Brookings: Projects - Energy Security Initiative

Geopolitics in the Eastern Mediterranean: A Cypriot Perspective

Thu, 09 May 2013 14:30:00 -0400

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May 9, 2013
2:30 PM - 4:00 PM EDT

Saul/Zilkha Rooms
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

In recent months, the Republic of Cyprus has been at the center of a number of critical geopolitical developments—holding a largely successful presidency of the European Union (EU), announcing the discovery of large offshore natural gas deposits, and undergoing an economic crisis that led to a bank bailout and raised new uncertainties about the future of the eurozone. The Cypriot government has also announced recently that talks with Turkey could be re-launched in the fall in a new attempt to resolve the political standoff that has divided the country for a generation.

On May 9, the Center on the United States and Europe at Brookings (CUSE) and the Energy Security Initiative (ESI) hosted the Minister of Foreign Affairs of Cyprus Ioannis Kasoulides for a public address. In his remarks, the foreign minister offered his perspectives on a range of issues that are shaping Cyprus’s role in Europe and across the rapidly evolving Eastern Mediterranean region.

Minister Kasoulides previously served as the Cypriot government spokesman from 1993 to 1997. He was first appointed minister of foreign affairs in 1997 and served in that capacity until 2003. During his initial term as foreign minister he led the diplomatic effort that marked the initiation and completion of Cypriot accession negotiations to the EU. From 2004 to 2013 Kasoulides was a member of the European Parliament, where he served as the vice president of the EPP group and head of its foreign affairs working group. He was appointed to a second term as foreign minister in 2013.

Vice President Martin Indyk, director of Foreign Policy at Brookings, offered introductory remarks.

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Energy, Indigenous Communities and the Arctic Council

Wed, 17 Apr 2013 08:30:00 -0400

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April 17, 2013
8:30 AM - 2:00 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

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Owing to the vast economic opportunities and environmental, social, and geopolitical challenges it presents, the Arctic is emerging as an important topic of debate. With an estimated 25 percent of the world’s undiscovered oil and gas reserves, and with climate change making shorter maritime routes through Arctic waters possible, the rewards of successful economic development are plentiful. However, the remote, pristine frontier is home to some of the world’s harshest conditions making energy development, maritime trade and tourism increasingly difficult and dangerous. The Arctic is also home to indigenous communities whose livelihoods are likely to be challenged by both the effects of climate change and increasing external human activity in the region.

On April 17, the Energy Security Initiative at Brookings hosted a forum to discuss the implications of greater Arctic energy and natural resource development and assessed how the international community can best cooperate to ensure that such developments are done in an environmentally and socially sustainable manner. The forum begins with keynote remarks from Ólafur Ragnar Grímsson, president of Iceland, and Kuupik Kleist, a member of Parliament of Greenland and former Greenland prime minister. Other speakers included the incoming Chair of the Senior Arctic Officials of the Arctic Council, Patrick Borbey; David Hayes, deputy secretary of the U.S. Department of Interior; and Mead Treadwell, lieutenant governor of the State of Alaska.

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U.S.-Alberta Energy Relations: A Conversation with Premier Alison Redford

Tue, 09 Apr 2013 14:00:00 -0400

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April 9, 2013
2:00 PM - 3:30 PM EDT

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

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Recently, the U.S. Department of State released its draft Supplement Environmental Impact Statement (SEIS) on the Keystone XL pipeline, which, if approved by the Obama administration, would connect Canada’s oil sands with U.S. refineries in the Gulf Coast. The debate surrounding the pipeline has brought increased attention to the Canadian province of Alberta—which, with an estimated 170 billion barrels—is home to the world’s third-largest proven reserves of oil.

On April 9, the Energy Security Initiative at Brookings hosted Alison Redford, the premier of Alberta, for a discussion on the the Alberta-U. S. energy relationship, environmental efforts undertaken by her administration, and the Keystone XL pipeline.

Senior Fellow Charles Ebinger, director of the Energy Security Initiative, provided introductory remarks. Brookings Trustee Daniel Yergin, chairman of Cambridge Energy Research Associates, moderated the discussion with Premier Redford.

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U.S.-Alberta Energy Relations: A Conversation with Premier Alison Redford

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Natural Gas Liquids: The “Other” Driver of the U.S. Oil and Gas Supply Resurgence

Charles K. Ebinger and Govinda Avasarala — Mon, 01 Apr 2013 14:36:00 -0400

The fundamental changes in the U.S. hydrocarbon production landscape are now widely acknowledged. Analysts and pundits liberally discuss the prospects for U.S. “energy independence” and becoming “Saudi America.” What is less understood and discussed, however, is the role that rapid increases in the production of Natural Gas Liquids (NGLs) will play in the U.S. hydrocarbon revolution and the important impacts of NGLs for the industry.

According to the Energy Information Administration (EIA), total domestic NGL production increased from just over 1.7 million barrels per day (mmbd) in 2005 to nearly 2.5 mmbd in October 2012. In the years to come, NGLs will be a critical component of the industrial sector’s ability to take advantage of the U.S. hydrocarbon resurgence, and will play a large role in the country’s ambitions for energy “self-sufficiency.” By 2025, EIA estimates that NGLs production will account for roughly one-quarter of U.S. liquids supply.

In this Natural Gas Briefing Document, the first in a new series of briefings by the Energy Security Initiative at Brookings (ESI) on developments in the natural gas market, the authors explain what NGLs are and why they are important, before exploring some important considerations for policymakers interested in capitalizing on this economic opportunity.

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Govinda Avasarala

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Power Struggle: Implications of the Changing Global Gas Market for the Middle East and Asia

Mon, 01 Apr 2013 00:00:00 -0400

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April 1-2, 2013

Four Seasons Hotel, Doha, Qatar

Second Annual Brookings Doha Energy Forum

The Brookings Doha Center (BDC) and Brookings Energy Security Initiative (ESI) convened the second annual Brookings Doha Energy Forum in Doha, Qatar. This year’s forum, from April 1-2, explored the theme “Power Struggle: Implications of the Changing Global Gas Market for the Middle East and Asia.”

The private, closed-door conference was the second in a series that examines the relationship between the Middle East and the emerging global powers of the 21st century. This year’s forum shed light on three principal themes:

The increasing prominence of Middle East-Asia energy relations;
The implications of political and economic change in the region for energy production and consumption; and
The prospects for investment in the region’s energy infrastructure. The Forum addressed these questions with a primary focus on natural gas.

The 2013 Forum’s Keynote Address was given by H.E. Sheikh Hamad bin Jassim bin Jabor Al-Thani, prime minister and minister of foreign affairs of the State of Qatar. Following the keynote address, opening remarks were given by H.E. Dr. Mohammed bin Saleh Al Sadah, Qatari minister of energy and industry; H.E. Eng. Ali bin Ibrahim Al Naimi, Saudi Arabian minister of petroleum and mineral resources; and Andrew Swiger, senior vice president of Exxon Mobil Corporation.

The Brookings Doha Energy Forum was attended by decision-makers and experts from major Gulf producers, the United States, Europe, and key Asian powers, including China, India, Japan, and South Korea. Attendees include a range of high-ranking officials, experts, leaders of national oil companies, and representatives of the corporate sector.

“The world is facing structural shifts in international gas flows at the same time it is witnessing rapid and unprecedented change in the Middle East,” said Salman Shaikh, director of the Brookings Doha Center. “The 2013 Forum will bring together senior figures in the energy industry—including officials, executives, and analysts—to discuss these changes from a constructive, multidimensional platform.”

"Global natural gas markets are at a critical juncture,” said Charles Ebinger, director of the Brookings Energy Security Initiative. “The shifting dynamics of gas supply and demand are rewriting the traditional energy producer-consumer relationships, a shift that has still unclear geopolitical implications. Through its 2013 Doha Energy Forum, Brookings is placing itself at the center of this critical issue."

The Brookings Doha Energy Forum is a product of the BDC-ESI Energy Partnership, which aims to address issues arising out of the nexus between the changing global energy landscape and the growing importance of local politics in the world. This collaboration links the expertise of the Energy Security Initiative with the Brookings Doha Center’s experience and scholarship on political transitions in the Gulf and broader Middle East.

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The Department of Energy’s Strategy for Exporting Liquefied Natural Gas

Charles K. Ebinger — Tue, 19 Mar 2013 15:00:00 -0400

Mr. Chairman, Ranking Member Speier, and distinguished Subcommittee members:

Thank you for inviting me here to share my views on U.S. LNG export policy. My name is Charles Ebinger and I am Director of the Energy Security Initiative at the Brookings Institution. These views are mine alone and do not reflect the views of the Brookings Institution, which does not take institutional positions on any policy issue.

The Energy Security Initiative at Brookings has been studying this issue for the past two years, having published an assessment of the case for LNG exports in May 2012 in our report, Liquid Markets: Assessing the Case for Exports of Liquefied Natural Gas from the United States.[1] In that report, we focused on two determinants of whether the U.S. should allow exports of LNG: what is the feasibility of exporting LNG, and what are the implications? After assessing both factors, my co-authors, Kevin Massy and Govinda Avasarala, and I came to two primary conclusions: first, the negative implications of LNG exports from the lower 48 states, which we believe to be technically feasible, are marginal and outweighed by the benefits; second, as the lynchpin of the globalized economy the United States must continue to espouse free trade and avoid intervening in a global market. Ultimately we believe, as we stated in our report, “that the United States should neither act to prohibit nor to promote LNG exports.”

In the 10 months since the release of this report, more studies and information—some good, some misleading—have surfaced. More opinions are being voiced. Amid the increased volume of debate, however, my opinion has not changed. I still believe that the benefits of U.S. LNG exports are, on balance, a benefit to the United States; that the United States still has the responsibility and the incentive to be an advocate for free trade; and that the U.S. government should not intervene in what should be a market-driven process.

I applaud this Committee for avoiding another acrimonious debate on the pros and cons of LNG exports by spending more time with both the implications of LNG exports and discussing some specifics reforms that might help rationalize the permitting process while clearly protecting the public interest.

Part 1: Implications

Any discussion surrounding the implications of U.S. LNG exports will focus on several considerations including the implications for domestic natural gas and electricity prices, the impact on other consumers of natural gas, and the impact on international prices and geopolitics.

Wellhead Prices

There have been a number of studies that have examined the impact of U.S. LNG exports on domestic prices. When analyzing them, policymakers should identify which study’s assumptions most resemble the existing natural gas market and its likely direction, and which models are most reflective of the complex nature of domestic and global natural gas trade. For instance, assuming realistic volumes of natural gas exports as well as a reasonable supply response by natural gas producers are two critical considerations. It is also important to note that the supply curves in the various studies reflect different interpretations of the economics of marginal production.

Under the most reasonable assumptions (in this case assuming 6 bcf/day of exports), most reports forecast that natural gas prices will be between 2 and 11 percent higher in 2035 than if the U.S. did not export LNG.[2] There are a number of factors that insulate domestic prices from dramatic increases in price as a result of exports. First, as will be discussed later, there is a market-determined limit on how much the United States can economically export, depending on domestic prices, the international gas market, and the global market for competing fuels. Second, the size of the resource base is substantial, an important factor because the EIA estimates that roughly 63% of the gas required to meet demand for LNG export will come from increased domestic production.[3] Finally, the domestic natural gas sector is very efficient and producers are able to respond rapidly to marginal increases in the domestic price.

