America (And The World)

Faces Genuine

Energy/Electricity Challenges

America (And The World)

Faces Genuine

Energy/Electricity Challenges

Global WINDPOWER 2004

Chicago, Illinois

March 31, 2004

Presented By:

Matthew R. Simmons

Global WINDPOWER 2004

Chicago, Illinois

March 31, 2004

Presented By:

Matthew R. Simmons

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Renewable Energy Soon To

Be Urgently Needed

Renewable Energy Soon To

Be Urgently Needed

n

For years, renewable energy
was “clean energy luxury.”

n

Fossil fuels are now running
into limits to growth.

n

It is now critical that renewable energy users
understand their own limits to growth.

n

The future for wind must be bright.

n

The challenges might also be awesome.

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The Nub Of The Problem:

We Face An Energy Crisis

The Nub Of The Problem:

We Face An Energy Crisis

n

Future growth in electricity demand needs
to shift from total reliance on natural gas.

n

Shift to oil does not work.

n

Coal and nuclear capacity now
approximately 100%.

n

U.S. energy demand has to grow for U.S.
to prosper.

n

Problems to grow energy use: domestic oil
and natural gas supply are both in decline.

n

The U.S. (and world) need a real
substitution for both in order for demand to
grow.

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Energy Is The Heart And

Soul Of Our Economy

Energy Is The Heart And

Soul Of Our Economy

n

Petroleum creates our transportation.

n

Natural gas creates our “heat”.

n

Electricity is used in industrial, residential and
commercial.

n

For economy to prosper, electricity must grow.

n

All future growth was supposed to happen
through natural gas.

n

This assumption was wrong.

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America’s Electricity Is “Mother’s

Milk” To Our Prosperity

America’s Electricity Is “Mother’s

Milk” To Our Prosperity

n

A pearl in America’s prosperity has been our electric grid.

n

To grow U.S. GDP, electricity
must grow.

n

We became one of few country’s
to be totally electrified.

n

Blackouts were what Third World
countries suffered.

n

To avoid blackouts, electricity generation and transmission
need to exceed electricity demand.

n

While electricity was totally regulated, need to know
electricity was limited.

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America’s Electricity Model Was Flawed

America’s Electricity Model Was Flawed

n

People assumed demand growth was waning.

n

Electricity deregulation would make industry
“efficient”.

n

Electricity could be wheeled from “coast to coast”.

n

1,000 KW of capacity creates power for 1,000 homes.

n

It was safe to use one form of feedstock (natural gas)
to fuel all future growth.

All assumptions were wrong!

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Electricity Demand Is Still Growing

Electricity Demand Is Still Growing

n

Historical demand facts:

–

1973 - 2002: 2.7% per annum growth

–

1998 - 2002: 1.6% per annum growth

n

Slowdown was primarily mild weather driven.

–

Average monthly use (1998) = 291,000 MMKW

–

Peak use (Summer 2002) = 381,500 MMKW

n

Electricity growth parallels GDP growth in normal
weather.

n

If electricity growth stopped, so would GDP.

+31% or

7% per annum

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Electricity Deregulation Was Flawed

Electricity Deregulation Was Flawed

n

Wheeling electricity assumes
neighboring states do not share
same peak weather uses.

n

As wheeling grows in distance,
yield losses soar.

n

Deregulation used up
“reserve margins”.

n

Free markets never intentionally create cushion (called
reserve margins).

n

Electricity capacity is still tied to peak needs, not average
needs.

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“1,000 KW Creates Power For 1,000

Homes” Was Wrong

“1,000 KW Creates Power For 1,000

Homes” Was Wrong

n

If true, America would only need 300,000 MW
generating capacity.

–

110 million homes use 35% of U.S. power.

–

U.S. has 950,000 MW of total power capacity.

n

This standard was probably true 40 years ago.

n

Today, it understates generation needs by
two-thirds.

n

Or generation added only fuels one-third as
many homes as expected.

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In 1999, America Began A

Power-Adding Binge

In 1999, America Began A

Power-Adding Binge

n

1990’s: Long standing habit of expanding
power capacity ground to a halt.

n

Summer of 1999: 29 different blackouts /
brownouts.

n

America then went on a “Power Buying Spree”.

n

220,000 MW added by end of 2003.

n

98% was gas-fired power plants.

n

America bets its future onto natural gas.

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Some Think America Created

A Power Glut

Some Think America Created

A Power Glut

n

Many energy experts now assume
America created massive power glut.

n

August 2003 blackout happened on
only extremely muggy day.

n

Late February 2003 bitter weather sent
power prices to $400 to 1,000 KW/hour
across the U.S.

Simulated photo. Not true representation of the

August 2003 blackout.

n

If we have too much generating capacity, we forgot to
de-bottleneck transmission.

n

Spare capacity needs to be approximately 35% to 50%.

