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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
Quadrillion (10 15) Btus
World Energy
 Developing world projected to drive the demand increase
 Coal, oil, and gas continue to supply ~80% of total energy
Source: DOE EIA 2008 International Energy Outlook.
2
The Hard Truths
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.
 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
3
The Growing Liquids Supply Challenge
Increasing demand and natural production decline create
growing need for significant new production capacity.
Source: National Petroleum Council, Global Oil and Gas Study – One Year Later
4
Investment, Capacity and Time
(2008 dollars)
Investment has dramatically increased ...
... with years required to increase production
Source: National Petroleum Council, Global Oil and Gas Study – One Year Later
5
Three Barriers to Energy Trade and
Investment
 Credit crunch (global)
 Cost escalation
 Carbon regulation uncertainty
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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
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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
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Recent Capital Cost Escalation Trends
240
Growth
2005-1Q08
70%
Relative Index, 2000 = 100
Power Capital Cost Index with Nuclear
220
200
180
33%
Power Capital Cost Index without Nuclear
44%
160
Downstream Capital Cost Index
140
120
100
1Q2008
2007
2006
2005
2004
2003
2002
2001
2000
Source: Cambridge Energy Research Associates
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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
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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
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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.
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Lack of Carbon Value Creates Uncertainty
that 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
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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
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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 costeffective 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
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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
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