James A. Slutz Assistant Secretary Office of Fossil Energy U.S. Department of Energy APEC Energy Trade and Investment Ro

1. Credit, Costs and Carbon: Three Obstacles to Energy Sector Investment James A. Slutz Assistant SecretaryOffice of Fossil Energy U.S. Department of Energy APEC Energy Trade and Investment Roundtable September 30 – October 2, 2008 Cairns, Australia

2. Projected Energy Demand 2005 and 2030 World Energy Quadrillion (10 15) Btus • Developing world projected to drive the demand increase • Coal, oil, and gas continue to supply ~80% of total energy Source: DOE EIA 2008 International Energy Outlook.

3. The Hard Truths The world is not running out of energy resources, but there are accumulating risks to continuing expansion of oil and natural gas production from the conventional sources relied upon historically. These risks create significant challenges to meeting projected demand. • Increasingly apparent accumulation of risks to expansion of conventional liquids • Resource estimates are growing, but turning resources into supplies is an increasing challenge • Where resource is accessible, cost and availability of materials and human resources are hindering projects • Constraints to expansion of first-generation biofuels are more apparent

4. The Growing Liquids Supply Challenge Increasing demand and natural production decline create growing need for significant new production capacity. Source: National Petroleum Council, Global Oil and Gas Study – One Year Later

5. Investment, Capacity and Time (2008 dollars) Investment has dramatically increased ... ... with years required to increase production Source: National Petroleum Council, Global Oil and Gas Study – One Year Later

6. Three Barriers to Energy Trade and Investment • Credit crunch (global) • Cost escalation • Carbon regulation uncertainty Costs

7. Global Credit Crunch Barrier to Energy Trade and Investment • Current turmoil and unease in banking • Real interest rates are not high for LIBOR or the U.S. Prime Rate, but … • Charges above LIBOR/Prime are rising • Banks are reluctant to lend money • New stock offerings are not attractive • Banks have written off bad loans • Energy projects rely on project finance • Credit crunch is real • Could take years to resolve

8. Increasing Costs Barrier to Energy Trade and Investment • Huge run-up in commodity prices • Metals: steel, aluminum, etc. • Energy • Huge increases in capital costs • Construction cost increases since 2005 of 30% to 70% • Tight labor markets • Chemical-engineering construction services cycle

9. Growth 2005-1Q08 Relative Index, 2000 = 100 Power Capital Cost Index with Nuclear 70% 33% Power Capital Cost Index without Nuclear 44% Downstream Capital Cost Index Recent Capital Cost Escalation Trends Source: Cambridge Energy Research Associates

10. Chemical-Engineering Construction Services • Five major factors affecting the availability of chemical engineering construction services: • Asia and the Middle East – massive expansion in refining through 2012 • Petrochemical projects follow refining trends • Nonconventional oil projects have stalled • Engineering resources have been devoted to Gas-to-Liquids • Large Middle East LNG projects are using world’s engineering services • Cyclical construction boom

11. Climate Change Policies Barrier to Energy Trade and Investment • Moderating climate change and controlling greenhouse gases – a major challenge • Regulatory uncertainty has limited investments in energy projects • Wall Street Carbon Principles • Uncertainty

12. Meeting New U.S. Electricity Demand • During 2007, fifty-nine proposed plants were cancelled, abandoned, or put on hold. “Rural Utilities Service has made the right decision not to fund new coal-fired power plants until it can calculate and apply a factor to reflect financial risks.” -- Rep. Henry A. Waxman (D-CA), March 12, 2008

13. Lack of Carbon Value Creates Uncertaintythat Blocks Investment • Investment in low-carbon power options: • Clean Coal with Carbon Capture & Storage • Solar Power (Photovoltaic, Concentrating) • Nuclear Power (for interested economies) • Wind Power (absent financial support) • Investment in low-carbon transport options: • Hybrid electric vehicles using low-carbon power • Biofuel vehicles using second generation feedstocks • Investment in New Supply, such as: • CO2-Enhanced Oil Recovery • Liquefied Natural Gas • Energy Efficiency

14. Lack of Harmonized Carbon Pricing System Risks Misinvestment • Risks if some economies implement carbon pricing and other do not, for example: • Investments in a given fuel (such as LNG liquefaction and regasification facilities) may simply move to economies with lower prices • Investments in a relatively low-carbon fuel (such as natural gas) may be displaced by higher-carbon fuels in other economies

15. Wall Street’s Carbon Principles • The Principles are: • Energy efficiency. An effective way to limit CO2 emissions is to not produce them. Encourage clients to invest in cost-effective demand reduction, taking into consideration the value of avoided CO2 emissions • Renewable and low carbon distributed energy technologies. Encourage clients to invest in cost-effective renewables and distributed technologies, taking into consideration the value of avoided CO2 emissions • Conventional and advanced generation. Encourage regulatory and legislative changes that facilitate carbon capture and storage (CCS) to further reduce CO2 emissions from the electric sector

16. Approaches to Countering the “C”s • Increased market transparency • Fosters competition, countering high costs • Shows where investment most valuable • Technology development and deployment • Brings clean energy costs steadily downward • Builds capacity to alleviate skills shortages • Expanding energy trade • Boosts competition, lowering costs • increases energy security • Helps to foster a global value for carbon • Climate Change • Global solutions • Leakage