Brookings: Topics - Energy

U.S.-Turkey Civil Nuclear Cooperation in the Post-Cold War World

Thu, 20 Jun 2013 14:30:00 -0400

Event Information

June 20, 2013
2:30 PM - 4:00 PM EDT

SEIU Building
1800 Massachusetts Ave. NW
Washington, DC

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On June 20, the Center on the United States and Europe (CUSE) at Brookings will host a discussion on the challenges and opportunities facing Turkey’s civil nuclear energy program and what they mean for U.S.-Turkish relations. The event, which is part of the TUSIAD U.S.-Turkey Forum at Brookings, will feature a presentation by Jessica C. Varnum of the Monterey Institute of International Studies. In her remarks, Varnum will discuss her new report on the potential for nuclear cooperation between the United States and Turkey to enhance what President Obama has called their “model partnership.” The report is the inaugural publication of the recently-launched Turkey Project Policy Paper Series.

Jessica Varnum is a research associate and adjunct professor at the James Martin Center for Nonproliferation Studies of the Monterey Institute of International Studies. She is an expert on Turkey, U.S.-Turkey relations, and nuclear energy policy.

TUSIAD Senior Fellow Kemal Kirişci will provide introductory remarks and moderate the discussion. Charles Ebinger, director of the Energy Security Initiative at Brookings, will offer comments following Varnum’s presentation. After the program, the speakers will take audience questions.

Building an Electric Vehicle Highway to Energy Security: Tennessee EV Project

Devashree Saha — Wed, 12 Jun 2013 09:46:00 -0400

Electric vehicles (EVs)—notwithstanding the high-end success story of Tesla Motors—remain stuck in a classic “chicken and egg” dilemma. Achieving widespread market penetration requires ubiquitous charging stations. But charging station scale-up requires a critical mass of EVs already on the road to justify the investment.

One approach to this problem is what a variety of partners in the state of Tennessee are doing through a $230 million public-private partnership partly funded by a grant from the Department of Energy (DOE) and managed by ECOtality. Together, these actors—working as a charter market for Ecotality’s EV Project, the largest deployment of EVs and charging infrastructure to date—are forcing the issue and simply blowing through the market challenge by building a ton of charging stations fast.

Tennessee’s involvement in the project is remarkable for a number of reasons. For one thing, the Tennessee effort is seeking to get to scale fast and so covers a larger geographical area than any other EV Project site. Knoxville, Chattanooga, Nashville, Memphis, and other smaller towns in east, west, and middle Tennessee are all gaining charging sites. In fact, DOE data reveal that there are 294 public EV charging stations in Tennessee catering to cars such as the Nissan Leaf, Chevrolet Volt, and Ford Focus Electric. Tennessee businesses including Cracker Barrel, Sears, and Crowne Plaza now host EV Project charging stations. Even more impressive are moves to essentially cover the full expanse of the state at highway scale. Most notable is the new coverage of the 425-mile stretch of highway that connects Knoxville, Nashville, and Chattanooga in what is known as the Tennessee Triangle. That is actually the nation’s largest EV charging corridor connecting multiple metropolitan areas.

Additionally, Tennessee’s EV project is also noteworthy for the strong support it has received from a variety of partners including state and local government, regional utility partners, the Tennessee Valley Authority (TVA), Oak Ridge National Laboratory (ORNL), and Nissan North America. Tennessee committed $2.5 million early on in the project to give as rebates to people purchasing the Leaf and Volt models. TVA, in partnership with ORNL and the Electric Power Research Institute, has developed solar assisted EV charging stations—also called the Smart Modal Area Recharge Terminal (SMART)—to minimize demand on the grid and integrate the use of renewable energy sources. The SMART station is being deployed in conjunction with the EV Project and 125 charging stations have been installed in the Knoxville-Nashville-Chattanooga corridor.

With so much going on Tennessee is well on its way to becoming an important test bed for advancing the deployment of EVs in the United States. As one of only a few states participating in the EV Project, Tennessee is contributing valuable data on infrastructure deployment process (for instance, how to select public charging locations that will provide maximum benefit to vehicle owners and charging hosts), charging station performance, vehicle owner driving and charging behavior, and impact on electric grid. All vehicles and charging units are equipped with meters and data loggers and the information is transmitted to a central database managed by ECOtality and the Idaho National Laboratory. In this fashion, the state’s efforts may yield critical insights on how to obliterate the chicken-egg conundrum and accelerate the deployment of EVs across the nation in the next few years.

Authors

Devashree Saha

Image Source: © Thomas Peter / Reuters

China-Middle East Energy Relations

Erica S. Downs — Thu, 06 Jun 2013 00:00:00 -0400

Editor's Note: In testimony before the U.S.-China Economic and Security Review Commission, Erica Downs discusses China’s energy trade with and investment in the Middle East, and the implications of the resurgence of oil and natural gas production in the United States for China’s role in the Middle East.

View a webcast of the hearing on the USCC website »

I would like to thank the members of the Commission for the opportunity to testify. It is an honor to participate in this hearing.

My remarks today will focus on China’s energy relations with the Middle East. I will discuss China’s energy trade with and investment in the region and the implications of the resurgence of oil and natural gas production in the United States for China’s role in the Middle East.

China’s oil trade with the Middle East

China imports more oil from the Middle East than any other region of the world. In 2011, China imported 2.9 million barrels per day (b/d) of Middle Eastern oil, which accounted for 60 percent of China’s oil imports. For comparison, the United States imported 2.5 million barrels per day of oil from the Middle East in 2011, accounting for 26 percent of US oil imports.[1]

China’s largest crude oil supplier is Saudi Arabia, which provided China with one-fifth of its crude oil imports -- almost 1.1 million b/d – last year.[2] Saudi Arabia has been China’s top crude oil supplier for the past decade. The Kingdom has established itself as a very reliable supplier in both word and deed. Saudi officials have repeatedly reassured the Chinese that they can count on Saudi Arabia to provide China with the oil it needs for continued economic growth.[3] Saudi Aramco has backed up this commitment with its participation in a joint venture refinery in China’s Fujian Province, which processes Saudi crude.