Figure 1: Study-by-study comparison of the Average Price Impact from 2015-2035 of 6 bcf/day of LNG exports (unless otherwise noted)

Study	Average Price without Exports ($/MMBtu)	Average Price with Exports ($/MMBtu)	Average Price Increase (%)
EIA*	$5.28	$5.78	9%
Deloitte	$7.09	$7.21	2%
Navigant (2010) (2 bcf/day of exports)**	$4.75	$5.10	7%
Navigant (2012)***	$5.67	$6.01	6%
ICF International***	$5.81	$6.45	11%

* Price impact figure for EIA study reflects the reference case, low-slow export scenario.
** Navigant (2010) did not analyze exports of 6 bcf/day.
*** Navigant (2010 and 2012) and ICF International studies are based on Henry Hub price.
Source: EIA, Deloitte, Navigant, ICF International
Power Sector Implications

LNG exports are likely to have a modest impact on electricity prices as well. In the power sector, natural gas has historically been used as a back up to coal and nuclear base-load generation. For such gas used at the margin, the increase in electricity prices as a result of LNG exports will be limited by its competitiveness relative to other fuels: as soon as it becomes more expensive than the alternative for back up generation, power producers will move away from gas. According to ICF International, a $0.64/MMBtu increase in the price of natural gas will result in an electricity price increase of between $1.66 and $4.97/megawatt-hour (MWh), depending on how often gas is used as the marginal fuel for electricity. Deloitte estimates that the price increase of electricity will not be more than $1.65/MWh. EIA estimates that electricity price impacts will be marginal as well (between $1.40/MWh and $2.90/MWh) except in the “high rapid” export scenario. By contrast, the EIA Annual Energy Outlook 2013 estimates that, in its reference scenario, the average price of electricity (across all fuels) in 2035 will be $101/MWh, showing clearly the small impact that the rise in domestic electricity prices will have on consumers.[4]

Industrial Sector Implications

I am similarly skeptical about the negative consequences of exports on our industrial sector. Some of the more vocal industry opponents to LNG exports contend that price increases will reverse the trend of manufacturing investment returning to the United States. I firmly disagree with this assessment. For starters, I don’t believe that multi-billion dollar industrial investments in factories that will be a part of the capital stock for decades will be rendered unprofitable by single-digit percent changes to natural gas prices. As one analyst put it, “if your margins are so thin that [modest price increases] could break them, then there isn’t much benefit to putting up a plant here. Conversely, if it is so beneficial to do it here, then a small change in price probably won’t undermine those benefits.”[5]

For the petrochemical sector, the picture is even more positive. The prospects of large volumes of new supply suggest that the industrial sector’s competitiveness is stable regardless of U.S. export policy. Today the ratio of the price of oil to the price of natural gas is over 25:1. This is well over the 7:1 oil-to-gas price ratio at which the American Chemistry Council (ACC) believes U.S. petrochemical and plastics producers to be globally competitive. European and Asian petrochemical producers use oil-based products such as naphtha as a feedstock, as they lack access to cheap natural gas liquids (NGLs). Increased drilling will likely result in the greater production of the NGLs. This is one of the principal reasons why petrochemical producers are looking to return to the United States, after spending much of the previous decade relocating facilities overseas. According to a March 2011 report by the ACC, a 25 percent increase in ethane—a natural gas liquid—production will yield a $32.8 billion increase in U.S. chemical production.[6] To the extent that increased gas production linked to exports results in increased production of natural gas liquids, they will benefit the petrochemical industry.

International/Geopolitical Implications

Before diving too deep into the international pricing and geopolitical implications of U.S. LNG exports, it is worth reviewing the structure of the global LNG market, which is informally separated into three markets: North America, the Atlantic Basin (mostly Europe), and the Pacific Basin (including Japan, South Korea, Taiwan, China, and India). These markets are separated because of important technical differences that impact the pricing structure for LNG in each market. The North American natural gas market is competitive and prices are traded in a transparent and open market. The Atlantic Basin is dominated by European LNG consumers such as the United Kingdom, Spain, France, and Italy, and is a hybrid of a competitive U.K. market that was liberalized in the mid-1990s and a Continental European market that is partially dependent on oil-linked, take-or-pay contracts. In recent years, the U.K. hub, the National Balancing Point (NBP), has traded at a premium to the U.S. hub, known as the Henry Hub. The Pacific Basin is a more rigid market that depends heavily on oil-indexed contracts that are more expensive than those used in the Atlantic Basin. While they have no central trading hub, the Pacific Basin consumers such as Japan and South Korea currently import LNG based on a pricing formula known informally as the Japan Crude Cocktail, the average price of custom-cleared oil imports into Tokyo. Many Pacific Basin contracts have a built-in price floor and price ceiling depending on the price of oil.

Without exporting any natural gas, the U.S. shale gas “revolution” has already had a positive impact on the liquidity of global LNG markets. Many LNG cargoes that were previously destined for gas-thirsty U.S. markets were diverted and served spot demand in both the Atlantic and Pacific Basins. The increased availability of LNG cargoes has helped create a more competitive LNG market for other consumers. This in turn has helped apply downward pressure to the terms of oil-linked contracts resulting in the renegotiation of some contracts. In 2010 short-term and spot contracts represented 19 percent of the total LNG market, up from only a fraction one decade earlier. This trend is particularly prominent in Europe, where in 2012 nearly half of its gas supply came on a spot-price basis (see Figure 2). As will be discussed later, this trend in the European market towards cheaper oil-indexed rates and increased spot consumption has not only benefited European economies but is also helping loosen the stranglehold of Gazprom, Russia’s state gas company, on our east and west European allies and trading partners.

Figure 2: European Gas Supply by Contract Type (%), 2012

Source: Societe Generale

Although increases in domestic gas production have initiated some changes within the international gas market, any dramatic alterations to the existing structure will depend on the volume that is actually exported. With roughly 37 bcf/day of liquefaction capacity in the global market today, it is unlikely that the U.S. will export a significant portion of the nearly 30 bcf/day worth of applications currently proposed to the Department of Energy. Building an LNG facility requires billions of dollars in investment and years of planning. Prospective exporters must also undergo an intricate and thorough regulatory process and must be reasonably certain that the economic opportunity for any investment exists for two or more decades.

Given these sobering realities, I don’t see very many LNG projects—our estimates predict 4-6 bcf/day’s worth—being constructed before their economic opportunity and early-mover advantage is eroded by increased domestic gas prices (resulting from more gas consumption in the electricity and industrial sectors, sources of demand that are emerging faster than export facilities), decreasing international gas prices, and a more balanced global LNG market. This last point about LNG market equilibrium is critical. Our forecast suggests that from 2015 to 2020, the global LNG market will swing to a surplus, mostly aided by the nine Australian projects that already have or are close to reaching final investment decision (see Figure 3) as well as other new supplies from East and West Africa. Further, pipeline gas (particularly into China), and a stubborn coal market will also compete with gas in global energy markets, particularly those in Asia. Furthermore, as we move beyond 2025, the possibility of other countries—again, China in particular—developing their own shale gas reserves could begin to have an impact on international gas trade.

Figure 3: Global LNG Supply/Demand Balance, 2015-2020 (bcf/day)

Source: Brookings, IEA, EIA, Morgan Stanley, JP Morgan, Credit Suisse

U.S. LNG exports will therefore have a beneficial but not transformational impact on international LNG prices. The market is still largely dependent on long-term contracts and much of the new liquefaction capacity emerging in the next decade (largely from Australia) has already been contracted for at oil-indexed rates.[7] The incremental LNG volumes supplied by the United States at floating Henry Hub rates will be small in comparison. Indeed, importing U.S. LNG at Henry Hub rates includes a number of other costs, such as the cost to liquefy the gas and the cost to ship it on specialized tankers. (Depending on the type of contract, regasification is another cost that can be borne by either the buyer or the seller.) These costs range depending on the transportation distance and the size of vessel. As a reference point, it is estimated that shipments of LNG from the U.S. Gulf Coast to Japan will cost $5-6/MMBtu.[8] These additional costs dramatically reduce the arbitrage opportunity available to exporters.

There is also no guarantee that all U.S. exports will be supplied at floating U.S. prices. LNG export facilities are multi-billion dollar investments that require revenue certainty. Moreover, many of the export facilities are owned by producers of natural gas. John Watson, Chevron’s Chief Executive, said earlier this week that his company’s investments in LNG export facilities does not mean that natural gas will be available to consumers at U.S. rates.[9] Most producers prefer selling long-term supply contracts to reduce the price risk to their investments.

A large increase in U.S. LNG exports will have the potential to increase U.S. foreign policy interests in both the Atlantic and Pacific basins. Unlike oil, natural gas has traditionally been an infrastructure constrained business, giving geographical proximity and political relations between producers and consumers a high level of importance. Issues of “pipeline politics” have been most directly visible in Europe, which relies on Russia for around a third of its gas. Previous disputes between Moscow and Ukraine over pricing have led to major gas shortages in several E.U. countries in the winters (when demand is highest) of 2006 and 2009. Further disagreements between Moscow and Kiev over the terms of the existing bilateral gas deal have the potential to escalate again, with negative consequences for E.U. consumers. The risk of high reliance on Russian gas has been a principal driver of European energy policy in recent decades. Among central and eastern European states, particularly those formerly aligned with the Soviet Union such as Poland, Hungary, and the Czech Republic, the issue of reliance on imports of Russian gas is a primary energy security concern and has inspired energy policies aimed at diversification of fuel sources for power generation. From the U.S. perspective such Russian influence in the affairs of these democratic nations is an impediment to efforts at political and economic reform. The market power of Gazprom, Russia’s state-owned gas monopoly, is evident in these countries. Although they are closer to Russia than other consumers of Russian gas in Western Europe, many countries in Eastern and Central Europe pay higher contract prices for their imports, as they are more reliant on Russian gas as a proportion of their energy mixes.

In the larger economies of Western Europe, which consume most of Russia’s exports, there are efforts to diversify their supply of natural gas. The E.U. has formally acknowledged the need to put in place mechanisms to increase supply diversity. These include market liberalization approaches such as rules mandating third-party access to pipeline infrastructure, and commitments to complete a single market for electricity and gas by 2014, and to ensure that no member country is isolated from electricity and gas grids by 2015.

Despite these formal efforts, there are several factors retarding the E.U.’s push for a unified effort to reduce dependence on Russian gas. National interest has been given a higher priority than collective, coordinated E.U. energy policy: the gas cutoffs in 2006 and 2009 probably contributed to the acceptance of the subsea Nord Stream pipeline, which carries gas directly from Russia to Germany. Germany’s decision to phase out its fleet of nuclear reactors by 2022 will result in far higher reliance on natural gas for the E.U.’s biggest economy. The environmental imperative to reduce carbon emissions—codified in the E.U.’s goal of essentially decarbonizing its power sector by the middle of century—mean that natural gas is being viewed by many as the short-to medium fuel of choice in power generation. Ironically, in the near term the phase out of nuclear power has lead to greater reliance on both domestic coal as well as imported coal from the United States.

