Climate Change: Designing an Effective Response · 1. Climate Change isn’t a problem 2. Fossil Fuels will Run Out Shortly 3. The “Engineer’s Myth” • Technological Solutions,

1

http://pesd.stanford.edu/

Climate Change: Climate Change: Designing an Effective Designing an Effective

ResponseResponse

Thomas C. HellerProgram on Energy & Sustainable

DevelopmentStanford University

Program on Energy and Sustainable Development - http://pesd.stanford.edu/ 2

OutlineOutline

•Five Myths Meet their Maker•Toward an effective Climate Strategy


Five MythsFive Myths

1. Climate Change isn’t a problem



1. Climate Change isn’t a problem2. Fossil Fuels will Run Out Shortly


Tapping the WorldTapping the World’’s s ““InfiniteInfinite”” Gas ResourcesGas Resources

White: where the lights are on, satellite imageryBlue Red : Gas resources, with increasing size (USGS)

Source: Baker Institute (Rice) and PESD (Stanford) Joint Study on the Geopolitics of Gas (CUP, forthcoming



1. Climate Change isn’t a problem2. Fossil Fuels will Run Out Shortly3. The “Engineer’s Myth”

• Technological Solutions, once identified, can spring forth and multiply

• The question is the speed, scale and price paths of varied technical possibilities

• Past experience– Rand study found average 150% cost overruns on estimated

costs of first of a kind demonstration plants– Commercial scale and diffusion not studied by labs or other

initiators– Time for substitution effects (and fight back by incumbents)

• Questions about the capacity of the state to induce technological change over endogenous (BAU) behavior– Portfolio values (Japan and US returns)


Rapid Evolution: Rapid Evolution: DRAMsDRAMs

0%

20%

40%

60%

80%

100%

1970 1975 1980 1985 1990 1995 2000 2005

Shar

e of

DR

AM g

ener

atio

n in

tota

l mar

ket

(%)

4K16K64K256K1M4M16M64M256M128M

Source: Ausubel and N. Victor


Learning CurvesLearning Curves


When does Learning Stop?When does Learning Stop?The experience with gas turbinesThe experience with gas turbines

Source: Colpier and Cornland. 2002. “The Economics of the Combined Cycle Gas Turbine – An Experience Curve Analysis.”Energy Policy 30: 309-316.


Slow Evolution: Primary Energy SystemsSlow Evolution: Primary Energy Systems

0%

20%

40%

60%

80%

100%

1800 1850 1900 1950 2000

Wood

Nuclear

Gas

Oil

Coal

Hydro elec.

Source: Nakicenovic and Grubler; IIASA



1. Climate Change isn’t a problem2. Fossil Fuels will Run Out Shortly3. The “Engineer’s Myth”4. The “Planning (Economists’) Myth”

• Governments and firms optimize with full information and leverage• The primacy of economics

– Cost-benefit analysis – Policy as marginal, linear change– No theory of the firm or organizational behavior


The architectural priority of economics The architectural priority of economics in climate changein climate change

•Climate is a global collective good– inclusive membership

•Cost-benefit analysis to set the level of stable concentrations

•Property rights for efficient implementation: – Cap and trade system – A single global price

•Hard law compliance•Graduation as differentiated responsibility


Difficulties in implementing the Difficulties in implementing the architecturearchitecture

• Asymmetrical information on demand and supply: strategic behavior

• Uncertainty on cost functions: escape clauses and no regrets pools

• Property rights distribution and equity claims• Trading (financial markets) requires sound institutions• Single price signal for disparate goals

– Gasoline demand at $100/ton CO2 ($40 increase per barrel oil)?

– Fuel shifting at $22/ton CO2?– Marginal shifting to renewables at low price signal?– Ratcheting up the signal?– Benefits?


Political economyPolitical economy

• Local resources will be used: nationalism and energy security

•Climate change priorities are low relative to development and local pollution

•Politics are less barriers than constraints – (Perceptions of) corruption and political

commodification in electricity reform• (Effective) policy usually follows technology or price shocks, but rarely leads them– Compare telecommunications to energy

reform


Political economyPolitical economy

• Competitive markets vs. regulated sectors– First best policies for second best contexts– Who benefits from climate: subsidies and rents?

