Facing the New Challenges in the Global Energy Market: Geopolitical and Financial Risks

Facing the New Challenges in the Global Energy Market: Geopolitical and Financial Risks

Amy Myers JaffeJames A. Baker III Institute

for Public Policy,Rice University

LIFTOFFLaunching Our Future

Today40th Annual ECC

Conference

February 14, 2008

Key Finding

Many of the risks that originally created the so-called “terror premium” have eased in the past year and this is now reflected in downward oil price trends. Other factors, related to the dollar and financial market trends, created a bubble effect that clouded fundamentals.

In the end, fundamentals do reassert themselves. Oil is a cyclical industry and it is hard to defy that reality.

Geopolitical Risk from Middle East

Tensions and Conflict in the

Middle East at a lull.

Israel in negotiations with Syria.

Violence in Iraq on a downswing, reducing chances of a spread to regional conflict.

Iranian politics in a transition.

Geopolitical Risk from Iran

Iranian spring election results an indication that economic sanctions are working.

Iran’s political conservatives’ concrete interests in promoting greater foreign investment and attaining a larger measure of autonomy for the private sector, put together with their current political rapprochement with domestic reformist groups could translate into a more flexible position on the nuclear issue. There is a greater possibility of diplomatic negotiations with the West than in the past.

Geopolitical Risk from Al-Qaeda

Starting in 2004, the attitude towards oil shifted and Al-Qaeda writings refocused on how supplying oil to the enemies of Islam justified the destruction of oil facilities by any means necessary. But Al-Qaeda assessed as having been weakened.

1) Attacks are aimed to destroy the economic basis of the kingdom rather than allow anyone collaborating with the United States to benefit from the oil

2) Prominent ideologue and strategist for global radical Islam Abu Musa`b al-Suri set a strategic direction of autonomous cells carrying out terrorist operations and focused specifically on the oil industry –a strategy which appears to have been adopted both by Al-Qaeda and a number of ideological affiliates

However, local and autonomous aspect of terror cells, in the aftermath of the U.S. military campaign in Afghanistan which disrupted some of Al-Qaeda’s global coordination capability, has reduced the chances of a successful strike against major oil facilities that requires expert coordination, planning and material support.

Scenario: Russian six month cutoff of natural gas supply to Europe—Extreme price impacts but market adjustments possible

starting after a year

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018$-1.00

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Scenario: Russian six month cutoff of natural gas supply to Europe—Supply Impacts. LNG impacts mean supply adjustments

divided among many players, not just EU

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Contagion, Petrodollar Recycling and Financial Crises

*Current potential for market contagion means sagging US

economy or banking crisis could become global *High oil prices worsen U.S. trade deficit and create asset bubbles*Debt accumulation started commodity and asset bubbles*Hot money from Middle East flowing around the world ala the

1970s*Escalating U.S. debt (combined with rising developing world debt)

could threatening global financial system if U.S. creditors (Asia and GCC) become fearful and begin to switch away from the dollar

*End of the dollar-standard era? Will it be orderly transition or chaotic crisis?

*Is it the 1970s all over again??? Did the Fed really learn from its mistakes about interest rates, stagflation and monetary policy?

The effect of the weakening $• It is no coincidence that the price of oil hits all time highs as the dollar

sinks to new lows. Since May 2003, when oil price was $28.18, the depreciating $ accounts for roughly $50 of the $100 increase.

• In fact, a stronger dollar yields a very different picture of oil price. – Construction: Use the $-Euro exchange rate to calculate the Euro price of oil.

Then, convert this price back to $ using the $-Euro exchange rate from the year 2000. This is a “ceteris paribus” argument, so a different exchange rate may very well lead to a different supply-demand balance.

• Supply-demand fundamentals would have, nevertheless, pushed oil prices over $78, which would have been new territory.

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Daily Oil Price (WTI)

$ Price (actual) Euro Price (actual) $ Price (fixed 2000 XR)

Source: Medlock (2008)

The number of deepwater drilling rigs is about to increase exponentially

Average Deepwater Rig Day-Rates

________________Source: ODS-Petrodata and Lehman Brothers Estimates

Deepwater Rigs under construction – Now let’s see if we get a supply response!