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America’s Bet On Natural Gas Was

Sound (If Supply Had Worked)

America’s Bet On Natural Gas Was

Sound (If Supply Had Worked)

n

Natural gas was a safe
economic bet.

–

Most efficient way to create
kilowatts.

–

Cheapest cost to build
generating capacity.

–

Cleanest form of fossil fuel.

–

Only form that turns on instantly.

n

The bet was essential.

–

All other forms operate at
effective 100% capacity.

–

Nuclear and coal take days to turn on.

Image courtesy of World Energy.

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Supply Constraints Made The Bet Bad

Supply Constraints Made The Bet Bad

n

NPC study (1999/2000) saw need for
supply to grow to 30 TCF.

n

NPC study (2003) shows how hard it will
be to keep supply even flat through 2009.

n

Conventional natural gas peaked in 1973.

n

Non-conventional gains created illusion that flat
supply in 1990s could grow if needed.

n

2000/2001 drilling boom shattered this dream.

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Natural Gas Prices Have Become

A “One-Way” Street

Natural Gas Prices Have Become

A “One-Way” Street

n

Commodity core assumptions:

–

High prices create surge in supply.

–

High prices also depress demand.

–

Low prices depress supply.

–

Low prices encourage greater demand.

n

This “thesis” underpins why commodities are
“commodating.”

n

High natural gas prices stimulate more “planting”
but not genuine supply growth.

n

If prices fall, supply also falls. (A one-say street)

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“Quo Vadis” Natural Gas Supply?

“Quo Vadis” Natural Gas Supply?

n

Conventional gas supplies are in steep decline.

–

New vintage gas wells decline by 40-50% in one year.

–

When production is > 10% of peak, final decline is
slow.

n

Oilfield technology revolution accelerated ability
to drain proved reserves.

n

Conventional gas supply peaked in 1973 at
63 bcf/day.

n

It is probably approximately 25 to 30 bcf/day
now.

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Creating Net Growth By

Non-Conventional Supply Is Tough

Creating Net Growth By

Non-Conventional Supply Is Tough

n

All non-conventional sources are
“non-conventional”.

n

Arctic gas has hurdles to overcome.

–

Proved North Slope gas is now injected.

–

McKenzie Delta gas “found” is not great.

–

Exploration in Arctic has been tough.

n

CBM/Tight Sands gas is small/wellhead.

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LNG’s Future Is Bright

(But Tough To Grow Fast)

LNG’s Future Is Bright

(But Tough To Grow Fast)

n

Global LNG markets are experiencing “Renaissance”.

n

U.S. was last to get aboard a fast moving train.

n

Why U.S. landed LNG has to grow.

2010 To

2015

(Bcf/day)

Implicit Demand

90

Probably U.S. Supply

40

Canadian/Arctic/Current LNG

10

Shortfall

40

ConocoPhillips Qatar Gas III: $5 billion for 1 bcf/day

of gas (in 2010). This is 2.5% of our need.

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Adequacy Of Global Natural Gas

Supply Is “Hazy”

Adequacy Of Global Natural Gas

Supply Is “Hazy”

n

All long-term global energy forecasts assume gas
demand will soar (and offset any surprises in oil supply).

n

Everyone assumes global gas supply is fabulous,
though stranded.

–

98% of “stranded” gas has never seen a drill bit.

–

Undrilled structures are not proved reserves.

n

65% of current global gas supply is in decline.

–

U.S./Canadian gas

–

Most of Russia’s gas

–

U.K. gas

–

Indonesian gas

–

Netherlands gas

If 2/3 of supply in decline, hard

for total growth to be high.

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How Did We Get Into This Energy Mess?

How Did We Get Into This Energy Mess?

n

Energy prices were “too low for too long”.

n

Low prices created illusion about energy security.

n

Low prices encouraged growth in demand.

n

Low prices inhibited growth of supply.

n

Supply growth might have ended
anyway.

n

Two decades of low energy prices took
a painful toll on energy sustainability,
let alone growth.

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What Will Future Energy Prices Be?

What Will Future Energy Prices Be?

n

For two decades, conventional energy wisdom
has assumed “prices are set to fall”.

n

Low prices inhibited any
supply growth and
stimulated energy demand.

n

There is no knowledge on
“replacement cost of a barrel of oil”.

n

Current prices are still too low.

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Global Energy Issues Are

Extremely Complex

Global Energy Issues Are

Extremely Complex

n

Worldwide oil demand at record high (exceeded
83 million b/d).

n

Natural gas and oil demand expected/needs to grow
by two-thirds over next 25 years.

n

World oil supplies are peaking.

n

Natural gas supplies could also peak.

n

This does not mean we have run out of either energy
source.

n

It does mean supply growth ends.

n

These are complex and serious issues.

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Investment

Bankers

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