Finally, the prospects for European countries to replicate the unconventional gas “revolution” that has resulted in a glut of natural gas in the United States look uncertain. Several countries, including France and the U.K., have encountered stiff public opposition to the techniques used in unconventional gas production, while those countries, such as Poland and Hungary, that have moved ahead with unconventional-gas exploration have generally seen disappointing early results. Ukraine is also at a very early stage in developing its potential shale reserves. Collectively, these factors suggest that the prospects for reduced European reliance on Russian gas appear dim.

The one factor that has been working to the advantage of advocates of greater European gas diversity has been the increased liquidity of the global LNG market, discussed above. Russia’s dominant position in the European gas market is being eroded by the increased availability of LNG. Qatar’s massive expansion in LNG production in 2008, coupled with the rise in unconventional gas production in the United States as well as a drop in global energy demand due to the global recession, produced a global LNG glut that saw many cargoes intended for the U.S. market diverted into Europe. As mentioned previously, with an abundant source of alternative supply, some European consumers, mainly Gazprom’s closest partners, were able to renegotiate their oil-linked, take-or-pay contracts with Gazprom.

Increased LNG exports will provide similar assistance to strategic U.S. allies in the Pacific Basin. By adding supply volumes to the global LNG market, the U.S. will help Japan, Korea, India, and other import-dependent countries in South and East Asia to meet their energy needs. The desire on the part of Pacific Basin countries for the U.S. to become a gas supplier to the region has been underlined by the efforts of the Japanese government, which has attempted to secure a free-trade agreement waiver from the United States to allow exports. As with oil price-linked Russian gas contracts in Europe, U.S. LNG exports—to the extent they occur on a floating Henry Hub basis, have the potential to weaken the market power of incumbent LNG providers to Asia, increasing the negotiating power of consumers and decreasing the price. As U.S. foreign policy undergoes a “pivot to Asia,” the ability of the U.S. to provide a degree of increased energy security and pricing relief to LNG importers in the region will be an important economic and strategic asset.

Beyond the basin-specific considerations of U.S. LNG exports, they will provide a source of predictable natural gas supply that is relatively free from unexpected production or shipping disruption. With Qatar representing roughly one-third of the global LNG market, a blockade or military intervention in the Strait of Hormuz or a direct attack on Qatar’s liquefaction facilities by Iran would inflict chaos on world energy markets. While the United States government will be unable to physically divert LNG cargoes to specific markets or strategic allies that are most affected (gas allocation will be made by the market players), additional volumes of LNG on the world market will benefit all consumers. Further still, even if the volumes exported from the United States aren’t large, there is an ideological geopolitical benefit to U.S. LNG exports. Exports will provide certainty to allies and economic partners around the world that the United States is a steadfast advocate for free trade.

Part 2: Policy Solutions

In that context, I believe a prudent policy is to continue to allow exports. However, there will be a need to reform the existing rules pertaining to LNG exports in order to reduce the risk and uncertainty that is hurting both producers and consumers.

So what does such a policy look like? For starters, I disagree with the two most extreme proposals of a volumetric cap, or a policy where the U.S. automatically approves all applications. Both are treacherous to implement and may increase, rather than decrease uncertainty. A balanced approach is one that doesn’t increase the cost of exporting, but accurately reflects the cost of building a facility at the beginning of the process. I suggest a policy that requires a prospective exporter to have successfully gone through FERC’s pre-filing process and have a portion of its supply contracts signed before being eligible to be considered by DoE for an application to export to non-FTA countries. Both requirements are costly and will encourage only serious projects to move forward.

There will also need to be more clarity on the “public interest” determination, which is currently too vague and creates investor uncertainty. One possibility is to allow the “public interest” to be dependent on the aforementioned two stipulations. In other words, if a company completes its pre-filing process and contracts out a given percentage of its capacity, the exports are deemed to be in the public interest.

One final consideration is to have an audit of natural gas export policy every five years. This would be an important information-gathering exercise. Such an audit would identify what happened to domestic natural gas supply, demand, and prices, and international markets during each five-year period.

I would like to thank the Subcommittee for giving me the opportunity to provide my views on this important issue, particularly in helping move the debate forward. I look forward to taking the Committee’s questions.

[1] Charles Ebinger, Kevin Massy, and Govinda Avasarala, “Liquid Market: Assessing the Case for Exports of Liquefied Natural Gas from the United States,” The Brookings Institution, May 2012. (Brookings 2012) (http://www.brookings.edu/research/reports/2012/05/02-lng-exports-ebinger)

[2] Brookings 2012, pg. 33; Pricing studies include “Effect of Increased Natural Gas Exports on Domestic Energy Markets,” Energy Information Administration, January 2012; “Made in America: the economic impact of LNG exports from the United States,” Deloitte, December 2011; “Resource and Economic Issues Related to LNG Exports,” ICF International, August 17, 2011; “Market Analysis for Sabine Pass LNG Export Project,” Navigant Consulting, August 23, 2010.; and “Jordan Cove LNG Export Project Market Analysis Study,” Navigant Consulting, January 2012. Note that Navigant Consulting’s study of the Sabine Pass LNG project forecasted the pricing implications of 2 bcf/day.

[3] Brookings 2012, pg. 33

[4] Brookings 2012, pg. 34.

[5] Comment by Kevin Book, Managing Director, Research, ClearView Energy Partners, at “Liquid Markets: Assessing the Case for U.S. Exports of Liquefied Natural Gas,” on May 2, 2012 at the Brookings Institution in Washington, D.C. (http://www.brookings.edu/~/media/events/2012/5/02%20lng%20exports/20120502_lng_exports.pdf)

[6] American Chemistry Council, “Shale Gas and new Petrochemicals Investment,” March 2011.

[7] Brookings 2012, pg. 39

[8] For two estimates, see Ken Medlock, “U.S. LNG Exports: Truth and Consequences,” James A. Baker III Institute for Public Policy, Rice University, August 10, 2012 (http://bakerinstitute.org/publications/US%20LNG%20Exports%20-%20Truth%20and%20Consequence%20Final_Aug12-1.pdf); and Robert Smith, “Asian Natural Gas: A Softer Market is Coming,” Presentation to the U.S. EIA International Natural Gas Workshop, Washington, D.C., August 23, 2012.

[9] Ed Crooks, “Chevron explores first Canada gas exports,” Financial Times, March 12, 2013. (http://www.ft.com/intl/cms/s/0/aaa61d84-8b3e-11e2-b1a4-00144feabdc0.html#axzz2NeqtOvnR)

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Charles K. Ebinger

Publication: Subcommittee on Energy Policy, Health Care, and Entitlements, House Committee on Oversight and Government Reform

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Why Jordan Is Building Two New Nuclear Power Plants

John P. Banks — Fri, 08 Mar 2013 00:00:00 -0500

Editor's note: As Jordan looks to develop a civilian nuclear energy program, some domestic and international analysts are questioning the feasibility and intentions of its efforts. In an interview with Monocle, John Banks suggests that while Jordan’s efforts are the result of domestic energy shortages, its program will be hard to develop for a number of reasons. Read an excerpt below.

Monocle: Now the generally accepted role of Jordan is to be the Middle Eastern country which doesn’t make everybody nervous. Possibly because they would like just a little bit of attention for a change, possibly because, who knows, they have a sincere desire to provide for their future energy requirements, Jordan is about to commission two nuclear reactors.

Amman is believed to be choosing between tenders from a French Japanese consortium and a Russian competitor. Jordan is almost totally dependent on oil and gas imports and this twelve billion euro project would spare Jordan from relying on the stability of their neighbors, which as recent events have reemphasized, is one of the world’s very least reliable qualities. Well joining us now to tell us more is John Banks, non-resident Fellow of the Energy Security Initiative at The Brookings Institution in Washington DC.

First of all, should we be pleased about this?

John Banks: Well, first thanks for having me. It depends on your perspective. Certainly from the Jordanian perspective there are several major drivers why they are pursuing a civilian nuclear energy program. The first is they are looking at annual electricity demand of about eight percent per year over the next decade or so. They are expected to need to add several thousand megawatts of capacity just to keep up with that electricity demand. And secondly, as your intro made reference to, they have energy security reasons for pursuing civilian nuclear power. They really have a situation where they’re highly dependent, as the intro mentioned, overwhelmingly on imports of energy, more than 90% dependent imports for energy across the economy, but in particular in transport and in power generation. One of their overall strategies is to diversify fuel sources and in particular to limit reliance on imported fossil fuels.

Monocle: The trouble that has been in the past though is that Jordan has had quite a stop-start nuclear program. It has been stopped by the Israelis; it has been stopped by the Americans. Obviously there is some fundamental concern about, not lightly, the safety of this.

Banks: Any country, but particularly a country that is pursuing its first nuclear reactor is going to be faced with a variety of very serious challenges, not the least of which is the need to develop a very robust framework to provide for the safe operation of the facilities as well as the security of the facilities and also to prevent proliferation. These are some of the major challenges that any county is faced with, but particularly for a country pursuing its first reactor. If you are starting from a position where you have no nuclear infrastructure and very little human resources capacity, this is a very big challenge. You need to develop a legal and regulatory framework, put in place the human resources capabilities, and allocate sufficient funding to ensure that this sector is operating according to the highest standards. So there is no question that, I think the Jordanian government recognizes the challenges, the question is are they going to be able to overcome them.

Listen to the full interview » (starts at 17:30)

Authors

John P. Banks

Publication: The Monocle Daily

Image Source: © Muhammad Hamed / Reuters

The Case for U.S. Liquefied Natural Gas Exports

Charles K. Ebinger and Govinda Avasarala — Thu, 28 Feb 2013 00:00:00 -0500

The recent natural gas ‘revolution’ in the United States has encouraged a nationwide shift in its energy consumption patterns. An abundance of unconventional natural gas (with help from a patchy economic recovery) has allowed for sustained low natural gas prices. With prices currently hovering just over $3/mmBtu, many energy consumers – most notably power generators, manufacturing and petrochemical producers, and potential consumers of natural gas for transportation – are turning their attention to natural gas. But one natural gas consumer is generating the most controversy for its demand for the new bounty: natural gas exporters.

In May 2012, we co-authored a report, ‘Liquid Markets: Assessing the Case for Exports of Liquefied Natural Gas’. In that study, we argued that the US government should neither prohibit nor promote liquefied natural gas (LNG) exports and that, by allowing the free market to allocate gas to its most economically efficient end-uses, the United States will reap both economic and geopolitical benefits. We still firmly support that conclusion. As we stated then: ‘As a principal advocate and beneficiary of a global trading system characterized by the free flow of goods and capital, the United States has a long-term economic and political incentive to refrain from intervention in the market wherever possible.’

