Energy Economics in the 21 st Century

1. Part One: Energy Economics in the 21st Century Bill Pike 21 April 2010

2. DISCLAIMER I am an employee of Leonardo Technologies Inc. (LTI), working under contract in the U.S. Department of Energy’s National Energy Technology Laboratory. In this capacity, I cannot speak for the U.S. Department of Energy or any of its divisions, including the National Energy Technology Laboratory. Nor may I speak for LTI. My comments today are personal observations. Nothing I say here should be taken as, or be construed to be, a policy or position, official or unofficial, of the U.S. Department of Energy or any of its divisions, or of LTI.

3. Fun Facts: • Total U.S. Energy Consumption (2010) – 98 quadrillion btu • Total U.S. Energy Production (2010) – 75 quadrillion btu • Top Energy Consuming States • Texas – 12 quadrillion btu • California – 8 quadrillion btu • Florida – 4 quadrillion btu • Top Energy Producing States • Texas – 11 quadrillion btu • Wyoming – 11 quadrillion btu • West Virginia – 4 quadrillion btu • Source : State Energy Data System, U.S. Energy Information Agency, DOE

4. More Fun Facts: • Total Energy Consumption per capita (lowest and highest) • Rhode Island – 187 million btu per person • Wyoming – 948 million btu per person • Top Production by Energy Source • Oil & Gas – Texas • Coal – Wyoming • Nuclear Electric – Illinois • Renewable – Washington • Biofuels – Iowa

5. Points to Remember as We Discuss Energy Economics • The global oil and gas industry is the world’s largest private sector enterprise, generating approximately $4.5 - $5 trillion in gross revenue yearly. • Oil and gas are commodities. Oil is a global commodity but gas remains, mostly, a regional commodity subject to local economic factors. • Simple supply and demand economics should explain supply, demand and pricing of oil and gas, but most often do not. • Despite the rising level of political rhetoric, carbon-based energy sources (oil, gas and coal) will remain our primary energy sources through 2035, at the very least.

6. The Basics Bill Pike 21 April 2010

7. Supply and Demand Economics • (Groan) • Demand – The Law of Demand holds that, other things being equal, as the price of a good rises, demand for that good will fall, and vice versa.

8. The Demand Curve Unit Price Equilibrium Point Quantity in the Market

9. Supply and Demand Economics • Few of us have experience with the supply side of the market. Supply is derived from producer’s desire to maximize profits. • Supply – The Law of Supply holds that, other things being equal, as the price of a good rises, its quantity supplied will rise, and vice versa.

10. The Supply Curve Supply Curve Demand Curve Unit Price Quantity in the Market

11. The Supply/Demand Model Price and Supply at Equilibrium Unit Price Equilibrium Point Quantity in the Market

12. So, What About Global Demand?

13. Demand Factors World Demand for Energy Will Continue to Grow Source: EIA, International Energy Outlook

14. By The Numbers • Primary Energy Demand (1015 btu) • 2010201520202025 • Petroleum 185 204 224 245 • Natural Gas 108 122 139 156 • Coal 108 117 127 140 • Nuclear 30 31 32 30 • Other 39 43 47 50 • Source: Energy Information Administration, U.S.Department of Energy

15. Petroleum Consumption in Developing Nations Will Exceed Developed Countries by 2025

16. Global Energy Demand by sector, billions barrels of oil equivalent

17. Energy Demand and GDP (1980 – 2002)Primary energy demand per capita (Gigajoules)

18. Energy and Well Being

19. But What About Supply? • We Know Where There is Enough Oil • Mature Fields • Unconventional Assets • Ultra-Deepwater • Arctic Regions

20. But What About Supply? • We Know Where There is Enough Gas • Shale Gas • Tight Gas • CBM • Methane Hydrates to Fuel the World’s Economy and Society for Many Decades.

21. So, We Should Be Set to Let Supply and Demand Economics End This Global Price Roller Coaster Ride? If You Believe This, See Me Later for a Really Good Deal on a Bridge.

22. Factors Skewing Supply and Demand Fundamentals • Political and/or economic instability in major producing areas

23. Canada USA Azerbaijan Algeria Libya Australia Norway Mexico Kazakhstan Malaysia Nigeria Indonesia Brazil UK Turkmen Angola India Oman Egypt OPERATED BY: NOC Non-NOC Instability and Worldwide Oil & Gas Reserves Russia Nationalizing China Venezuela Unstable Unstable Saudi Arabia Iran Unstable Unstable Iraq Unstable Qatar Kuwait UAE • Oil & Gas Reserves combined • Source: BP Statistical Review • of World Energy 2004

24. Factors Skewing Supply and Demand Fundamentals • Political and/or economic instability in major producing areas • Speculation in the market place

25. War – The Ultimate Instability

26. Speculation in the Market Place • Hedging: The spot and futures markets • Fear that wars, political maneuvering and/or nationalizations will disrupt oil and gas supplies leads market traders to buy and hedge upwards to guarantee supply • This probably accounts for as much as $15 of the price of a barrel of oil today • Most producers would be happy with an oil price of $75 to $85 per barrel

27. Factors Skewing Supply and Demand Fundamentals • Political and/or economic instability in major producing areas • Speculation in the market place • Artificial pricing through subsidies and taxes

28. Artificial Pricing Through Subsidies • 2007 U.S. R&D Energy Subsidies:$ millions • Coal 932 • Refined Coal 2,370 • Natural Gas/Petroleum Liquids 2,149 • Nuclear 1,267 • Renewables 4,875 • Total 11,593

29. Types of Subsidies/Market Intervention • Direct Subsidies • Royalty Relief • Tax Credits • Investment Credits • Depletion Allowance • Grants • Accelerated Depreciation • Import/Export Restrictions • Price Controls

30. Factors Skewing Supply and Demand Fundamentals • Political and/or economic instability in major producing areas • Speculation in the market place • Artificial pricing through subsidies • Cost variations – reserve types and recovery costs

31. Cost Variations: Price Sensitivity for Development Source: Martin Wolf, “Coal and open markets are the best hope for energy security,” The Financial Times, 5 July 2006, p 13.