• Energy examples– Long term gas contracts in the rate base? IGCC?– Bio-fuels and corn based ethanol?– Renewable portfolio standards

• Sunsets and learning curves– De-linking gas prices from oil?– Mandated fuel supplies at administered prices?– Generation tariff subsidies and power distribution

in New Delhi?


Organization theoryOrganization theory

• Organizations do what they do– Flexibility is limited– Resistance and fight back

• Capacity to integrate across departments and agencies is scarce – Optimization across sectors is weak

• Government agencies are fragmented and reproduce their routinized political cultures– Environmental ministries vs. finance and energy– Political constitution, cultures and instrument preferences

• Margins change little – Economists think marginally; financiers use step-functions



1. Climate Change isn’t a problem2. Fossil Fuels will Run Out Shortly3. The “Engineer’s Myth”4. The “Planning Myth”5. The “Diplomats’ Myth”

• Policy Planning can be extended to the global level

• All countries should be involved in the most effective solutions

• Enforcement is based on sovereign state model


Trends in Fossil Carbon EmissionsTrends in Fossil Carbon Emissions(Trajectories and Kyoto Commitments)(Trajectories and Kyoto Commitments)

0

1000

2000

3000

4000

5000

6000

7000

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

MtC

O2

BPAmoco_HHV

IIASA/WEC

Oak Ridge

EIA

IEA_LHV

Official FCCC baseyear

USA

EU15

Japan


Trends in Fossil Carbon EmissionsTrends in Fossil Carbon Emissions(Trajectories and Kyoto Commitments)(Trajectories and Kyoto Commitments)

0

1000

2000

3000

4000

5000

6000

7000

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

MtC

O2

BPAmoco_HHV

IIASA/WEC

Oak Ridge

EIA

IEA_LHV

Official FCCC baseyear

USA

EU15

Japan


Allocation of World Emissions: Allocation of World Emissions: Only a Few Countries Really MatterOnly a Few Countries Really Matter


Toward and Effective Climate StrategyToward and Effective Climate Strategy


Building Blocks: SectorsBuilding Blocks: Sectors

•Climate is a derivative problem of three economic sectors central to growth and development–Energy–Transportation–Land Use


Building Blocks: SectorsBuilding Blocks: Sectors

•Government actors from these sectors make decisions on the development paths their economies will follow– Line ministries– Finance ministries

•Political priorities of these actors are nowhere focused on climate, especially in developing countries– Environmental constraints on emitting sectors are

resisted unless they advance higher priority goals• Actors from key emitting sectors are rarely represented in climate negotiations


Building Blocks: ProblemsBuilding Blocks: Problems

• Climate change can be broken down into three separate problems – The immediate need for a low level carbon price signal

• Incentives to look for mitigation opportunities that save costs and carbon (no regrets pools)

• Incentives to adopt options to mitigate carbon whose incremental costs are only marginal (below price signal)

– The mid-term need to diffuse more rapidly than business as usual existing commercial technologies that are relatively less climate damaging• Cooperative measures to engage leading developing

countries with rapidly growing carbon emissions– The long-term need to develop energy, transport and land

use technologies that are currently across the commercial horizon


Building Blocks: PillarsBuilding Blocks: Pillars

• Each separate climate problem is best approached through separate institutional pillars that are tailored to the specificproblem

• The climate regime should be composed of multiple pillarsdifferentiated from one another according to:– The nations involved– The actors from each nation with policy authority– The timelines demanded– The instruments and measures to be used

• The Kyoto Protocol, particularly tailored to low level price signals, should be maintained in the UNFCCC framework, but should also be supplemented by new pillars tailored to the diffusion and technology development problems


Building Blocks: International Building Blocks: International RegimesRegimes

•Multiple clubs with members sharing local cooperative solutions are more likely to support international regime growth than comprehensive multilateral arrangements– The more closely agreements are built around non-

cooperative solutions, the more likely they will be implemented

– Most international environmental regimes in the past half century have less than 7 members