The Protectionist’s Argument

As the policy currently stands, prospective exporters must submit applications to the US Department of Energy (DoE) for the right to export LNG to countries that have a free-trade agreement (FTA) with the United States and to those that do not. DoE is required to approve any application to export LNG to FTA nations ‘without delay’. With respect to countries that do not have an FTA with the United States, DoE reviews each proposal and can only deny the application if it finds that exports are not in the public interest. (It is important to note that aside from South Korea, the United States does not have an FTA with any major LNG importing nation.) To date 17 projects have applied to DoE to export a total of more than 24 billion cubic feet of LNG a day (bcf/d) to countries that do not have a free-trade agreement with the United States. Only one of these projects – Cheniere Energy’s Sabine Pass terminal – has received full approval from DoE to export to non-FTA nations; it has also received regulatory approval and is expected to begin exports from its Louisiana terminal by 2016.

Opponents of Cheniere’s project and other prospective LNG exports are a diverse group. Some industrial gas consumers, manufacturers, and petrochemical producers argue that LNG exports will hurt the competitive advantage provided to them by abundant, cheap domestic natural gas feedstocks, a benefit not enjoyed by their Asian and European competitors. Dow Chemical, the industrial giant that is one of the more vocal industry critics of LNG exports, frequently asserts that the natural gas ‘revolution’ will trigger a manufacturing renaissance, which it estimates will add $90 billion in new investments to the US economy. ‘We are all for exporting natural gas. We just want to see it exported in solid form instead of liquid form’ said Andrew Liveris, Dow’s CEO at CERA Week, an industry conference, in 2012.

Mr. Liveris’ views are shared by some politicians in Washington. The most vocal opponent of LNG exports on Capitol Hill is Congressman Edward Markey of Massachusetts, the Minority Leader of the House Committee on Natural Resources. His campaign, ‘Drill Here, Sell There, Pay More: The Painful Price of Exporting Natural Gas,’ reflects his concern that exporting natural gas will mean ‘exporting our manufacturing jobs along with the fuel’. Congressman Markey’s views are shared – albeit with slightly more nuance – by Senator Ron Wyden of Oregon, the new Chairman of the Senate Committee on Energy and Natural Resources. Senator Wyden’s hesitations about LNG exports apparently stem from the speed at which new project proposals are coming forth, and he has called for a ‘timeout’ on approving projects until the implications of exports are better known. Part of his concern stems from how the legislation ‘rubber-stamps’ proposals to export LNG to FTA nations, an acute concern given that the United States is in negotiations to establish a Trans-Pacific Partnership trade agreement that may include major LNG importers. (It is also important to note that the Senator’s home state hosts one prospective LNG export facility that is opposed by many local groups.) Dow, Congressman Markey and Senator Wyden are joined in their opposition by many in the environmental community, who believe that shale gas production is harmful to the environment and that LNG exports would only increase US shale gas production.

Those in Favor

It is predictable that prospective exporters like Cheniere, Dominion Resources, and Sempra Energy all argue that natural gas exports will help, rather than hurt, the US economy. Exports, their argument goes, will require billions of dollars of investment in liquefaction plant infrastructure, new pipeline infrastructure, and will promote additional gas production, all of which would boost domestic employment. They maintain that any domestic price increases resulting from exports would be marginal and would not hamper the growth of domestic manufacturing. Prospective exporters are supported in their views by gas production companies, including Exxon Mobil (which has plans for petrochemical plant expansions and for an LNG export terminal), and the American Petroleum Institute (API), the oil and gas sector’s trade association.

Companies and groups in favor of exports make some noteworthy points. First, a host of reports by third party analysts have found that the pricing implications of exports are indeed modest. Studies from three consulting firms – Navigant, ICF International, and Deloitte – and the Department of Energy’s Energy Information Administration (EIA) have all found that under reasonable expectations for export volumes natural gas prices in 2035 would be between 2 and 11 percent higher if the USA does export LNG than if it does not. (Most analysts, including us, estimate that 4–6 bcf/day of LNG would be exported under reasonable market conditions.) These price increases should not sway the profitability of multi-billion dollar industrial investments. According to Kevin Book, Managing Director of ClearView Energy Partners, another consulting firm, ‘if your margins are so thin that [modest price increases] could break them, then there isn’t much benefit to putting up a plant here. Conversely, if it is so beneficial to do it here, then a small change in price probably won’t undermine those benefits.’

Even if one cannot fault the industrial sector for being worried about potential price increases, given the high natural gas prices experienced in the 2000s, the prospects of large volumes of new supply suggest that the industrial sector’s competitiveness is stable regardless of US export policy. Today the ratio of the price of oil to the price of natural gas is over 30:1, well over the 7:1 oil-to-gas price ratio at which US petrochemical and plastics producers are generally considered to be globally competitive. (Competing European and Asian petrochemical producers use oil-based products such as naphtha and fuel oil as feedstock, as they lack access to cheap natural gas.) Moreover, the majority of gas used for exports will come from new production, according to both Deloitte and the EIA. Increased drilling will likely result in greater production of natural gas liquids such as ethane, a valuable feedstock for industrial consumers. According to a study by the American Chemistry Council, an industry trade body, a 25 percent increase in ethane production would yield a $32.8 billion increase in US chemical production. To the extent that increased gas production linked to exports results in increased production of such natural gas liquids, they will benefit the petrochemical industry.

In addition to the economic benefits of more domestic natural gas production, LNG exports may have additional macroeconomic benefits, including to the balance of payments and foreign exchange. In December 2012 NERA, an economic consultancy, released a report commissioned by DoE modeling the macroeconomic implications of LNG exports under a variety of scenarios. The study found that in each scenario ‘the US would experience net economic benefits from increased LNG exports.’ To be sure, these are net economic benefits, and certain segments of the population are projected to be adversely affected by LNG exports. Both the benefits and the costs, however, are marginal. Welfare, represented in NERA’s report as the amount that households are made better or worse off over the time horizon modeled, is estimated to increase between 0.004 percent and 0.03 percent, depending on the scenario. The greatest achievable net increase in GDP as a result of exports is 0.26 percent of GDP.

Opponents of LNG exports were quick to dismiss NERA’s long-awaited report. Mr Liveris of Dow argued that the report ‘fails to consider the tremendous competitive advantage that affordable, abundant domestic natural gas offers to the nation’. In an official letter to Secretary Chu, Senator Wyden expressed concern that the model uses 2010 EIA demand data, which do not reflect new forecasts for greater industrial sector natural gas demand. While this is true, the model also uses 2010 supply data, which has been subsequently revised dramatically upward to illustrate the increases in domestic gas production.

Finally, there is an additional benefit to LNG exports that is unquantifiable: its impact on geopolitics. Additional volumes of US LNG will be beneficial to the global gas market, potentially helping US allies in Europe and Asia that are dependent on natural gas for energy. While US export volumes are unlikely to transform the fragmented structure of existing LNG trade, US exports will provide liquidity to natural gas consumers around the world, potentially improving the energy costs for consumers in LNG-dependent countries like Japan and India. The US natural gas ‘revolution’ has already helped the prospects for European gas consumers: Gazprom, Russia’s state-owned natural gas corporation, has been forced to revise many of its long-term contracts with European customers owing to the availability of cheaper spot-LNG cargoes once destined for the United States.

Free Markets

At a more fundamental level, the USA has a responsibility as a principal advocate for and beneficiary of free trade. Political interference and market intervention to prevent LNG exports will come at a cost. The USA would forego any economic benefits realized through free trade and its reputation as a supporter of a global market characterized by the free flow of goods and capital would be damaged. (This is without even considering the potential for legal action against such a decision in international fora such as the World Trade Organization.) In response to objections to exports from industrial consumers, Jack Gerard, the President and CEO of API, stated: ‘Restricting exports of energy as a “strategic resource” makes no more sense than unnecessarily restricting the export of chemicals, agriculture products or cars.’ Moreover, government intervention in the allocation of rents (banning exports is a de facto subsidy to domestic consumers) often comes with unintended consequences.

This Might all be Hot Air – or Gas

As Kenneth Medlock, a leading energy economist at Rice University argues, the debate surrounding natural gas exports may be misguided. ‘Allowing exports does not mean exports will occur in any particular volume,’ he explains. Solely attempting to quantify how much LNG the United States can export misses a more important point. If allowed to work, the domestic and international gas market will determine the economically efficient amount of exported LNG. As we stated in our 2012 report, ‘the economics of US LNG exports – both the costs associated with producing, processing, and transporting LNG, and the competitive nature of the global market – are likely to impose market-determined boundaries on their viability.’ Moreover, export facilities are capital-intensive projects, requiring financing contingent on a confidence that the arbitrage opportunity will exist for the life of an LNG facility. Increases in domestic natural gas prices as a result of marginal increases in demand will have a negative impact on the economics of additional export projects, thereby protecting domestic consumers from unlimited exports and price rises.

Determining how much LNG should be exported, therefore, is not the responsibility of the US government, which should neither prohibit nor promote exports. In refraining from intervention in the gas market, the government will ensure that US gas is allocated to its most efficient end uses, many of which will bring ancillary political and economic benefits to the United States and its partners and allies around the world.

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Note: Part of this essay is adapted from a May 2012 Brookings report, Liquid Markets: Assessing the Case for Exports of Liquefied Natural Gas

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Authors

Charles K. Ebinger
Govinda Avasarala

Publication: Oxford Energy Forum

Image Source: © Sergei Karpukhin / Reuters

Fluid and Gases: How Obama Can Balance Energy and Environmental Priorities

Kevin Massy — Thu, 28 Feb 2013 11:30:00 -0500

President Obama started his second term in office with a clarion call to act on climate change in his inaugural address. The energy and climate related provisions of the State of the Union address, reiterated yesterday by Heather Zichal, his deputy assistant secretary at an event here in Washington, have provided the first signs of how his vision will survive contact with reality. In her remarks, Ms. Zichal noted that the Administration’s policy has been “fluid” as it responds to a rapidly changing domestic energy sector while making meaningful progress on addressing the challenge of climate change.

Amid the flux, the blueprint for the president’s second term agenda suggest an Administration that is willing both to double down on its first-term lower-carbon agenda and to explore new ways to put the country on a path to greater energy security. The goals to double the amount renewable energy in the U.S. by 2020 show an Administration building on its commendable record of green-energy development and unbowed by Republican grandstanding over a small number of failed government-support projects. The drive to greater efficiency through a “race to the top” program is also laudable and continues the very good progress the Administration made in its first term. The biggest energy-related innovation of the president’s blueprint is a call for an Energy Security Trust fund, to be financed by taxes on oil and gas production on Federal lands, and to be used to invest in technologies to wean the U.S. transportation fleet off gasoline. This proposal shows consistency on the part of a president whose first term plans for electric cars are looking like they will fall far short of expectations. It also, intriguingly, suggests some expanded federal support for natural-gas vehicles.

