Duke students
3
Questions Posed Questions Posed
Presentation focuses on four key issues:
1. Fundamental drivers
2. Actions required to ameliorate
3. Reasons not recognized sooner
4. Steps to strengthen our institutions to avoid repetition
– Government, private industry, academic
Many lessons learned applicable to other major public policy issues:
– Inability to effectively control health care costs/maximize quality of health care services provided
– Lagging quality of U.S. public education system
– Lagging penetration rate for access to broadband
4
Solutions Start Here Solutions Start Here
Thesis: need to teach more effectively -- 1. Limits of what markets can accomplish
– Problem of the commons, difficulty of ensuring adequate investment in public goods, reluctance to make large capital investments in high-risk projects with long lead times
2. Skills in integrated, interdisciplinary problem solving
Real world has come to mirror division of university into series of separate academic disciplines– Armies of highly skilled specialists, but remarkably few
capable generalists; disinclination to focus on effectively solving problems in holistic manner
Greatest value often resides in connecting dots Also need to devote far more academic research & course
work to major public policy issues + develop new models for partnerships with government to tackle these issues
5
Emerging Natural Gas & Electricity Crisis Poses Greater Threat to U.S. Economy Than
Rising Oil Prices
6
Key Fuel For EconomyKey Fuel For Economy
One quarter of our total energy supply
U.S. = largest natural gas U.S. in world
97 % of current supply obtained from U.S. & Canada
Perceived as clean fuel
Has been fuel of choice to meet incremental demand for:
– Residential
– Commercial
– Electric power
– Manufacturing sector
7
Increasingly Drives Electricity PricingIncreasingly Drives Electricity Pricing
Natural gas is setting an increasing critical role in power generation
Sets market-clearing price for electricity in wholesale markets increasing number of hours every year:
Source: CERA
8
Risks to U.S. Economy > Than for Oil Risks to U.S. Economy > Than for Oil
Future natural gas price shocks = greater risks than oil
Unlike oil (where impact global), impact of higher prices and supply shortages concentrated in U.S.
Including electricity, $$’s at stake nearly 50 % > than for oil
Total U.S. Energy Use – 2004 (Quad BTU)
Energy Source
Fuel Consumption
Percentage of Total U.S. Fuel Use
Generation of Electricity
38.86 Quad Btu (Incl. Use of 5.33 Quad Btu of Natural Gas and 1.20
Quad Btu of Oil)
38.9 %
Direct Use of Natural Gas by Residential, Commercial & Industrial Users
17.40 Quad Btu
17.4 %
Direct Use of Oil (Including Transportation)
38.86 Quad Btu (Incl. 2.85 Quad Btu of Natural Gas Liquids)
38.9 %
Direct Use of Coal & Other Fuels
4.69 Quad Btu
4.7 %
Total U.S. 99.81 Quad Btu 100.0 %
9
No National Energy PolicyNo National Energy Policy
U.S. Department of Energy currently expects major shift in future sources of supply
Largely by default, U.S. now dependent upon two highly uncertain potential sources of supply to meet future needs
– Hoped for major expansion in LNG + proposed Alaskan pipeline
10
LNG Imports Expected to Increase SharplyLNG Imports Expected to Increase Sharply
Longer term, LNG imports could add significantly to U.S. trade deficit By 2020, in BTU equivalent terms, expected to exceed current oil imports from
Persian Gulf by 20 %
EIA estimates will account for up to 87 % of incremental U.S. natural gas supply
Potential Increase in Balance of Payments Deficit Due to Increased Imports of LNG
Impact of Liquefied Natural Gas Imports
$ 3.5
$ 18.0
$ 32.0
$ 40.0
$ 50.0
$ 0
$ 10
$ 20
$ 30
$ 40
$ 50
$ 60
2004 2010 2015 2020 2025
(bill
ion
per y
ear)
11
Recent events highlight vulnerability of U.S. economy to soaring energy costs Severe natural gas summer-month price spike
Post-Katrina/post-Rita explosion to all-time highs
Not a short-term problem; past 3 ¾ years: 6 X increase in natural gas prices, 3 X in oil
Daily Closing Prices Natural Gas October '05
$5
$6
$7
$8
$9
$10
$11
$12
3-J
an
17-J
an
31-J
an
14-F
eb
28-F
eb
14-M
ar
28-M
ar
11-A
pr
25-A
pr
9-M
ay
23-M
ay
6-J
