David Pumphrey

Senior Fellow and Co-Director

The 4th Japan-U.S. Joint Public Policy Forum

The Future of Energy:

Choices for Japan and the United States

October 31, 2012

U.S. Energy Policy has Emphasized Transformation to Clean Energy

• Economic stimulus package 2009 included $80 Billion to clean energy investments. Tax incentives maintained

• Vehicle Fuel Efficiency standards increased. Faster implementation of other efficiency standards.

• EPA began process to regulate greenhouse gases and moved on additional regulations affecting coal.

• Climate legislation failed.

• Copenhagen commitment to 17% reduction in 2020 from 2005 baseline.

• Unexpected increases in natural gas and oil production now driving U.S. energy sector.

“The nation that leads the world in creating a new clean energy economy will be the nation that leads the 21st century

global economy” – President Obama

New Technologies and Practices Drive Production from Shale and other Unconventionals Deposits

3

Unconventional Resources are Extensive

2%

Increased Contribution of Shale Gas to Total US Supply

5

U.S. dry gas production

trillion cubic feet per year

Source: EIA, Annual Energy Outlook 2012 Early Release

Non-associated offshore

Projections History

Associated with oil

Coalbed methane

Non-associated onshore

Shale gas

2010

10%

7%

9% 7%

21%

23%

9%

9%

7%

49%

Alaska 1%

Tight gas 26% 21%

U.S. Oil Outlook also being Reshaped by

Unconventionals as well as Efficiency

means lower imports

Source: U.S. Energy Information Administration, Annual Energy Outlook 2012, June 25, 2012

Expectations of Natural Gas Production Have Increased

Significantly

EIA US natural gas production projections, tcf/year

Source: EIA AEO Forecasts from Trevor Houser, Peterson Institute for International Economics, Unpublished Manuscript

0

5

10

15

20

25

30

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

2027

2029

2031

2033

2035

AEO 2006 AEO 2008

AEO 2010 AEO 2012

Historical

2012

2010

2006

2008

And Natural Gas Price Expectations are Significantly

Lower

nat

ura

l gas

sp

ot

pri

ce (

Hen

ry H

ub

)

20

09

do

llars

per

mill

ion

Btu

Sources: EIA, Annual Energy Outlook 2011; EIA, Annual Energy Outlook 2010; and EIA, An Updated Annual Energy Outlook 2009 Reference Case

0

1

2

3

4

5

6

7

8

9

10

1990 1995 2000 2005 2010 2015 2020 2025 2030 2035

Projections History 2009

Updated AEO2009

AEO2011

AEO2010

$9/MMBtu

$7/MMBtu

Oil and Gas Prices have Disconnected Crude and Natural Gas Prices, 2011 USD per MMBTU

Source: EIA from Trevor Houser, Peterson Institute for International Economics, Unpublished Manuscript

0

5

10

15

20

25

Jul-97

Jan-9

8

Jul-98

Jan-9

9

Jul-99

Jan-0

0

Jul-00

Jan-0

1

Jul-01

Jan-0

2

Jul-02

Jan-0

3

Jul-03

Jan-0

4

Jul-04

Jan-0

5

Jul-05

Jan-0

6

Jul-06

Jan-0

7

Jul-07

Jan-0

8

Jul-08

Jan-0

9

Jul-09

Jan-1

0

Jul-10

Jan-1

1

Jul-11

Jan-1

2

Jul-12

Brent Crude

Henry Hub Natural Gas

An Overview of Natural Gas Pathways

Gas

Crude Oil

Pipeline

As

so

cia

ted

ga

s

Non-Associated gas

Liquefaction

Syngas Gas To Liquids (GTL)

Refined

Oil Products

Chemical

Reaction

Gas to Power/ Residential

& Commercial

LNG for Export

LNG for Transport

Gas to Chemicals

Source: Royal Dutch Shell

Increasing Natural Gas Production Allows U.S. to

Transition from Net Importer to Net Exporter of Natural

Gas

Source: U.S. Energy Information Administration, Annual Energy Outlook 2012, June 25,

2012

Shale Gas has Major Implications for Electric Power

Sector

• Utilities switching to gas fired capacity rather than coal. Coal share of power generation reduced.

• Cheaper gas combined with new environmental rules will accelerate closer of older coal power plants.