However, while all of the initiatives unveiled so far by Obama 2.0 have merit from an environmental perspective, they do more to bolster longer-term U.S. energy security and to reduce domestic carbon emissions than they do to address the real global climate threat that the president outlined in his inaugural address. The president is right to see expanded U.S. oil and gas production as a potential means of raising revenue for the development of low-carbon technologies. However, the Energy Security Trust proposal, which will probably require an act of Congress to be implemented, fixes only part of the problem. While U.S. vehicle-related emissions are substantial, reducing them – even to zero – is not going to address global climate change. The political economy of the Trust is also questionable: by designing the Trust as a tax on oil production that is specifically destined to back out gasoline for the U.S. vehicle fleet, the initiative essentially asks oil producers to pay to diminish their largest market.

To really address the global climate challenge, the president should first acknowledge three incontrovertible facts. He should then build on the Trust idea to strike a larger bargain that will get industry support and will make a meaningful impact on carbon emissions worldwide.

Start with the facts.

The first is that global energy demand will continue to grow over the next two decades. Nearly all of this demand growth will be in the countries of the non-OECD, particularly India and China. Under any circumstances, the majority of this demand will be met using fossil fuels such as coal, oil and gas. The second trend is that the current efforts to mitigate climate change are not working. Despite some incremental progress through the annual meetings under the aegis of the United Nations, the international community is on track to singularly fail to meet its goal of limiting global warming to two degrees Celsius, the point at which many scientists see catastrophic climate change becoming irreversible. The third trend is that the United States is undergoing a resurgence as a producer of hydrocarbons. Hydraulic fracturing, directional drilling, and seismic mapping technologies have enabled untold quantities of previously uneconomic "unconventional" oil and gas to be produced from the U.S. mainland. The boom in shale gas and tight oil production has been accompanied by hyperbolic predictions of U.S. energy independence, a wealth of new high-paying employment opportunities and a resurgence of U.S. manufacturing, and has relegated discussions on the environment to a footnote in the national discussion around energy.

Against a backdrop of expanding global hydrocarbon usage, stalled multilateral efforts on greenhouse gas mitigation, and a newly resurgent and politically potent oil and gas industry at home, how can the president possibly hope to make any meaningful impact on climate change? What about this: By striking a grand bargain with industry and hydrocarbon-producing states that allows full-scale development and exportation of U.S. hydrocarbon resources in exchange for a production-based carbon tax, the Obama Administration could enhance U.S. economic and political interests while investing the two technologies that will be critical in any attempt to address climate change. Here's how it works.

First, accept that the near-term forces of global supply and demand are irresistible, and seek to take advantage of them. As China, India, and other emerging economies continue their growth, they will continue to expend increasing amounts of money on energy imports. Currently, this money goes principally to the OPEC nations, Russia, Australia, Kazakhstan and a handful of other resource-rich countries. Given its vast reserves of coal, oil and gas, the United States could position itself as a - perhaps the - major beneficiary of global demand, putting valuable foreign exchange in its coffers and strengthening its geopolitical position by becoming a stable supplier to key allies. Such a policy would involve the increased leasing of acreage on federal lands for oil and gas exploration; permitting of ancillary pipeline infrastructure projects and railway and port projects; and the enabling of crude oil and gas exports, which are currently subject to policy restrictions or prohibitions.

In exchange for these measures, the Administration should implement a modest but meaningful carbon-based tax on fossil-fuel production, with a clear schedule for incremental increase. The introduction of a carbon tax would serve a two-fold purpose. It would demonstrate to the international community that the United States takes climate change seriously and is willing to introduce measures to address it; such an overture would increase Washington's credibility in discussions around emissions reductions and would serve to encourage other large emitters to follow suit. It would also generate revenue, which should be allocated to technologies that have the best chance of addressing emissions on a global scale: carbon capture and storage (CCS) and advanced battery technologies. While policy tools like renewable portfolio standards and production tax credits have added to the stock of non-fossil energy sources, they will have a negligible impact on climate change as long as coal - soon to overtake oil as the world's leading energy source - continues to be burned in the developing world. Only by reducing the carbon emissions of coal (and, eventually, gas) in the global power sector or finding scalable alternatives for base-load power will we have any chance of stabilizing greenhouse gas emissions in time. Both CCS and large scale batteries, which enable the greater deployment of intermittent renewable energy sources like wind and solar to be used as base-load power, meet this challenge. The development of batteries for transportation will address the next biggest carbon-emitting sector. The funds should be allocated via an independently run green bank, whose objective would be to stimulate and leverage private sector investment. Having proven cost-effective CCS and advanced batteries at scale, U.S. companies would then be in a position to become the leader in the supply of these essential technologies to the rest of the world.

The president's inaugural address laid out the scale of the problem and his promise to "respond to the threat of climate change" was a welcome reengagement in one of the signature challenges of our time. Some of the new ideas from the White House show that the second Obama Administration is serious about improving U.S. energy security and shows some creative thinking on supporting a lower-carbon trajectory. The president should build on the latter to address the former: only by thinking big and taking an international leadership role will the U.S. make any meaningful difference to climate change.

Authors

Kevin Massy

Image Source: © Kevin Lamarque / Reuters

Could East African Gas Impact U.S. Liquified Natural Gas Exports?

John P. Banks — Fri, 15 Feb 2013 10:30:00 -0500

The hottest U.S. energy policy topic coming into 2013 is whether the administration should permit exports of liquefied natural gas (LNG). With the early December release of a Department of Energy-sponsored study examining the domestic economic impact of LNG exports, the debate has intensified and the stage is set for a decision sometime in 2013.

While opponents focus on the potential for rising domestic natural gas prices and the attendant negative impact on industry and consumers, proponents counter that market forces will constrain the volume of economically feasible exports and thus serve as a built-in safety valve limiting domestic price increases.

One of those market forces is growing global LNG supplies. As the Energy Security Initiative at the Brookings Institution noted in its May 2012 assessment: “A well-supplied global gas market will give U.S. exporters fewer opportunities for exports.”

One oft-cited source of new LNG supply is East Africa, especially offshore Mozambique and Tanzania. Wood Mackenzie indicates that four of the five largest oil and gas discoveries in 2012 were made off Mozambique alone, with ENI and Anadarko now having identified 85 tcf of recoverable gas in that country. These resources are sufficient to have prompted the companies to announce plans in late December to jointly develop an LNG export facility in northern Mozambique to be operational in 2018 with an eventual capacity of 50 million tonnes per year (2,435 bcf), making it the largest LNG facility outside of Qatar.

Natural gas represents a major potential benefit for low income and energy poor East African countries. It can provide much-needed revenues for pressing needs in health, education, and infrastructure, as well as help meet demand in various sectors of the economy and expand energy access. For example, the consultant ICF indicates that the government of Mozambique could “collect tens of billions of dollars for gas development” by 2035: to put that in context, the World Bank estimates total GDP in 2011 at $12.8 billion.

Nonetheless, this excitement must be tempered with some sobering realities. There is little to no supporting infrastructure and unpredictable economic and market conditions will have an impact on the viability of proposed LNG projects. But much more important is that a broad array of institutional, regulatory, human capacity, and governance “pre-conditions” must be in place to ensure that the natural gas wealth benefits the local population.

Mozambique is illustrative of these challenges. In the most recent Global Competitiveness Report from the World Economic Forum, Mozambique ranks 138th out of 144 countries. Among the most problematic factors affecting the country’s competitiveness are corruption, insufficient infrastructure, inefficient government bureaucracy, access to financing, and an inadequately educated workforce.

The World Bank’s annual global ranking on the ease of doing business ranks Mozambique 139th out of 183 nations, scoring particularly low in access to electricity, enforcement of contracts, and the ease of registering property. Corruption is also a daunting problem: Transparency International’s Corruption Perceptions Index ranks Mozambique 123rd out of 176 countries.

The Mozambican government seems highly aware of the potential benefits of the natural gas bonanza, of avoiding the “resource curse,” and of addressing institutional and governance challenges. The Minister of Mineral Resources recently stated “We want more than just LNG. We have huge resources and we want to see how we can use the gas in the local, regional, and international market.” The government also has made progress on some key issues: the Extractive Industries Transparency Initiative has certified Mozambique as compliant with its “companies publish what they pay and governments publish what they receive” standards and it is in the process of updating the Petroleum Law and finalizing a Natural Gas Master Plan. Furthermore Anadarko has worked with the government to commit to providing funds for health, educational and other development needs for the local population in Mozambique.

East Africa may well emerge as a global force in the LNG market, impacting the competitiveness of U.S. LNG exports. But there is much work to be done if Mozambique and neighboring nations are to build and sustain world class institutions, laws, infrastructure, and governance mechanisms to support large-scale LNG exports, as well as to ensure that newfound natural gas wealth benefits domestic development and poverty alleviation. Let’s see if progress on these issues keeps pace with gas production and development of associated projects.

Authors

John P. Banks

Image Source: © STR New / Reuters

A 180 Degree Shift in Energy Policy?

Charles K. Ebinger — Wed, 13 Feb 2013 17:06:00 -0500

In his evocative State of the Union Address, President Obama opened the door for a new chapter in U.S. energy policy, a fact totally missed in the Republican Party’s muted response. The president stated that it is time to put the nation’s interests before an individual party’s interest and promised to engage in reasonable compromise. Sure, the president took credit for the dramatic reduction in CO2 emissions brought about shale gas replacing large volumes of coal in electricity production even though this has occurred as the result of market forces and not because of any championship by the White House. He also took credit for the dramatic expansion of wind and solar energy even though together they still account for less than 4% of primary energy production and set a goal to double them again over the next 15 years. The president also rightfully took credit for his administration’s success in doubling the nation’s CAFE standards which over time will reduce the nation’s oil imports by 2 million barrels of oil per day.

But this was just the warm-up to the real message in the president’s speech which was a quantum change in his policy toward the oil and natural gas industry. Gone were the blistering tirades on the tax credits enjoyed by big oil and gas “fat cats.” Gone were the highly partisan attacks on oil and natural gas lobbyists and their influence peddling on Capitol Hill. Instead, the president talked about the huge benefits that have accrued to the U.S. economy and energy security by the “natural gas boom.” Instead of calling for a go-slow policy on leasing oil and gas on federal lands and the attendant “fracking” that will occur—a policy favored by many of the president’s most staunch environmental supporters—President Obama reversed course saying that he would support “speeding up” new oil and natural gas lease sales on federal lands. If one contemplates how the unconventional oil and gas revolution over 96% of which has occurred on state or private land has done to transform the U.S. energy landscape, it is simply mind boggling to realize how much additional oil and natural gas may be found if the president puts his words into action.

Industry critics will counter that the president’s threat to use executive actions to attack climate change if Congress fails to act represents regulatory overreach which will only add to energy production costs. However, such a view misses the president’s willingness to horse trade by allowing new oil and gas production on federal lands while at the same time creating an “Energy Security Trust” which would use a portion of the enhanced oil and natural gas royalties accruing from the accelerated opening of federal lands to fund research to get our cars and trucks running on non petroleum fuels. If this was not an open endorsement for the natural gas industry to replace diesel in our 18-wheel trucks, locomotives, delivery vehicles, and marine transportation then it is hard to imagine what else the gas industry could want from the president.