un
20-J
un
4-J
ul
18-J
ul
1-A
ug
15-A
ug
29-A
ug
Daily Closing Prices Crude Oil October '05
$40
$45
$50
$55
$60
$65
$70
3-J
an
17-J
an
31-J
an
14-F
eb
28-F
eb
14-M
ar
28-M
ar
11-A
pr
25-A
pr
9-M
ay
23-M
ay
6-J
un
20-J
un
4-J
ul
18-J
ul
1-A
ug
15-A
ug
29-A
ug
Recent Increases inNatural Gas Prices
Recent Increases in Crude Oil Prices
U.S. Reaching a Crisis PointU.S. Reaching a Crisis Point
12
Major Long-Term Inflexion PointMajor Long-Term Inflexion Point
Still just “tip of the iceberg”
Cause = long-term structural imbalance between growing demand and available supplies
– In North America for natural gas, globally for oil
Supply gap certain to:
– Become more severe over time
– Result in major dislocations to U.S. & global economies
No easy or quick solutions
13
Price Shocks to U.S. EconomyPrice Shocks to U.S. Economy
Past 4 years have seen:
– $ 400 billion/year + increase in oil costs
– $ 225 billion/year + increase in natural gas costs
– $ 100 billion/year + increase in price of electricity
Significant adverse impact on U.S. economy
– Reduces consumer spending power, ability of U.S. companies to compete in global markets
– Federal Reserve Board estimates reduced U.S. GDP by ¾ of 1 % in 4th quarter of 2004 alone
$ 200 billion/year + increase over past 4 years in energy contribution to balance of payments deficit
– Creates need to borrow an additional $ 500 million per day from other countries to pay for imported fuel
14
Katrina & Rita Add to UrgencyKatrina & Rita Add to Urgency
Katrina & Rita have thrown a match onto an uncovered tank of kerosene
Production losses virtually certain to be far greater than for Ivan one year ago Ivan: 45 million barrels of oil, 178 Bcf of natural gas, minimal
impact on refined products Katrina/Rita: could easily result in 160 to 180 million barrels
of lost oil production, 300 to 500 Bcf of loss natural gas production, steepest draw downs ever of gasoline and other refined products
Impact on oil market partially mitigated by surge of oil imports from Europe + draw downs of government reserves No similar source of relief available for natural gas
Magnitude of natural gas price increase depends upon severity of winter weather But risk of severe price spikes is off the charts
15
Decisive Action RequiredDecisive Action Required
Creates urgent need to put in place comprehensive program to develop alternative sources of supply under direct U.S. control
Emphasis should be on critical period of next 3 to 10 years– Available options limited; risk of price spikes & potential supply
shortages particularly high In addition to conservation & renewable energy, potential
elements for inclusion in any response plan include:1. Rapid deployment of advanced coal gasification systems to
provide an alternative fuel supply for currently under-utilized gas-fired combined cycle units & major industrial users
2. Replacement of older, less efficient gas-fired generating units with new advanced pulverized coal-fired units or combined cycle units that utilize synthetic gas
3. Efforts to significantly accelerate development of new on-shore and off-shore gas fields
4. Modernization of electric T&D system to significantly reduce line losses
16
Rapid Deployment of Coal Gasification = KeyRapid Deployment of Coal Gasification = Key
Major goal: to minimize growth in use of natural gas to generate electricity in order to preserve available supplies for higher priority uses
Rapid deployment of coal gasification = key to achieving this goal
Low-hanging fruit– Technology already demonstrated
– Ample coal supplies available
– Issue = willingness to take decisive action in a timely manner
Requires adding at least:– 35,000 to 50,000 MW’s of gasification capability by 2015
– An additional 35,000 MW by 2020
Sufficient to displace:– 33 to 45 % of expected increase in natural gas demand by 2015
– 40 to 50 % of expected increase in demand by 2020
17
Alternatives Potentially DireAlternatives Potentially Dire
Other potential actions (e.g., nuclear power or renewables) can contribute significantly to long-term solution but will not provide relief soon enough or on required scale
Life or death issue for many U.S. companies Significant portion of U.S. manufacturing sector cannot