China’s oil imports from Iran-- its fourth largest supplier in 2012 and third largest supplier for most of the previous decade-- have recently declined, probably as a result of US sanctions aimed at reducing Iran’s revenue from crude oil exports. The National Defense Authorization Act of 2012 prescribes penalties for foreign financial institutions which do business with the Central Bank of Iran, the main clearinghouse for oil payments, but also grants 180-day exemptions to countries that “significantly reduce” oil imports from Iran. China’s imports of Iranian crude have fallen from 555,000 b/d in 2011 to 439,000 b/d in 2012 to 402,000 b/d during the period January-April 2013. These reductions earned China exemptions in June and December 2012 and June 2013.[4]

China’s oil investments in the Middle East

The Chinese national oil companies’ largest upstream projects in the Middle East are in Iraq and Iran. The firms have signed service contracts to develop several large oil fields in both countries. (These include al-Ahdab, Halfaya and Rumaila in Iraq and Azadegan and Yadavaran in Iran.) The projects in Iraq have progressed much more quickly than the projects in Iran.

China National Petroleum Corporation (CNPC), which moved quickly to develop a foothold in the postwar Iraqi oil industry, is one of the largest foreign companies, in terms of production, operating in Iraq. One of the crown jewels of CNPC’s international upstream portfolio is Iraq’s Rumaila oil field, which CNPC is developing in partnership with BP. Last year, Rumaila accounted for more than one third of Iraq’s oil output. It was also CNPC’s top-producing overseas project, accounting for almost half of CNPC’s net overseas oil and natural gas production.[5]

In contrast, the upstream activities of CNPC and its domestic peers in Iran have slowed in recent years. The Iranians suspended the contract of China National Offshore Oil Corporation (CNOOC) for the development of the North Pars natural gas field in 2011 for lack of progress, and CNPC withdrew from developing phase 11 of South Pars, the world’s largest natural gas field in 2012 (after the Iranians threatened to void CNPC’s contract for lack of progress).[6] CNPC is behind schedule in developing the Azadegan oil field, and Sinopec ‘s work on the Yadavaran oil field reportedly has suffered delays. [7] The reasons for the shrinking presence of China’s oil companies in Iran include sanctions that have made it difficult for China’s oil companies to secure equipment and technologies needed to operate in Iran, unhappiness with contract terms, uncertainty about whether Iran’s nuclear program will spark a military conflict, and reported guidance from China’s leadership to move slowly in Iran.[8]

In sum, the Chinese oil companies’ strategy for securing upstream projects in Iran has been one of “talk now and spend later.” In the 2000s, the companies were happy to negotiate contracts for projects that would almost certainly have been awarded to major international oil companies in the absence of sanctions. However, they have not been in any rush to actually pump large sums of money into Iran.

The Implications of greater American energy self-sufficiency for China’s role in the Middle East

I would also like to say a few words about how the resurgence of oil and natural gas production in the United States may reshape the roles of the United States and China in the Middle East. The International Energy Agency projects that the United States’ oil imports from the Middle East will fall from 1.9 million b/d in 2011 to just 100,000 b/d --3 percent of total oil imports-- in 2035 as a result of increasing domestic oil production and decreasing demand. In contrast, China’s oil imports from the Middle East are projected to grow from 2.9 million b/d in 2011 to 6.7 million b/d -- 54 percent of total oil imports-- in 2035.[9]

These trends have prompted speculation about future US military posture in the Persian Gulf and, in turn, what it might mean for the security of regional oil flows to China. It is highly unlikely that the United States would completely disengage from the Middle East; Washington will almost certainly retain a variety of interests in the region, including the free flow of oil, counterterrorism and nuclear nonproliferation, even if the United States is importing little or no oil from the Middle East. However, if a diminishing appetite for Middle Eastern crudes and budgetary constraints were to prompt Washington to substantially reduce its military presence in the region, oil security concerns might compel Beijing to play a larger role in defusing the primary threat to the free flow of oil from the Persian Gulf – the closure of the Strait of Hormuz by Iran. At a minimum, this might entail Beijing communicating to Tehran that it would regard the disruption of oil exports bound for China as a threat to one of China’s vital interests, similar to the public warning then-Premier Wen Jiabao issued in Qatar in January 2012.[10] A less likely but more active Chinese effort might involve reinforcing verbal admonitions with the stationing of a ship in the Persian Gulf, perhaps from one the multinational regional antipiracy patrols in which the Chinese navy participates.[11]

Finally, it is worth noting that the boom in oil and natural gas production in North America may provide Washington with more leverage over the activities of China’s national oil companies in Iran. North America is now the epicenter of global mergers and acquisitions in oil and natural gas exploration and production. In 2011, for example, 60% of all upstream mergers and acquisitions worldwide were in North America.[12] China’s national oil companies are part of this story. Since 2009, almost half of the capital Chinese oil companies have spent on overseas mergers and acquisitions has been used to purchase assets in North America. In the United States alone, Chinese oil companies have invested more than $8 billion since 2010. Chinese oil executives have indicated continued interest in acquiring additional assets in North America.[13]

The more Chinese oil companies are invested in the United States, the more likely they are to think twice about doing business in Iran. This is because involvement in the Iranian oil industry may undermine the efforts of Chinese oil companies to expand their presence in the United States in two ways. First, any proposed acquisition that would result in foreign control of an American business -- such as CNOOC’s recent acquisition of Nexen – should be reviewed by the Committee on Foreign Investment in the United States (CFIUS) for national security risks, and it is likely that CFIUS would inquire about the nature of the acquirer’s activities in Iran. Second, Chinese oil companies are acutely aware of how public opinion can scuttle a deal thanks to CNOOC’s unsuccessful bid for Unocal in 2005. Strong opposition to a Chinese oil company’s business in Iran might prevent that company from acquiring an asset in the United States by making the transaction costs unacceptably high. In sum, opportunities to invest in the United States might diminish the appetite of China’s national oil companies for undertaking projects in Iran.