– Trading across fragmented international regimes is limited, reducing the value of wide and diverse membership in each regime



•Non-mandatory regimes may be more effective in setting and encouraging ambitious behavioral targets– Effectiveness is not equal to compliance– Compliance with international regimes is high

because:• Formal obligations are bargained down ex ante to what

nations can and will do • Ambiguities in norms allow ex post claimed compliance

through shifting interpretations of compliance behavior


Antarctic Whaling: Perfect complianceAntarctic Whaling: Perfect compliance

Antarctic Whaling:catch by species and compliance with IWC quotas

0

10,000

20,000

30,000

40,000

50,000

60,000

1920 1930 1940 1950 1960 1970

Year

Num

ber o

f wha

les

0

5000

10000

15000

20000

Blu

e W

hale

Uni

ts

(tota

l cat

ch a

nd q

uota

)

Blue Fin Humpback Sei-Bryde's Minke Sperm Total Catch IWC Quota



• International system shift– 1950-2000 international system composed of negotiating

blocs of developed (OECD or Annex I) countries, socialist countries, developing countries G-77 and China

– International system responsibilities (market stability and regimes) largely devolved on the OECD (Annex I) nations

– Shift after 1990 in growth rates, principally in India and China, raises issues of increased dependency on international markets with commodified products

– Unclear whether the economic position of emerging market large nations moves their international interest away from G-77 toward OECD and strategy toward support of markets and regimes or towards mercantilism



•Shift context for market behavior rather than regulation

•Price signals that adequately address three different dimensions of climate change not politically feasible

•Take political constraints and the actors who represent them seriously

•Climate is a derivative problem of politically regulated sectors

•Pillars and political cultures (instrument choice)


Low Level Price Signals in the EULow Level Price Signals in the EU

•Salience of the EU regime– Of the nations that have signed the Kyoto

Protocol, only (some) EU member states have taken on positive cost obligations• Canada?• Japan?

– All former Soviet bloc nations and developing countries are permit sellers

– US and Australia have withdrawn


Low Level Price Signals in the EULow Level Price Signals in the EU

•Structure of the EU regime– Internal burden sharing agreement– European Trading System vs. EU and member state

policies and measures– ETS linkage to CDM and JI when accession nations file

their allocation plans• Market is thin in first period while rules are uncertain and

second period allocations are not politically decided•Compliance?

– Expected behavior on current track?– Article 17 purchases if ETS trading prices rise and supply

of CDM/accession country permits is not adequate– Sanctions and soft law in the EU


A A MadisonianMadisonian Perspective:Perspective:Emerging Carbon CurrenciesEmerging Carbon Currencies

(10)

(5)

-

5

10

15

20

25

30

35

40

45

Oct-00 Apr-01 Nov-01 May-02 Dec-02 Jun-03 Jan-04 Aug-04 Feb-05 Sep-05 Mar-06

$/M

etric

Ton

ne C

O2

Volume (MTCO2)

1.5 million

500,000

125,000

50,000

EU

PCF CCX

CDM

NSW

UK

Sources: PointCarbon, International Emissions Trading AssociationReprinted from Victor, House & Joy (2005)


Low Level Price Signals: USLow Level Price Signals: USPlan Details

Bush Administration

Voluntary target of 18% reduction in GHG intensity between 2002 and 2012.

McCain-Lieberman Cap 2010 emissions at 2000 levels for electricity, transportation, industrial and commercial sectors.

Hewlett Foundation Economy-wide cap and trade beginning in 2010 targeting 2.4% annual reduction in GHG intensity. $7/ton safety valve.

Hagel Bill(s) Investment incentives for advanced climate technologies; assistance for developing countries; R&D incentives.