survive $ 12 to 20/MMBTU natural gas– Even prices this high may not be sufficient for market to
clear
Potential adverse impact on U.S. balance of payments deficit, value of U.S. dollar of lost manufacturing revenues could be severe
Massive imports of Liquefied Natural Gas (LNG) not the answer
– Far too few multi-billion dollar liquefaction projects being under-taken to meet likely global demand
– Competition for output likely to fierce + priced against oil
18
Not a Short Term Problem
19
Collision of Tectonic PlatesCollision of Tectonic Plates
Train wreck that is beginning to occur stems from collision of two tectonic plates set in motion long ago:
1. After several decades of development, production from most conventional on-shore fields in U.S., Alberta and Near-Shelf region in Gulf has either hit plateau or entered into a period of rapid – and irreversible -- decline Particularly severe in shallow waters off Gulf Coast
Until recently, most important source of new U.S. supplies
2. Simultaneously, demand is growing rapidly due to shift to natural gas as near-exclusive fuel to meet incremental electricity needs of U.S. economy Due in part to:
Delayed impact of Clean Air Act requirements enacted long ago
20-year period required to work off huge generation surplus left over after oil price shocks of ’70’s
20
Continued Economic Growth Requires
Expanded Supplies of Electricity
Continued Economic Growth Requires
Expanded Supplies of Electricity
Demand for electricity generally increases every year Current ratio = 0.72% increase for each 1% growth in GDP
21
Major Shift in Incremental Source of SupplyMajor Shift in Incremental Source of Supply
Prior to late ’90’s, possible to meet high % of incremental electricity needs of U.S. economy thru increased utilization of existing coal and nuclear units:
Source of Electric Generation to MeetIncremental Demand (1979-97)
0
1400
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997
Bill
ion
Kw
h
Coal Nuclear Natural Gas Renewable (excl. Hydro)
22
4.561
5.322
5.691
5.081
4.2
4.4
4.6
4.8
5.0
5.2
5.4
5.6
5.8
1997 1998 1999 2000
Sharp Increase in Natural Gas ConsumptionSharp Increase in Natural Gas Consumption
Beginning in 1998, however, as coal and nuclear fleet increasingly utilized at maximum capacity, power sector consumption of natural gas began to rapidly increase:
Cumulative In
crease = 1.13 TCf
TCf
TCf
TCf
TCf
Power Sector Consumption of Natural Gas (1997-2000)
23
Mild Winters Temporarily Masked IncreaseMild Winters Temporarily Masked Increase
Warmer-than-normal winters initially masked magnitude of increase Resulting reductions in use of natural gas for space heating entirely
offset power sector demand for natural gas
24
Prices QuadrupledPrices Quadrupled
In 2000, mild winter weather no longer masked increase in power sector demand
Led to 4X increase in natural gas prices nationally not predicted in advance by anyone in industry
25
Abrupt Shift in Strategy for Meeting U.S. Electricity Needs
Without Careful Evaluation by AnyFederal or State Agency
26
Need for New CapacityNeed for New Capacity
By late 1990’s, as load continued to grow, new electric generating capacity needed in every region of U.S. for first time in almost 30 years
At this key choice point, utility industry in midst of far-reaching change FERC de-regulation of wholesale markets + state PUC restructuring
Explosive growth of Independent Power Producer industry & power marketers
Power plant developers strongly favored gas-fired capacity over coal Shorter lead time and much lower (apparent) capital cost
Lower perceived permitting risk/seen as “pro-environment”
Near universal belief natural gas supplies would remain plentiful and prices would remain low, based in part upon 1999 National Petroleum Council Study Parallels in some respects impact of 2003 NPC Study urging strategy
of massively increasing dependence upon imports of LNG
27
Ample Natural Gas Supplies ExpectedAmple Natural Gas Supplies Expected
1999 NPC Study forecast North American natural gas production rising to 33.5 TCf by 2015 without significant price increases Increased production expected to come principally from U.S.
