Credit, Costs and Carbon: Three Credit, Costs and Carbon: Three Obstacles to Energy Sector InvestmentObstacles to Energy Sector Investment

Projected Energy Demand 2005 and 2030

Projected Energy Demand 2005 and 2030

Source: DOE EIA 2008 International Energy Outlook.

Qu

adri

llio

n (

10 15

) B

tus

World Energy

Developing world projected to drive the demand increase Coal, oil, and gas continue to supply ~80% of total energy

The Hard TruthsThe Hard TruthsThe Hard TruthsThe Hard Truths

Increasingly apparent accumulation of risks to expansion of conventional liquids

Resource estimates are growing, but turning resources into supplies is an increasing challenge

Where resource is accessible, cost and availability of materials and human resources are hindering projects

Constraints to expansion of first-generation biofuels are more apparent

The world is not running out of energy resources, but there are accumulating risks to continuing expansion of oil and natural gas production from the conventional sources relied upon historically. These risks create significant challenges to meeting projected demand.

The Growing Liquids Supply Challenge The Growing Liquids Supply Challenge

Source: National Petroleum Council, Global Oil and Gas Study – One Year Later

Increasing demand and natural production decline create growing need for significant new production capacity.

Investment, Capacity and Time (2008 dollars)

Investment, Capacity and Time (2008 dollars)

Source: National Petroleum Council, Global Oil and Gas Study – One Year Later

Investment has dramatically increased ... ... with years required to increase production

Three Barriers to Energy Trade and Investment

Three Barriers to Energy Trade and Investment

Credit crunch (global)

Cost escalation

Carbon regulation uncertainty

Costs

Global Credit Crunch Barrier to Energy Trade and Investment

Global Credit Crunch Barrier to Energy Trade and Investment

Current turmoil and unease in banking

Real interest rates are not high for LIBOR or the U.S. Prime Rate, but …

• Charges above LIBOR/Prime are rising

• Banks are reluctant to lend money

• New stock offerings are not attractive

Banks have written off bad loans

Energy projects rely on project finance

Credit crunch is real

Could take years to resolve

Increasing Costs Barrier to Energy Trade and Investment

Increasing Costs Barrier to Energy Trade and Investment

Huge run-up in commodity prices

• Metals: steel, aluminum, etc.

• Energy

Huge increases in capital costs

• Construction cost increases since 2005 of 30% to 70%

• Tight labor markets

Chemical-engineering construction services cycle

Source: Cambridge Energy Research Associates

100

120

140

160

180

200

220

240

2000

2001

2002

2003

2004

2005

2006

2007

1Q2008

Relative Index, 2000 = 100

Power Capital Cost Index with Nuclear

Power Capital Cost Index without Nuclear

Downstream Capital Cost Index

Growth2005-1Q0870%

33%

44%

Recent Capital Cost Escalation TrendsRecent Capital Cost Escalation Trends

Chemical-Engineering Construction Services

Chemical-Engineering Construction Services

Five major factors affecting the availability of chemical engineering construction services:

• Asia and the Middle East – massive expansion in refining through 2012

• Petrochemical projects follow refining trends

• Nonconventional oil projects have stalled

• Engineering resources have been devoted to Gas-to-Liquids

• Large Middle East LNG projects are using world’s engineering services

Cyclical construction boom

Climate Change Policies Barrier to Energy Trade and Investment

Climate Change Policies Barrier to Energy Trade and Investment

Moderating climate change and controlling greenhouse gases – a major challenge

Regulatory uncertainty has limited investments in energy projects

Wall Street Carbon Principles

Uncertainty

Meeting New U.S. Electricity DemandMeeting New U.S. Electricity Demand

“Rural Utilities Service has made the right decision not to fund new coal-fired power plants until it can calculate and apply a factor to reflect financial risks.”

-- Rep. Henry A. Waxman (D-CA), March 12, 2008

During 2007, fifty-nine proposed plants were cancelled, abandoned, or put on hold.

Lack of Carbon Value Creates Uncertaintythat Blocks Investment

Lack of Carbon Value Creates Uncertaintythat Blocks Investment

Investment in low-carbon power options:• Clean Coal with Carbon Capture & Storage

• Solar Power (Photovoltaic, Concentrating)

• Nuclear Power (for interested economies)

• Wind Power (absent financial support)

Investment in low-carbon transport options:

• Hybrid electric vehicles using low-carbon power

• Biofuel vehicles using second generation feedstocks

Investment in New Supply, such as:

• CO2-Enhanced Oil Recovery

• Liquefied Natural Gas

Energy Efficiency

Lack of Harmonized Carbon Pricing System Risks Misinvestment

Lack of Harmonized Carbon Pricing System Risks Misinvestment

Risks if some economies implement carbon pricing and other do not, for example:

• Investments in a given fuel (such as LNG liquefaction and regasification facilities) may simply move to economies with lower prices

• Investments in a relatively low-carbon fuel (such as natural gas) may be displaced by higher-carbon fuels in other economies

Wall Street’s Carbon PrinciplesWall Street’s Carbon Principles

The Principles are:

• Energy efficiency. An effective way to limit CO2

emissions is to not produce them. Encourage clients to invest in cost-effective demand reduction, taking into consideration the value of avoided CO2 emissions

• Renewable and low carbon distributed energy technologies. Encourage clients to invest in cost-effective renewables and distributed technologies, taking into consideration the value of avoided CO2 emissions

• Conventional and advanced generation. Encourage regulatory and legislative changes that facilitate carbon capture and storage (CCS) to further reduce CO2

emissions from the electric sector

Approaches to Countering the “C”s Approaches to Countering the “C”s

Increased market transparency

• Fosters competition, countering high costs

• Shows where investment most valuable

Technology development and deployment

• Brings clean energy costs steadily downward

• Builds capacity to alleviate skills shortages

Expanding energy trade

• Boosts competition, lowering costs

• increases energy security

• Helps to foster a global value for carbon

Climate Change

• Global solutions

• Leakage