In my recently published book, Lights Out: Ten Myths About and Real Solutions To Our Energy Crisis, I outlined a strategy for America’s power sector that could help us address our energy security and environmental challenges. I believe that with a focused effort and an aggressive federal commitment to devising constructive energy policy, we could dramatically revamp the composition of our power markets between now and 2030.

I call my plan the 30-30-30 by 2030 strategy. It calls for us to produce 30 percent of our power from nuclear and 30 percent from natural gas and clean coal by the target date. It also calls for us to generate another 30 percent from a combination of renewable energy and reductions in demand as a result of energy efficiency improvements during this timeframe.

To get there I recommend we take such actions as:

1)    Extending Investment Tax and Production Tax credits in gradually phased-out forms for renewable energy for 10 years. This action will eliminate the incredible uncertainties that currently impede investment in renewables (because these credits need to be regularly extended and Congress has not acted in a timely fashion) and as a result have undermined the maturation of these industries. I suggest that much of the cost of such credits be offset with reductions in other energy subsidies and supports.

2)    Investing federal dollars—alongside private-sector investments—to build new nuclear plants, with the United States owning a stake in new nuclear facilities equivalent to the size of its investment. The problem with nuclear energy is the reluctance of private capital to take the enormous political risks associated with financing new plants. However, if the United States were a substantial or equal partner, private dollars would flow and the plants would be built. Once operational, there is little doubt that the government’s interest in these plants will be attractive and the taxpayers will realize their initial investment—and a profit—when the government’s share is sold.

3)    Encouraging state governments and utility commissions to support and encourage utilities to invest in the installation of a modern, intelligent electricity grid. Smart grid technology can dramatically improve energy efficiency, but the states have to provide roadmaps and support to their utilities to bring about a transition to new systems.

4)    Expediting the process for permitting offshore wind energy farms. Offshore wind can play a big part in our future energy mix, but we have to follow the lead of countries like the UK and get it built. Unfortunately, current regulatory barriers have established a timetable for the permitting of offshore wind facilities that is far too long to allow the companies in this new industry to secure financing. A sensible but shorter approach consistent with environmental safety is essential.

5)    Providing the support necessary to allow for the production of the vast quantities of shale gas that the United States possesses. Recent news stories have raised a cloud of suspicion about shale gas and the fracking technologies that help us produce it. It is not hard to imagine this entire industry forced to stand down while politicians jockey for position on the legitimacy and safety of these new technologies. That cannot be allowed to happen. Without shale reserves, the United States will find itself unable to meet the growing demand for natural gas, which will diminish the potential role gas can play in our power mix, and drive the price back up to the double-digit levels we faced just a few short years ago.

I believe that this plan can be accomplished, and that we can reconfigure our energy mix in the way it proposes, by 2030.  If we get that far in 20 years, there is no doubt in my mind that by 2040 we can make even more progress in terms of energy efficiency gains and increasing the role of nuclear power, clean coal and renewables in the power generation sector.

As we make those changes, we can accommodate the larger level of demand that will be required to meet the challenge of electric vehicles and the broader use of natural gas for industrial and transportation purposes—both in terms of natural gas vehicles (for large fleets) and as part of a “gas-to-liquids” effort, which would allow us to utilize liquids derived from natural gas to power conventional vehicles without requiring a massive change in our transportation fuel infrastructure.

These goals can be met, but policy makers will have to depart from the traditional practice of postponing tough decisions on energy matters. For too long we have been content to pass energy challenges to the next generation of political decision makers. But, we are running out of time. As the clock ticks down, our choices narrow and our opportunity to surmount the hurdles we confront diminishes. We need to act on energy now.

At a Washington energy forum sponsored by The Abraham Group and Bloomberg Government, energy industry officials predicted that GOP leaders would have little choice but to act if gas prices climbed above $4 and $5 a gallon during this summer’s peak driving season.

U.S. Rep. Fred Upton, the Michigan Republican who chairs the House Energy and Commerce Committee, told the forum that “with the unrest in the Middle East, we are seeing increasing prices, which are really threatening our economy in the months and years ahead.”

Congress needs to take action to avert a crisis. “I think the emphasis will be on supply—what can we do to increase the supply to have a downward pressure on prices,” Upton noted. The pressure would likely take the form of legislation to encourage the extraction of additional oil resources in the United States, both in the Gulf of Mexico and Alaska.

In its short-term energy outlook released in February, the Energy Information Administration (EIA) forecast that the average WTI price of crude oil would be $93 in 2011. As of March 11, the price was hovering at $100. The EIA also projected that regular-grade gasoline retail prices would rise from an average of $2.78 per gallon in 2010 to $3.15 per gallon in 2011. According to AAA, the average price of unleaded gasoline in the United States this week is $3.54 per gallon.

“The price of oil passing $100 per barrel represents a serious challenge to the U.S. economy,” said Spencer Abraham, Chairman and CEO of The Abraham Group and former U.S. Secretary of Energy. “We need to continue to look for adequate and affordable energy supplies within the United States to lessen our dependence on foreign oil, offset growing demand from American consumers and continue to stimulate the economy.”

