0 The Emerging U.S. Natural Gas & Electricity Crisis – How You Can Help Andrew D. Weissman Senior Managing Director FTI Consulting, Inc. [email protected].

1

The Emerging U.S. Natural Gas & Electricity Crisis – How You Can Help

Andrew D. WeissmanSenior Managing Director

FTI Consulting, [email protected]

University of North Carolina/Duke UniversitySeptember 28, 2005

Energy Challenges Seminar

2

Major Threat Major Threat

U.S. faces serious energy crisis

– Natural gas & electricity as much or more than oil Supplies of fuel & feedstock no longer sufficient to sustain

normal growth of U.S. economy– Major dislocation point; due to long-term structural imbalance

between supply and demand Already has resulted in serious economic harm

– At least $ ½ trillion bite from U.S. economy over past 2 ½ years Could quickly become far more severe

– In BTU equivalent terms, by 2015 potential natural gas supply gap = 1 ½ X current U.S. oil imports from Middle East

Potentially = greatest threat to health of U.S. economy over next 10 to 15 years

Could also thwart efforts to achieve major environmental goals, significantly affect careers of current UNC and Duke students

3

Questions Posed Questions Posed

Presentation focuses on four key issues:

1. Fundamental drivers

2. Actions required to ameliorate

3. Reasons not recognized sooner

4. Steps to strengthen our institutions to avoid repetition

– Government, private industry, academic

Many lessons learned applicable to other major public policy issues:

– Inability to effectively control health care costs/maximize quality of health care services provided

– Lagging quality of U.S. public education system

– Lagging penetration rate for access to broadband

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Solutions Start Here Solutions Start Here

Thesis: need to teach more effectively -- 1. Limits of what markets can accomplish

– Problem of the commons, difficulty of ensuring adequate investment in public goods, reluctance to make large capital investments in high-risk projects with long lead times

2. Skills in integrated, interdisciplinary problem solving

Real world has come to mirror division of university into series of separate academic disciplines– Armies of highly skilled specialists, but remarkably few

capable generalists; disinclination to focus on effectively solving problems in holistic manner

Greatest value often resides in connecting dots Also need to devote far more academic research & course

work to major public policy issues + develop new models for partnerships with government to tackle these issues

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Emerging Natural Gas & Electricity Crisis Poses Greater Threat to U.S. Economy Than

Rising Oil Prices

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Key Fuel For EconomyKey Fuel For Economy

One quarter of our total energy supply

U.S. = largest natural gas U.S. in world

97 % of current supply obtained from U.S. & Canada

Perceived as clean fuel

Has been fuel of choice to meet incremental demand for:

– Residential

– Commercial

– Electric power

– Manufacturing sector

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Increasingly Drives Electricity PricingIncreasingly Drives Electricity Pricing

Natural gas is setting an increasing critical role in power generation

Sets market-clearing price for electricity in wholesale markets increasing number of hours every year:

Source: CERA

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Risks to U.S. Economy > Than for Oil Risks to U.S. Economy > Than for Oil

Future natural gas price shocks = greater risks than oil

Unlike oil (where impact global), impact of higher prices and supply shortages concentrated in U.S.

Including electricity, $$’s at stake nearly 50 % > than for oil

Total U.S. Energy Use – 2004 (Quad BTU)

Energy Source

Fuel Consumption

Percentage of Total U.S. Fuel Use

Generation of Electricity

38.86 Quad Btu (Incl. Use of 5.33 Quad Btu of Natural Gas and 1.20

Quad Btu of Oil)

38.9 %

Direct Use of Natural Gas by Residential, Commercial & Industrial Users

17.40 Quad Btu

17.4 %

Direct Use of Oil (Including Transportation)

38.86 Quad Btu (Incl. 2.85 Quad Btu of Natural Gas Liquids)

38.9 %

Direct Use of Coal & Other Fuels

4.69 Quad Btu

4.7 %

Total U.S. 99.81 Quad Btu 100.0 %

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No National Energy PolicyNo National Energy Policy

U.S. Department of Energy currently expects major shift in future sources of supply

Largely by default, U.S. now dependent upon two highly uncertain potential sources of supply to meet future needs

– Hoped for major expansion in LNG + proposed Alaskan pipeline

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LNG Imports Expected to Increase SharplyLNG Imports Expected to Increase Sharply