“Carbon Intensity” of the U.S. Economy (1800-1998)

0

100

200

300

400

500

600

700

800

900

1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000

CO

2/G

DP

USFranceJapanUnited KingdomUnited StatesGermany

Intensity: grams C per 1990 USD(mer)


U.S. Climate Change Policy: U.S. Climate Change Policy: StateState--driven processdriven process

Source: Pew Center on Global Climate Change


Climate Architecture and DevelopmentClimate Architecture and Development

Regime architecture is climate-centric and flows from output (constraint) to input (development)

CDM holds only limited prospect of increased or redirected flows

No assurance of stable assistance from developed to developing countries


Limitations of the CDM ModelLimitations of the CDM Model

• Tropical “hot air”: currency devaluation– CH4: land fill and flaring

• Rising natural gas prices• Local environmental controls

– HFC23: industrial processes gases– Renewable Portfolio standards withdrawal

• High transaction costs– Small Scale Projects– No methodologies for large-scale energy efficiency

and fuel switching• Baseline identification

– Baselines feasible only for marginal activities


Engaging Developing Countries:Engaging Developing Countries:The Clean Development Mechanism (CDM)The Clean Development Mechanism (CDM)

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

In Development Project Design Document Commented Registered Credits Issued

Num

ber o

f Pro

ject

s

0

100

200

300

400

500

600

700

MtC

O2 R

educ

tions

Number of Projects (March 8) Number of Projects (July 12) MtCO2e Reductions (March 8) MtCO2e Reductions (July 12)

Source: PointCarbon


ClimateClimate--Friendly Development Friendly Development PathwaysPathways

• Example: CO2 Savings from Natural Gas• IEA forecast for China in 2020:

– 560GW (coal) – 67GW (gas)

• What happens if you switch 80GW from coal to natural gas combined cycle?

– Saves 105 Million Tonnes CO2 per year beginning in 2020


COCO22 Savings in PerspectiveSavings in Perspective

0

100

200

300

400

500

600

Year 2000 UKEmissions

Year 2000 Emissionsfrom California Cars

Reductions under"High Gas" Scenario

Reductions from 100Large CDM Projects

Mill

ion

Tonn

es C

O2

(Ann

ual)


Chinese total energy Chinese total energy consumption: IEAconsumption: IEA

•2000

–Coal 69%–Oil * 25%–Gas 3%–Nucl./hydro 2%

*imports 37% Imports 63-70%

•2030

–Coal 60%–Oil* 27%–Gas 7%–Nucl./hydro 6%


Overview Overview -- capacitycapacity

Generation capacity (1970 - 2020)

0

200

400

600

800

1,000

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

GW


Supply growth in China Supply growth in China (national)(national)

• 2004 installed capacity about 440 GW; 900 in 2020

• Portfolio managed mainly at provincial level during high growth

• Market reform is slow in high growth• Energy intensity estimates key to demand

estimates– Energy intensities rise recently over 1990-2003

period– Electricity grows faster than energy


Overview Overview ---- 2004 Boom2004 Boom2004 2003 Growth % Structure %

Installed capacity (GW) 441 391 13 100Hydro 108 95 14 25

Thermal 325 290 12 74Nuclear 7 6 11 2

Generation (TWh) 2187 1905 15 100Hydro 328 281 17 15

Thermal 1807 1579 15 83Nuclear 50 44 14 2

Operating hours 5460 5245 4Hydro 3374 3239 4

Thermal 5988 5767 4

Consumption (TWh) 2174 1892 15 100Agriculture 61 60 3 3Industries 1626 1396 16 75Services 244 211 15 11

Residential 243 225 8 11 Urban 147 136 8 7 Rural 96 88 9 4


Central Government Plan to 2020Central Government Plan to 2020

• Real GDP grows 7-8% per year; GDP p.c. reaches $10,000 (PPP basis)

• Primary energy consumption grows 4.5-5% per year

• 520 GW (30 GW per year) generation capacity will be added

• Natural gas to provide new and clean sources of energy

– Over 7% annual growth rate– Consumption to increase from 40 bcm to between 140

and 160 bcm under various policy scenarios


Overview Overview –– fuel structurefuel structure

2000

Hydro24.9%

Oil4.7%

Nuclear0.7%

Wind0.1%

Coal69.7%

2020

Hydro27.1%

Oil1.6%

Nuclear4.2%

Gas7.5%

Wind1.0%

Coal58.6%


Central Government PlanCentral Government Plan• Demand Uncertainty

–Domestic (Chinese) gas forecast driven by higher price for gas than coal, driven by