A recent Heritage Foundation analysis projected that a $10-per-barrel increase in the price of imported crude oil in the first quarter of 2011 and $20 in the second quarter would reduce the United States’ gross domestic product (GDP) by $20 billion, trim employment by nearly 100,000 jobs, and boost gasoline prices 18 cents per gallon in 2011 alone.

“Major energy and environmental laws are passed on a bipartisan basis, and many of them happen as a result of a crisis,” said Thomas R. Kuhn, President of the Edison Electric Institute, at the forum. “I think we may be in the middle of a new crisis here.”

It was a sentiment echoed by the other speakers at the forum, which included Dave McCurdy, President and CEO of the American Gas Association, Denise Bode, CEO of the American Wind Energy Association, Daniel J. Weiss, Senior Fellow and Director of Climate Strategy at the Center for American Progress, and Bob Simon, Democratic Staff Director for the Senate Energy and Natural Resources Committee.

Simon suggested that even with the threat of substantial increases in gasoline prices, comprehensive energy measures, including a clean energy standard highlighted by President Obama in his State of the Union address, aren’t likely to get any traction in this Congress. “This is going to be a challenging Congress to operate in because there are going to be lots of other crosswinds of other policy areas that threaten to knock us off course,” Simon said at the forum.

Simon predicted that “discrete” efforts would likely come on legislation that has had bipartisan support in the past. Along with an effort to increase U.S. oil production, those measures include improving energy efficiency standards for appliances and equipment and establishing a federal financing program to stimulate technology deployment. Sen. Jeff Bingaman, D-N.M., the committee chairman, and the committee’s ranking member, Lisa Murkowski, R-Alaska, have introduced an energy efficiency bill that follows the measure that nearly passed the Senate last year.

“The energy system in the United States is much more complex, much more interconnected … than most anyone in the American public realizes,” Simon said. “It is a difficult enterprise to turn around in any one piece of legislation. The realistic thing to hope for is we can have a good, long-term comprehensive policy vision and then we can take that vision and look for ways of implementing it in whatever environment we find ourselves in. There are some environments that lend themselves to large pieces of legislation. If you can get things done, then you do it that way. At other times, you can get things done in a more discrete fashion, then you do it that way.”

Simon said the Senate might also act on legislation addressing access to and availability of rare-earth elements. Despite immense domestic resources, the United States imports most of these rare earths from China. Sen. Mark Udall, D-Colo., has sponsored legislation that would address the issue.

Upton also supports increasing imports of Canadian crude oil from oilsands, and urged the approval of a U.S. permit for construction of TransCanada’s 1,661-mile Keystone XL pipeline, which would transport about 500,000 barrels of oilsands crude per day from northern Alberta to Gulf Coast refineries.

U.S. Rep. Fred Upton, chairman of the U.S. House Energy and Commerce Committee, told a Washington energy forum—sponsored by The Abraham Group and Bloomberg Government—that Congress needs to actively seek a more varied energy mix to meet the increasing need for electricity—both for economic growth and to service the growing number of electric and hybrid vehicles.

Electric vehicles are “where we need to go, but, of course, you have to have the energy on the other side of that cord to propel the vehicle,” said Upton, R-Mich. “That’s one of the reasons why we have to increase domestic production of electricity by 30 to 40 percent by the end of the next decade, not only because our economy is going to improve but also because we have these new vehicles that are going to tap into it.”

“We’re a country with great resources that we ought to be able to utilize,” Upton added. “We shouldn’t turn our back on what is here. …That’s the agenda we’re going to try to pursue in our committee.”

Thomas Kuhn, president of the Edison Electric Institute, agreed, noting that it is essential that the United States move beyond talk to action—it must build an energy infrastructure that can support the mounting demand sparked by electric vehicles. “There is a changing dynamic on what the priorities are on energy issues, and they are changing because of the transportation sector and our dependence on foreign oil. …Republicans and Democrats are saying we need all the options. We can’t foreclose on any of the options.”

Accenture, the global management consulting company, forecasts there will be 1.5 million electric vehicles in the United States by 2015, and more than 10 million are feasible by 2020. Automobile manufacturers here and around the globe are introducing new electric and hybrid vehicles with increasing frequency to respond to the public’s interest. In 2011 the market for plug-in vehicles in the United States will be flooded with entries from the top automobile manufacturers as well as new hybrid manufacturing companies. The market leaders are expected to be the Toyota Prius, Chevrolet Volt, Nissan LEAF, Ford Focus Electric, Tesla Roadster, Fisher Karma, Honda Fit EV, Mitsubishi I and Daimler Smart Fortwo ED.

“We need to be serious about diversification of energy sources,” said Spencer Abraham, the Chairman and CEO of The Abraham Group and former U.S. Secretary of Energy. “We’re going to need new resources if electric vehicles are really going to take off in the United States. We’ll need serious baseload and that means clean coal and nuclear energy. We are not going to be able to do it with renewable energy alone.”