Longer term, LNG imports could add significantly to U.S. trade deficit By 2020, in BTU equivalent terms, expected to exceed current oil imports from

Persian Gulf by 20 %

EIA estimates will account for up to 87 % of incremental U.S. natural gas supply

Potential Increase in Balance of Payments Deficit Due to Increased Imports of LNG

Impact of Liquefied Natural Gas Imports

$ 3.5

$ 18.0

$ 32.0

$ 40.0

$ 50.0

$ 0

$ 10

$ 20

$ 30

$ 40

$ 50

$ 60

2004 2010 2015 2020 2025

(bill

ion

per y

ear)

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Recent events highlight vulnerability of U.S. economy to soaring energy costs Severe natural gas summer-month price spike

Post-Katrina/post-Rita explosion to all-time highs

Not a short-term problem; past 3 ¾ years: 6 X increase in natural gas prices, 3 X in oil

Daily Closing Prices Natural Gas October '05

$5

$6

$7

$8

$9

$10

$11

$12

3-J

an

17-J

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31-J

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28-F

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14-M

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9-M

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23-M

ay

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20-J

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1-A

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ug

Daily Closing Prices Crude Oil October '05

$40

$45

$50

$55

$60

$65

$70

3-J

an

17-J

an

31-J

an

14-F

eb

28-F

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28-M

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11-A

pr

25-A

pr

9-M

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23-M

ay

6-J

un

20-J

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4-J

ul

18-J

ul

1-A

ug

15-A

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29-A

ug

Recent Increases inNatural Gas Prices

Recent Increases in Crude Oil Prices

U.S. Reaching a Crisis PointU.S. Reaching a Crisis Point

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Major Long-Term Inflexion PointMajor Long-Term Inflexion Point

Still just “tip of the iceberg”

Cause = long-term structural imbalance between growing demand and available supplies

– In North America for natural gas, globally for oil

Supply gap certain to:

– Become more severe over time

– Result in major dislocations to U.S. & global economies

No easy or quick solutions

13

Price Shocks to U.S. EconomyPrice Shocks to U.S. Economy

Past 4 years have seen:

– $ 400 billion/year + increase in oil costs

– $ 225 billion/year + increase in natural gas costs

– $ 100 billion/year + increase in price of electricity

Significant adverse impact on U.S. economy

– Reduces consumer spending power, ability of U.S. companies to compete in global markets

– Federal Reserve Board estimates reduced U.S. GDP by ¾ of 1 % in 4th quarter of 2004 alone

$ 200 billion/year + increase over past 4 years in energy contribution to balance of payments deficit

– Creates need to borrow an additional $ 500 million per day from other countries to pay for imported fuel

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Katrina & Rita Add to UrgencyKatrina & Rita Add to Urgency

Katrina & Rita have thrown a match onto an uncovered tank of kerosene

Production losses virtually certain to be far greater than for Ivan one year ago Ivan: 45 million barrels of oil, 178 Bcf of natural gas, minimal

impact on refined products Katrina/Rita: could easily result in 160 to 180 million barrels

of lost oil production, 300 to 500 Bcf of loss natural gas production, steepest draw downs ever of gasoline and other refined products

Impact on oil market partially mitigated by surge of oil imports from Europe + draw downs of government reserves No similar source of relief available for natural gas

Magnitude of natural gas price increase depends upon severity of winter weather But risk of severe price spikes is off the charts

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Decisive Action RequiredDecisive Action Required

Creates urgent need to put in place comprehensive program to develop alternative sources of supply under direct U.S. control

Emphasis should be on critical period of next 3 to 10 years– Available options limited; risk of price spikes & potential supply

shortages particularly high In addition to conservation & renewable energy, potential

elements for inclusion in any response plan include:1. Rapid deployment of advanced coal gasification systems to

provide an alternative fuel supply for currently under-utilized gas-fired combined cycle units & major industrial users

2. Replacement of older, less efficient gas-fired generating units with new advanced pulverized coal-fired units or combined cycle units that utilize synthetic gas

3. Efforts to significantly accelerate development of new on-shore and off-shore gas fields

4. Modernization of electric T&D system to significantly reduce line losses

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Rapid Deployment of Coal Gasification = KeyRapid Deployment of Coal Gasification = Key

Major goal: to minimize growth in use of natural gas to generate electricity in order to preserve available supplies for higher priority uses

