Energy Security - Economics for Energy

Energy Security Presentation to Economics for
Energy
Madrid
January 19, 2015
Amy Myers Jaffe
Executive Director
Energy and Sustainability
OPEC in Disarray : Repeating Boom and Bust Cycles
Characterize Oil.
Source: Medlock, K.B., Amy Jaffe, “The price of crude oil: deja vu all over
again?” (2013), EIA
• 
High oil prices usher in demand destruction through conservation, efficiency gains, and
substitution
• 
High oil prices stimulate drilling innovations, which over time can lead to supply bubbles.
Research Finding: Wavelet analysis reveals key variables that
create prolonged oil price discontinuities and interrupt cycle:
1. War
2. Drilling Technology breakthrough
3. Demand destruction
4. Saudi price war
3 Insurgencies Target Oil Facilities
World Demand and Supply
Other Supply Responses
Secular Business Cycle and Demand
Supply Responses to High & Low Prices
0
500
1000
1500
2000
2500
Technology-Driven Supply Response to Rising Prices: UK
1970
1980
Mahmoud A. El-Gamal – Medium Term Price Talk – June 12, 2013
1990
2000
2010
university-logo
Oil Demand, Supply, and Medium Term Price Prospects — 13/30
War’s impact can be extended as countries struggle to repair
facilities damaged during prolonged conflicts.
6 US Stimulus Hits the Energy Jackpot
Twice at Once
The United States has the opportunity to become a net oil
exporting country. Future US climate, vehicle and energy policy
and the industrial internet will accelerate this trend.
U.S. liquid fuel supply million barrels per day History Projec8ons 2012 25
2005 2040 2016 High Resource 20
15
10
Consump8on 25% 40% Net imports 32% 60% Domes8c supply 5
0
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040
Source: EIA, Annual Energy Outlook 2014 Reference case and High Resource 8 Russia Cannot Currently Shift Europe’s Natural Gas
Supply to China
• 
About 50% of Russia’s natural gas exports still transit Ukraine (142 bcm/yr capacity)
• 
Nordstream design is 55 bcm/yr but currently constrained to 35 bcm/yr by ontake limits
• 
TANAP (Azerbaijan) only adds 10 bcm/yr
• 
Europe currently has a large surplus in storage, but…
• 
If Europe’s weather were normal and supply remains robust, Europe will have too much gas; If Europe’s
winter is mild and only half of Russian supply to Europe is disrupted (via Ukraine), inventories will be
sufficient; If Europe’s winter were cold and there is a Russian supply cutoff, a serious energy shortage
would ensue in Europe.
• 
Residential/commercial sector is 40% of total European natural gas use market.
• 
Long term prospects for Arctic and other upstream deals may sour over time
Source: Baker Institute RWGTM February 2014
2039 2037 Asia (JKM) 2035 2033 2031 2029 NBP 2027 2025 Henry Hub 2023 2021 2019 2017 2015 2013 2011 Liberalization
Scenarios:
Produces Lower
Global Prices and
Encourages US
LNG Exports
$/
$16,00 mcf $15,00 $14,00 $13,00 $12,00 $11,00 $10,00 $9,00 $8,00 $7,00 $6,00 $5,00 $4,00 $3,00 $2,00 $1,00 $-­‐ 10 Europe Would Become Less Reliant on Russian
Exports Over Time, But Hard to Do Quickly
•  Under a liberalization scenario, Russian export volumes are negatively
impacted, with European market share falling. Under Russia/EU “cutoff”
scenarios, additional LNG receiving capacity added in Germany, Italy. More
North Sea supplies come on line.
Source: Baker Institute RWGTM February 2014
11 Shale gas production will eventually proliferate
globally, bringing down international LNG prices.
•  North America accounts for the majority of shale gas. Qatar will have to discount
prices to keep market share in geopolitically important countries, especially if
Chinese shale can be developed.
