Excerpts from remarks to the 4 th Annual Qatar Conference on Democracy and Free Markets Doha, Qatar April 5, 2004

Transcription

1 Excerpts from remarks to the 4 th Annual Qatar Conference on Democracy and Free Markets Doha, Qatar April 5, 2004 Panel Discussion: Politics & Economics of Energy in the Next Generation William Cattan Partner, Latham & Watkins LLP

2 William Cattan Partner, Latham & Watkins LLP Excerpts from remarks to the 4 th Annual Qatar Conference on Democracy and Free Markets Doha, Qatar April 5, 2004 Panel Discussion: Politics & Economics of Energy in the Next Generation Today s topic is tremendously broad and complex. Energy is perhaps the quintessential area in which issues of politics and economics come together. I thought I would start by outlining what I see as five broad themes about the global energy picture for the next two or three decades. I will then go back through each of these points in slightly more detail. General Themes - There is broad agreement about the situation we face in terms of energy demand. Economic and population growth will result in rising demand for energy. - It is not clear that reasonably priced energy supplies will keep pace with demand. For this to happen, the right policy and business decisions will need to be made. - Major infrastructure development is required to exploit global oil and gas reserves to keep up with rising demand. The required infrastructure development will depend on the availability of a similarly large amount of financing capacity, particularly from private sector sources. - Although the oil and natural gas markets will continue to globalize and diversify, the energy consuming countries, and the U.S. in particular, will remain highly dependent on external sources of supply. And the Middle East will remain the primary source of the world s energy. 2

3 - There is tremendous excitement about the potential for natural gas to play in the world s energy future. Projected gas shortages in the U.S., Europe and Asia are driving a surge in efforts to build the infrastructure necessary to liquefy gas and transport it to users around the world. LNG could grow into the second largest energy market in the world. Discussion 1. There is broad agreement that we face a future of substantially growing energy demand. Economic and population growth is projected to result in an almost 60% increase in the worldwide demand for energy in the next 25 years There are very high stakes at issue in our ability to meet growing energy demands. Access to reliable, reasonably priced energy supplies will remain critical to the world s economic well-being. High oil prices have a substantial negative effect on worldwide economic activity. In the U.S., the recessions of the 1970 s, the early 1980 s, and the early 1990 s were all preceded by a rise in oil prices. And the stakes for the developing world are just as high. There is a close correlation between energy availability and use on the one hand, and economic growth and poverty alleviation on the other. 3. So, how will energy supply keep pace with growing demand? Part of the answer is that major infrastructure development will be required to exploit existing resources, to develop new sources of supply, and to transport energy resources to where they are needed for consumption. According to estimates, more than $15 trillion worth of infrastructure will be required worldwide over the next 30 years International Energy Outlook 2003, Energy Information Administration, U.S. Department of Energy, May World Energy Investment Outlook 2003, International Energy Agency, November 4, 2003 (the IEA 2003 ). 3

4 4. Whether the necessary infrastructure build-out does, in fact, take place will depend on the availability of a large amount of financing and investment, particularly from private sector sources. Fewer energy projects are being financed from public budgets. More capital will have to come from private sources. Foreign investment will be critical for oil and gas projects. And the energy sector is going to have to compete against other sectors of the economy for capital. 5. Governments policies will be critical. It will be important for governments -- in particular in the Middle East, Africa and Russia, where much of the increase in global production and exports is expected to occur -- to create favorable conditions for private investment in the energy sector. Governments will have to consider how their policies affect investment risks. This includes, in particular, assuring a stable and transparent legal and regulatory environment, and reducing barriers to foreign investment. 6. Technological Advances also will be critical. Technological advances played an important role over the last 30 years in allowing industry to locate resources more accurately and extract them more efficiently, and consumers to utilize energy resources more efficiently. Future technological advances will be necessary to open new horizons and create new efficiencies. To give you one example of the transforming potential of technology: there is growing use of a digital technology that puts microcomputers on drill bits. This makes oil exploration and production more exact. Cambridge Energy Research Associates, with which many of you are no doubt familiar, estimates this technology could make available 125 billion barrels of oil that previously were not economic to produce. That is more that the reserves of Iraq or Latin America. 3 3 Daniel Yergin, Chairman of Cambridge Energy Research Associates, Oil -- Iraq and After, in New Perspectives Quarterly, Volume 20 #2, Spring See also Oil field of the future is digital -- and it s already here, by Brad Foss, AP Business Writer, published in The Detroit News Technology, February 14,