–Higher gas costsSecurity requirement – 2/3 domestic production, 1/3 imports Domestic production costs Infrastructure development costs


2. Potential Markets: Beijing,2. Potential Markets: Beijing, Shanghai,Shanghai,GuangdongGuangdong

Beijing(pipeline)

Shanghai(pipeline, LNG)

Pearl River Delta(LNG)

Three regions may account for ~ 50% of total gas consumption


Beijing Beijing –– Energy consumptionEnergy consumption

Coal

Oil

Gas

Imported power

0

5

10

15

20

25

30

35

40

45

2000

mill

ion

tons

SE

C


Beijing -- NG Consumption Structure (2003)

Residential22%

Industrial3%

Commercial14%

Transprt.1%

Space heating60%


Beijing Seasonal NG Load CurveBeijing Seasonal NG Load Curve

0.02.04.06.08.0

10.012.014.016.018.0

1/1/

03

2/1/

03

3/1/

03

4/1/

03

5/1/

03

6/1/

03

7/1/

03

8/1/

03

9/1/

03

10/1

/03

11/1

/03

12/1

/03

mill

ion

cubi

c m

eter

s


Beijing Beijing ---- Gas Demand ProjectionGas Demand Projection

6

10.8

13.5

16

2.52

7

11.8

02468

1012141618

2004 2010 2020 2030

bcm

Low

High


Shanghai Shanghai –– Energy consumptionEnergy consumption

Coal

Oil

Imported power

0

10

20

30

40

50

60

70

2002

millio

n ton

s sce

Gas; 0.6


Shanghai Shanghai –– Future NG ApplicationsFuture NG Applications

• CCGT• Industrial boilers• Distributed

generation• Heating/cooling

2 X 350 MW CCGT under construction


Guangdong Guangdong –– Energy consumptionEnergy consumption

Coal

Oil

Gas

Imported power

0

20

40

60

80

100

2002

mill

ion

tons

SC

E


Guangdong Guangdong –– Natural gas Natural gas aapplicationpplication

• Electricity sector will be the largest off-taker– Current (end 2004) 40 GW projected to 100 GW (2020)– 9 units nuclear @ 1 GW per

– 7 or 8 (4x600) MW coal plants being built (17-20+GW)

– 11 gas units (online 2006) or 3.3 GW of planned 30-40 units (10 GW gas fired power total) by 2020

– Hydro contracts from West and Three Gorges (11-18GW)

• Residential and commercial sector

• Other industrial uses


Plans and prices: is the standard story about Plans and prices: is the standard story about to change?to change?

Relative Electricity Costs: Guangdong, August 2004• Hydro: 32-34 cents/kwh (fen in levelized costs);• Coal without FGD: 37 cents/kwh; • Coal with FGD: 40 cents/kwh;• LNG (all in): 43 cents/kwh; • Nuclear: 47-50 cents/kwh• $4/mbtu gas = $70/ton coal


Source: IEA, World Energy Outlook 2004


Relative prices: Coal, gas ,oilRelative prices: Coal, gas ,oil


Mine mouth coal priceMine mouth coal price

0.0

10.0

20.0

30.0

1996 1998 2000 2002 2004

$/to

n

power sector price

market price

• 2004: Jan – Sept.• Actual price for power

generation is higher ($22/ton) due to sellers’ resistance against planned price

• End-user prices are much higher, reaching $60 – $70/ton ($50 -$60 for power generation).