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Refinery capacity expansion to outpace product demand

• Refinery capacity additions could outpace demand growth in 2010 by 2:1

Refinery investment had not kept up with rapid demand growth in recent years, but we are approaching a turning point, especially East of Suez

Global CDU CapacityAdditions (k b/d)

Global UpgradingCapacity Additions (k b/d)(1)

________________Source: Lehman Brothers Estimates.1. Includes coking, catalytic cracking, and hydrocracking units and expansions.

3,120

2,255

1,809

2,392

1,551

1,833

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1,667

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1,507 1,566

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Latest Demand Trends May 2008Source: Energy Intelligence

('000 b/d) Chg. vs. Chg. vs.

Main Markets May '08 May '07 Q1'08 Q1'07

United States 20,443 -1.4% 19,935 -4.6%

Japan 4,477 +1.6% 5,448 +1.1%

Europe Big 4 7,537 -1.9% 7,785 -0.8%

OECD G-7 35,110 -1.2% 35,965 -2.4%

Other OECD 12,317 -1.1% 12,839 +0.0%

Total OECD-30 47,427 -1.1% 48,804 -1.8%

Ex-USSR 4,222 +0.9% 3,701 +0.3%

China 8,089 +5.4% 7,824 +6.7%

Other Non-OECD 25,883 +2.0% 25,506 +2.3%

Total Non-OECD 38,194 +2.6% 37,032 +3.0%

Total World 85,621 +0.5% 85,836 +0.2%

Latest Demand Trends July 2008

Source: Energy Intelligence

('000 b/d) Chg. vs. Chg. vs.

Main Markets July '08 July '07 Q2'08 Q2'07

United States 20,052 -3.4% 19,897 -4.3%

Japan 4,534 -1.3% 4,792 -11.8%

Europe Big 4 7,669 -3.2% 7,645 -2.8%

OECD G-7 34,957 -3.1% 34,977 -5.1%

Other OECD 12,572 +0.9% 12,671 +1.7%

Total OECD-30 47,529 -2.6% 47,648 -4.4%

Ex-USSR 3,996 +0.0% 4,141 +12.2%

China 8,043 +4.9% 8,317 +13.4%

Other Non-OECD 26,196 +4.2% 26,186 +4.3%

Total Non-OECD 38,235 +4.1% 38,644 +7.6%

Total World 85,764 +0.3% 86,292 +0.6%

Will Dependence on NOCs Collide with Pent Up Demand in Developing World?

Geopolitics is driving our energy future.

There are many reasons to remain concerned about a major supply disruption that could

affect mobility.

The restructuring of the oil industry means that we are going to be more dependent on

national oil companies to produce future energy supply.

Longer term, given this restructuring, the future oil supply may fail to materialize in

the volumes we expect and need.

There exists a vast pent up demand for automobiles and electricity in the

developing world that will be hard to meet long term without a breakthrough change in

the status quo.

Control of World Oil Reserves

Control of Oil Reserves, 2005

NOCs77%

NOCs-IOCs jointly

7%

IOCs10%

Russian OCs6%

Majority of remaining oil resources are controlled

by traditional state monopolies and emerging partially privatized firms.

World Proved Crude Oil Reserves, 1980-2006

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1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

Bil

lion

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rels

OECD RoW

Iran, Iraq, Venezuela,

UAE

Alberta oil sands

Saudi Arabia

NOCs have important national goals and priorities that go beyond the maximization of return on capital to shareholders.

NOC national priorities sometimes interfere with these firms’ abilities to maximize the value of oil resources; replace reserves; expand production in line with market opportunity; and meet performance goals in line with best practices in international industry.

Goal Examples

• Fuel at subsidised prices• Oil wealth redistribution to society at large

• Foreign and strategic policy and alliance building

• Wealth creation for the nation

• Energy security, including assurance of domestic fuel supply and security of demand for producing nations

• Industrialization and economic development

• Participation in national level politics

• Contribution to national GDP• Fund for future generations

• Local content programs

• Ensure no domestic fuel shortages

• Leadership with greater political aspirations and involvement of unions and employees in national politics

• Oil Diplomacy and advisory role to national leaders

NOC Efficiency

Technical Efficiency• On average, NOCs that are fully government-owned and sell petroleum products at subsidized

prices, will be only 35 percent as technically efficient as a comparable firm which is privately held and has no obligation to sell refined products at discounted prices.