Abraham and Upton were joined by a distinguished group of energy advocates at the forum, including Dave McCurdy, President and CEO of the American Gas Association, Denise Bode, CEO of the American Wind Energy Association, Daniel J. Weiss, Senior Fellow and Director of Climate Strategy at the Center for American Progress, and Bob Simon, Democratic Staff Director for the Senate Energy and Natural Resources Committee.

In recent years, the U.S. energy landscape has become more diverse. While oil remains a critical energy resource, utility companies have looked to expand their energy mix with fossil fuel and renewable resources. The examples of this U.S. diversification are many:

• More than 6500 MW of new coal capacity was added in 2010, and some 8000 MW is under construction;
• Total natural gas reserves increased by 11 percent with potential shale gas production in 2009;
• Twenty percent of the nation’s electricity comes from nuclear power, and plants are operating, on average, at 90 percent of capacity;
• As of the third quarter of 2010, there were 530 MW of new photovoltaics installed last year, up from 435 MW in installations in 2009; and
• Fourteen states have installed more than 1000 MW of wind power, and 37 states have at least some utility-scale wind power installed. Wind power accounted for 40 percent of all new power selected by utilities in 2008 and 2009.

Upton noted that nuclear power plays a vital role in U.S. electricity production, and Congress needs to speed the federal process for renewing licenses and seeking new ones. “On the merits, it shouldn’t take much longer than two years to process an application for an extension, yet we see some now that are taking four and five years,” said Upton. “That is too long. We need to streamline the process otherwise we’ll be taking a lot of megawatts off-line.”

Not surprisingly, renewable energy producers are seeking the same sort of tax incentives and federal research and development opportunities that fossil fuel producers have long enjoyed, both to keep kilowatt prices affordable and to encourage the sector’s growth. “It is in the national interest to have an all-of-the-above policy on energy,” said Bode. “I think the renewable sector deserves the same sort of long-term support [given to fossil fuels] to become part of the long-term energy mix.”

Given today’s federal budget climate, it may be difficult to find support to grow the number and size of financial incentives to purchase electric vehicles or to support renewable energy development and research. Republican leaders have made it clear that deficit reduction is their top priority in this Congress, but energy advocates are hoping that economic pressures may increase interest in economy-building incentives. “We need to create an incentive for people to buy an electric vehicle, and we need subsidies to help finance new technology,” said Weiss, noting that the federal government’s financial incentives proved very effective with advanced battery technology. “When President Obama took office, we had two advanced battery facilities in this country and now there are two dozen.”

While electric vehicles do hold great promise for the future, McCurdy suggested that to win congressional approval and public support for federal financial incentives to broaden energy resources, advocates need to show the incentives make good economic sense and provide greater security for the United States as well. “As much investment that has gone into electric vehicles, they’re still in the 3 percent range of the total auto fleet in terms of annual sales,” said McCurdy. “Scaling it is going to be a real challenge.”

When the new Congress convenes, the central questions before it, and between Capitol Hill and the White House, will be how to improve America’s economy and maintain U.S. national security. The answers to both questions are, in no small measure, the same: We need to strengthen our energy security.

Without an affordable, sufficient energy supply, our economy cannot make the forward strides required to put the recession behind us. America’s economy has never grown at a strong clip without adequate supplies of reasonably priced energy — and this remains true.

Moreover, without affordable, domestic energy supplies, America is likely to continue to face the geopolitical vulnerability that comes from being at the mercy of other nations for such a disproportionate share of our energy supply.

Energy security must be at the top of Washington’s agenda, or we will continue to face serious economic and national security threats well into the future.

Fortunately, it is within our power to address these challenges. The United States remains blessed with large quantities of domestic energy supplies. The issue is: Can we take advantage of them?

Monday marks the 50th anniversary of the northeast corner of Alaska’s designation as the Arctic National Wildlife Range. This area, home to large quantities of natural resources, has been off limits to energy production.

We had a unique opportunity 15 years ago to change course and fortify our nation’s domestic energy supply. But it was derailed. In 1995, President Bill Clinton vetoed legislation that would have allowed environmentally responsible exploration for an estimated 10 billion plus barrels of oil in a tiny sliver of ANWR. This action deprived our nation of what could now be about one million barrels of oil per day—an amount that would allow us to reduce our imports by almost 10 percent.

And that’s not all. Astoundingly, huge percentages of additional U.S. oil resources remain off-limits to exploration. According to federal estimates, there is enough oil in deep waters many miles off our coasts and on federal lands to power more than 60 million cars for 60 years. In addition, if we advance the commercialization of the nation’s 2 trillion barrel oil shale resource, we could meet U.S. oil needs for more than two centuries.

If we are permitted to use our vast domestic energy reserves, prices would fall, new jobs could be created and the United States could achieve a greater level of energy security.

Inexpensive energy helped build our economy into the most powerful and prosperous in the world. High energy costs, along with growing dependence on foreign sources, take us in the opposite direction.

And, it is not just oil. We have not licensed and built a nuclear power plant in decades. Ignoring advances made in nuclear safety and the deployment of nuclear plants in the rest of the world, U.S. policymakers have thwarted development of nuclear energy despite its obvious benefits.