sources
28
Key JunctureKey Juncture
Timing of 1999 NPC study critical
Key choice point regarding long-term strategy for meeting incremental electricity requirements of U.S. economy
Potential long-term implications for U.S. economy of decisions required to be made during this period not well understood at the time
With benefit of hindsight, one of the most significant failures of public policy formulation of past decade Lack of adequate analysis and review at both federal and state
level nationwide
Arguably already has resulted in $ 100 billion + in potentially avoidable energy costs Negated all or most of the benefits of industry restructuring
Potential long-term costs could be many times greater
29
Choices NecessaryChoices Necessary
Result of choices made = abrupt shift in U.S. energy policy $ 100 billion investment in new gas-fired plants
Enough generation to meet total current electricity demand in Great Britain, Germany and France combined
30
One of Two Major Causes ofCalifornia Energy Crisis in 2000
One of Two Major Causes ofCalifornia Energy Crisis in 2000
U.S. now dependent upon gas-fired units to meet virtually all of its incremental electricity needs for at least the rest of this decade
Expected Sources of Incremental Generation(2000-2020)
0
1800
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Bill
ion
Kw
h
Coal Nuclear Natural Gas Renewable (excl. Hydro)
31
Primary Driver of Increased Consumption
Primary Driver of Increased Consumption
After brief pause early in decade, power sector consumption of natural gas likely to increase significantly every year:
Cumulative Increase in Power Industry Natural Gas Consumption (2004-2015) vs. 2003
0
1
2
3
4
5
6
7
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Year
To
tal T
Cf
32
Cumulative Increases HugeCumulative Increases Huge
Increase likely to be > 3.4 TCf by 2010, > 5.7 TCf by 2015
No other current source of generation to meet incremental electricity needs of U.S.economy
Projected Increase in Power Sector Natural Gas Consumption
Year Increase
Increase vs. 2003
Total
2004 0.275 TCf 0.250 TCf 5.486 TCf2005 0.462 TCf 0.712 TCf 5.948 TCf2006 0.563 TCf 1.275 TCf 6.511 TCf2007 0.522 TCf 1.797 TCf 7.033 TCf2008 0.460 TCf 2.257 TCf 7.493 TCf2009 0.568 TCf 2.825 TCf 8.061 TCf2010 0.568 TCf 3.393 TCf 8.629 TCf2011 0.353 TCf 3.746 TCf 8.892 TCf2012 0.353 TCf 4.099 TCf 9.335 TCf2013 0.546 TCf 4.645 TCf 9.881 TCf2014 0.546 TCf 5.191 TCf 10.427 TCf2015 0.546 TCf 5.737 TCf 10.975 TCf
33
Creates Massive Hole in Expected U.S. Energy Supply
Creates Massive Hole in Expected U.S. Energy Supply
2003 NPC Study reduces 1999 estimate of total natural gas production from “traditional” North American sources of supply by an almost unfathomable 50 TCf + between now and 2015
Creates >21 TCf gap between projected needs and available supplies and between now and 2010
34
Creates Huge VoidCreates Huge Void
North American supply certain to fall far short of current estimates of U.S. demand
NPC U.S. production estimate for 2010 reduced by a staggering 16 BCf/day vs. 1999 forecast (i.e., just under 6.0 TCf/year)
2003 NPC Forecast of U.S. Production
35
Production Has Hit PlateauProduction Has Hit Plateau
At best, production increases in Rockies and Deepwater projects in Gulf of Mexico expected to just barely offset declines in other basins
2003 NPC Forecast of North American Production
36
May Overestimate SignificantlyAvailable Supplies
May Overestimate SignificantlyAvailable Supplies
NPC estimates more of a “best case” than a “most likely” scenario
Many assumptions – while plausible – may not be achieved No contingency for further declines
Assumes that: Decline rates, which have been increasing significantly, will soon level off
Well size, which has been falling rapidly, will soon begin to stabilize, with only modest further decreases in future years
Also assumes that high degree of success in finding new targets in existing fields and new fields in unexplored regions even though: Expenditures on exploratory drilling have slowed markedly (as companies prefer to buy
proven reserves than to explore)
Many E&P companies are said to have largely exhausted their inventory of attractive prospects during 2000/2001
Also, does not take into account potential for steep decline in imports in Canada due to Tar Sands development + commitment to retire all existing coal-fired plants in Ontario by 2007 and other potential Kyoto-related measures
37
High Level of Uncertainty Regarding
Ability to Achieve Targets
High Level of Uncertainty Regarding
Ability to Achieve Targets To meet NPC targets, more than ½ future U.S. production must
come from undiscovered wells in undiscovered fields
38
Steep Price Increases LikelySteep Price Increases Likely