Sure there is much more to be done and critical questions remain about other aspects of the president’s energy agenda such as his approval of the Keystone Pipeline, his position on natural gas and crude oil exports, and his views toward the future of the coal and nuclear power industries. Specifically, there will need to be more clarity over whether his energy policy will support new research on carbon capture and sequestration from both natural gas and coal power plants, R&D for small scale modular nuclear reactors, and implementation of the recommendations of his blue ribbon commission on long-term nuclear waste storage. Finally there is the critical issue of whether the administration will take on the maritime lobby and support repeal of the Jones Act bringing great relief to New England consumers and their dependence on imported oil while finding a market for the growing surplus of oil on the Gulf Coast.

In his SOTU address, President Obama opened the door to the oil and gas industry to be part of the nation’s great energy future. It is now time for industry to step forward, meet the president halfway, and help reindustrialize America.

Authors

Charles K. Ebinger

Image Source: © Sergio Perez / Reuters

Energy and Climate: Black to Gold to Green

Charles K. Ebinger and Kevin Massy — Thu, 17 Jan 2013 00:00:00 -0500

The United States can use its oil and gas bonanza to put itself back at the forefront of global trade, and take a leadership role in climate change mitigation. Charles K. Ebinger and Kevin Massy drafted this memorandum to President Obama as part of Big Bets and Black Swans: A Presidential Briefing Book.

How can American energy exports to China and India be used to advance climate change mitigation?
How should President Obama address opposition to exporting oil and gas, and promote greater investments in green energy?
What are the geopolitical benefits of increasing American oil and gas exports?

Download Memorandum (pdf) | Download the Presidential Briefing Book (pdf)

TO: President Obama

FROM: Charles K. Ebinger and Kevin Massy

Your second term offers a significant opportunity for the United States to strengthen its economic and geopolitical position by taking advantage of near-term global demand for oil, gas and coal, while bolstering its competitive position in the longer-term global market for lower-carbon technology and taking a leadership role in the battle to address climate change.

Recommendation:

By adopting policies that encourage the development and export of U.S. hydrocarbons including oil, coal and gas, the United States can take advantage of the rising demand for these fuels in developing and emerging economies around the world. As a condition of greater exploration, production and trade in these fuels, the Federal Government should impose a modest but meaningful volumetric or carbon-based tax on their production, with the resultant revenues allocated specifically to the development of two technologies that are essential to global efforts to fight climate change: carbon capture and sequestration; and advanced batteries, both at the grid and vehicle scale.

Background:

While the global political economy is likely to throw up many surprises over the next 20 years, three things appear certain:

U.S. global power and influence will have to be shared with others, as emerging powers such as China and India gain economic and geopolitical influence. As highlighted by the recent National Intelligence Council Report, Global Trends 2030, the global political order will change to one in which “power will shift to networks and coalitions in a multi-polar world.”

• Asia will continue to experience rapid growth in energy demand, most of which will have to be met with fossil fuels under any scenario. China’s energy demand is set to grow by 60 percent between 2010 and 2030, while India’s demand is projected to more than double. Despite the development of renewable and low-carbon technologies such as wind, solar and nuclear, coal will continue to play a leading role in global energy supply, with consumption in Asia’s electric power sector alone projected to increase by 63 percent between 2011 and 2020. Asian demand for energy will more than compensate for a broad leveling off of energy demand and a reduction in carbon emissions among the OECD countries.

• Consequently, global carbon emissions will continue rising at an unsustainable rate as efforts to get an internationally binding agreement on emissions reductions stall and investments in low-carbon technologies falter in the economic downturn. In its most recent annual assessment, the IEA concluded: “Taking all new developments and policies into account, the world is still failing to put the global energy system onto a more sustainable path.”

These global trends are coinciding with large structural domestic changes in the United States. Facing weak economic growth prospects, a massive debt burden, fiscal constraints and a dysfunctional political system, the one bright spot for our country in recent years has been the unexpected boom in oil and gas production. U.S. oil production rose at its highest annual rate ever in 2012 to levels not seen in decades. Thanks to technical developments in hydraulic fracturing and lateral drilling, natural gas production and inventories are at all-time highs. While the natural gas bonanza and environmental concerns are leading to a reduced role for coal in the U.S. power sector, exports of the commodity — of which the United States is the largest resource holder — are also at record levels.

The oil and gas boom has had many commentators breathlessly heralding an era of U.S. energy independence. This is unlikely to materialize either practically or economically. Under even the most optimistic scenarios for domestic hydrocarbon production, the United States will continue to import millions of barrels of crude oil per day for the foreseeable future, albeit increasingly from our own hemisphere rather than the Middle East. And as long as the United States is connected to the global trading system, it will be subject to supply and demand shocks beyond its borders, meaning that price disruptions anywhere in the world will be passed on to U.S. consumers.

However, there is a way in which the U.S. can use its oil and gas bonanza to arrest both its relative economic and political decline to put itself back at the forefront of global trade and to take a leadership role in climate change mitigation.

Irrespective of actions by OECD countries, China, India and other emerging nations will burn oil, gas and coal in ever greater quantities for the foreseeable future. The main beneficiaries of this demand are likely to be the OPEC nations, Russia, Australia and other oil, gas and coal producers. Given its huge reserves of hydrocarbons, the United States could position itself as perhaps the principal beneficiary of this demand by adopting a near-term policy of full-scale, export-led oil, gas and coal development. Such a policy would involve the expedited permitting of oil and gas production and ancillary pipeline infrastructure projects and the enabling of crude oil and gas exports, which are currently subject to policy restrictions or prohibitions. The resultant surge in production and exports would strengthen both the country’s fiscal position through export revenues and job creation; and its political position through weakening the market power and the revenue generation of OPEC nations and Russia. It would also bring geopolitical benefits through the deepening of partnerships with key consumers such as China and India.

The obvious opposition to such a policy is on environmental grounds. With global warming an unavoidable and worsening reality, such a course of action is open to criticism of being irresponsibly self-interested. However, a policy of full-scale hydrocarbon development can be consistent with leadership on climate change if, as a strict condition of the rapid development and export of our oil, gas, and coal resources, the production of hydrocarbons is taxed, either on a volumetric or carbon-content basis. You should then allocate the revenues to a modern “Apollo Mission” effort toward the development of carbon capture and storage (CCS), and advanced batteries and storage technologies. CCS is a necessary technology for any meaningful reduction in climate change given the continued prominence of coal in the global power generation mix. Advanced battery and alternative fuel storage technologies are essential to make electric cars competitively viable and to give solar and wind power the reliability and scale they need to compete with fossil fuels. The policy will also work to move the domestic economy towards lower-carbon consumption in power generation and transportation and to prove the new technologies at scale.

Having gained a competitive advantage in green technologies, the United States can then become the dominant global producer and exporter of CCS technology, advanced batteries and other lower-carbon products and services, maintaining its competitive position in the global energy economy.

The implementation of this policy will not be easy. There is likely to be opposition to exports of oil and gas on the grounds of U.S. energy security and ideological opposition to new taxes. Such concerns should be addressed by greater efforts at public education on the importance of global trade to U.S. energy security and the domestic economic and geopolitical benefits of expanded production.

Conclusion:

In a business-as-usual scenario, the world will continue its hydrocarbondependent trajectory towards an unsustainable level of carbon emissions with the principal economic benefits accruing to other resource-rich nations. By adopting this “black-gold-green” policy, the United States could simultaneously realize the near-term economic and geopolitical benefits generated by the world’s near-term need for hydrocarbons while taking a leadership role in the development and deployment of the technologies that are able to meaningfully address climate change over the longer term.

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Image Source: © Yuriko Nakao / Reuters

President Barack Obama’s Second Term: Big Bets and Black Swans

Thu, 17 Jan 2013 13:00:00 -0500

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January 17, 2013
1:00 PM - 3:00 PM EST

Falk Auditorium
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

President Barack Obama begins his second term at a critical moment in world affairs, facing the many challenges that an unstable world—much of it in turmoil—presents. In response to these many challenges, Brookings Foreign Policy scholars have prepared a Presidential Briefing Book with memos to President Obama that detail the “Big Bets” that he should place in foreign policy, and the “Black Swans”—low probability, high impact events— that could unexpectedly dominate President Obama’s second term. The “Big Bets” include: a nuclear deal with Iran; a new approach to China; securing free trade agreements with Asia and Europe; outlining an Obama doctrine for the use and deployment of drones and cyberweapons; and establishing the United States as a leading energy exporter. The “Black Swans” include: a U.S.-China confrontation over Korea; revolution and war in China; the collapse of the House of Saud; the unraveling of the eurozone; the unraveling of the Palestinian Authority; and the impact of rising seas and climate change-related migration.

On January 17, Foreign Policy at Brookings hosted the launch of “Big Bets and Black Swans: A Presidential Briefing Book.” The first panel focused on the transformational policies that could shape a new global order. The second panel focused on the low probability, high impact events that might derail the president’s second term agenda. Vice President Martin Indyk, director of Foreign Policy, provided introductory remarks. David Gregory, host of NBC’s Meet the Press, moderated both panel discussions.

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Fracking More Complex Than "Promised Land" Lets On

John P. Banks — Thu, 10 Jan 2013 10:38:00 -0500

Energy policy wonks and movie aficionados can now judge for themselves the merits of Promised Land – the Gus Van Sant film with Matt Damon that opened on December 29th in New York and Los Angeles dealing with the natural gas boom and the process of hydraulic fracturing. Alas, they’re both likely to be disappointed.

As noted by some critics thus far, the movie is more character-driven than story- or substance-driven. In fact, the word “fracking” is used just four times – in the same scene – and there is no real meaty, technical discussion of the various issues surrounding fracking and horizontal drilling currently being debated in real life. This is certainly not surprising – it’s Hollywood after all and detailed discussions of well bore integrity and surfactants don’t make for gripping cinema for the average person.

The main points made can be summarized easily. On the “pro” side, there are references to gas being cleaner than coal and oil (which it is), and energy security comes up also, with one scene depicting the gas company salesman suggesting that with abundant domestic natural gas resources we won’t have to go overseas to fight and die for oil any more (although this would only be true if large volumes of the gas are used in passenger vehicle transportation to displace oil; we import very little natural gas now, and it comes almost entirely from Canada and Mexico).

But the principal argument made in support of natural gas, and in fact the central theme of the movie and of the character inter-play, is that exploiting this resource is a way to re-invigorate economically depressed communities generally, and provide much-needed cash for struggling lower income individuals specifically. There is no question that money from gas provides benefits, but it also has complicated local politics and economics, as well as social dynamics. In this regard the movie broadly captures these themes, but some of the locals in the film who accept the money are depicted as caricatures of simple, easily manipulated folks, largely taken advantage of by the gas company, or in the case of the town’s senior local politician, a contemptible crook bribed by the soul-less firm. But, as other commentators have noted, many real-life communities have become very sophisticated in their dealings with the industry.

The major “con” arguments – as articulated by Frank, the elder statesman and well-informed skeptic in the community played by Hal Holbrook – are that the extraction of natural gas is “a bit more complicated than it seems,” and that while the gas is clean, “the way we go about getting it is some dirty business.” There are references to contaminated water, flowback, air pollution, and pictures of dead cows, not to mention a cartoonish, fiery demonstration for a classroom full of grade-school kids.