Supply Chains in ComparisonSupply Chains in Comparison

• Coal

Mine mouth

• Natural Gas

State-Owned Shipping

State-Owned Railroads

Plant

Well Liquefaction Shipping Pipe PlantRe-gas


NonNon--price drivers of gasprice drivers of gasdevelopmentdevelopment

Local autonomy (federalism)Chinese oil majorsEnvironmental concernsPeak pricingExchange ratesCapital Market reformsReliability and distributed power


Electricity Reform Electricity Reform ExperienceExperience

OligopolyIndustrial

Organization

ImperfectMarket

Competition

Quasi-privatizedSOE

PoliticalPrivate Firms

Hybrid plannedSystem

(Uncertain)Regulation

Central or lower level


Regulatory Instabilities:Regulatory Instabilities:

PoliticalRegulation

High cost resistance

Hybrid FirmsFuel Cost

Administration

Laggingretail tariffs

Squeezedutility

margins

State bank financing reforms?Higher

capital costsRising totalfuel costs

Inter-regional transfers

Administered fuel prices receding?

Grid exit;Distributedgeneration

Low qualitygrid power;Poor grid

investment

Independent generatorsresist tariffreductions

Central orProvincial

Government

Local autonomy for energy security

and differentialdemand


Incremental North American LNGIncremental North American LNG


US Gas Supply and Demand (1970US Gas Supply and Demand (1970--2025)2025)EIAEIA--AEO 2005AEO 2005

0

5

10

15

20

25

30

35

1970 1980 1990 2000 2010 2020

Trill

ion

cubi

c fe

et

Consumption

Net Imports

Domestic

Production


# of Wells vs. Avg. Productivity# of Wells vs. Avg. Productivity

Source: US EIA


Net US Gas Imports, 1970 Net US Gas Imports, 1970 –– 20252025EIAEIA--AEO 2005AEO 2005

-2

0

2

4

6

8

1970 1980 1990 2000 2010 2020

Trill

ion

cubi

c fe

et

LNG

Canada

Mexico


European Gas Consumption by Sector to 2030European Gas Consumption by Sector to 2030IEAIEA--WEO, 2002WEO, 2002

0

5

10

15

20

25

30

2000 2010 2020 2030

Tcf /

yea

r

Power GenerationRes / CommIndustry


7 Tcf 22 TcfDomestic gas production: Y2000 = 8 Tcf Y2030 = 5 Tcf

EU Consumption Y2000 = 15 Tcf Y2030 = 27 TcfSource: IEA-WEO, 2002


Sources of European LNG Sources of European LNG 1980 1980 -- 2003 (million 2003 (million tonnestonnes per annum, per annum, mtpamtpa))

0

5

10

15

20

25

30

35

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

Algeria Libya Nigeria Trinidad Middle East Pacific BasinSource: Alphatania

mtp

a


US LNG Imports by Source US LNG Imports by Source 19711971--20032003

02468

1012

19711976

19811986

19911996

2001

Algeria Trinidad Nigeria M. East Pacific Basin

Source: Alphatania

mtp

a


Revolution in Global LNG Markets (1)Revolution in Global LNG Markets (1)

• Shift from “old world” defined by:

Few importers Rigid long-term, take-or-pay contracts with destination clausesMuted price incentives to divert cargoes“Buyer takes the volume risk and seller takes the price risk”Captive customers of regulated utilities ultimately backed contracts


Revolution in Global LNG Markets (2)Revolution in Global LNG Markets (2)

• Toward a “new world” defined by more flexible LNG trade and driven by:

Liberalization of gas and electricity marketsDeclining LNG costs (esp. liquefaction and regas)Growth of new markets (Spain, US, UK) Entry of energy super-majors to gas trade

• Flexible LNG trade will integrate US and European gas (and electric power) markets


TrinidadTrinidad’’s ATLANTIC LNG Cargoes Already Follow s ATLANTIC LNG Cargoes Already Follow USUS--Spain Price Differential:Spain Price Differential:

+

0

100

200

300

400

500

600

700

800

900

1,000 and over

AMJJASONDJFMAMJJASONDJFMAMJJASONDJFMAMJ JASONDJFMAMJJASO

1999 2000 2001 2002 2003

1,00

0 cu

bic

met

ers

LNG

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

$/M

MB

tuUSA Spain

Henry Hub - Spain Price Differential

Volume

Gas Strategies Consulting Ltd.