Rapid deployment of coal gasification = key to achieving this goal

Low-hanging fruit– Technology already demonstrated

– Ample coal supplies available

– Issue = willingness to take decisive action in a timely manner

Requires adding at least:– 35,000 to 50,000 MW’s of gasification capability by 2015

– An additional 35,000 MW by 2020

Sufficient to displace:– 33 to 45 % of expected increase in natural gas demand by 2015

– 40 to 50 % of expected increase in demand by 2020

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Alternatives Potentially DireAlternatives Potentially Dire

Other potential actions (e.g., nuclear power or renewables) can contribute significantly to long-term solution but will not provide relief soon enough or on required scale

Life or death issue for many U.S. companies Significant portion of U.S. manufacturing sector cannot

survive $ 12 to 20/MMBTU natural gas– Even prices this high may not be sufficient for market to

clear

Potential adverse impact on U.S. balance of payments deficit, value of U.S. dollar of lost manufacturing revenues could be severe

Massive imports of Liquefied Natural Gas (LNG) not the answer

– Far too few multi-billion dollar liquefaction projects being under-taken to meet likely global demand

– Competition for output likely to fierce + priced against oil

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Not a Short Term Problem

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Collision of Tectonic PlatesCollision of Tectonic Plates

Train wreck that is beginning to occur stems from collision of two tectonic plates set in motion long ago:

1. After several decades of development, production from most conventional on-shore fields in U.S., Alberta and Near-Shelf region in Gulf has either hit plateau or entered into a period of rapid – and irreversible -- decline Particularly severe in shallow waters off Gulf Coast

Until recently, most important source of new U.S. supplies

2. Simultaneously, demand is growing rapidly due to shift to natural gas as near-exclusive fuel to meet incremental electricity needs of U.S. economy Due in part to:

Delayed impact of Clean Air Act requirements enacted long ago

20-year period required to work off huge generation surplus left over after oil price shocks of ’70’s

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Continued Economic Growth Requires

Expanded Supplies of Electricity

Continued Economic Growth Requires

Expanded Supplies of Electricity

Demand for electricity generally increases every year Current ratio = 0.72% increase for each 1% growth in GDP

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Major Shift in Incremental Source of SupplyMajor Shift in Incremental Source of Supply

Prior to late ’90’s, possible to meet high % of incremental electricity needs of U.S. economy thru increased utilization of existing coal and nuclear units:

Source of Electric Generation to MeetIncremental Demand (1979-97)

0

1400

1979 1981 1983 1985 1987 1989 1991 1993 1995 1997

Bill

ion

Kw

h

Coal Nuclear Natural Gas Renewable (excl. Hydro)

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4.561

5.322

5.691

5.081

4.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

5.8

1997 1998 1999 2000

Sharp Increase in Natural Gas ConsumptionSharp Increase in Natural Gas Consumption

Beginning in 1998, however, as coal and nuclear fleet increasingly utilized at maximum capacity, power sector consumption of natural gas began to rapidly increase:

Cumulative In

crease = 1.13 TCf

TCf

TCf

TCf

TCf

Power Sector Consumption of Natural Gas (1997-2000)

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Mild Winters Temporarily Masked IncreaseMild Winters Temporarily Masked Increase

Warmer-than-normal winters initially masked magnitude of increase Resulting reductions in use of natural gas for space heating entirely

offset power sector demand for natural gas

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Prices QuadrupledPrices Quadrupled

In 2000, mild winter weather no longer masked increase in power sector demand

Led to 4X increase in natural gas prices nationally not predicted in advance by anyone in industry

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Abrupt Shift in Strategy for Meeting U.S. Electricity Needs

Without Careful Evaluation by AnyFederal or State Agency

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Need for New CapacityNeed for New Capacity

By late 1990’s, as load continued to grow, new electric generating capacity needed in every region of U.S. for first time in almost 30 years

At this key choice point, utility industry in midst of far-reaching change FERC de-regulation of wholesale markets + state PUC restructuring

Explosive growth of Independent Power Producer industry & power marketers

Power plant developers strongly favored gas-fired capacity over coal Shorter lead time and much lower (apparent) capital cost

Lower perceived permitting risk/seen as “pro-environment”

Near universal belief natural gas supplies would remain plentiful and prices would remain low, based in part upon 1999 National Petroleum Council Study Parallels in some respects impact of 2003 NPC Study urging strategy

of massively increasing dependence upon imports of LNG

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Ample Natural Gas Supplies ExpectedAmple Natural Gas Supplies Expected