Potential price increases likely to be far greater than currently assumed
To a significant degree, all but core industrial users who value natural gas highly already have been driven out of market
For remaining users, cost of natural gas often a smaller % of total cost of goods produced than for users forced to leave market in previous years
Economy currently still reasonable strong
Far higher percentage of industrial users hedged than in earlier years
Most viable fuel switching already has occurred
End result: may require steep increases to free up even relatively modest supplies – let alone amounts required
39
Bottom LineBottom Line
U.S. faces unprecedented natural gas supply shortfall Already has caused serious harm to the economy
Severe, unanticipated price spikes 3 out of past 5 winters One of two major precipitating causes of California crisis in
2000 May have helped to precipitate recession in 2001 (worst
manufacturing recession in 22 years) No precedent for being able to sustain growth of U.S. economy
without being able to expand supplies of electricity Yet, no urgent effort is being made at national level to:
Dramatically improve efficiency of energy utilization beyond current levels
Increase our ability to supply electricity from alternative sources (e.g., coal, nuclear and renewable energy)
Unless corrected, likely to have severe adverse repercussions for economy
40
Why Isn’t Urgency of Emerging
Crisis Better Understood?
41
Masked by WeatherMasked by Weather
Winter of 2002-2003 gave an early indication of severity of current shortfall Started winter with above-average amounts of natural gas in storage
Number of gas-weighted Heating Degree Days only 0.7 % > normal
Still just barely avoided crisis
Since that time, demand has grown significantly and supplies have fallen
On a weather normalized basis, even at current record price levels, U.S. market chronically under-supplied Energy Ventures Group estimate: by at least 500 to 750 BCf
During the past year, only an extraordinary streak of back-to-back mild weather events has masked severity of shortfall
As soon as weather reverts to historical norms, natural gas prices will soar Even if oil prices moderate (which is not likely to occur)
42
Extraordinary String of Back-to-Back EventsExtraordinary String of Back-to-Back Events
In 2004, not just one episode of milder-than-normal weather, but an unbroken string of one after another followed by another Temperatures generally warmer-than-normal (in winter, spring and fall),
significantly reducing space heating demand
But summer then far cooler-than-normal (reducing use of power sector demand for natural gas to run air conditioners by at least 300 BCf)
Includes: 3rd mildest spring in past 110 years in spring of 2004
Followed by 2nd coolest summer in 30 years
Followed by an exceptionally mild fall
Followed by an exceptionally mild winter, with Heating Degree Days far below normal for 4 months in a row (i.e., November through February)
March was the first month in a year with slightly above normal weather-related demand - but April has again been exceptionally mild
43
Extremely Mild Spring Last YearExtremely Mild Spring Last Year
3rd mildest spring in 110 years
44
Like Flicking a Switch on First Day of SummerLike Flicking a Switch on First Day of Summer
Followed immediately by exceptionally mild summer Huge impact on power sector consumption of natural gas
45
Switch BackSwitch Back
Then switched back in fall:
46
Exceptionally Mild WinterExceptionally Mild Winter
Then capped off by exceptionally mild temperatures in core winter months from December through February – particularly in Midwest Greatest impact on consumption of natural gas
47
Current StrategyFor Meeting U.S. Needs
Certain to Fail
48
Role of LNGRole of LNG
Increased imports of LNG should and almost certainly will play at least some role in filling a portion of existing U.S. natural supply gap
Concerns regarding transportation safety appear to be exaggerated
BUT -- availability of new supplies in timely manner + price = far greater concerns
Increased imports of LNG may be appropriate when: Obtained from reliable suppliers Within time frame required to meet U.S. needs Pursuant to firm, long-term commitments made directly to end-users
of natural gas, Local Distribution Companies or generators With guaranteed, commercially binding start-dates for deliveries
enforceable through meaningful penalties At reasonable prices not indexed to the price of oil Pursuant to contracts that guarantee replacement supplies if
shipments from the expected source of supply are curtailed Even then, however, dependence upon LNG has a huge
potential cost in terms of job loss to U.S. economy and adverse balance of payments impact
49