• Most of the NOCs in OPEC countries offer subsidized fuel prices. While individual firms may vary in efficiency, on average government held firms in general exhibit only 60 to 65 percent of the efficiency of the privately-held international oil majors

Revenue Efficiency• Our analysis shows that there is a large difference in the revenue efficiency growth which could

be achieved through process improvement and better integration:– IOCs: In the range of 10-20% growth– NOCs: In the range of 30-90% growth

OverallMany NOCs are 80 percent or more below the frontier of the most efficient firms in the industry50 percent of that gap in efficiency is accounted for by:• Their lack of vertical integration• The inefficiencies created by having to provide facilities to meet domestic product demand that is

growing inefficiently largely due to subsidized prices• 100 percent government ownership• Some government interference in the businesses

Revenue Efficiency

Percent Revenue

Generated Relative to

“Best Practice”

Revenue efficiency is measured as the percent of revenue a company achieves relative to “best practice” for a given level of reserves and employees.

Geopolitical and Economic Implications

• NOC’s national priorities sometimes interfere with the firm’s ability to:– Maximize the value of oil resources,– Replace reserves– Expand production, and– Perform in a technically efficient manner.

NOC Geopolitical Responses to Tightening Markets

NOCs feel empowered by oil supply shortages and this will tempt them to flex their geopolitical muscle…

• Russia increasingly assertive to defend its sphere of influence, using energy levers

• Iran flexing spoiler power in the Persian Gulf• China becoming heavily embedded in producing

countries; less trusting of market based system• Producers try to get more than economic gain; advance

geopolitical and regional goals; Example: Venezuela trying to leverage geopolitical power from oil (the special problem of the Citgo assets)

• Consumer nations seek geographic diversification of oil and gas supplies as well as alternative energy to respond to saber rattling by oil producers; Regardless of your view on Russian motivation, Ukraine affair was landscape changing event in Europe

• Resource Wars Fear Literature: Could scarcity lead to greater conflict? Within oil producing countries? Between energy scarce countries?

Geopolitical and Economic Implications

• NOCs are expected to control a greater portion of future oil production over the next two decades but they will have difficulty fulfilling this role

• Many NOCs have stagnant (or falling) oil production due to civil unrest, government interference, corruption, inefficiency, and diversion of capital to social spending

• Combined with the lack of spending of the largest IOCs, supply might fail to materialize in the volumes and time frame that it is needed, despite “price signals” for investment

• Uncertainty about climate policy is another influence dampening the investment response

OPEC Investment Barely Keeps Pace with Losses from Iraq, Venezuela and Indonesia

1998 2001 2003 2005

Saudi Arabia 9.8 9.9 10.15 10.3

Iran 3.7 3.8 3.8 4

Iraq 2.8 3.05 2.2 1.8

Kuwait 2.4 2.4 2.5 2.6

UAE 2.4 2.45 2.5 2.4

Qatar 0.72 0.75 0.75 0.82

Venezuela 3.3 3.1 2.5 2.5

Nigeria 2.05 2.3 2.3 2.3

Indonesia 1.35 1.3 1.15 0.9

Libya 1.45 1.45 1.45 1.6

Algeria 0.88 0.88 1.15 1.35

Total 30.85 31.38 30.45 30.57

Call on OPEC 25.85 28.23 29.2 29.87

Spare Capacity 5 3.15 1.25 0.7

The Largest Five IOCs represent 20 percent of non-OPEC Production with 9.7 million b/d and had $150 billion in operating cash flow in 2006

(compared to $50 billion for the next largest twenty American firms).

Source: Baker Institute Working Paper: The International Oil Companies

Non- OPEC Production 2006

ENI2%Total3%

Pemex7%

Petrobras4% Total

Chinese8%

Big 520%

Next 20 US4%

Other27%

Total FSU25%

The Largest Five IOCs spent 56 percent of operating cash flow in 2006 on stock buybacks and dividends.