Nuclear plants are a terrific source of job creation and economic development. Expanding nuclear power could create thousands of good-paying permanent jobs and provide yet another domestic source of vitally needed energy.

Oil and nuclear are not the only energy sources we need more of. The current situation demands an “all of the above” strategy — diversifying our energy portfolio, and pushing development of our own natural resources. That means not just more oil and nuclear, but more coal, natural gas and renewables. Sooner rather than later.

Unfortunately, in the past two years Congress, along with Obama administration regulators, have promoted policies likely to push prices even higher, by creating disincentives for energy production in the United States. The glaring consequence of reducing new domestic energy production is greater dependence on foreign energy, coupled with higher commodity prices.

Enough is enough. The days of such policies must come to an end.

Congress has a duty to pursue a broad, visionary, comprehensive approach to energy security. Everything must be on the table. Neither our economy nor our national security can be adequately protected if we continue to declare various forms of energy, or areas of energy production, “off limits.” Instead, we need to pave the way for more nuclear power and for the extraction of more domestic natural resources.

If we do this, we can have adequate supplies of affordable energy and end the increasing demand for energy imports. If we do not, we will find our energy more expensive and less available. Our economy is likely to suffer and our growing dependence on foreign energy will jeopardize U.S. security.

The choice is clear. We owe it to all Americans to make the tough decisions and take the bold actions they expect and deserve. It is time to get back on track to protect our nation and expand our economy.

Special column by U.S. Rep. Fred Upton, R-Mich., who was elected chairman of the House Energy and Commerce Committee in the coming 112th Congress by House Republicans Dec. 7, and former Energy Secretary Spencer Abraham. This column originally appeared in Politico on Monday, Dec. 6, 2010.

For Europe, natural gas imports today comprise about 46 percent of demand, while for the European Union (EU) gas imports account for about 59 percent of demand. Russia is a significant factor in these imports, providing about 25 to 26 percent of total gas demand for Europe and the EU. Although the International Energy Agency (IEA) expects slow growth in European and EU gas demand through 2030—about 0.7 to 0.8 percent per year—in absolute terms more gas will be necessary. Unfortunately, for Europe and the EU, internal production is declining, except for Norway, leaving Europe and the EU increasingly dependent on foreign sources.

As a sign of the significance of the issue, Europe and the EU’s natural gas dependence was highlighted at the 11^th IAEE European Conference “Energy Economy, Policies and Supply Security: Surviving the Global Economic Crisis” in Vilnius, Lithuania.

Looking to the future, gas import dependence will likely grow rapidly. By 2015, European gas imports will increase to 49 percent and by 2030 to 66 percent. For the EU, gas import dependence will be even greater, reaching 69 percent by 2015 and 83 percent in 2030. A major difference between European and EU dependence is Norway, a part of Europe but not the EU. Norway, whose production is expected to increase through 2030, is a major gas exporter to the rest of Europe. European imports also come from North Africa (Algeria and Libya). Internal supplies come from the Netherlands and the United Kingdom, which are both experiencing declining production.

Dependence on Russian imports will increase as well, rising in Europe to 29 percent in 2015 and 36 percent in 2030. For the EU, Russia’s share of the gas import market will increase to an estimated 30 percent in 2015 and 38 percent in 2030. By 2030, Russia will be supplying more gas to Europe and the EU in absolute volumes than any other source, a terrifying prospect for today’s policy makers.

Still, Russian gas dependency differs considerably among European countries. Three countries, Finland, Macedonia and Slovakia, are completely dependent upon Russia for their gas supplies. Several others, Bulgaria, Greece and Serbia-Montenegro, are more than 80 percent dependent. Additionally, nine countries (Austria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia and Turkey) rely on Russia for at least 50 percent of their natural gas supplies. For Germany, France and Italy, Russian gas imports range from 20 to 36 percent, although the total volume that Russia supplies is substantial.

Most of future gas imports will be used for electric power generation, which is expected to grow faster than total gas demand. Europe’s emphasis on reducing its carbon footprint and the fact that natural gas is the least harmful of fossil fuels will result in more demand for gas in the future. As electric power demand continues to grow in the coming decades, natural gas will likely be the fossil fuel of choice rather than coal or oil. Europe is relying on demand reduction strategies and enhanced reliance on renewable energy to meet its climate change goals; however, gas will continue to play an important part of its energy strategy.

With the shift to natural gas, import dependency, especially reliance on imports from Russia, looms as a growing political issue. There are good reasons for the concern. In the past four years, European gas supplies from Russia were severely disrupted twice. In January 2006, Russia and Ukraine had a dispute over gas prices. Russia turned off its gas valves for several days, and Ukraine did not send on to Europe the gas transiting its country. As a result, Europeans froze. In January 2009, a similar Russian-Ukrainian gas dispute led to a two-week shutdown of the gas transit system. Europeans felt the frigid impact again until the dispute was settled, even though the EU was better prepared for this disruption. A minor dispute in Belarus in June 2010 did not lead to a disruption but was another reminder of constant problems.