1999 NPC Study forecast North American natural gas production rising to 33.5 TCf by 2015 without significant price increases Increased production expected to come principally from U.S.

sources

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Key JunctureKey Juncture

Timing of 1999 NPC study critical

Key choice point regarding long-term strategy for meeting incremental electricity requirements of U.S. economy

Potential long-term implications for U.S. economy of decisions required to be made during this period not well understood at the time

With benefit of hindsight, one of the most significant failures of public policy formulation of past decade Lack of adequate analysis and review at both federal and state

level nationwide

Arguably already has resulted in $ 100 billion + in potentially avoidable energy costs Negated all or most of the benefits of industry restructuring

Potential long-term costs could be many times greater

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Choices NecessaryChoices Necessary

Result of choices made = abrupt shift in U.S. energy policy $ 100 billion investment in new gas-fired plants

Enough generation to meet total current electricity demand in Great Britain, Germany and France combined

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One of Two Major Causes ofCalifornia Energy Crisis in 2000

One of Two Major Causes ofCalifornia Energy Crisis in 2000

U.S. now dependent upon gas-fired units to meet virtually all of its incremental electricity needs for at least the rest of this decade

Expected Sources of Incremental Generation(2000-2020)

0

1800

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

Bill

ion

Kw

h

Coal Nuclear Natural Gas Renewable (excl. Hydro)

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Primary Driver of Increased Consumption

Primary Driver of Increased Consumption

After brief pause early in decade, power sector consumption of natural gas likely to increase significantly every year:

Cumulative Increase in Power Industry Natural Gas Consumption (2004-2015) vs. 2003

0

1

2

3

4

5

6

7

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year

To

tal T

Cf

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Cumulative Increases HugeCumulative Increases Huge

Increase likely to be > 3.4 TCf by 2010, > 5.7 TCf by 2015

No other current source of generation to meet incremental electricity needs of U.S.economy

Projected Increase in Power Sector Natural Gas Consumption

Year Increase

Increase vs. 2003

Total

2004 0.275 TCf 0.250 TCf 5.486 TCf2005 0.462 TCf 0.712 TCf 5.948 TCf2006 0.563 TCf 1.275 TCf 6.511 TCf2007 0.522 TCf 1.797 TCf 7.033 TCf2008 0.460 TCf 2.257 TCf 7.493 TCf2009 0.568 TCf 2.825 TCf 8.061 TCf2010 0.568 TCf 3.393 TCf 8.629 TCf2011 0.353 TCf 3.746 TCf 8.892 TCf2012 0.353 TCf 4.099 TCf 9.335 TCf2013 0.546 TCf 4.645 TCf 9.881 TCf2014 0.546 TCf 5.191 TCf 10.427 TCf2015 0.546 TCf 5.737 TCf 10.975 TCf

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Creates Massive Hole in Expected U.S. Energy Supply

Creates Massive Hole in Expected U.S. Energy Supply

2003 NPC Study reduces 1999 estimate of total natural gas production from “traditional” North American sources of supply by an almost unfathomable 50 TCf + between now and 2015

Creates >21 TCf gap between projected needs and available supplies and between now and 2010

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Creates Huge VoidCreates Huge Void

North American supply certain to fall far short of current estimates of U.S. demand

NPC U.S. production estimate for 2010 reduced by a staggering 16 BCf/day vs. 1999 forecast (i.e., just under 6.0 TCf/year)

2003 NPC Forecast of U.S. Production

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Production Has Hit PlateauProduction Has Hit Plateau

At best, production increases in Rockies and Deepwater projects in Gulf of Mexico expected to just barely offset declines in other basins

2003 NPC Forecast of North American Production

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May Overestimate SignificantlyAvailable Supplies

May Overestimate SignificantlyAvailable Supplies

NPC estimates more of a “best case” than a “most likely” scenario

Many assumptions – while plausible – may not be achieved No contingency for further declines

Assumes that: Decline rates, which have been increasing significantly, will soon level off

Well size, which has been falling rapidly, will soon begin to stabilize, with only modest further decreases in future years

Also assumes that high degree of success in finding new targets in existing fields and new fields in unexplored regions even though: Expenditures on exploratory drilling have slowed markedly (as companies prefer to buy

proven reserves than to explore)

Many E&P companies are said to have largely exhausted their inventory of attractive prospects during 2000/2001