Figure 3: Selected Outlays (Big 5)

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1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Milli

ons

of D

olla

rs

Purchases of Equity Dividends Exploration Development Property Acquisitions

The Big Five Oil Companies (in Nominal US Dollars)

Year 1994 2006 2007

Operating Cash Flow 42 billion 154 billion 160 billion

Share Buy Backs 1.4 billion 55 billion 55 billion

Dividends 14 billion 31 billion 33 billion

Exploration Spending 6.5 billion 9 billion 9.9 billion

Development Spending 16 billion 50 billion 54 billion

Property Acquisitions 1.9 billion 4.7 billion 3 billion

Source: “The International Oil Companies,” The Changing Role of National Oil Companies in International Energy Markets, James A. Baker III Institute for Public Policy, Rice University (based on SEC filings)

The Next Twenty American Firms are spending the same amount on exploration as the Largest Five IOCs.


Figure 6: Exploration Expenditues

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The Largest Five IOCs are struggling to replace reserves.


Reserve Replacement Ratio

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The market is not rewarding the majors for this strategy. Moreover, the NOCs do not need the majors for capital financing. NOCs can go

directly to the markets and investors are rewarding the more commercial NOCS.


Share Price PerformanceIndexed, October 2002 equals 100

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Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07

NOC's + 531%

Majors's + 113%

CNOOCEniGazpromIndian OilMOLNorsk Hydro

OMVONGCPetrobrasPetroChinaSinopecStatoil

NOC's used for Index:

Transportation Energy Use, Vehicle Stocks, and Economic Development

• Countries such as China are at the “launching” point. So, we should expect vehicle stocks and transportation fuel use to grow very rapidly in those countries as they continue to develop.

"Average" Country Simulation of Patterns

China

US

GDP per Capita

Fuel Use per Capita

Vehicles per Capita

Source: Medlock and Soligo (2003)

Note: Series are plotted on different scales in order to depict them in the same chart

IEA Reference Scenario:Increase in World Primary Energy Demand, 2005-2030

China & India will contribute about 45% of the increase in global energy demand to 2030 on current trends

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100%

Coal Oil Gas Nuclear Hydro Rest ofrenewables

Total

Rest of the worldIndiaChina

Cap-and-Trade

Higher CAFE

Renewable

Energy Standard

Drill Offshore? Tax on Big Oil Tax Credits

•Yes: reduce emissions 80% from 1990 levels by 2050

•100% permit auction

•Supports Low Carbon Fuel Standard

•Increase fuel economy beyond 35mpg•52 mpg by 2025

25% by 2025

•Supports limited offshore drilling (1Aug2008)

•Prioritize the Construction of the Alaska Natural Gas Pipeline

•Proposes giving working families $1,000 energy rebate; paid from oil companies’ profits

•Proposes selling 70million barrels of oil from reserves to lower current gas prices (4Aug2008)

•(Proposes eliminating need for oil from Middle East & Venezuela in 10 years)

•Proposes $7,000 tax credit on the purchase of fuel-efficient cars

•Proposes that new vehicles sold in US are flex-fuel by the end of his first term: $4 billion in loans/ tax credits to U.S. auto plants

•Supports extending tax credit for renewable energy production

•Yes: reduce emissions 66% from 1990 levels by 2050

•Mix of free permit allocation and auction

•(Introduced a climate change bill with Sen. Lieberman in 2003)

•Supports increases in principle

•supports enforcing existing standards

No national standard but support state targets

•Supports, but states should decide (17Jun2008)

•No drilling in ANWR.

•Opposes windfall profits on oil companies

•Suspend 18.4-cent-a-gallon federal tax during summer

•Strongly opposes the use of the government oil reserves

•$5,000 tax credit for purchase of zero carbon emission cars

•Opposes extending corn ethanol tax credit: opposes tariff on imports of ethanol produced from sugarcane

•Proposes tax credit to companies investing in R&D for clean, alternative energy (equal to 10% of wages spent on R&D)

McCain versus Obama on energy policy

Three Interacting Forces:Energy Security/Climate Change Legislation, Energy

Consumption, and Technological Innovation

• As climate change and security of supply grow into critical geopolitical issues, governments and consumers are searching for solutions

• This is leading a movement to increasingly strict regulation and public sensitivity to security and environmental issues

• Fuel and technology types will have to change to meet consumer and legislative expectations

– Hybrid vehicles

– Clean coal

– Nuclear

– Solar, Wind

– Ethanol

Future fuel mix will be driven by three interacting forces

Legislation

ConsumersTechnical &BusinessInnovation

Future Fuel Mix

Figure source: Accenture

New Political Lexicon

“We must treat energy security and climate security as two sides of the same coin”

--Tony Blair, October 20, 2006

This is a mistaken notion. There is a conflict between the two that will need to be resolved through smart science and good policy.