Disruptions in Ukraine and Belarus are important since 80 percent of Russian gas exports to Europe go through Ukraine, with the remainder going through Belarus. Russia and Ukraine resolved their natural gas contractual dispute in April 2010 (two months after a pro-Russian government was installed in Ukraine); however, future natural gas pricing and other contractual disputes cannot be ruled out. These incidents underlie the concerns in Europe and the EU on increasing dependence on Russian gas. Where Russia used to be a reliable supplier to Europe, politicians and policy makers now view Russia with skepticism and uncertainty.

Both Russia and the EU are advancing different energy systems to solve the uncertainty.  Russia is proceeding with two different pipeline bypasses that would eliminate the need to cross Belarus and Ukraine. The northern pipeline bypass is Nord Stream that will transport gas from Russia under the Baltic Sea to Germany. The first of two lines is under construction and is expected to open in 2011, while the second line is expected to open in 2013 or 2014. The second pipeline system is South Stream that would originate in Russia and transport gas under the Black Sea to Bulgaria and, eventually, to the European gas hub in Austria. Russia continues to announce progress on South Stream. But its expense, in the $15 billion range, and the uncertainty in gas supplies, leave many in Europe skeptical of this system. Russia has another option: using the existing Blue Stream gas system from Russia to Turkey as a way of bypassing Ukraine and transporting gas to Europe. Blue Stream is underutilized, and using this system would require the cooperation of Turkey and other transit countries.

The EU is looking to the Caspian and the Middle East for potential new sources of natural gas, with the Nabucco Pipeline as the primary transportation system. This system is in the advanced planning stages; however, many obstacles remain, including gas supply sources, transit agreements and financing. Neither South Stream nor Nabucco are certainties.

In the meantime, Europe and the EU have been diversifying their gas imports by turning to liquefied natural gas (LNG). This allows access to a variety of sources in Africa, the Middle East and the North Atlantic. Using LNG can increase flexibility when demand is uncertain, and LNG facilities can serve as storage facilities, again enhancing flexibility during times of uncertainty.

As the EU and Europe look toward the future, several important questions must be answered: Will Russia again be a reliable partner or will it exacerbate the EU and Europe’s import dependence problems? Can the EU’s development of Nabucco be a part of the solution to future gas import uncertainty? Will Europe be able to develop its unconventional gas resources as the U.S. has done, allowing it to increase internal production while limiting future gas imports? Will LNG become a greater part of the diversification strategy, again limiting increases in pipeline gas deliveries? All of these questions raise interesting and important issues for EU energy security. Until more definitive answers are provided by key European, EU and Russian leaders, Europe and the EU will continue to worry about their future natural gas supplies.

Analysis by Abraham Energy Report Contributing Editor Leonard L. Coburn who spoke at and moderated a panel at the 11^th IAEE European Conference “Energy Economy, Policies and Supply Security: Surviving the Global Economic Crisis.”

This book effectively answers how America and the world can overcome the challenges of rising global energy demand, geopolitical disruptions of the energy marketplace, and the environmental impact of producing and using energy.

What emerges is a pragmatic energy strategy that calls for blending a variety of energy sources including nuclear, clean coal, solar, wind, and natural gas with a more determined effort at improving energy efficiency through the deployment of smart energy grids and buildings, to help meet our challenges while preserving our economy and environment.

Order the book on Amazon.com, barnesandnoble.com or borders.com.

In early 2009 with the election of the President and overwhelming Democratic majorities in the Congress, the odds seemed high that a climate/energy bill would pass in short order. Since then, though, despite passage of the Waxman/Markey bill in the House, the Senate has been reluctant to act. Rustbelt Democrats have sounded a lot like Sunbelt Republicans when it comes to climate legislation, and there is growing apprehension that passing a potentially costly new bill to regulate carbon will further undermine our fragile economy.

Since members on both sides of the aisle and the American people would like to see action on such key energy matters as our dependence on foreign energy imports and the environmental challenges associated with producing energy, the question becomes: Is there a path forward that can help us improve our energy security and reduce our emissions of pollutants and greenhouse gases without bankrupting the U.S. treasury or undermining the economy? I believe there is.

Rather than losing more time in an effort to pass an energy/climate bill that lacks sufficiently broad support to prevail, let us focus instead on how we will structure our energy sector over the next 20 years—and then create a set of incentives that can make that structure a reality.

In recent years, many states have adopted renewable energy legislation mandating that a certain percentage of their power be derived from sources such as wind, solar, biomass and geothermal. The House-passed Waxman/Markey legislation sets up such a standard for the country as a whole, and a version of that approach has passed the Senate Committee on Energy and Natural Resources on a bipartisan vote. Today a principal barrier to final Senate passage is most likely the White House’s insistence that no energy bill be adopted unless it also contains some type of carbon regulation.

Yet even if Congress were to pass a national renewable energy bill, it would not be enough. Renewables are not the only “clean” domestic source of energy that can be ramped up over the next 15 to 20 years. If policymakers are truly serious when it comes to improving energy security and reducing the environmental risks associated with energy production, it is time for an increased role for nuclear power in America.