Let’s start by accepting that Hollywood loves a David v. Goliath story and it has to use caricature and simplified characters and arguments to make a point and keep the audience’s attention. Those with money, power, and knowledge being confronted by the underdog is a captivating theme, one that resonates especially in a struggling economy of the post-Madoff era financial collapse. But the evil, all-knowing, all-powerful, conniving and stop-at-nothing corporation is too easily depicted. There are of course bad companies in real life who do not act in the community’s best interest, and these stories can make for great cinema – see Silkwood, A Civil Action, and Erin Brockovich.

What this movie ultimately does is provide fuel to a trend to view the hydraulic fracturing process through a simplistic, all or nothing lens. Specifically, there are louder voices calling for an outright national ban on fracking, insisting that the process cannot be regulated, environmental risks cannot be mitigated, and oil and gas companies cannot be trusted.

But, as Frank would say, it’s a bit more complicated than that. There are certainly companies trying to do their best, adopt leading practices, innovate solutions, and work with regulators, environmental organizations, and local communities. And natural gas companies and the oil and gas industry broadly are not the only ones who believe that responsibly developing our natural gas resources provides real benefits to the country. President Obama supports this view, as does the Environmental Defense Fund, stating that while natural gas production involves risks, “we are convinced that if tough rules, oversight and penalties for noncompliance are put in place, these risks become manageable.” Others in this camp include the Massachusetts Institute of Technology, the Center for American Progress, the Energy Future Coalition, and New York City Mayor Michael Bloomberg. As George P. Mitchell, the oil and gas man largely credited with developing the innovations allowing the commercial extraction of shale gas has stated – in an August 2012 op-ed with Mayor Bloomberg – that “fracking for natural gas can be as good for our environment as it is for our economy and our wallets, but only if done responsibly.”

So, don’t go to the movie to get informed about natural gas and hydraulic fracturing, as I’m sure most people would not anyway. Go to be entertained for a couple of hours, and then go home and do your homework.

Authors

John P. Banks

Another Untapped Resource: Mine the Uranium Now!

Charles K. Ebinger — Thu, 10 Jan 2013 16:45:00 -0500

What a sad state of affairs our nation has reached when powerful political groups such as the Sierra Club and other interest groups can cloud issues with false statements and scare tactics which have no basis in factual reality. Whether it is opposition to Dominion Resources’ shale gas export project at Cove Point in Maryland or uranium mining development in southwestern Virginia, the Sierra Club seems to ignore findings by competent regulatory authorities that resources such as shale gas can revitalize American manufacturing by providing cheap industrial feedstocks and nuclear energy, which does not contribute to global climate change. It can be developed safely and in a manner that provides high paying jobs for local individuals as well as valuable foreign exchange for our nation’s ailing economy.

Critics of uranium mining in Virginia where large reserves are available state that mining this resource in Virginia is “an experiment” since there is no place in Canada or Australia (two large uranium producers) where an active uranium mine is operating in a wet climate that is also subject to an occasional hurricane. Apparently these propagandists are unaware that a large volume of uranium mining in Australia sits in the path of almost yearly typhoons while uranium mines in Gabon sit in the middle of rain forests while those in South Africa lie directly in the path of violent weather in the Indian Ocean littoral. A lot of Canadian uranium production lies in fragile Arctic tundra environments while the prospects for new uranium mining in Greenland and Alaska are hardly in hospitable environments. Uranium mining and prospecting also occurs in other fragile rain forest environments in Brazil.

Today the United States has more commercial nuclear reactors (104) in operation than any other country in the world. We are also the world’s largest producer of enriched uranium, providing valuable services not only to power plants around the world but also to medical and advanced research reactors at universities and medical research facilities. Ironically, however, for many years our nuclear edifice has depended on large volumes of imported uranium both because it is usually economically less expensive than domestic uranium to produce and because, owing to environmental opposition, most uranium mines have had to close down. The market for uranium is complex. A grass roots world class uranium mine which could be developed in Virginia often takes as much as 15 years to develop fully and can cost $5-10 billion. Because of this long lead time, uranium prices can gyrate wildly with large fluctuations when there is any disruption in the market such as a strike at a major producing facility. Consequently before making such an investment, investors need to make sure that there will be a market for this uranium (both domestically and internationally) when it comes on line, or, since uranium often comes in association with other valuable minerals such as gold, that there is enough of the other mineral to cover costs as the uranium mine is developed.

While the U.S. market for new nuclear power plants in the U.S. is currently modest, this may well change the day the United States finally decides to place a price on carbon to reduce dangerous CO2 emissions. To meet domestic uranium demand, currently there is only one (Nevada) major operating mine in the United States. To meet the needs of the current generation of reactors especially as they receive life extensions, as well as a booming potential export demand in India, China, the Middle East and elsewhere, is it not imprudent to open a world class mine that would vastly reduce our dependency on imported uranium while creating valuable jobs at home? While Virginia has a proud tradition of states’ rights, it is also the home of Washington, Jefferson, Madison and Monroe--men of vision who saw the potential to turn warring parochial constituencies into a great nation composed of many diverse people when woven together would form a great nation. Come on Virginia, rise to the occasion and help once again meet the needs of a great nation.

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Charles K. Ebinger

Bad Tax Policy Makes Bad Energy Policy

Charles K. Ebinger — Mon, 07 Jan 2013 10:00:00 -0500

Despite the fact that all renewable energy, minus hydropower, is projected to account for less than 10% of U.S. energy supply by 2040, Congress and the administration once again have shown themselves to be pusillanimous and are refusing to stand up to an industry which, in the absence of an extension of tax credits, cannot compete in the marketplace despite years of subsidies, paid courtesy of the American taxpayer. Under the new fiscal deal, the wind industry will receive $12 billion over the next decade, not including the higher electricity costs that consumers will pay for state mandates requiring that a portion of future electricity supply come from high cost renewable energy resources. The situation is even more egregious in regards to offshore wind projects such as Cape Wind in Nantucket Sound where the project was designed and justified based on the premise that it would lower the utility costs of hard pressed New England consumers who will now see their utility bills escalate dramatically. The Congressional/administration decision to make qualifying for these tax credits even less onerous than before is another stark example of the abnegation of public fiscal accountability. Whereas previously to receive a tax credit wind projects had to be completed and in operation by the end of the calendar year, under the revised rules, new wind farms will be able to claim either a production tax credit or an investment tax credit analogous to what just expired as long as the project breaks ground in 2013. The fact that we already have completed windmills that are not tied to the grid gives little reason to be sanguine that this loophole will not be exploited.

The wind industry and its lobbyists argue that wind farms will generate so much tax revenue (federal, state and local) that they will more than pay for the tax credits . In this regard, it is ironic that, according to the American Wind Energy Association’s own statistics, nearly 80% of the nation’s wind farms are in Congressional districts represented by Republicans as are 67% of the factories producing turbines and other components of electric wind generating facilities. To be fair to the wind industry, it was not the only recipient of a basket of goodies from the Congress and the administration. Electricity made from biomass, tidal and ocean power, technical improvements in hydroelectric facilities and landfill methane all got their tax cuts extended.

While it may be argued that given the size of our fiscal debacle, including our unfunded future entitlement liabilities, all these subsidies represent a drop in the financial bucket. What is truly sad is that this whole debate over subsidies has occurred against the backdrop of a transformation in the North American (U.S. and Canada) energy economies which offer the United States and our Canadian neighbors unique political and economic opportunities. Given this energy bonanza, we can use our new unconventional oil and gas reserves to: (1) eliminate our oil import dependency, saving over $425 billion dollars a year; and (2) revitalize American manufacturing and industrial exports, using cheap unconventional natural gas liquids (propane, butane, pentane, etc.) as fuel, while exporting some of the remainder of our vast gas resources, thereby breaking the stranglehold of Russian gas on our European allies while also assisting other allies and trading partners such as Korea, India and Japan in meeting their rising energy requirements.

Mr. President, the time has come to lead this nation towards a bright energy future using the unconventional oil and natural gas that nature has provided us. Specifically, it is time to sit down with the governors of New York and Connecticut to end the bottlenecks keeping shale gas production and transport from reaching New England. As the region of the country still most susceptible to high oil prices, nothing would do more for national energy security than to build a pipeline network that would allow oil and gas from the Marcellus to flood into New England. Second, it is time to give approval for the Keystone XL pipeline, sending a clear message to all concerned that your administration will move after sound environmental reviews to expedite the construction of all the requite pipelines that will need to be built to maximize our unconventional oil and natural gas and to get them to market. Third, with demand for LNG in the Pacific growing exponentially, it is time not only to accelerate the export of natural gas from the lower 48 states but also from Alaska. For too long, the promises made to Alaskans at the time of statehood and the Land Claims Settlement Act have gone unfulfilled. Alaska should no longer be treated as some sort of colony or as a vast national park but rather as part of the nation’s great resource heritage, albeit with the proper environmental oversight by both the federal and state governments.

Mr. President, the fiscal debate exhibited American parochialism and the lack of statesmanship by both our great political parties at their worst. It is now time for you to move this nation away from the perception held by some that our future energy situation can be met fully by renewables, energy conservation and end use efficiency. Of course, these are all important but with every leading energy forecast suggesting that for at least the next 30-40 years the world will remain dependent on fossil fuels which we have in untold abundance, it’s time to get on with the job, find ways to strip out CO2 from our oil, coal and gas production and to utilize what we can while sequestering the rest proving once again the very essence of American Exceptionalism.

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Charles K. Ebinger

Through the Looking Glass: U.S. Energy Exports to the Middle East?

Kevin Massy — Thu, 20 Dec 2012 16:30:00 -0500

In Lewis Carroll’s Through the Looking Glass, the White Queen tells Alice that in her youth she could believe as many as six impossible things before breakfast. If she had been looking at recent projections from the International Energy Agency and the U.S. Energy Information Administration (EIA), she might have made it seven: sometime in the not-too-distant future, U.S. energy exports could be passing in through the Straits of Hormuz.

That the global energy landscape is changing is now conventional wisdom: technology developments in drilling techniques have unlocked vast quantities of previously uneconomic “unconventional” oil and gas, meaning that U.S. is on track to increase oil production this year at its fastest rate on record. Natural gas, a commodity we thought we would have to be importing just a few years ago, is now so abundant that it is too cheap to produce in many parts of the country, and there are plans afoot to export it in the form of LNG. Much has been made of the potential for U.S. energy independence – a chimerical concept both practically (we are still likely to import at least half of our crude oil for the foreseeable future) and economically (even in the unlikely event that the U.S. ever produces as many barrels of oil as it consumes, domestic consumers will still be exposed to price shocks as long the country remains integrated in the global economy).