Thank you. I look forward to your questions.

[1] International Energy Agency, World Energy Outlook 2012 (Paris: OECD/IEA, 2012), pp. 85, 107; and data provided by the International Energy Agency by email on May 29, 2013.

[2] “Table of China December Data on Oil, Oil Product and LNG Imports,” Dow Jones Global Equities News, January 21, 2013.

[3] See, for example, Ali Ibrahim Al-Naimi, Speech at the Conferment Ceremony of Honorary Doctorate, Peking University, Beijing, China, November 13, 2009, http://www.kaust.edu.sa/about/bot/speeches/PekingUniversitySpeech.html.

[4] Nidhi Verma and Meeyoung Cho, “India leads Asian cuts in Iran oil imports ahead of waiver review,” Reuters, May 21, 2013, http://www.reuters.com/article/2013/05/22/iran-sanctions-waiver-idUSL3N0E30D720130522; “Market Eye: China Demand Growth Sputters to Seven-month Low,” International Oil Daily, April 23, 2013; Judy Hua and Chen Aizhu, “Update 2 – China’s Feb crude imports from Iran up 81 pct on yr,” Reuters, March 21, 2013, http://www.reuters.com/article/2013/03/21/china-oil-iran-idUSL3N0CC0CS20130321; “Table of China December Data on Oil, Oil Product and LNG Imports,” Dow Jones Global Equities News, January 21, 2013; and “Oil Data: Table of China December Oil, Oil Pdt, LNG Imports,” Dow Jones International News, January 20, 2012.

[5] He Qing “Zai mou zhaobiao: Zhongshiyou de Yilake jingji zhang” (“Planning another bid: CNPC’s Iraqi balance sheet”), 21^st shjiji jingji daobao (21^st Century Business Herald), April 20, 2013, http://finance.qq.com/a/20130420/000560.htm; “Unrest Hits CNPC’s 2012 Output,” International Oil Daily, January 18, 2013; and Aref Mohammed and Ahmed Rasheed, “Update 2 – BP proposed cuts to Iraq’s Rumaila target,” Reuters, December 13, 2012, http://www.reuters.com/article/2012/12/13/energy-iraq-rumaila-idUSL5E8ND7YS20121213.

[6] “Iran Set to Replace CNPC with Local Firms at South Pars 11,” International Oil Daily, April 23, 2013; and “CNPC to Withdraw from Iran’s South Pars Project,” International Oil Daily, September 28, 2012; “CNOOC Iran Gas Project Suspended,” SinoCast, October 14, 2011; and “Iran suspends $16 billion Chinese gas deal,” Platts Oilgram News, October 12, 2011.

[7] “CNPC, NIOC Eye Early Production at South Azadegan,” International Oil Daily, April 1, 2013; “Sanctions Show Importance of China for Iran’s Economy,” June 24, 2012; and “Output of Iran’s Yadavaran field reaches 16,000 b/d,” Platts Oilgram News, May 2, 2012.

[8] For more on the government’s guidance, see Chen Aizhu, “Exclusive: China slows Iran oil work as U.S. energy ties warm,” Reuters, October 28, 2010, http://www.reuters.com/article/2010/10/28/us-china-iran-oil-idUSTRE69R1L120101028.

[9] International Energy Agency, World Energy Outlook 2012 (Paris: OECD/IEA, 2012), pp. 78-80; and data provided by the International Energy Agency by email on May 29, 2013.

[10] “Records of Premier Wen Jiabao’s Press Conference at Doha Just Before the End of His Official Visits to the Three Gulf States,” January 18, 2012, http://www.fmprc.gov.cn/ce/cebel/eng/zxxx/t898607.htm.

[11] This paragraph is based in part on an email exchange between the author and Rear Admiral Michael McDevitt, US Navy (ret.) on May 28-30, 2013.

[12] “2011 Bumper Year for European Upstream M&A,” EI Finance, January 25, 2012.

[13] Rakteem Katakey, Aibing Guo and Sarah Chen, “China Joining US Shale Renaissance With $40 billion,” Bloomberg News, March 6, 2013, http://mobile.bloomberg.com/news/2013-03-05/china-joining-u-s-shale-renaissance-with-40-billion.html; and Judy Hua and Fayen Wong, “China’s Sinopec says still seeking assets in N. America,” Reuters, March 4, 2013, http://www.reuters.com/article/2013/03/05/china-npc-sinopec-idUSB9E8LA02G20130305.

Authors

Erica S. Downs

Publication: U.S.-China Economic and Security Review Commission

Image Source: © Atef Hassan / Reuters

Trillions of Dollars in Oil, Gas and Mining Revenue Still Shrouded in Secrecy

Daniel Kaufmann — Mon, 20 May 2013 10:23:00 -0400

Editor's Note: This version references a past event held at the Brookings Institution. The original version can be found on the Huffington Post.

Opacity still prevails in how natural resources are managed. This conspires against economic development. The lives of over a billion citizens could be transformed if their governments managed their oil, gas and minerals in a more open, accountable manner. This emerges from the Resource Governance Index, released by the Revenue Watch Institute at an event at Brookings last week.

The Index measures the transparency and accountability in the oil, gas and mining sector of 58 countries. Together these nations produce 85 percent of the world’s oil, 90 percent of diamonds and 80 percent of copper, generating trillions of dollars annually. The in-depth analysis finds that over 80 percent of the countries fail to meet satisfactory standards in how their natural resources are governed. In these nations, opacity, corruption and weak processes keep citizens from fully benefiting from their countries’ resource wealth, revealing a significant ‘governance deficit’.

