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Credit, Costs and Carbon: Three Obstacles to Energy Sector Investment. James A. Slutz Assistant Secretary Office of Fossil Energy U.S. Department of Energy APEC Energy Trade and Investment Roundtable September 30 – October 2, 2008 Cairns, Australia. Projected Energy Demand 2005 and 2030. - PowerPoint PPT Presentation
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James A. SlutzAssistant Secretary
Office of Fossil EnergyU.S. Department of Energy
APEC Energy Trade and Investment Roundtable
September 30 – October 2, 2008Cairns, Australia
Credit, Costs and Carbon: Three Credit, Costs and Carbon: Three Obstacles to Energy Sector InvestmentObstacles to Energy Sector Investment
2
Projected Energy Demand 2005 and 2030
Source: DOE EIA 2008 International Energy Outlook.
Qua
drill
ion
(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
3
The 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.
4
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.
5
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
6
Three Barriers to Energy Trade and Investment
Credit crunch (global)
Cost escalation
Carbon regulation uncertainty
Costs
7
Global Credit Crunch Barrier to Energy Trade and Investment
Current turmoil and unease in banking
Real interest rates are not high for LIBOR or the U.S. Prime Rate, but …
• Charges above LIBOR/Prime are rising
• Banks are reluctant to lend money• New stock offerings are not
attractive Banks have written off bad loans Energy projects rely on project
finance Credit crunch is real Could take years to resolve
8
Increasing Costs Barrier to Energy Trade and Investment
Huge run-up in commodity prices• Metals: steel, aluminum, etc.• Energy
Huge increases in capital costs • Construction cost increases since 2005 of
30% to 70%• Tight labor markets
Chemical-engineering construction services cycle
9Source: 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 Trends
10
Chemical-Engineering Construction Services
Five major factors affecting the availability of chemical engineering construction services:• Asia and the Middle East – massive expansion
in refining through 2012
• Petrochemical projects follow refining trends
• Nonconventional oil projects have stalled
• Engineering resources have been devoted to Gas-to-Liquids
• Large Middle East LNG projects are using world’s engineering services
Cyclical construction boom
11
Climate Change Policies Barrier to Energy Trade and Investment
Moderating climate change and controlling greenhouse gases – a major challenge
Regulatory uncertainty has limited investments in energy projects
Wall Street Carbon Principles
Uncertainty
12
Meeting New U.S. Electricity Demand
“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.
13
Lack of Carbon Value Creates Uncertaintythat Blocks Investment
Investment in low-carbon power options:• Clean Coal with Carbon Capture & Storage• Solar Power (Photovoltaic, Concentrating)• Nuclear Power (for interested economies)• Wind Power (absent financial support)
Investment in low-carbon transport options:• Hybrid electric vehicles using low-carbon power• Biofuel vehicles using second generation feedstocks
Investment in New Supply, such as:• CO2-Enhanced Oil Recovery• Liquefied Natural Gas
Energy Efficiency
14
Lack of Harmonized Carbon Pricing System Risks Misinvestment
Risks if some economies implement carbon pricing and other do not, for example:• Investments in a given fuel (such as LNG
liquefaction and regasification facilities) may simply move to economies with lower prices
• Investments in a relatively low-carbon fuel (such as natural gas) may be displaced by higher-carbon fuels in other economies
15
Wall Street’s Carbon Principles
The Principles are:
• Energy efficiency. An effective way to limit CO2 emissions is to not produce them. Encourage clients to invest in cost-effective demand reduction, taking into consideration the value of avoided CO2 emissions
• Renewable and low carbon distributed energy technologies. Encourage clients to invest in cost-effective renewables and distributed technologies, taking into consideration the value of avoided CO2 emissions
• Conventional and advanced generation. Encourage regulatory and legislative changes that facilitate carbon capture and storage (CCS) to further reduce CO2 emissions from the electric sector
16
Approaches to Countering the “C”s
Increased market transparency• Fosters competition, countering high costs• Shows where investment most valuable
Technology development and deployment• Brings clean energy costs steadily downward• Builds capacity to alleviate skills shortages
Expanding energy trade• Boosts competition, lowering costs• increases energy security• Helps to foster a global value for carbon
Climate Change• Global solutions• Leakage