Around the world, from China to Finland to Abu Dhabi, nuclear power is being deployed and is considered a viable alternative energy source. Not so here. In the United States, we haven’t licensed and built a new reactor in decades. While there are many plans on the table, jump-starting the deployment of nuclear plants will require the U.S. government to play a major role in helping finance and license new units. Thus far, the Obama Administration has advocated for an enhanced government role in support of nuclear power. As with renewables, we need a full-court press to advance nuclear power if we are serious about realigning the energy sector. The time for that is now.

The simple fact is that we cannot improve our energy security or the environmental risks associated with energy production unless we significantly increase the roles of renewable energy and nuclear power. Neither one alone will be enough to sufficiently reshape the energy sector. What Congress needs to do now is to focus on passing an energy bill that sets attainable goals for both renewable energy and nuclear growth, and provides sufficient government incentives and support to make sure those targets are met.

I propose that we increase the role of renewables from current levels by 10 percent to 15 percent by 2030, and increase the percentage of power coming from nuclear energy by 10 percent during that same timeframe. If we do, in less than 20 years, America would derive more than half its power from non-emitting domestic sources. That would be an incredible achievement, placing us well on the road to addressing the energy challenges that most Americans and policymakers urgently want to overcome.

But to get there Congress needs to focus on the doable. As we learned in 2003 after the Northeast blackout, even a serious energy disaster does not cause members of Congress to vote against their constituents and political interests. Then, despite the fact that an energy bill was already in conference committee and leaders on all sides were confidently predicting its imminent passage, it took two years for a watered-down version of the legislation to make it to the finish line.

Rather than hoping that the Deepwater Horizon incident can help bring about a weak, likely unworkable energy/climate bill, the President and Congressional leaders should pursue a strategy with a higher chance of success. Let’s set some realistic goals and timetables to dramatically increase the role of renewables and nuclear power, and provide the federal backing needed to ensure those goals are achieved.

Such legislation may not solve all our energy problems, but the truth is there is no magic formula that can, by itself, accomplish everything. What we must avoid is continued inaction. Any new energy strategy will take years to fully implement and, therefore, we must begin the effort today. It is the best way to get us on the road toward enhanced energy and environmental security.

Spencer Abraham served as a U.S. Senator and America’s 10^th Energy Secretary. He is also the author of Lights Out: 10 Myths About and Real Solutions to America’s Energy Crisis. The book can be pre-ordered on Amazon.com.

The specter of the oil spill was raised two weeks ago when Interior Secretary Ken Salazar announced the department’s final reforms of its oil and gas leasing policies. Under the new guidelines, the Bureau of Land Management will develop “master leasing plans” in consultation with the public, allowing the agency to review other natural resource issues before deciding to lease lands for development.

“We must continue to move forward quickly and responsibly on our agenda to reform the management of our nation’s onshore and offshore energy resources and our oversight of the companies that develop them,” Salazar said in a statement. “The BLM reforms we are finalizing today establish a more orderly, open, and environmentally sound process for developing oil and gas resources on public lands. The BP oil spill is a stark reminder of how we must continue to push ahead with the reforms we have been working on and which we know are needed.”

Salazar started 2010 proposing these new restrictions on oil and gas leases and drilling permits, following up on his withdrawal one year earlier of nearly 2 million acres in three states that had been approved for development by the Bush administration.

Salazar took another step backward—at least in the view of energy producers—in March when he tightened limits on the use of “categorical exclusions” that had been authorized in the 2005 Energy Policy Act to streamline environmental reviews for new wells on public lands. The action, initially proposed in the changes announced in January, officially came in a settlement of a lawsuit over exemptions from environmental studies that had been granted for thousands of wells in the Rocky Mountain region from 2006 to 2008.

Two weeks ago, Salazar confirmed the agency’s new policy requiring a review of “extraordinary circumstances” before applying the “categorical exclusions” provision. A review would be triggered if the proposed actions were deemed to be of a degree or nature that they warranted environmental analysis.

Already, U.S. Sens. John Barrasso of Wyoming and Robert Bennett of Utah have sponsored legislation to block the reforms, responding to what they see as policies that exacerbate the already “uncertain business environment on public lands,” threatening jobs and communities throughout the West.

The pullback from drilling on federal lands in the West comes just as the need is growing to produce more energy from a region that has an estimated one-quarter of the gas reserves in the continental United States. Additionally, the Gulf spill triggered the recent Obama Administration announcement to freeze new deepwater drilling for six months as well as halted scheduled new exploration in Alaska waters and an upcoming lease sale off the Virginia coast.

Slowing offshore production would be a huge setback in efforts to increase domestic energy supplies, says Barry Russell, president and CEO of the Independent Petroleum Association of America. He cites estimates that there are 288 trillion cubic feet of natural gas and 59 billion barrels of oil still untapped in the Outer Continental Shelf off the U.S. coast, not counting Alaska.

More than half of all domestic supplies of natural gas come from federal lands, with roughly equal amounts produced onshore and offshore, according to the Interior Department.

The Gulf crisis has already made a bad situation worse in the western states, say independent oil and gas producers who do 90 percent of the drilling in the region, providing 236,000 jobs and nearly $6 billion in annual revenues for the federal government.