There is hope, however. Some countries prove it is possible to lift the veil of secrecy and meet higher standards of transparency and accountability. Eleven out of the 58 countries received satisfactory scores overall, including emerging economies in Latin America. By shedding light on reforming states as well as lessons and solutions, we can reject the tired notion of the deterministic ‘resource curse’.

Each country, from the highly ranked Norway, Brazil and United Kingdom to the poorly performing Turkmenistan and Iran, is judged on four criteria: legal framework, transparency levels, checks and balances, and the broader governance context. Most of the worst performers depend almost exclusively on revenues from natural resources as their main source of income, implying that transparency and accountability is largely missing where it is needed the most (Figure 1). And the Middle East and North Africa, the most resource-dependent region, is the worst performing.

Key American allies are among the poor performing countries. Saudi Arabia ranks 48th out of 58 with failing scores on all four components. Afghanistan, which has received billions in aid from the U.S. and sits atop an estimated $3 trillion of minerals, performs poorly. U.S. companies invest heavily in the oil sectors of poorly rated countries, Angola and Equatorial Guinea. At the same time, our study also finds that wealth is no guarantee for attaining openness and accountability in natural resources as illustrated by Qatar, ranked 54th out of 58.

In fact, there is room for improvement in every nation, including wealthy nations. Canada, the U.S. and Australia also need to ensure their multinational companies do not facilitate the opacity found in many countries where they operate.

Improved management of natural resources could make a major difference in the economic development of many countries. In Nigeria, oil revenues were 60 percent higher than total aid to sub-Saharan Africa in 2011. In Libya, the Central Bank’s $65 billion in reserves are quickly depleting to pay for the government’s deficit spending. Equatorial Guinea has a higher average per capita income than the U.K., yet three-fourths of its population lives under the poverty line.

The Index also assesses 45 state-owned oil and mining companies and 23 natural resource sovereign wealth funds according to their levels of transparency and accountability. Industry heavyweights Statoil, Pemex and Petrobras exhibit high rankings, while the national oil companies of Turkmenistan and Myanmar rank at the bottom. The sovereign wealth funds of Kuwait, Libya and Qatar, which hold an estimated $476 billion in total assets, score among the bottom five.

Improved governance in natural resources is arguably the development challenge of the decade. The stakes are high, so now is the time to act. The annual gathering of the Extractive Industries Transparency Initiative (EITI) is now starting in Sydney, Australia, and in a few weeks the G-8 is holding its summit in Lough Erne, U.K. Government, industry and civil society leaders have an opportunity to advance the reform agenda.

The analysis of our report points to some concrete reforms that are sorely needed, and where EITI and the G-8 could help propel the agenda forward. Specifically:

EITI adoption and G-8 support for full disclosure of extractive industry contracts. Further, the G-8 could encourage the multilateral development banks to incorporate the transparency of extractive industry contracts (in addition to revenues) as a component of their lending programs and technical assistance.
Building on the pioneering Lugar-Cardin provision in U.S. Dodd-Frank legislation and the newly minted agreement in the European Union (EU), the G-8 should endorse both home- and host-country mandatory disclosure standards in line with these new U.S. and EU regulations and support their implementation. In particular, Canada and Russia ought to adopt these standards and ensure that G-20 and emerging economies including Australia, Brazil, China, South Africa and Switzerland follow suit. EITI should also fully align itself with these disclosure standards, helping countries and companies report detailed revenues paid to governments.
Support the disclosure of the beneficial ownership of companies to disclose the real owners of these firms (thereby helping to mitigate corruption and tax evasion), and support a common, public registry to house this data.
Extend transparency and accountability standards to state-owned companies and natural resource funds.
Promote a standardized set of data and indicators as a baseline empirical framework of transparency, measuring and monitoring open, effective resource and revenue management throughout the ‘value chain,’ and commit new funding for the development of institutional resources to support the gathering, analysis and dissemination of key data in resource-rich countries.

Ultimately, the responsibility for improving governance rests mostly with each country, its leadership, companies and civil society. Yet these global initiatives can have a major catalytic effect in supporting reforms at the country level.

Authors

Daniel Kaufmann

Publication: The Huffington Post

Image Source: © Beawiharta Beawiharta / Reuters

Oil, Gas and Minerals for the Public Good: The Revenue Watch 2013 Resource Governance Index

Wed, 15 May 2013 10:00:00 -0400

Event Information

May 15, 2013
10:00 AM - 11:30 AM EDT

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

Watch live streaming video from livefrombrookings at livestream.com

Trillions of dollars in resources lie buried in the backyards of many of the world’s poorest citizens. Oil, gas and minerals can, if managed effectively and accountably, stimulate economic development. Too often, however, secrecy, corruption and weak institutions obstruct this path. To advance the understanding of this challenge, the Revenue Watch Institute has produced the Resource Governance Index, a collection of research, rankings and analysis that measures the quality of governance in the oil, gas and mining sector of 58 countries. Together, these nations produce 85 percent of the world’s oil, 90 percent of its diamonds and 80 percent of its copper, generating trillions of dollars annually. The future of these countries, both developed and developing, depends on how well they manage their resources.

On May 15, Global Economy and Development at Brookings hosted a discussion on these concerns. Brookings Nonresident Senior Fellow Daniel Kaufmann, president of Revenue Watch, presented the index findings, followed by a panel discussion on resource governance with Carlos Pascual, special envoy and coordinator for International Affairs, Bureau of Energy Resources, U.S. State Department, and Brookings Senior Fellow George Ingram with the Global Economy and Development program. Brookings Visiting Fellow Tamar Manuelyan Atinc moderated the discussion.