Source: Baker Institute RWGTM February 2014
12 Breakevens for US shale oil and gas are lower than many
other regions. developments
Unconven=onals are not at the top of the scale for breakeven costs. Arc=c and Mega-­‐LNG projects could be most under pressure as global gas prices ease. Field Breakeven OPEX Marcellus (gas) $2.50 BarneP (gas) $3.80 $1.30 $1.60 GLNG
Carmon Creek Joslyn
Arrow LNG
Terre de Grace Kashagan Ph 1
Abadi FLNG
LNG cost
Dover
Fort Hills
MacKay River QCLNG
pressures
BG Haynesville Surmont Ph 2
West Canada LNG Block 61 Oman
RDS Unc Gas
STL Marcellus
Sunrise Ph 1 Filanovsky
Aparo-Nsiko Usan
Kearl
OPL245 Domino
Bolia-Chota Tengiz
Exp
STL Eagle Ford Browse
LNG
Low-cost conventional
Gorgon LNG
Jack-St MaloBl. 31 SE
Prelude
LNG
PSVM
China
Domestic
Oil
Junin
5
giants (Brazil & Norway)
OXY Bakken
Yamal LNGAPLNG
Ichthys LNG
Wheatstone LNG
remain robust.
Colombia Oil
Tanzania LNG
Block 32
China Domestic Oil
Laggan/Tormore
Zaedyus
West Qurna 2 CLOV
Ghana Gas STL Bakken
Kaskida
North Alexandria Hub
Tiber
Bl. 15/06 East Vankor
Clair Ph 2 Absheron
Mozambique LNG
Yamal Gas
Uganda Bl.1,2,3
ADMA
PNG LNG T1-2
Sandridge JV
Hadrian
Trebs Titov
Pricing-discounts
Sapinhoa Lula Iara Jupiter
Itaipu Carioca
Skrugard Big Foot
Majnoon
pushing
Franco
GoM Tiebacks
Whales Park
Perla NE Tupi
unconventionals higher
Gbaran Ubie Ph2 Ngamia
Cepu Exp
PNG LNG T3 Tempa
up the curve
Rossa
West Qurna 1
Zubair
(2Q
writedowns)
Campos Exp
Bina Bawi China Domestic Gas
Disappointing pace in Iraq
Jubilee Area
Rumaila
Johan Sverdrup
sees industry accept
80
Eagle Ford $37 (oil) $7-­‐$8 Permian (oil) $49 $10-­‐$12 Bakken (oil) $37 Breakeven, $/bbl
70
$1.30 13 Heavy oil
expectations
being scaled
back
90
Haynesville $3.60 (gas) Mississippi
an 100
60
50
40
30
20
$7-­‐$8 political risk of Kurdistan
10
0
$43 $7-­‐$8 0
5
10
15
20
2020e Production, Mboe/d
Source: Ci8 Research 25
30
35
40
Costs and Oil Prices Move Together
•  Chicken egg effect: As prices rise, more drillers expand activity, increasing
demand for equipment and rigs and raising costs. Equal and opposite effect
seen when prices fall.
•  It is not correct that cost increases will be permanently rising based on
complexity. Cost management-technology improvement, accelerated
development cycle times, and improved well productivity can all reduce
costs. (source for graphic: Kenneth Medlock, The Oil Price Cycle Presentation, Baker Institute)
•  Chick
Generational shift in Attitudes Towards
Automobiles and Climate Change
Younger Americans More Urban, Less Interested in Car Culture
15 US will follow different models towards low
carbon energy. Local policy is driver. §  Smart homes and net zero energy communities fit US interest in
resilience and response to extreme weather events
§  Debate beginning on new utility models, distributed energy and net
metering. Resistance to “death spiral” of falling electricity demand,
maintenance cost of transmission.
§  Sharing economy and millennial purchasing patterns changing the way
transportation “services” (eg ride sharing), urban planning, and
consumer facing household technologies will develop.
§  Expect more disruptive technologies to come out of the US
The US Strategy for COP21 §  US negotiator Todd Stern expresses support for New Zealand proposal in October
2014, country by country “legally binding” pledges with mandatory accounting,
but not an int’l binding treaty, removing distinction between developed and
developing world considered desirable.
§  US-China meetings in early November focus on possible areas of agreement on
climate change. US expecting to lead, not follow in global dialogue.
§  Little appetite in US Congress, Obama administration focused on policies that can
be implemented by executive order.
§  US-China energy and climate dialogue focusing on clean tech collaboration and
investment strategies
§  China-California collaboration on air pollution, EV strategy