Also, does not take into account potential for steep decline in imports in Canada due to Tar Sands development + commitment to retire all existing coal-fired plants in Ontario by 2007 and other potential Kyoto-related measures

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High Level of Uncertainty Regarding

Ability to Achieve Targets

High Level of Uncertainty Regarding

Ability to Achieve Targets To meet NPC targets, more than ½ future U.S. production must

come from undiscovered wells in undiscovered fields

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Steep Price Increases LikelySteep Price Increases Likely

Potential price increases likely to be far greater than currently assumed

To a significant degree, all but core industrial users who value natural gas highly already have been driven out of market

For remaining users, cost of natural gas often a smaller % of total cost of goods produced than for users forced to leave market in previous years

Economy currently still reasonable strong

Far higher percentage of industrial users hedged than in earlier years

Most viable fuel switching already has occurred

End result: may require steep increases to free up even relatively modest supplies – let alone amounts required

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Bottom LineBottom Line

U.S. faces unprecedented natural gas supply shortfall Already has caused serious harm to the economy

Severe, unanticipated price spikes 3 out of past 5 winters One of two major precipitating causes of California crisis in

2000 May have helped to precipitate recession in 2001 (worst

manufacturing recession in 22 years) No precedent for being able to sustain growth of U.S. economy

without being able to expand supplies of electricity Yet, no urgent effort is being made at national level to:

Dramatically improve efficiency of energy utilization beyond current levels

Increase our ability to supply electricity from alternative sources (e.g., coal, nuclear and renewable energy)

Unless corrected, likely to have severe adverse repercussions for economy

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Why Isn’t Urgency of Emerging

Crisis Better Understood?

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Masked by WeatherMasked by Weather

Winter of 2002-2003 gave an early indication of severity of current shortfall Started winter with above-average amounts of natural gas in storage

Number of gas-weighted Heating Degree Days only 0.7 % > normal

Still just barely avoided crisis

Since that time, demand has grown significantly and supplies have fallen

On a weather normalized basis, even at current record price levels, U.S. market chronically under-supplied Energy Ventures Group estimate: by at least 500 to 750 BCf

During the past year, only an extraordinary streak of back-to-back mild weather events has masked severity of shortfall

As soon as weather reverts to historical norms, natural gas prices will soar Even if oil prices moderate (which is not likely to occur)

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Extraordinary String of Back-to-Back EventsExtraordinary String of Back-to-Back Events

In 2004, not just one episode of milder-than-normal weather, but an unbroken string of one after another followed by another Temperatures generally warmer-than-normal (in winter, spring and fall),

significantly reducing space heating demand

But summer then far cooler-than-normal (reducing use of power sector demand for natural gas to run air conditioners by at least 300 BCf)

Includes: 3rd mildest spring in past 110 years in spring of 2004

Followed by 2nd coolest summer in 30 years

Followed by an exceptionally mild fall

Followed by an exceptionally mild winter, with Heating Degree Days far below normal for 4 months in a row (i.e., November through February)

March was the first month in a year with slightly above normal weather-related demand - but April has again been exceptionally mild

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Extremely Mild Spring Last YearExtremely Mild Spring Last Year

3rd mildest spring in 110 years

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Like Flicking a Switch on First Day of SummerLike Flicking a Switch on First Day of Summer

Followed immediately by exceptionally mild summer Huge impact on power sector consumption of natural gas

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Switch BackSwitch Back

Then switched back in fall:

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Exceptionally Mild WinterExceptionally Mild Winter

Then capped off by exceptionally mild temperatures in core winter months from December through February – particularly in Midwest Greatest impact on consumption of natural gas

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Current StrategyFor Meeting U.S. Needs

Certain to Fail

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Role of LNGRole of LNG

Increased imports of LNG should and almost certainly will play at least some role in filling a portion of existing U.S. natural supply gap

Concerns regarding transportation safety appear to be exaggerated

BUT -- availability of new supplies in timely manner + price = far greater concerns

Increased imports of LNG may be appropriate when: Obtained from reliable suppliers Within time frame required to meet U.S. needs Pursuant to firm, long-term commitments made directly to end-users

of natural gas, Local Distribution Companies or generators With guaranteed, commercially binding start-dates for deliveries

enforceable through meaningful penalties At reasonable prices not indexed to the price of oil Pursuant to contracts that guarantee replacement supplies if

shipments from the expected source of supply are curtailed Even then, however, dependence upon LNG has a huge

potential cost in terms of job loss to U.S. economy and adverse balance of payments impact