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Oil, Gas and Minerals for the Public Good: The Revenue Watch 2013 Resource Governance Index

A Conversation on President Obama’s Trip to Mexico and Costa Rica

Joshua Meltzer, Diana Villiers Negroponte, Ted Piccone and Neil Ruiz — Wed, 01 May 2013 17:59:00 -0400

In advance of President Obama’s trip to Mexico and Costa Rica later this week, Brookings scholars Ted Piccone, Joshua Meltzer, Neil Ruiz and Diana Negroponte discuss the main priorities on the agenda between the United States, Mexico and Costa Rica. Topics covered include: expanding trade and economic cooperation between the U.S., Mexico and Central America, U.S. immigration reform, border security, drugs, crime and violence in Mexico and Central America, energy cooperation, and local politics in Mexico.

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“I think there has a been a view around for awhile now that the bilateral relationship at least with Mexico has been dominated by drugs and violence. And I think there is going to be a concerted effort here to refocus attention on to the depth and size of the economic relationship.” — Joshua Meltzer

“It’s a second term trip for the president, but its early in his second term and I think he’s got a lot of heavy lifting still to do on issues that are particularly important to Latin America and especially important to Mexico and Central America. These issues [jobs and the economy, immigration, security] are not the typical ones on the foreign policy agenda. These are issues that are bread and butter, hot-button domestic political issues but they are very important to the Latins, particularly in Mexico and Central America.” — Ted Piccone

“Immigration is a hot button issue of course. It’s something that is still alive here in the U.S. There’s no reform yet to report back to Mexican and Central American leaders. But these meetings actually set the stage for building the relationship for working together once immigration reform is implemented into law.” —Neil Ruiz

“This is a time when Enrique Pena Nieto, the newly elected Mexican president, has got a chance to really celebrate the strength of the Mexican economy: 3.5 percent GDP growth this year, 3.9 percent GDP growth last year… [and] a growing middle class, which means more people with a car and an ability to take a vacation, with iPods, with cellular telephones, and more mobile.” —Diana Negroponte

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A Conversation on President Obama’s Trip to Mexico and Costa Rica

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Energy, Indigenous Communities and the Arctic Council

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

Event Information

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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Black Carbon and Kerosene Lighting: An Opportunity for Rapid Action on Climate Change and Clean Energy for Development

Arne Jacobson, Nicholas L. Lam, Tami C. Bond and Nathan Hultman — Tue, 16 Apr 2013 14:09:00 -0400

SUMMARY

Replacing inefficient kerosene lighting with electric lighting or other clean alternatives can rapidly achieve development and energy access goals, save money and reduce climate warming. Many of the 250 million households that lack reliable access to electricity rely on inefficient and dangerous simple wick lamps and other kerosene-fueled light sources, using 4 to 25 billion liters of kerosene annually to meet basic lighting needs. Kerosene costs can be a significant household expense and subsidies are expensive. New information on kerosene lamp emissions reveals that their climate impacts are substantial. Eliminating current annual black carbon emissions would provide a climate benefit equivalent to 5 gigatons of carbon dioxide reductions over the next 20 years. Robust and low-cost technologies for supplanting simple wick and other kerosene-fueled lamps exist and are easily distributed and scalable. Improving household lighting offers a low-cost opportunity to improve development, cool the climate and reduce costs.

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Authors

Arne Jacobson
Nicholas L. Lam
Tami C. Bond
Nathan Hultman

The Road Ahead for China’s Economy

Tue, 16 Apr 2013 09:00:00 -0400

Event Information

April 16, 2013
9:00 AM - 4:30 PM EDT

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

In recent years, China has increasingly confronted new challenges in economic policy, including rising labor costs, low household consumption, rapid urbanization and inefficient domestic investment. While it is now widely acknowledged in Beijing that major structural adjustments are needed to address these issues, implementing serious reforms pose major challenges for the newly installed leadership.

On April 16, the John L. Thornton China Center at Brookings and China’s Caixin Media Group hosted a conference to examine the daunting challenges confronting China’s new leaders. The morning panels featured a discussion of the financial sector as well as the relationship between the domestic agenda for financial reform and China’s evolving strategy for outbound investment. The afternoon panels took a close look at the political obstacles to implementing major economic reform in areas such as tax policy, the household registration system and land transfers, as well as explore the impact of environmental and natural resource constraints on China’s economic growth.

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The Clean Energy Ministerial in Delhi: An International Forum to Address National Energy Policy Goals

Nathan Hultman — Tue, 16 Apr 2013 15:32:00 -0400

This week, India will host the fourth Clean Energy Ministerial (CEM), an annual gathering of energy ministers and high-level energy officials from the world’s major economies. While this conference tends to go largely unnoticed in the wider world, the CEM represents an innovative—and potentially fruitful—approach to international energy and environmental policy. Initiated in 2009 by then-incoming U.S. Secretary of Energy Steven Chu, the CEM is designed to bring together those officials charged with understanding, regulating and improving the energy systems of the world’s biggest energy users. According to the CEM, the 20 participating countries account for 90 percent of clean energy investment and 80 percent of global greenhouse gas emissions.

There is no formal CEM treaty structure nor is there a specific mission or agenda other than providing a forum to address issues of common concern. This makes it similar in some ways to other forums like the G-8, G-20 or ASEAN, but its sole focus on energy differentiates it. Consisting of a high-level ministerial dialogue, working groups on concrete initiatives and high-level public-private meetings, the CEM provides unique opportunities. First, it allows for informal consultations on issues of common concern, and therefore allows for the discovery, development and articulation of common goals. Second, the meeting provides a platform for government technical experts to share best practices and ideas about concrete and actionable steps that could help address energy policy goals at the national level.

The location of the CEM rotates annually, and this year India will host in Delhi. With the international community currently engaged in a vigorous discussion about post-2015 development goals, attention has turned toward improving and broadening access to clean and sustainable energy services as a means of achieving poverty reduction goals. Reaching this broad goal will take a combination of both long-term development work and specific steps that are amenable to national-level policy interventions.