But the economic and political benefits of the hydrocarbon boom are real. The 760,000 barrels a day of added domestic crude production in 2012 will make a significant dent in the trade deficit. The shale gas bonanza has spared us the fate of Japan, Korea and other countries that are paying four to five times as much as US consumers for their gas. On the geopolitical front, the strategic value of U.S. oil and gas for are attracting attention. Last week, Senator Richard Lugar unveiled legislation proposing that the U.S. use LNG exports to help our import-dependent NATO allies. Last month OPEC admitted that North America shale resources are likely to play an increasingly important role among its competition. And just this week, Anne-Marie Slaughter, former Director of Policy Planning at the U.S. State Department called the US energy resurgence “the most important geopolitical trend out there”.

When looked at in the context of broader supply and demand trends, there is some justification for this claim. At the same time that U.S. supply is surging, domestic demand – like that elsewhere throughout the OECD – is leveling out or falling. Meanwhile, non-OECD demand for oil and gas is rising rapidly. While much is made of the role of India and China in this story, one of the fastest growing sources of demand are OPEC supplier states of the Middle East. At around 3 million barrels per day, Saudi Arabia’s oil consumption is already approaching that of India. This summer, the kingdom was burning as much as 1 million barrels a day just for power generation at a huge cost of forgone revenue. The UAE, the country with the world’s seventh largest reserves of natural gas, is already a net importer of the commodity. So is Kuwait, which already buys LNG during the summer months and is expected to need year-round supplies from 2013.

As populations, industries, and demand for (subsidized) electricity in the region is projected to grow, the trend is set to continue. Provision of sufficient electricity and water - made from power-intensive desalination facilities – to citizens will be all the more important as governments in the region try to ride out the aftermath of the Arab Spring. With tight fiscal budgets they can ill-afford to continue burning valuable oil to keep the lights on. While serious efforts are being made to develop and deploy civil nuclear power and renewable energy to meet the challenge, the scale of the requirements (an additional 30,000 megawatts by 2020 in Saudi Arabia alone), will require a significant contribution from natural gas. (Qatar, which is the world’s largest producer of LNG and is realizing very handsome profits from selling it to Asia, has very little incentive to sell at a discount to its larger regional neighbors, who, in any case, have little inclination to look for favors from their smaller peer).

Which brings us back to the United States. The U.S. Department of Energy is currently reviewing 15 applications from companies looking to export LNG from the lower 48 states. It is already clear that the process for approval of these applications – especially to countries with which the US does not have a free trade agreement – will be a politically contentious one. And even if all applications are permitted, it is highly unlikely there will be a market for all of the volumes seeking export. Nevertheless, EIA recently doubled the amount of U.S. LNG exports it sees in the global market by 2027. Where that supply goes is still an open question, but it is sure to go to where it is needed. And few countries need it more than those in the Middle East. As the U.S. tries to manage its relative decline and reorient its foreign policy in light of the Asian “pivot” and the Arab Spring, it may find itself in the extraordinary position of being able to invert its signature strategic weakness of recent decades by using energy exports to the Middle East as a source of influence and economic strength. Curiouser and curiouser, as Alice might say.

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Kevin Massy

Nuclear Power in Developing Countries? Let's Talk about It

John P. Banks and Kevin Massy — Sun, 16 Dec 2012 00:00:00 -0500

Editor's note: This opinion piece first appeared on the Global Post website.

With annual negotiations on a global climate change in Doha, Qatar just completed, it is clear that the world is failing to meet the challenge to reduce carbon emissions. As countries squabble about low-carbon investment funds, historical responsibility, and “climate compensation,” one proven low-carbon technology is being left out of the discussion: nuclear power.

Cited by many as a critical component of any meaningful carbon reduction effort, nuclear energy has been relegated in developed countries. Some nations are planning complete nuclear-power phase-outs and others see a reduced role for the technology as safety related costs and the viability of alternatives – principally natural gas – increase.

While the developed world gets cold feet on nuclear power, its prospects in developing countries are different. The challenges of meeting electricity demand, reducing reliance on imported energy, and promoting economic growth while lowering carbon dioxide emissions, leave many emerging nations with no alternative but to consider nuclear energy as a key component of their economic development and energy security strategies.

The International Energy Agency (IAEA) projections show that these countries will account for 40 percent of total global nuclear power generation by 2035, up from 17 percent in 2010. Of nuclear reactors currently under construction, 69 percent are in China, India and Russia, with China alone accounting for 40 percent of the total. In addition, several developing countries are looking to construct their first nuclear reactors in the next decade or so; the United Arab Emirates has broken ground on the construction of its first units, and Turkey, Jordan and Vietnam are also well along in their plans to build their first civilian nuclear reactor. A handful of others are seriously considering nuclear power, but commitments are pending.

Serious challenges remain in expanding or introducing a nuclear energy infrastructure in developing countries. Major barriers include the high cost of building nuclear power plants, the time required to develop robust legal and regulatory frameworks, the long-term commitment required, establishing a sustainable safety and non-proliferation culture, small grid sizes and lack of interconnections, and lack of human resources capacity.

Our research has highlighted one issue that has received insufficient attention even as it is gradually emerging as critical both in existing nuclear energy states as well as in countries aspiring to introduce their first reactors: the lack of comprehensive, timely and transparent stakeholder engagement is contributing to a growing opposition to nuclear power.

The IAEA emphasizes that stakeholder engagement is of the “utmost importance.” In building popular support it is essential to promote understanding of the advantages of nuclear power, to explain how its risks will be addressed and to legitimize the program in the eyes of the public. The role of stakeholder is also critically related to a country’s ability to attract, motivate, and retain qualified individuals in its nuclear power industry.

In Jordan, skepticism about the rationale for its nuclear power policy is expressed in distrust of official information and rising public protests. Opposition to the nuclear project has spread to the parliament: in May 2012 the Energy and Mineral Resources Committee of the lower house recommended that the government suspend the nuclear power program. As part of an exercise to assess for Jordan lessons from Japan’s Fukushima experience in 2011, a government official acknowledged that “silence and defensive attitude creates doubts…and the more people know, the more they support nuclear energy.”

In Turkey, public protests in the aftermath of Fukushima against that country’s plans to build a nuclear power plant on the Mediterranean coast prompted a Turkish think tank to state that a more regular and comprehensive communication strategy would be helpful in “defusing the polarization surrounding the transition to nuclear power.”

Other countries are also witnessing more vocal opposition. In China, four retired officials of Wangjiang County petitioned against the government’s planned construction of the Pengze nuclear power plant, citing poor or falsified data used in the plant’s application and approval process. The country’s Ministry of Environmental Protection stated that one of the lessons of Fukushima for China is that Beijing “should further strengthen publicity and information disclosure.” Since Fukushima, protesters have been intensifying their demonstrations against the nuclear power plant at Kundakalum in the Indian state of Tamil Nadu.

Whether due to Fukushima, particular local circumstances, the rise in access to information technology and social media, or generally heightened political and environmental awareness, emerging market countries are witnessing nascent, but increased, opposition to nuclear energy plans.

In our view, lack of stakeholder engagement is a major contributing factor. Governments that may not have a tradition of proactively explaining policy decisions and responding to questions and concerns in a timely and transparent manner are now confronting the reality that engaging in a dialog with all interested parties is essential, especially for an endeavor with such long-term and unique safety, environmental, cost, proliferation and strategic characteristics.

Stakeholders include the news media, NGOs, the general public, opinion leaders, and national and local government officials. Governments in developing countries intending to introduce or expand nuclear energy should engage in serious discussions with all of these interests. If they don’t, the viability, sustainability and safety of their programs will be compromised.

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Publication: Global Post

Human Resource Development in New Nuclear Energy States

Wed, 12 Dec 2012 12:00:00 -0500

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December 12, 2012
12:00 PM - 1:00 PM EST

Saul/Zilkha Rooms
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

With the United Arab Emirates, Jordan and Turkey continuing to pursue civil nuclear energy programs, the Middle East is likely to play host to the first new civil nuclear energy states of the 21st century. After a long hiatus, the likely entry of several new states into the global nuclear power sector presents a number of unprecedented challenges, including the development of the institutional and human capacity to run their programs competently and sustainably.

On December 12, the Energy Security Initiative at Brookings hosted a discussion of its latest research paper, “Human Resource Development in New Nuclear Energy States: Case Studies from the Middle East.” Based on case studies from three countries in the Middle East, the paper offers a series of recommendations on human resource related risks for emerging market nations looking to enter the civil nuclear sector. Following the presentation of the report’s findings and recommendations, Senior Fellow Charles Ebinger, director of the Energy Security Initiative, moderated a discussion with its authors.

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Human Resource Development in New Nuclear Energy States: Case Studies from the Middle East

John P. Banks, Kevin Massy and Charles K. Ebinger — Tue, 20 Nov 2012 09:47:00 -0500

With the United Arab Emirates, Jordan, and Turkey all continuing pursuit of civil nuclear energy programs, the Middle East is likely to play host to the first newcomer civil nuclear energy states of the 21st century. After a long hiatus, the likely entry of several new states into the global nuclear power sector presents a number of unprecedented challenges. To meet these challenges, it is essential that new nuclear energy states develop the institutional and human capacity to run their programs competently and sustainably. Against this backdrop, this paper assesses human resource development (HRD) in the United Arab Emirates (UAE), Jordan, and Turkey against these two criteria.

With widely varying economic, political, and social contexts, each of the three countries under review has different HRD requirements and objectives. However, while each country has unique challenges related to its individual circumstances, it is also possible to identify areas of relative success and concern with regard to leading HRD practices.

With a high level of sovereign wealth and a well-formulated, well-articulated strategy for the implementation of civil nuclear power, the UAE has the most comprehensive approach to HRD among the countries under review. The principal challenges for the UAE relate to its ability to reconcile the extensive needs of its civil nuclear program and the objectives of recruiting the requisite number of qualified nationals into training programs and professional positions. Jordan faces more challenges than the UAE with regard to preparedness for a civil nuclear program. While the country has a large educated population the country has far fewer financial resources. Further, some of the biggest obstacles with regard to its nuclear program are the result of a lack of public-sector coordination and communication. Finally, while Turkey has struggled to develop commercial-level nuclear power, its nuclear-related education programs have been established for decades. With no commercial-scale operational experience, however, the host country may be vulnerable to a situation of information asymmetry its regulator may not have sufficient expertise and capacity to competently oversee the construction and operation of the new design they have chosen for construction.

Based on the conclusions from the three country case studies, the paper offers a series of recommendations on competence and sustainability-related HRD risks for the three reviewed countries and emerging market nations looking to enter the civil nuclear sector.

These recommendations are:

• HRD should be a central part of a new nuclear energy state’s strategy

• HRD programs should place a large emphasis on safety culture

• Quality control initiatives should include merit-based recruitment, international benchmarking and vendor involvement

• Stakeholder engagement should be a core element of new nuclear energy programs’ HRD strategies

• HRD strategies should be designed around the operational needs of the nuclear industry rather than around high-profile academic programs

• New nuclear energy states adopting new reactor technologies should allocate additional HRD time and resources to become an “intelligent customer”

• National quota policies should be flexible to the needs of new nuclear programs

• Regional cooperation should not be relied upon as the primary or major source for HRD in the nuclear sector

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