5 7. Even if everything I have suggested needs to take place -- the infrastructure development, the technological developments -- does in fact take place, the energy consuming countries, and the U.S. in particular, will remain highly dependent on external sources of supply. And although the oil and natural gas markets will continue to globalize and diversify. And this process could result in new geopolitical relationships and alignments. It is clear that the Middle East will remain the primary source of the world s energy. It has been a longstanding goal of U.S. policy to make the U.S. more energy self-reliant and less dependent of foreign oil. However, this has not been achieved, and it seems an unrealistic goal for the foreseeable future. Today, the U.S. imports 55% of its oil. It is projected that by 2025, the number will rise to 70%. 4 In addition to the reality of continued energy dependence, is the reality that the Middle East will continue to be the world s principal supplier. Because of the region s enormous reserves, and low capital and operating costs, the Middle East is projected to provide almost two-thirds of the increase in global oil demand between now and The projections for U.S. supplies show a similar trend. OPEC s share of U.S. oil imports, which peaked at 70% in the 1970 s, and is now down to 40%, is expected to rise to about 50%. 6 And Saudi Arabia will remain the dominant component in the equation. I would also note with respect to the U.S. that -- in the absence of very substantial increases in the price of oil -- I do not see the U.S. doing much to change its patterns of energy consumption, or alternatives to fossil fuels doing much to change the fundamental reliance on imported oil. 8. The obvious and long standing concern that these facts give rise to is the vulnerability of energy consuming nations to supply disruptions. Discussions on energy security in the U.S. often address this issue in terms of the U.S. exposure to the political manipulation of oil supplies by OPEC or an individual supplier. I think this Kyle E. McSlarrow, Deputy Secretary of Energy, U.S. Department of Energy, keynote address at Global Challenges for U.S. Energy Policy: Economic, Environmental and Security Risks, a conference sponsored by The Brookings Institution (the Brookings Conference ), on March 5, IEA (See footnote 2.) Kyle E. McSlarrow at the Brookings Conference. (See footnote 4.) 5

6 concern is overstated. I would be happy to elaborate in the question period. But fundamentally it comes down to the fact that, despite the many differences of opinions and interests we have, there is a mutual desire on the part of both producers and consumers to maintain stable energy markets. While consumers rely on oil purchases, producers also rely on oil revenues. What would really hurt producing countries today is a worldwide economic recession that drove down long-term oil demand. However, it is certainly possible to contemplate supply disruptions occurring for other reasons. In the current geopolitical climate, one would have to put terrorism at the top of the list. Al Qaida has demonstrated that it understands the economic dimensions of terror attacks. And there is already evidence that the energy supply chain has been targeted. For example, there have been incidents of modern day pirates taking and piloting tankers in South East Asia. A British terrorism expert has called this a maritime equivalent of a pre-9/11 flight school, because a blown up tanker could paralyze vital shipping lines like the Panama or Suez canals. 7 It does not take a lot of imagination to come up with other examples. A LNG tanker could do enormous damage to a shipping or receiving terminal. An aircraft crashed into oil facilities could take major production off line. This should be of grave concern to us all. There is one positive bit of information to inject into this analysis, and that is the potential impact of the increasing diversity of supply sources. One thing the diversity of supply is doing is making it possible to add, on the margins, additional surplus capacity that could be brought to bear in the case of temporary supply shortages and price spikes. But, ultimately, you can t get away from the centrality of Saudi Arabia. Cambridge Energy Research Associates does a lot of economic modeling for different supply and demand scenarios. Quite significantly, there is one scenario for which they say there is no satisfactory answer -- and that is the scenario where some external event causes millions of barrels of Saudi Arabian oil production to go off line for some or many months. The projections are that such a situation 7 Riyadh Attack Threatens U.S. Energy Security by Dr. Ariel Cohen, The Heritage Foundation WebMemo #368, November 14, Tim Spicer is the British terrorism specialist quoted by Dr. Cohen. 6