In a new policy brief, Arne Jacobson, Nick Lam, Tami Bond and I have identified one such possible clear and actionable step toward such a shared goal—replacing single-wick kerosene lamps with cleaner substitutes. We argue that while the household benefits of such lamps are clear and have been well documented, new research on the much greater climate impacts of black carbon from these lamps underscores a climate benefit that would be much greater than previously estimated. In addition, at a time when there is broad consensus about the need to start phasing out fossil fuel subsidies—in a way that doesn’t hurt the poorest¬—our approach can help reduce state expenditures on kerosene subsidies while actually improving the quality of the energy services for those most in need. This is an issue of great interest in India currently, where kerosene subsidy expenditures are large and the topic of much debate.

Our suggestion is just one of several focused, low-cost and technically feasible approaches to improving the energy systems in CEM countries. Improving appliance and building efficiency standards are other examples. The CEM has the potential to stimulate real and lasting improvements in national energy policies in the world’s major economies—and with that, real and lasting improvements in development, environmental and energy-security outcomes.

Authors

Nathan Hultman

Image Source: © Adnan Abidi / Reuters

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

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

Event Information

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

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

Register for the Event
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.

Video

An American Future Filled with Promise

Michael E. O'Hanlon and Gen. David Petraeus — Mon, 08 Apr 2013 12:29:00 -0400

As politicians in Washington focus on reining in America’s worrisome deficit, they tend to have attitudes of doom and gloom. They convey fears of shortchanging future generations, overtaxing workers, depriving the needy, killing the fragile economic recovery and failing to make crucial investments.

This narrative contains elements of truth. But it is too pessimistic and contributes to our psychological and political paralysis, reinforcing convictions held by members of both parties that they must not yield on core principles, lest the country’s future be compromised. There is, however, a more positive and more accurate reality. The United States could be on the threshold of a period of remarkable progress. It has a number of unique opportunities, including:

An energy revolution. We are the world’s largest producer of natural gas, with a 100-year supply, and we are on track to become among the largest producers of crude oil.
A manufacturing revolution. We are rapidly developing robotics and 3-D printing, areas in which the United States is among the world’s leaders.
A revolution in life sciences. Genetics and stem-cell technology offer great potential in fields such as agriculture and pharmaceuticals and fundamentally new approaches in medicine.
The IT revolution and the transition to cloud computing, in which we are also leading.

Read the full article »

Authors

Michael E. O'Hanlon
Gen. David Petraeus

Publication: The Washington Post

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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Authors

Charles K. Ebinger
Govinda Avasarala

Image Source: © Reuters Photographer / Reuters

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

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

Event Information

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.

Event Materials

Al Naimi Opening Remarks Doha Energy Forum

Participants

Panelists

Money Talks: China-Russia Energy Relations after Xi Jinping’s Visit to Moscow

Erica S. Downs — Mon, 01 Apr 2013 10:42:00 -0400

The series of energy deals signed during Chinese President Xi Jinping’s visit to Moscow in March 2013 underscore the important role that Chinese capital -- primarily in the form of loans from China Development Bank (CDB) --plays in spurring Eurasian economic integration. The nonbinding agreements inked by Chinese and Russian firms have laid the groundwork for the creation of new energy corridors stretching from Russia to China. Indeed, Xi spoke of oil and natural gas pipelines functioning as an artery connecting China and Russia in the 21st century like the tea road over which traders exchanged Chinese tea for Russian furs did in centuries past. The key to substantially expanding energy trade between Russia (one of the world’s largest exporters of oil, natural gas and coal) and China (one of the world’s largest importers of oil and coal and a growing importer of natural gas) is likely to be CDB. The bank not only has the motivation and means to finance the infrastructure needed for the cost-effective delivery of substantially larger volumes of Russian energy to China. It also has an established track record as a driver of regional economic integration.

The latest China-Russia summit set the stage for dramatically increasing the flows of oil, coal and natural gas from Russia to China. First, Rosneft pledged to triple its oil deliveries to China from 300,000 barrels per day (b/d) to as much as one million b/d, which is double the amount of oil Russia exported to China in 2012 and equal to the amount of oil Saudi Arabia, China’s top crude oil supplier, delivered to China last year. Second, China’s Shenhua Group and Russia’s EN+ Group agreed to develop coal resources and related infrastructure in East Siberia and the Russian Far East with an eye to expanding Russian coal exports to China. Third, Gazprom and China National Petroleum Corporation (CNPC) signed a memorandum of understanding for the delivery of 38 bcm of natural gas to China over for 30 years starting in 2018 with the option of expanding deliveries to 60 bcm. A supply contract of this size would help fill the projected gap of 150 bcm between China’s natural gas demand and China’s domestic natural gas supply in 2020 projected by CNPC last year.

CDB features in the oil and coal agreements. The increased volumes of oil that Rosneft pledged to deliver to China reportedly are being used to support a $2 billion loan from CDB. The bank also agreed to extend a $2 billion line of credit to Shenhua Group and EN+ Group for the development of coal resources and infrastructure to transport them to markets.

CDB may also become part of Chinese and Russian efforts to transform their long-discussed dream of a cross-border natural gas pipeline into a reality. This project has a strong logic for both parties; Russia is looking to diversify its markets away from Europe, while China is looking for supplies to meet its growing demand. The principle obstacle to moving this pipeline off the drawing board has been a disagreement over price. Gazprom has long insisted on selling natural gas to China at prices that would provide the same level of profits it earns from sales to Europe, while CNPC has repeatedly refused to pay international prices for Russian gas due to domestic price controls. (The company lost almost $7 billion on natural gas imports in 2012 because it could not pass the full cost of its imports to Chinese customers.) However, a multibillion dollar loan from CDB to Gazprom may resolve the stalemate. Indeed, Gazprom Deputy CEO recently indicated that his company would reconsider its position that its standard terms of deliveries for European customers should apply to China if China were to provide a loan that could be repaid with natural gas exports.