Threatens Long-Term U.S. ProsperityThreatens Long-Term U.S. Prosperity
Impact of energy costs on trade deficit = particularly serious long-term threat >30 % decline in value of U.S. dollar vs. EURO over past 2 years Decline expected to continue and potentially accelerate
Higher energy costs increase trade deficit through: Rapid increase in expenditures for imported fuels (i.e., oil + LNG) Decline in U.S. exports – particularly chemical industry &
agricultural products (two largest exporting industries)
Heavily-LNG dependent strategy virtually guarantees U.S. natural gas & electricity costs will be among highest in the world Greater distance from producers results in higher delivered costs
As a result, heavily LNG-dependent likely to: Increase inflation rate Significantly reduce growth rate of U.S. economy Cause significant job loss Seriously impair ability of U.S. companies to compete in world
markets
50
Fuel Imports Drive Trade DeficitFuel Imports Drive Trade Deficit
Dollar outflow to pay for imported fuels has tripled over past 4 years:
Could double again over next 24 to 48 months
US Fuel Imports (billions of dollars)
U.S. Fuel Imports
$ 75
$ 225
$ 0
$ 50
$ 100
$ 150
$ 200
$ 250
2002 2005
(bill
ions
)
51
LNG Imports Expected to Increase SharplyLNG Imports Expected to Increase Sharply
Longer term, LNG imports could add significantly to U.S. trade deficit By 2020, in BTU equivalent terms, expected to exceed current oil imports from
Persian Gulf by 20 %
EIA estimates will account for up to 87 % of incremental U.S. natural gas supply
Potential Increase in Balance of Payments Deficit Due to Increased Imports of LNG
Impact of Liquefied Natural Gas Imports
$ 3.5
$ 18.0
$ 32.0
$ 40.0
$ 50.0
$ 0
$ 10
$ 20
$ 30
$ 40
$ 50
$ 60
2004 2010 2015 2020 2025
(bill
ion
per y
ear)
52
Need for Careful Evaluation of AlternativesNeed for Careful Evaluation of Alternatives
To date, no careful effort has been made at either Federal or State level to evaluate potential alternatives to a policy of massively increasing imports of LNG
In many respects surprising
Just 36 months ago, EIA did not expect increased imports of LNG to play an significant role in meeting future U.S. energy needs U.S. now expecting to rely upon increased imports of LNG for up to
87 % of its incremental supplies of natural gas (potentially 100 % excl. Alaska)
Must be obtained almost entirely from projects that have not yet even broken ground
Pricing terms uncertain – but likely to be closely linked with oil
By 2020, in BTU equivalent terms, imports of LNG expected to significantly exceed current oil imports from Middle East
Could seriously exacerbate already severe U.S. balance of payments deficit and further weaken value of U.S. dollar
53
Unanswered QuestionsUnanswered Questions
Unanswered questions include:
1. How many new projects actually will be built
2. When they will be completed
3. Likely price terms/extent to which pricing will be tied to oil
4. How U.S. can protect itself against potential for extended delays in completion of projects not under its control
5. Extent of risk U.S. will be outbid for the output of these projects from competitors in other Regions (e.g., China, India, Japan, Korea, many European countries)
6. Potential for shipping to be disrupted or for shipments to be diverted to other countries
7. Potential pricing power of suppliers (who have the ability to sell spot market cargoes to the highest bidder anywhere in the world)
8. Whether there is any way to mitigate the job loss or the severe potential adverse impact on the U.S. balance of payments deficit from relying on a new source of imported fuel rather than domestic sources of supply
54
Potential AlternativesPotential Alternatives
Potential alternatives include: More intensive efforts to facilitate development of domestic
supplies of natural gas
An urgent effort to rapidly deploy coal gasification on a major scale nationally, both to provide a source of fuel for existing gas-fired combined cycle units and existing industrial facilities and as a source of fuel for new facilities
Relief of major electric transmission bottlenecks that prevent full utilization of existing coal-fired plants
Replacement of older, steam-fired gas plants in load pockets with new, more efficient combined cycle units
Accelerated construction of new coal and nuclear plants
Further efforts to promote renewable energy
Accelerated energy conservation, especially in commercial office buildings and retail shopping malls (where the greatest waste currently occurs)
55
Issues Requiring EvaluationIssues Requiring Evaluation
To date, there has not been any rigorous analysis – or, indeed, any analysis at all – of the potential risks and benefits of these alternatives vs. a heavily-LNG dependent strategy in terms of: Reliability of U.S. energy supply Potential pricing power of major LNG suppliers/ability to