US Spot, Japanese & European LNG Prices US Spot, Japanese & European LNG Prices ($/($/MMbtuMMbtu))

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

$8.0

$9.0

Jan-00Jul-00

Jan-01Jul-01

Jan-02Jul-02

Jan-03Jul-03

Jan-04

USJapanEurope

*Henry Hub for U.S. data, average of Japanese & European landed LNG prices


US LNG Import Capacity UtilizationUS LNG Import Capacity Utilization

0

10

20

30

40

50

60

70

80

90

Jan-00Jul-00

Jan-01Jul-01

Jan-02Jul-02

Jan-03Jul-03

Jan-04Jul-04

Bcf /

mon

th

Spare Capacity

Imports

US EIA


Forward Prices in Key LNG MarketsForward Prices in Key LNG Markets(US$/(US$/MMbtuMMbtu; 20 July 2005); 20 July 2005)

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

Jul-05Aug-05

Sep-05Oct-05

Nov-05Dec-05

Jan-06

UK NBP

Henry Hub

Japanese Import

Spanish Import

NW Europe

Source: Heren LNG Markets


US Gas Prices Linked to Oil ProductsUS Gas Prices Linked to Oil Products

0123456789

1011

Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05

$ pe

r mm

btu

GasoilHeavy Fuel OilGas

Purvin & Gertz 2005


Atlantic Basin PlayersAtlantic Basin Players


Figure 6HISTORY AND FORECAST [1] OF FIRM, "PROBABLE" AND "POSSIBLE"

LNG LIQUEFACTION CAPACITY BY REGIONMILLION TONS OF LNG

Jensen

1990

1995

2000

2005

2012

050

100150200250300350400450MMT

MIDDLE EAST POSSIBLE [2]MIDDLE EAST PROBABLEMIDDLE EAST FIRMPACIFIC BASIN POSSIBLE [2]PACIFIC BASIN PROBABLEPACIFIC BASIN FIRMATLANTIC BASIN POSSIBLE [2]ATLANTIC BASIN PROBABLEATLANTIC BASIN FIRM

[1] Jensen Estimates[2] Placing Unscheduled Possibles in 2012

Average Annual Capacity Increase - 4.2 MMTPY

Average Annual Capacity Increase - 7.9 MMTPY

Average Annual Capacity Increase - Firm - 9.0 MMTPY+ Probable - 14.8 MMTPY + Possible - 31.3 MMTPY

Global LNG SuppliesGlobal LNG Supplies

Source: James Jensen

mtp

a


Key Factors Shaping Atlantic Basin MarketKey Factors Shaping Atlantic Basin Market

1. Market fundamentalsFixed and variable costs for each segment of LNG supply chain

2. Seasonal, stochastic variations in gas demand in Atlantic Basin markets

3. Market rules in gas and electricity for US & EuropeContract provisions (oil-linked, regulatory constraints on term and pricing provisions?)Contracting strategies of buyers and sellers

4. Price elasticity of demand for Atlantic Basin marketscomposition of demand (electric power, industrial, residential)market rules (see above)


Monthly Demand Index: US vs. OECD EuropeMonthly Demand Index: US vs. OECD EuropeAverage 2001Average 2001--20042004

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Jan Feb MarApr

May Jun JulAug Sep Oct

Nov Dec

OECD EuropeUS


Monthly Consumption Deviations from 4Monthly Consumption Deviations from 4--Yr Avg. Yr Avg. ((20012001--2004); US vs. OECD Europe2004); US vs. OECD Europe

(0.15)

(0.10)

(0.05)

-

0.05

0.10

0.15

(0.15) (0.10) (0.05) - 0.05 0.10 0.15

US Deviation

Eur

Dev

iatio

n

2001200220032004


Key Issues Key Issues

– Do LNG terminals get built? If so, where?– What are the access provisions to regasification

terminals?• FERC’s Hackberry decision• “Use it or Lose it”—the UK model• Open access, ala US interstate pipelines

– LNG procurement contracts and regulatory approval?• Pricing structure (fixed price, Henry Hub-linked, $/MWh

linked?)• Term-length• Availability of cargoes?