CDB is no stranger to breaking impasses in the China-Russia energy relationship. In 2009, the $25 billion in oil-backed loans that the bank extended to Rosneft and Transneft (the Russian pipeline monopoly) persuaded Moscow to give the green light to the construction of a spur from the East Siberia Pacific Ocean oil pipeline to the Chinese border. The Russians were thrilled with the large volume, low cost and long duration of their loans, and the Chinese were delighted to see Russian oil exports to China jump after the ESPO spur began operation in 2011.

CDB also helped open up energy corridors between Central Asia -- one of the least economically integrated regions of the world -- and China by bankrolling the construction of the Kazakhstan-China oil pipeline and the Trans-Asia Gas Pipeline. Before these pipelines were built, most of the oil and natural gas produced in Central Asia were shipped to points west. Today, increasing volumes of energy are going to China.

It’s hardly surprising that CDB has emerged as a premier financier of energy development and related infrastructure projects in Eurasia. The bank has a mission to advance the interests of the Chinese leadership as the leadership understands those interests at any given time. In the past, those interests included financing the domestic infrastructure necessary for China’s economic boom. Today, those interests include increasing the flows of energy from Russia and Central Asia to China. CDB also has the means to support those interests. It is China’s largest overseas lender, and its outstanding foreign currency loans – a rough proxy for its international lending – have ballooned from nearly $17 billion in 2005 to $210 billon in 2011.

If history is any guide, CDB’s involvement in the energy deals signed during Xi’s visit to Moscow improves the likelihood that these nonbinding agreements will be finalized. The past decade of negotiations over cross-border pipeline projects indicate that geographic proximity and economic complementariness are necessary –but not sufficient – for the development of a robust bilateral energy relationship. An increase in the flow of Chinese capital across the border for infrastructure construction should expand the flow of energy in the other direction.

Authors

Erica S. Downs

Image Source: © Sergei Karpukhin / Reuters

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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Authors

Charles K. Ebinger

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

The Climate Scientist and the Pipeline

William Y. Brown — Fri, 15 Mar 2013 17:03:00 -0400

Editor's Note: William Y. Brown responds to John M. Broder's New York Times article, Report May Ease Path for New Pipeline, on the 1,700 mile Keystone XL pipeline.

Opponents of the Keystone XL pipeline say carbon emissions make tar sands oil a “dirty” fuel, and so it should not be sent to the United States from Canada. True, the whole process from extraction to incineration produces more carbon emissions than oil from conventional reserves, as the State Department’s environmental impact statement concludes.

But what about coal? Coal gives off significantly more carbon emissions per unit of energy than tar sands oil. If tar sands are dirty, then coal is dirtier. Yet United States coal exports have soared from 50 million tons in 2006 to more than 125 million tons in 2012 — a record high, with exports to China doubling.

Earth’s climate doesn’t care where the coal is burned. A proposed pipeline may make a good target for protest, but doesn’t what we are doing with everyday coal speak more to what matters?

Authors

William Y. Brown

Publication: New York Times

China’s Carbon Tax Proposal Highlights the Need for a New Track of Climate Talks

Adele Morris, Warwick J. McKibbin and Peter J. Wilcoxen — Fri, 15 Mar 2013 00:00:00 -0400

China’s Ministry of Finance recently announced a carbon tax. Although the statement was vague about the timetable and the tax rate, the mere prospect of China pricing carbon should have prompted swift laudatory international responses, especially by countries that have long hectored China to take stronger action on climate. China’s announcement, and the underwhelming response of the international community, shows that it’s time to start an international conversation about pricing carbon and invite anyone who’s interested aboard. A Carbon Pricing Consultation (CPC) would allow China and other countries that want to price carbon (via a carbon tax, cap-and-trade system or a hybrid approach) to learn more about it, exchange views, find out what other countries are considering, and potentially coordinate their policies.

In a recent paper we proposed a CPC process that would lead to detailed, pragmatic, and ongoing international discussion of the implementation details of domestic carbon pricing approaches, policies that economists widely agree could address the climate problem cost effectively. A domestic carbon price creates broad, efficient incentives to reduce greenhouse gas emissions. Done well, it would gradually shift consumer demand, production methods, new investment, and technology development towards less emissions-intensive goods and services without unduly burdening poor households. Pricing carbon can also raise revenue to fund government programs or cut distortionary taxes. Finally, a carbon price can promote economic growth by replacing less efficient regulatory and spending policies.

Accordingly, we think parties should embrace carbon pricing as a key low-carbon growth strategy and establish a venue to discuss it. Disparate carbon prices across different countries can shift emissions, production, investment, and trade patterns, and mutual understanding of these cross-border effects is of interest to all. Several countries have adopted or are implementing carbon pricing policies, so there is increasing experience to discuss. And the vehement opposition to the EU’s efforts to price carbon in aviation fuels suggests that unilateral approaches to carbon pricing can undermine progress.

This moment to begin a CPC process is opportune. Climate talks in December 2012 in Doha, Qatar, resolved contentious questions about the future of the Kyoto Protocol and finally retired the constraints of the Bali agenda. Now negotiators will turn to developing a new agreement under the United Nations Framework Convention on Climate Change to cover the post-2020 period. At the same time, the Major Economies Forum (MEF) needs a new thrust of engagement, having developed the Clean Energy Ministerial into an enduring venue for technology discussions. A CPC would fit nicely within the MEF, or possibly the G20.

This new line of discussion would address a glaring gap in climate talks to date. Negotiations have tackled emissions targets, temperature targets, technology transfer, financial assistance to poor countries, forest preservation, and many other topics, but not the practical design of cost-effective domestic mitigation policy. Indeed, few countries include their finance and trade ministries in climate talks outside of discussions of finance. This vacuum of economic expertise and leadership leaves parties prone to commitments, such as a two degree maximum global mean temperature increase, that imply implausibly stringent global efforts and fail to identify concrete solutions.