Instruments and targets

Climate change

Energy security

Increased energy efficiency

Increased non-fossil energy

Damage mitigation and remediation

CO sequestration

2

CO emission constraints

2

Directly restrict use of coal and unconventional oil

Range of effect uncertain

• Some policies can further both goals:

– Increasing energy efficiency– Increasing non-fossil fuel sources

• Some policies have conflicting effects:– Directly limiting the use of coal and

unconventional oil– CO2 emissions constraints, which can

artificially increase demand for natural gas

• Climate change policies with no effect on energy security:

– Increased sequestration– Climate damage adaptation and

remediation

IEA Base Case Reference Scenario: Increase in World Oil Supply, 2004-2030

Under a business as usual scenario, world will increasingly rely on Persian Gulf and unconventional oil, including about 3.5 to 4 million b/d of Canadian tar sands production, 1.5 to 2 mb/d of

upgraded heavy oil, 2.4 mb/d of gas to liquids and 1.7 mb/d of coal to liquids, oil shale, etc

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Iraq

Iran

Other

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CO2–intensity of fossil fuels

BBBBBB BB

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HHH

HHHH

HHHHHH

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B Petroleum

J Natural gas

H Coal

Source: EIA

US electricity generationGeneration by source 2006 Generating capacity 2005

Average annual net capacity growth 2005-2030 in the EIA Annual Energy Outlook, 2008 reference case

Coal (49%)

Petroleum (2%)

Natural Gas (20%)

Nuclear (19%)

Hydroelectric (net) (7%)

Other Renewables (2%)Other (1%)

Coal (33%)

Oil & Natural Gas Steam (13%)Combined Cycle (18%)

Turbine or Diesel (14%)

Nuclear (11%)

Pumped Storage (2%)

Renewables (10%)

-1.5%

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2.0%Coal

Oil & Natural Gas Steam

Combined Cycle

Turbine or Diesel

Nuclear

Pumped Storage

Renewables

Concern about future CO2 regulation already is delaying new coal plants

Source: Wood Mackenzie

• Amount of coal capacity cancelled in 2007 is nearly the amount cancelled between 2004 and 2007

• Some cancellations are also the result of rising construction costs

– But these also tend to favor less capital-intensive CCGT and also disadvantage nuclear in addition to coal

• Despite the cancellations, some coal projects are still proposed

– 2,800 of the 6,700 MW still proposed at the beginning of 2008 was IGCC

Restricting CO2 emissions

• Natural gas, as the least CO2-intensive fossil fuel, will be favored

• Increase the price of energy other than natural gas by 50% in OECD western Europe, North America and Asia, leave it unchanged elsewhere in the world

– The increase in energy price will reduce the energy-intensity of GDP, but absent an increase in natural gas prices will raise the demand for natural gas

– The endogenously calculated price of natural gas thus also will rise• In the US, the demand for natural gas to generate electricity is modeled

conditional on the available capacities of the different types of plants– The estimated cross-price elasticity of substitution between fuels is lower in

the US• In the restricted emissions case, we assumed that all the planned coal-fired

capacity additions in the US were required to be natural gas instead– As in the reference case, we still allow substantial development of IGCC

with sequestration, along with nuclear and renewables capacity

Access restrictions in the US

• Relaxing restrictions on drilling in the US might satisfy some increased demand resulting from CO2 emission restrictions

• Specifically, some Federal lands and offshore areas known to contain significant natural gas reserves are effectively off-limits

– Some restrictions are via legislation, executive order, regulation or administrative decisions

– Other resources have been rendered uneconomic by Federal and State regulatory requirements that increase costs and create delays

• Major resources affected include interior Western States, some US offshore areas and the Alaska National Wildlife Refuge and some other areas in Alaska

• Ultimately, the amount restricted will depend on gas prices and other costs

QuickTime™ and aTIFF (LZW) decompressor

are needed to see this picture.