dramatically increase U.S. natural gas prices by shipping to other countries cargoes originally expected to be delivered to the U.S. market
Resulting potential for severe price shocks and heightened price volatility in the U.S. natural gas and electricity markets
Potential job loss or job creation in the U.S. economy depending upon whether U.S. energy supply is obtained using domestic resources or by increasing dependence upon imported fuels
The continued ability of U.S. industry and U.S. farmers (who depend upon the availability of competitively-priced fertilizer) to compete in world markets
The U.S. balance of payments deficit The future growth of the U.S. economy
56
Lack of Any Fall-back StrategyLack of Any Fall-back Strategy
Nor has any apparent effort been made to develop a possible U.S. “fall-back” strategy if: The global LNG market does not develop as rapidly as forecasts assume
or available reserves are used to develop liquid fuels instead of LNG;
Other countries outbid the U.S. for the limited new supplies expected to become available on the world market over the next 7 to 10 years; or
Supplies from one or more suppliers are interrupted at any point in time due to political unrest, labor strikes, terrorist incidents, wars or any of the other factors that frequently interrupt international shipments of oil
Instead, to date, one of the most important energy policy choices ever facing the U.S. has been made almost entirely by default, with little or no apparent thought given to the potential risks of a heavily LNG-dependent strategy
It’s as if we learned nothing from the gas-fired plant fiasco of the first ½ of this decade – which already has resulted in $ 100 billion or more in unanticipated costs – or dependence upon imported oil
57
Urgent Need to Deploy CoalGasification On a Major Scale
58
Rapid Deployment of Coal Gasification = KeyRapid Deployment of Coal Gasification = Key
Major goal: to minimize growth in use of natural gas to generate electricity in order to preserve available supplies of natural gas for other, higher priority uses
Rapid deployment of coal gasification = key to achieving this goal Low-hanging fruit
Technology already demonstrated Ample coal supplies available Issue = willingness to take decisive action in a timely manner
Requires adding at least: 35,000 to 50,000 MW’s of gasification capability by 2015 An additional 35,000 MW by 2020
Sufficient to displace: 33 to 45 % of expected increase in natural gas demand by 2015 40 to 50 % of expected increase in demand by 2020
Proposed Alaskan pipeline potentially can supply most of the remaining required increase by 2016 or 2017
59
Huge Potential BenefitsHuge Potential Benefits
Potential benefits compelling:
1. Huge reduction in natural gas & electricity costs, compared to increases that are otherwise nearly certain to occur
– Savings easily could reach $ 150 to 300 billion per year
2. Creates a large number of new U.S. jobs, to construct new gasification facilities and coal mines and provide required fuel on an ongoing basis
3. Greatly reduces risk of a long-term, energy-price-induced slow down in growth rate of U.S. economy
4. As a practical matter, only strategy to avoid massive further declines in U.S. manufacturing sector
5. Eliminates – or at least reduces greatly – massive increase in U.S. balance of payments deficit otherwise likely to occur due to:
– Loss of large number of U.S. manufacturing jobs
– Proposed massive increase in imports of Liquefied Natural Gas (LNG)
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Compelling Reasons to ActCompelling Reasons to Act
Health and prosperity of U.S economy for at least next 10 to 15 years directly at stake
Steep natural gas price increases of past several years demonstrates seriousness of problems
Realistic action plan at federal level must be developed and implemented on an “urgent, highest priority possible” basis Alternative = potentially catastrophic further energy price
increases and potential periodic shortages of electricity and natural gas
Proposed actions cost effective even at prices well below current levels
Only unresolved issue = willingness to act – especially in the time frame required to avoid severe potential set-backs for U.S. economy
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How to Contact Andy for QuestionsHow to Contact Andy for Questions
Mailing Address: Andy Weissman FTI Consulting, Inc.
1201 Eye St., N.W. Suite 400 Washington, D.C. 20005
E-mail: [email protected]
Office Phone: 202/589-2391
Cell: 202/744-1956
Fax: 202/312-9101
62FTI CONSULTING INC. SEPTEMBER 2005