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Threatens Long-Term U.S. ProsperityThreatens Long-Term U.S. Prosperity

Impact of energy costs on trade deficit = particularly serious long-term threat >30 % decline in value of U.S. dollar vs. EURO over past 2 years Decline expected to continue and potentially accelerate

Higher energy costs increase trade deficit through: Rapid increase in expenditures for imported fuels (i.e., oil + LNG) Decline in U.S. exports – particularly chemical industry &

agricultural products (two largest exporting industries)

Heavily-LNG dependent strategy virtually guarantees U.S. natural gas & electricity costs will be among highest in the world Greater distance from producers results in higher delivered costs

As a result, heavily LNG-dependent likely to: Increase inflation rate Significantly reduce growth rate of U.S. economy Cause significant job loss Seriously impair ability of U.S. companies to compete in world

markets

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Fuel Imports Drive Trade DeficitFuel Imports Drive Trade Deficit

Dollar outflow to pay for imported fuels has tripled over past 4 years:

Could double again over next 24 to 48 months

US Fuel Imports (billions of dollars)

U.S. Fuel Imports

$ 75

$ 225

$ 0

$ 50

$ 100

$ 150

$ 200

$ 250

2002 2005

(bill

ions

)

51

LNG Imports Expected to Increase SharplyLNG Imports Expected to Increase Sharply

Longer term, LNG imports could add significantly to U.S. trade deficit By 2020, in BTU equivalent terms, expected to exceed current oil imports from

Persian Gulf by 20 %

EIA estimates will account for up to 87 % of incremental U.S. natural gas supply

Potential Increase in Balance of Payments Deficit Due to Increased Imports of LNG

Impact of Liquefied Natural Gas Imports

$ 3.5

$ 18.0

$ 32.0

$ 40.0

$ 50.0

$ 0

$ 10

$ 20

$ 30

$ 40

$ 50

$ 60

2004 2010 2015 2020 2025

(bill

ion

per y

ear)

52

Need for Careful Evaluation of AlternativesNeed for Careful Evaluation of Alternatives

To date, no careful effort has been made at either Federal or State level to evaluate potential alternatives to a policy of massively increasing imports of LNG

In many respects surprising

Just 36 months ago, EIA did not expect increased imports of LNG to play an significant role in meeting future U.S. energy needs U.S. now expecting to rely upon increased imports of LNG for up to

87 % of its incremental supplies of natural gas (potentially 100 % excl. Alaska)

Must be obtained almost entirely from projects that have not yet even broken ground

Pricing terms uncertain – but likely to be closely linked with oil

By 2020, in BTU equivalent terms, imports of LNG expected to significantly exceed current oil imports from Middle East

Could seriously exacerbate already severe U.S. balance of payments deficit and further weaken value of U.S. dollar

53

Unanswered QuestionsUnanswered Questions

Unanswered questions include:

1. How many new projects actually will be built

2. When they will be completed

3. Likely price terms/extent to which pricing will be tied to oil

4. How U.S. can protect itself against potential for extended delays in completion of projects not under its control

5. Extent of risk U.S. will be outbid for the output of these projects from competitors in other Regions (e.g., China, India, Japan, Korea, many European countries)

6. Potential for shipping to be disrupted or for shipments to be diverted to other countries

7. Potential pricing power of suppliers (who have the ability to sell spot market cargoes to the highest bidder anywhere in the world)

8. Whether there is any way to mitigate the job loss or the severe potential adverse impact on the U.S. balance of payments deficit from relying on a new source of imported fuel rather than domestic sources of supply

54

Potential AlternativesPotential Alternatives

Potential alternatives include: More intensive efforts to facilitate development of domestic

supplies of natural gas

An urgent effort to rapidly deploy coal gasification on a major scale nationally, both to provide a source of fuel for existing gas-fired combined cycle units and existing industrial facilities and as a source of fuel for new facilities

Relief of major electric transmission bottlenecks that prevent full utilization of existing coal-fired plants

Replacement of older, steam-fired gas plants in load pockets with new, more efficient combined cycle units

Accelerated construction of new coal and nuclear plants

Further efforts to promote renewable energy

Accelerated energy conservation, especially in commercial office buildings and retail shopping malls (where the greatest waste currently occurs)