Outline of restricted areas

Sources: NPC Supply Task Group Report, MMS

Planning Region/Basin Resource Off-limits (Tcf)

Rocky Mountains

Montana 9.4Wyoming Thrust Belt 0.8Green River 39.5Powder River 6.0Uinta-Piceance 8.4San Juan 5.3

OCS

Eastern Gulf of Mexico 22.1North Atlantic 18.0Middle Atlantic 15.1South Atlantic 3.9Washington/Oregon 2.3North/Central California 6.0

Southern California 10.0

Total Lower 48 146.8

AlaskaANWR 8.6North Aleutian Basin 8.6

Total 164.0

Reduced emissions: Changes in demand

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

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USA

Canada, Mexico

EU15

Other Europe

Japan, Korea

Other Asia/Pacific

Russia

Other FSU

Middle East

Africa

India

China

ASEAN

South/Central America

Increased access & reduced emissions: Changes in demand

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

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Tcf

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USA

Canada, Mexico

EU15

Other Europe

Japan, Korea

Other Asia/Pacific

Russia

Other FSU

Middle East

Africa

India

China

ASEAN

South/Central America

Reduced emissions: Changes in supply

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

-1

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Tcf

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North America

Europe

Australia, NZ, PNG

Qatar

Iran

Iraq

Saudi Arabia

UAE

Other Middle East

Russia

Other FSU

North Africa

Other Africa

ASEAN

China

Other Asia

Central/South America

Reduced emissions: Changes in imports

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

Tcf

per

year

EU15

North America

Japan, Korea

China

Other Asia/Pacific

Other FSU

Increased access & reduced emissions: Changes in imports

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

Tcf

per

year

EU15

North America

Japan, Korea

China

Other Asia/Pacific

Other FSU

Reduced emissions: Changes in exports

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Tcf

per

year

Russia

Saudi Arabia

Iran

Iraq

UAE

Other Middle East

North Africa

Other Africa

ASEAN

Australia, NZ, PNG

Other Europe


Increased access & reduced emissions: Changes in exports

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

Tcf

per

year

Russia

Saudi Arabia

Iran

Iraq

UAE

Other Middle East

North Africa

Other Africa

ASEAN

Australia, NZ, PNG

Other Europe


Reduced emissions: Changes in LNG imports

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

Tcf

per

year

USA

Canada

Mexico

Spain, Portugal

Italy

Netherlands

UK

France

Rest of Europe

Japan

South Korea

China

India

Rest of World

Increased access & reduced emissions: Change in LNG imports

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

-1.5

-1

-0.5

0

0.5

1

1.5

2

Tcf

per

year

USA

Canada

Mexico

Spain, Portugal

Italy

Netherlands

UK

France

Rest of Europe

Japan

South Korea

China

India

Rest of World

Reduced emissions: Changes in LNG exports

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

Tcf

per

year

Iran

UAE

Saudi Arabia

Qatar

Other Middle East

North Africa

Nigeria

Other Africa

Russia

Australia

Indonesia

Other SE Asia

South America

Rest of World

Increased access & reduced emissions: Change in LNG exports

2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039

-1

-0.5

0

0.5

1

1.5

2

Tcf

per

year

Iran

UAE

Saudi Arabia

Qatar

Other Middle East

North Africa

Nigeria

Other Africa

Russia

Australia

Indonesia

Other SE Asia

South America

Rest of World

Concluding remarks

• Restricting CO2 emissions will shift primary energy use toward natural gas

• Developed OECD will become more dependent upon Russia and the Middle East (Iran)

• Access to prospective areas currently off-limits in the US can lessen the increased dependence on the Middle East and Russia and offset some of the increased demand from carbon restrictions

• Increased US domestic supply does displace some Middle East exports– Increased US domestic supply also changes the elasticity of

response of the market to disruptions and shocks– The big winners of Western carbon controls will be Iran and

Russia if US OCS remains blocked to drilling– However, the effects of opening OCS are unlikely to be large

enough to fully offset the effects of tightened emission controls

Documents

Facing the New Challenges in the Global Energy Market: Geopolitical and Financial Risks