• Investment in new nuclear power plants will likely not happen except for protected markets or with substantial government support.

• Existing nuclear power plants under competitive pressure.

• Investment in renewable energy will also be challenged though state renewable standards and tax credits will provide support.

13

Federal and State Actions Supporting Renewable Energy

• Federal production tax credits supporting solar and wind energy.

• No progress on national clean energy standard.

• 36 states have some sort of renewable or alternative electricity standard (27 States have mandatory renewable RPS, 5 states have RE goals, 4 states have alternative portfolio standards that include CCS)

• 42 states offer green pricing - 11 have made it a mandatory utility offering

• One fully operational cap and trade market and one to begin soon

Source: Pew Center on Global Climate Change

Energy use grows slowly. Efficiency improves and mix shifts toward renewables and natural gas

15

U.S. primary energy consumption

quadrillion Btu per year

Source: EIA, Annual Energy Outlook 2012

History Projections 2010

37%

25%

21%

9%

7%

1%

32%

26%

20%

11%

9%

4%

Shares of total U.S. energy

Nuclear

Oil and other liquids

Liquid biofuels

Natural gas

Coal

Renewables

(excluding liquid biofuels)

18%

15%

Electricity Generation Shifts to Natural Gas and Renewables in Reference Case

16

electricity net generation

trillion kilowatthours per year

Source: EIA, Annual Energy Outlook 2012

2010

24%

20%

45%

10%

1%

38%

28%

1%

Nuclear

Oil and other liquids

Natural gas

Coal

Renewables

Energy Information Administration

AEO2012, June 2012

Natural gas and Renewables May Account for More than 90% of New Capacity to 2035

17

Source: EIA, Annual Energy Outlook 2012

Coal

313 (30%)

Natural gas

350 (34%)

Hydropower*

101 (10%)

Nuclear

101 (10%)

Other

renewables

16 (2%)

Other fossil

111 (11%) * Includes pumped storage

Coal

11 (5%)

Natural gas

142 (60%)

Hydropower*

3 (1%)

Nuclear

9 (4%)

Other renewables

34 (14%)

Other

fossil

1 (0.4%)

2010 capacity Capacity additions 2010 to 2035

1,036

gigawatts

235 gigawatts

Wind

30 (13%) Wind

39 (4%)

End-use coal

4 (0.4%)

End-use coal

6 (2%)

Energy Information Administration AEO2012, June 2012

Issue Obama Romney

LNG Exports Under study; likely approval with volumetric/economic considerations

Under study; likely approval with volumetric/economic considerations

CAFE Standards Increase mileage requirements (54.5 mpg by 2025)

Oppose mandates, could roll back

Nuclear Supportive, economic/safety challenges Improve NRC process, Yucca?*

Renewables Supports tax credit extension* Opposes tax credits

Climate Continue GHG regulation by sector Stop EPA regulations; repeal CAA requirements*

Alternative Fuel Vehicles Continue to support credits* “Not picking winners”

Energy Taxes Favors reallocation of $/credits* Thought to retain preferences though debate notion of all on the table?*

Oil Exports Products permitted; no decision on crude Opposes crude exports

Oil and Gas Access and Transport

GOM and Alaska, no ANWR. Stringent OCS permit rules. Likely approval of Keystone XL with conditions.

Streamline permits, relax rules, open more (federal) areas, increase states’ role. Approval of Keystone XL.

*requires Congressional action

Extra Slides

20

Unconventional Resources are Distributed Globally

IEA Estimate of Global Natural Gas Resources

Prospects for Shale Gas Development in China

• Shale gas development among government priorities. • Shale resource estimates vary. Knowledge of the geology is limited. • Desire to develop as indigenously as possible. The role of foreign

companies uncertain. • Access to technologies a key driver behind Chinese investments in N.

America. • Bottlenecks to the Development include:

Lack of geological data; Technologies and Expertise; Fiscal regimes; Pricing regimes; Infrastructure; and Water.

• Chinese shale gas production may not eliminate import needs, but may serve as a bargaining leverage with gas exporters on price.

• Successful shale gas development in Asia may eventually affect global gas trade, primarily as LNG, but its scale may largely depend on the future trajectory of overall energy demand in China and India.