7 would push the world into a depression -- and that if the interruption of oil supplies went on for many months, the global depression would be deep and long lasting I would like to close by commenting on a topic of particular relevance to Qatar -- the tremendous potential for natural gas to play in the world s energy future. Gas is the cleanest burning of the fossil fuels. It produces little pollution and emits less carbon dioxide (the key greenhouse gas) than either oil or coal. 9 It exists in abundant supplies, in particular, here in Qatar. Demand for it is rising. And the expansion of the LNG market -- the process where gas is liquefied and shipped around the world -- is transforming natural gas into a global commodity. LNG s main market has been Asia. That market, and the European market, are both expected to expand. But I would like to focus on the U.S. The U.S. added almost 200,000 megawatts of gas-fired electric-power generation capacity in the late 1990 s. All in, approximately 40% of U.S. industry uses gas as its primary fuel. 10 But regional -- meaning U.S., Canadian and Mexican -- gas reserves are maturing and supply has essentially peaked. There are potential sources for additional gas in the U.S., but these are currently off limits because of environmental concerns. In another decade, there may be a pipeline from Alaska bringing gas through western Canada and into the U.S. But even taking that into account, there is a large supply gap forecasted for the future, suggesting the U.S. will be forced to look to world markets for supply James A. Placke, Senior Associate, Cambridge Energy Research Associates, speaking at the Brookings Conference. (See footnote 4.) Daniel Yergin, The Next Prize, Cambridge Energy Research Associates News Article, November 3, Daniel Yergin interviewed in The Calgary Herald, October 1,

8 Notwithstanding the projected U.S. supply gap, and the existence of a growing international market in LNG, there are, however, hurtles that must be overcome in order for LNG to reach its full potential -- in the U.S. market and globally. Here are a few of the issues. - There is a need for a massive build out of LNG infrastructure. Cambridge Energy has coined the phrase 40 in 8 -- referring to the need to construct as much capacity in the next eight years as the global industry has built in the past The construction of LNG production, shipping, and re-gasification facilities is expensive. An upstream production facility can cost between 2 and 10 billion dollars. Ships -- and as many as 5 or 10 might be required -- cost about $150 million each. And the receiving/re-gasification terminal can cost $500 million to $1 billion. Financing all of that is complex and difficult. - Gas prices can be volatile, and that volatility could discourage the development and financing of LNG infrastructure. - And finally, there are issues particular to the U.S. market. To begin with, there are those who argue the U.S. has been down this path before. Relatively high natural gas prices in the 1970 s led to the construction of four import terminals... [T]hree of the four spent most of the 1980 s and 1990 s not being utilized. 12 In addition, over the last 40 years, the economic model in Asia and Europe was for long term purchase and sale agreements to support infrastructure development. The U.S. model is for short term gas supply contracts. Also, industry participants Michael Stoppard, Director of Global LNG at Cambridge Energy Research Associates, quoted in LNG: On the Road to becoming the Next Prize?, CERA press release dated February 11, Tim Evans, Senior Energy Analyst, IFR Energy Services, The U.S. need for LNG, in Project Finance International s Americas Energy Review, March

9 are cautious based on the experience with gas-fired power projects, where there was a substantial over-build of capacity. But many, including myself, think these issues are surmountable. And projections are for LNG imports, which constituted just 2% of U.S. natural gas use in 2003, to rise to 10% in a decade, and to 25%-30% by This gives rise to the question of who will be the major suppliers of LNG to the U.S. And I think there is a strong likelihood that Qatar will be a part, if not the, answer to that question. Qatar is the 3 rd largest holder of gas reserves in the world. Its North Field is now, and for the foreseeable future will remain, the most significant natural gas reserve in the world for the production of LNG. Qatar has strong and growing ties to the United States. And the government, and Qatar Petroleum, have undertaken aggressive efforts to expand their LNG production and marketing. In 2002, QP made the bold assertion that by 2010 Qatar would export more LNG than any other nation in the world. At a conference in the U.S. earlier this year, a representative of QP announced Qatar s intention to supply half of U.S. gas imports by So I believe it is very possible that in 10 or 20 years, at conferences such as this, and when Americans talk about energy issues, discussions of Qatar and LNG could figure as prominently as discussions of Saudi Arabia and oil have in the past -- with all the complexities, problems and opportunities for the two countries that suggests Daniel Yergin interviewed by Stephanie Anderson Forest in BusinessWeek online, March 1, Comments of Mona Al-Maadeed, senior business planner at Qatar Petroleum, reported in LNG Boom, Project Finance International, February 18,