The CPC, unlike existing clean energy and climate consultations, would be led by finance and trade ministries (not the environment and energy ministries). It would focus exclusively on the practical administrative and technical aspects of responsible mitigation policy. One advantage of this pragmatic approach is that parties could sidestep divisive issues such as who bears responsibility for collective mitigation goals, who should compensate whom for what, and whose approach is more ethical. However justifiable, these debates have done little to promote real emissions mitigation.

The CPC would focus on the technical and administrative aspects of the policies, such as options to identify taxable or regulated entities and sources and methods to track revenue, minimize administrative costs, and ensure compliance. Parties could also discuss the role of international offsets and the interplay between carbon pricing and other domestic climate and energy policies. Countries could discuss ways to predict the effects of alternative tax trajectories, and they could discuss how to distribute and manage markets of allowances and tax revenue. Other topics could include the design of border carbon adjustments and other trade-related issues. The CPC could also steer existing resources to assist developing countries in reducing fossil fuel subsidies and pricing carbon.

One impediment to climate policy in the United States is the concern that without meaningful action by developing countries, pricing carbon will harm the US economy with little overall environmental benefit. A move towards transparent price-based policies give all major emitters comfort they are moving forward in concert with others. The first step is to discuss how to do it.

Authors

Publication: East Asia Forum

Say Yes to the Pipeline—and New Green Regulations: Why Triangulation is the Answer on Keystone

William A. Galston — Fri, 15 Mar 2013 00:00:00 -0400

In his second inaugural address, President Obama evoked the highest possible authority in stating his commitment to the global environment:

We will respond to the threat of climate change, knowing that the failure to do so would betray our children and future generations. … The path to sustainable energy sources will be long and sometimes difficult. But America cannot resist this transition; we must lead it. … That is how we will preserve our planet, commanded to our care by God.

As Mario Cuomo famously remarked, however, we campaign in poetry, but we govern in prose. And the period of environmental prose has begun for Obama, in the form of a 2000-page "Draft Supplemental Environmental Impact Statement" for the hotly debated Keystone XL pipeline, which would link oil produced from tar sands in Alberta, Canada and Montana to existing pipelines in southeastern Nebraska. The president now faces a momentous choice, albeit one whose symbolic force and political consequences exceed its impact on the global climate. Fortunately, there does seem to be a way that Obama can extricate himself from the dilemma.

This new report makes it clear that the project has been revised significantly since the initial request was rejected in 2011: The pipeline’s new proposed route is more than 500 miles shorter than the original and was altered to avoid environmentally sensitive areas in Nebraska’s Sand Hills region. Although there are residual domestic environmental concerns and risks that the various parties to the dispute assess differently, the heart of the remaining debate is the effect of the pipeline’s construction on the rate at which Canadian oil sands are developed for extraction of heavy crude. This matters because, as the draft report states, the oil from this source generates more greenhouse gases, all things considered, than does the average barrel of heavy crude now refined in the United States. The report puts the difference at 17 percent; some other estimates are significantly higher.

In what may be its single most important sentence, the report states that “Approval or denial of any one crude oil transport project, including the proposed Project, remains unlikely to significantly impact the rate of extraction in the oil sands, or the continued demand for heavy crude oil at refineries in the U. S.” The report argues that railroads offer a feasible (if more expensive) transportation option, and that the oil industry will develop alternative pipeline routes in the event that Keystone project does not go forward.

Environmental groups strongly disagree with this assessment, and industry leaders are divided. A recent article in Bloomberg Businessweek argues that “Stopping the pipeline would mean continued discounted prices for Canadian crude, making it harder for producers to sell their commodity at a profit and potentially slowing oil-sands development.” Canadian heavy crude prices have declined because a lack of export capacity has generated a glut, forcing producers to offer discounts of almost $30 per barrel. Said one energy company CEO, “If we can’t attract world prices, then we will ultimately curb energy development.”

It’s not clear how much any of this would matter in the long run. Although environmentalists hope to stifle the extraction of heavy crude from oil sands permanently, the State Department report does not believe that outcome is feasible, and neither do Canadian officials. The report estimates that suppressing all new pipelines—not only Keystone but other Canadian and U.S. alternatives—would reduce production from oil sands by only 2 to 4 percent in 2030. If Keystone were halted while other proposed pipeline projects proceed, the effect would be even less—0.4 to 0.6 percent. The impact on climate change would be undetectable.

Canada's oil sands are estimated to hold 170 billion barrels, a total that could rise sharply as extraction technologies improve. Given the economic stakes for Canadians, it is hard to believe that a negative answer from us would stop their progress. Indeed, the State Department’s assessment seems more plausible than that of major environmental organizations: The fate of the Keystone pipeline will have a short-term impact on Canada, but in the long run, “Fundamental changes to the world crude oil market … would be required to significantly impact the rate of production in the oil sands.” In that way, the principal policy effect of turning down Keystone would be the souring of relations with Canada, whose senior officials would regard it as a capitulation to U.S. political considerations at their expense.

The State Department report will make it much harder for Obama to justify rejecting the Keystone project. Still, it has become a highly visible and emotionally charged symbol of an often diffuse issue, and it is where many leading environmental organizations have chosen to draw the line. If the president were to proceed with Keystone, millions of his supporters would regard his decision as an outright betrayal. So what is he to do?

Obama is in this fix in part because he raised the stakes after the 2012 election and largely because Keystone is the first major environmental decision of his second term. But what if it weren’t? There are other decisions that he could make that would have a far greater impact on greenhouse gas emissions.

For example, the president could announce that because Congress had failed to act in more than four years to curb climate change, he would rely on his executive authority to do so, just as he pledged during his 2013 State of the Union address. One possibility is for the EPA to unveil new initiatives to accelerate the closure of high-emission coal-fired power plants—before Obama announces his position on Keystone. And those actions would then frame the Keystone decision and mute its negative political impact. That may be the only way to avoid having this long-delayed and over-hyped project end up as a political disaster.

Authors

William A. Galston

Publication: The New Republic