– “Security of Supply” concerns and regulatory oversight


Factors Driving U.S. Natural Gas DemandFactors Driving U.S. Natural Gas Demand

% ∆ Gas Demand =

+ 1.000 x % ∆ Real GDP

+ 0.250 x % ∆ Heating Degree Days

+ 0.075 x % ∆ Cooling Degree Days

+ 0.075 x % ∆ Real Oil Price

- 1.000 x % ∆ Real Gas Price (lag)

- 0.300 (constant)

Source: Deutsche Bank


Volume, distances determine transit modeVolume, distances determine transit mode

Distance to Market (Nautical Miles x 103)

Vol

ume

(tonn

es/y

r x 1

06)

1 2 3 4 5

PipelineLNG

CNG

1

2

3

4

5

Stranded

Transmed (15 mtpa)

Transgas (60 mpta)

Algeria – Lake Charles

CE Tech


Spot Imports by RegionSpot Imports by Region

0

1

2

3

4

5

6

7

8

9

1995 1996 1997 1998 1999 2000 2001 2002 20030%

10%

20%

30%

40%

50%

60%

70%

% Asian Spot % European Spot % NA SpotAsia Europe North America

BCM Spot as % of total imports


Henry Hub Gas Henry Hub Gas vsvs West Texas Crude pricesWest Texas Crude prices


Henry Hub gas prices vs. storage, fuel oil, Henry Hub gas prices vs. storage, fuel oil, distillatesdistillates


Predicted Atlantic LNG prices: 2015Predicted Atlantic LNG prices: 2015


LNG vs. other North American gas supplies LNG vs. other North American gas supplies


Impacts on Climate ChangeImpacts on Climate Change

• IEA forecast for electricity capacity in China in 2020– Coal: 560 GW– Gas: 67 GW

• What are CO2 savings if:– 480 GW of coal and 147 GW of gas?– 460 GW of coal and 167 GW of gas?More?

• Can this be accomplished using CDM?






Full Range of Published ScenariosFull Range of Published Scenarios


Percent of World Total

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

Arab StatesAfricaSE Asia

C & E EuropeOceania

Latin America

India & C. AsiaCIS

China

Japan and NICsWestern Europe

North America

Gross Expenditure on R&D(1994)Scientific Output (SCIPublications, 1995)Carbon Dioxide Emissions(1998)

Top Innovators and Emitters by World Top Innovators and Emitters by World RegionRegion


Elements of a Technology StrategyElements of a Technology Strategy

• Diverse Country-Based Initiatives– Loose international coordination among nations with diverse national

cultures of innovation• Price and technology progress are not either/or

– Politically acceptable price signals tend to operate at margins, while vintage shifts may require dedicated policy programs

• Technology development involves a long pipeline from scientific conceptualization through diffusion of commercial production– Common pitfall: premature selection of winners– The pace of development along a pathway is affected by predictable

and diverse problems that will crop up along the pipeline, which may be subject to diverse policy influence

– Infrastructure development, finance (risk allocation) and law may dominate engineering in much of the pipeline

– The feasible technology portfolio may be limited with search space more diverse within a particular pipeline than between technologies in the portfolio

– Industries with experience in R&D in particular pipelines more likely than governments to explore successfully this internal search space


Future Gen Power Plant

•Design, build, and operate a nominal 275 MW prototype plantthatproduces electricity and hydrogen with near-zero emissions

•Sequester 90 percent of CO2emissions with the future potential to capture/ sequester nearly 100 percent

•Validate CO2sequestrationeffectiveness, safety, & permanence

•Confirm standardized technologies and protocols for CO2measuring, monitoring, and verification

•Confirm the engineering, economic, and environmental viability ofadvanced coal-based, near-zero emission technologiesthat by 2020

will

-Generate electricity with less than 10% cost increase compared to nonsequestered systems

-Make hydrogen at $4.00/million Btu(wholesale)


Future Gen Summary PlanFuture Gen Summary Plan


Clean Coal Technology ProgramsClean Coal Technology Programs


Documents

Climate Change: Designing an Effective Response · 1. Climate Change isn’t a problem 2. Fossil Fuels will Run Out Shortly 3. The “Engineer’s Myth” • Technological Solutions,