“It’s kind of hard to imagine it being any more difficult to operate on public lands in the West,” said Kathleen Sgamma, government affairs director for the Independent Petroleum Association of Mountain States, which represents more than 400 energy companies in the region. “Already this year we’ve seen $3.9 billion leave our region as a result of Interior policies that make it even more difficult to operate in our region.”

Now some members of Congress are having “knee-jerk reactions” to the Gulf spill, Sgamma said. “There are already several pieces of legislation that would make it even more difficult to operate onshore in the Rockies,” she said.

One is a bill introduced by Rep. Edward Markey, D-Mass., on the day after the oil rig exploded off the coast of Louisiana on April 20. The legislation would impose new fees on oil and gas leases on public lands that are inactive for more than 90 days per year. The bill is targeted at offshore leases that were exempted from making federal royalty payments under a 1990s law aimed at expanding domestic energy production. But Markey’s bill would apply to leases on both “onshore and offshore lands,” in effect assessing an added annual tax of $4 to $6 per acre for any leases not yet producing oil and gas in the West.

Western producers say Salazar put a chill on their industry as soon as he took office last year and halted leasing on 77 parcels near national parks in Utah that had been opened up by the Bush administration. A few weeks later, Salazar also rescinded lease offers and canceled a low royalty rate that had been granted for oil-shale development on 1.9 million acres in Colorado, Utah and Wyoming.

Last September, Salazar responded to an earlier scandal in the department’s Minerals Management Service (MMS) by eliminating the ability of producers on federal lands to fulfill royalty obligations with oil and gas in lieu of making cash payments. MMS officials were accused several years ago of using the royalty-in-kind program to solicit gifts and personal favors from the industry.

Then Salazar capped a year of new restrictions on western development by announcing regulatory reforms in January 2010 requiring extensive scrutiny of every proposed lease, including “public participation, an interdisciplinary review of available information, confirmation of Resource Management Plan (RMP) conformance, and national, state, and local guidance.”

Salazar also took a swipe at the Bush administration when he announced the changes, saying, “Under the previous administration, the oil and gas companies were kings of the world, with Interior their handmaiden.”

The energy industry responded that such claims are based on misconceptions, when in reality the Bush administration put more than 2 million acres off limits to drilling, designated 750,000 acres as “Areas of Critical Environmental Concern,” and increased the stipulations added to lease agreements.

Oil and gas production did increase on federal lands during the previous administration, the drillers acknowledge, but it has dropped precipitously under President Obama. There were 1,934 fewer leases and 1.1 million fewer acres open to development in 2009 than there were in the first year of the Clinton administration, according to statistics compiled by the Independent Petroleum Association of Mountain States.

Even some Democrats are upset about the trend. “To stifle the growth of this industry in the midst of record-setting national deficit and unemployment levels is not only outrageous but irresponsible,” said Rep. Dan Boren, D-Okla.

Perhaps adding insult to injury, Interior announced in April that it would launch a study of how other countries collect royalties on oil and natural gas as part of an effort to increase the return on development of energy resources on public lands.

U.S. royalty rates are currently 12.5 percent of the value of oil and gas produced from onshore leases and up to 18.75 percent for offshore leases, but a recent study by the Government Accountability Office found that U.S. revenues are well below the royalties received in other countries from oil and gas leases.

Despite the Administration’s claims of support for new domestic oil production, its recent actions both before and after the Gulf spill undermine the important goal of U.S. energy security—and at a significant cost to jobs and local economies.

The wrenching news and photos of the oil spill in the Gulf of Mexico have emboldened opponents of domestic oil and gas development, leaving supporters of this key industry to silently wait their turn until the next oil shortage or spike in gas prices.

An increase of only 10 percent in Russian oil production by 2030 represents a significant challenge to the Russian oil sector. Most of today’s oil production comes from West Siberian oil fields, fields that have been producing oil for decades. Many of these fields have been rehabilitated during the past 10 years and are largely responsible for the 50 percent increase in Russian oil production during the last decade. But many of these fields have been substantially depleted and are nearing the end of their useful lives. To reach the goal of 11 million barrels per day, the Russian oil industry will have to find large amounts of investments to keep Western Siberian fields producing while developing new production in East Siberia, Sakhalin, Caspian and the extreme Northern fields.

Attracting investment in Russia’s oil industry has been a challenge. In 2009, only 60 percent of planned investments were realized in the energy sector as a whole (both oil and gas). While the oil sector has experienced significant investments, it has not been sufficient to stem the high depletion rates of old West Siberian fields, which are about 80 percent depreciated. To meet the goals of the 2030 strategy, four questions must be answered: How much money is needed? Where will this money come from? How much oil does Russia have to meet its future goals? Where is the oil located?