32. Cost Variations: Processing Costs • Cost to process a barrel of oil • 160 various types of crude produced worldwide • a price differential of $15 barrel, or higher • depending on the composition of the oil, processing cost can vary widely

33. The Role of Taxes Company profit on a $3 per gallon gasoline at the pump is about 10 cents a gallon.

34. Factors Skewing Supply and Demand Fundamentals • Political and/or economic instability in major producing areas • Speculation in the market place • Artificial pricing through subsidies • Cost variations – reserve types and recovery costs • Regulatory restrictions - Macondo

35. Regulation and Prices • Macondo • Delays due, primarily, to moratoria and complex permitting and development regulations resulted in the loss of 200,000 or more barrels of oil per day in the Gulf of Mexico next year • Moratoria in other areas, such as the Arctic and offshore the Atlantic Coast, will forestall or prevent development of incremental production

36. So Where Does the U.S. Stand in Terms of Oil and Gas? • We have significant amounts of mature and unconventional oil resources. • However, they may not be enough to end our dependency on imported oil.

37. U.S. Primary Energy Consumption by Fuel, 1980-2035 (quadrillion Btu) Annual Energy Outlook 2011

38. U.S. Oil Supply, Consumption, and Net Imports, 1960-2030 (million barrels per day) - Revised History Projections Consumption Domestic Supply Annual Energy Outlook Energy Information Agency, Department of Energy, Annual Energy Outlook

39. What is the natural gas story for the U.S.? • We have more gas than we know what to do with. • We are set to become a net exporter of natural gas at current resource development rates. • However, basic economics may hinder development of these resources in the near and mid term.

40. U.S. Natural Gas Production, Consumption, and Net Imports, 1960-2030 (trillion cubic feet) History Projections Cancelled Consumption Production

41. Unconventional Gas to the Rescue

43. Energy Economics in the 21st Century Renewable Energies

44. Renewable Energy Consumption in the Nation’s Energy Supply, 2008 Source: http://www.eia.doe.gov/cneaf/alternate/page/renew_energy_consump/rea_prereport.html The British thermal unit (BTU or Btu) is a traditional unit of energy. It is approximately the amount of energy needed to heat one pound of water one degree Fahrenheit.

45. Renewables Gain Electricity Market Share; Coal Share Declines billion kilowatt-hours and percent shares History Projections 17.0 Renewable 9.1 20.8 Natural gas 21.4 Coal 43.8 48.5 Oil and other 1.4 1.5 Nuclear 19.6 17.1 Richard Newell, SAIS, December 14, 2009 Source: Annual Energy Outlook 2010

46. Comparative Electrical Generation Costs Resource: Cents per kwh (2008) Wind 5.7 – 11.3 Geothermal 5.8 – 9.3 Biomass (direct) 6.5 – 11.3 Natural Gas (combined cycle) 7.4 – 10.2 Coal 11.0 – 14.1 Fuel Cell 12.7 -- 15.0 Solar (thermal) 12.9 – 20.6 Solar (photo voltaic 16.0 – 19.6 Source: www.sourcewatch.org

47. Comparative Electrical Generation Costs With Federal Tax Subsidies Removed Resource: Cents per kwh (2008) Natural Gas (combined cycle) 7.4 – 10.2 Biomass (direct) 7.8 – 13.6 Wind 8.2 – 16.1 Geothermal 8.3 – 13.3 Coal 11.0 – 14.1 Fuel Cell 15.2 – 18.0 Solar (thermal) 20.6 – 33.0 Solar (photo voltaic) 25.6 – 31.4 Source: Lazard, Levelized Cost of Energy Analysis – Version 3.0, 2009

48. And, That Is Just With Federal Tax Subsidies Removed • It does not take into account state, regional and local tax breaks • Direct subsidies • Land donations • And myriad other concessions that can and are made

49. An Additional Cost: Infrastructure Retooling • How many of you think that all Americans will be driving totally electric cars in 10 years? • How many of you think that all your goods will be moved in totally electric vehicles? • How many of you think you will have a photovoltaic array in your backyard? • Or a geothermal well in your neighborhood? • Or a network of electric fueling stations that rivals that for today’s gas stations. • How many of you think we have resources or the intent to totally replace our energy provision and transportation infrastructure – at today’s usage levels – in the next 10 years?

50. Conclusions • The economics of oil and gas are subject to external forces and respond to altered supply and demand models. • Despite assurances to the contrary, we probably will not end our dependency on foreign oil nor our vulnerability to fluctuating oil prices. • We have massive reserves of clean, inexpensive natural gas. • The sheer volume of increased gas production has suppressed gas prices and slowed future reserves development. • Wide spread adoption of renewable energy is, at present, a pipe dream. • Alternative energy is too expensive, especially in today’s strained economy, and can currently only be made competitive with generous subsidies. And the economic limitations are only part of the reason that renewable energy is not now viable. • Renewable energy must be developed and made economic. We must, however, be realistic about how and when this will happen.