55

Issues Requiring EvaluationIssues Requiring Evaluation

To date, there has not been any rigorous analysis – or, indeed, any analysis at all – of the potential risks and benefits of these alternatives vs. a heavily-LNG dependent strategy in terms of: Reliability of U.S. energy supply Potential pricing power of major LNG suppliers/ability to

dramatically increase U.S. natural gas prices by shipping to other countries cargoes originally expected to be delivered to the U.S. market

Resulting potential for severe price shocks and heightened price volatility in the U.S. natural gas and electricity markets

Potential job loss or job creation in the U.S. economy depending upon whether U.S. energy supply is obtained using domestic resources or by increasing dependence upon imported fuels

The continued ability of U.S. industry and U.S. farmers (who depend upon the availability of competitively-priced fertilizer) to compete in world markets

The U.S. balance of payments deficit The future growth of the U.S. economy

56

Lack of Any Fall-back StrategyLack of Any Fall-back Strategy

Nor has any apparent effort been made to develop a possible U.S. “fall-back” strategy if: The global LNG market does not develop as rapidly as forecasts assume

or available reserves are used to develop liquid fuels instead of LNG;

Other countries outbid the U.S. for the limited new supplies expected to become available on the world market over the next 7 to 10 years; or

Supplies from one or more suppliers are interrupted at any point in time due to political unrest, labor strikes, terrorist incidents, wars or any of the other factors that frequently interrupt international shipments of oil

Instead, to date, one of the most important energy policy choices ever facing the U.S. has been made almost entirely by default, with little or no apparent thought given to the potential risks of a heavily LNG-dependent strategy

It’s as if we learned nothing from the gas-fired plant fiasco of the first ½ of this decade – which already has resulted in $ 100 billion or more in unanticipated costs – or dependence upon imported oil

57

Urgent Need to Deploy CoalGasification On a Major Scale

58

Rapid Deployment of Coal Gasification = KeyRapid Deployment of Coal Gasification = Key

Major goal: to minimize growth in use of natural gas to generate electricity in order to preserve available supplies of natural gas for other, higher priority uses

Rapid deployment of coal gasification = key to achieving this goal Low-hanging fruit

Technology already demonstrated Ample coal supplies available Issue = willingness to take decisive action in a timely manner

Requires adding at least: 35,000 to 50,000 MW’s of gasification capability by 2015 An additional 35,000 MW by 2020

Sufficient to displace: 33 to 45 % of expected increase in natural gas demand by 2015 40 to 50 % of expected increase in demand by 2020

Proposed Alaskan pipeline potentially can supply most of the remaining required increase by 2016 or 2017

59

Huge Potential BenefitsHuge Potential Benefits

Potential benefits compelling:

1. Huge reduction in natural gas & electricity costs, compared to increases that are otherwise nearly certain to occur

– Savings easily could reach $ 150 to 300 billion per year

2. Creates a large number of new U.S. jobs, to construct new gasification facilities and coal mines and provide required fuel on an ongoing basis

3. Greatly reduces risk of a long-term, energy-price-induced slow down in growth rate of U.S. economy

4. As a practical matter, only strategy to avoid massive further declines in U.S. manufacturing sector

5. Eliminates – or at least reduces greatly – massive increase in U.S. balance of payments deficit otherwise likely to occur due to:

– Loss of large number of U.S. manufacturing jobs

– Proposed massive increase in imports of Liquefied Natural Gas (LNG)

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Compelling Reasons to ActCompelling Reasons to Act

Health and prosperity of U.S economy for at least next 10 to 15 years directly at stake

Steep natural gas price increases of past several years demonstrates seriousness of problems

Realistic action plan at federal level must be developed and implemented on an “urgent, highest priority possible” basis Alternative = potentially catastrophic further energy price

increases and potential periodic shortages of electricity and natural gas

Proposed actions cost effective even at prices well below current levels

Only unresolved issue = willingness to act – especially in the time frame required to avoid severe potential set-backs for U.S. economy

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How to Contact Andy for QuestionsHow to Contact Andy for Questions

Mailing Address: Andy Weissman FTI Consulting, Inc.

1201 Eye St., N.W. Suite 400 Washington, D.C. 20005

E-mail: [email protected]

Office Phone: 202/589-2391

Cell: 202/744-1956

Fax: 202/312-9101

62FTI CONSULTING INC. SEPTEMBER 2005