According to the Russian energy strategy, $600 billion must be invested in the oil industry through 2030 (in 2007 dollars). To break down this enormous number, the strategy assumes that the exploration and production (E&P) sector will need $110 billion from today to 2016, an additional $110 billion will be necessary from 2016 to 2022, and, finally, another $275 billion from 2022 to 2030. The remaining $105 billion will be needed in refining, transportation and marketing. According to the strategy, most of the E&P investment (approximately 70 percent) will have to be made in East Siberia and Sakhalin due to the very high cost of development in those regions. To compare this government estimate with a private-sector forecast, Lukoil estimated that $1 trillion would be needed over the next 20 years just to maintain Russian production at the 10-million-barrels-per-day level.

Before answering the question of where the money will come from, the answer to the third question—is there enough oil to reach the 2030 goal—appears to be yes. There is plenty of oil still to be developed. The strategy suggests that 77 billion barrels of oil, a cumulative total, will have to be produced by 2030, requiring Russia to increase its production to 11 million barrels per day in the intervening years. Today, Russia has a productive capacity of about 30 billion barrels. According to the strategy, if $600 billion is invested in production, it will lead to an additional 91.5 billion barrels productive capacity through 2030. This new capacity will be brought on line in stages with most of the new productive capacity in West Siberia (45.4 billion barrels), East Siberia (18.8), European North (4.6), and other areas that include Sakhalin, Volga/Urals, and Caspian (22.7 billion barrels). All the investments are made according to the Russian energy strategy, Russian oil productive capacity will total more than 120 billion barrels (new plus existing capacity). This is more than enough to meet the goal of 77 billion barrels (11 million barrels per day by 2030), with some 40 billion barrels remaining that can be produced in the post 2030 period.

But this analysis assumes sufficient reserves and sufficient investment. Are there reserves to meet these goals? BP’s annual analysis of worldwide reserves indicates that Russia’s proved oil reserves amount to 79 billion barrels, although there are large areas of undeveloped reserves that are not included in this total. Other analysts say that with enough investment in higher-cost regions, Russia could meet its future needs.

This brings us back to the most important question: Where will the money come from to meet the investment needs of Russia’s long-term strategy? In resolving this question, Russia’s fiscal and tax policies play an important role. Since 2004, Russia has put in place an extremely high tax regime to meet its budgetary needs. For exported oil, Russia takes 90 percent of revenues in total taxes on the marginal barrel produced and exported.  For all oil on an average basis, Russia’s taxes take about 60 percent or more of revenues.  To further clarify this analysis, one recent analyst indicated that for the last eight years, Russia’s gross oil revenues were about $1 trillion. Of this, about $700 billion went directly to taxes and only about $150 billion could be considered net income. Out of the $150 billion, only $50-70 billion was reinvested in the domestic oil industry. Many of the large Russian oil companies moved their investments offshore rather than put their money back into Russia. Meanwhile, the state-controlled companies—Gazprom and Rosneft—are not putting sufficient amounts of their profits back into the domestic industry to meet future goals. Foreign investment in the Russian oil sector has been declining sharply due to Russia’s policies of renationalizing oil assets, limiting where investments can be made by declaring the most important oil fields “strategic” (a designation of “strategic” severely limits foreign participation in the deposit), and undermining the investment environment through a variety of hardball tactics, high levels of corruption and the weak rule of law. The level of risk is much too high for large foreign investors in Russia today. While Russia has provided some tax incentives for new fields in East Siberia, these incentives have been viewed as inadequate to draw the kind of investments from Russian and foreign companies necessary to sustain long-term production. Thus, it is questionable whether Russia will be able to attract the level of investment necessary to meet its long-term goals. If this is true, then Russia’s long-term energy strategy is in doubt.

The last question is where is the oil located that will be developed? Today, the Russian oil industry’s focus is East Siberia. Tax incentives, pipeline infrastructure and investments have been concentrated there, making East Siberia the future for Russian oil production. But some analysts do not think that is where Russia’s oil future lies. They believe that West Siberia, Timan Pechora (northern provinces of Russia) and the North Caspian are the regions with the most oil. These analysts estimate that East Siberia only has about 5 billion barrels of oil reserves, far less than estimated in the Russian energy strategy.

The future for the Russian oil industry rests on answering these four questions in a way that supports its strategy to 2030. The plan estimated that $600 billion is needed, while one private Russian company estimated that $1 trillion is necessary. In either case, the level of investment necessary is massive. The strategy indicated that in addition to the current productive capacity of 30 billion barrels, another 77 billion barrels would be needed to increase overall oil production to 11 million barrels per day. Most analysts conclude that Russia has more than enough oil resources (proved reserves and yet-to-be-developed oil) to meet its expectations. While today’s focus of development is on East Siberia, a region that must be developed to meet future needs, some think that more should be going into the traditional regions of Russia and especially West Siberia. Of the four questions raised in this article, the most vital of the outstanding issues is where Russia will find the money to meet its future production goals. Today, both domestic and foreign investments are inadequate. Russia will have to change its investment environment to provide the incentives and stability necessary to attract the level of investment that is essential to meet its future goals. Without sufficient changes in its policies, Russia’s ability to achieve its oil production goals by 2030 is in doubt.

Analysis by Contributing Editor Leonard Coburn

In January, we forecast that the economic recovery would gradually gather momentum, but we also expected the road to recovery to be rough, particularly in the developed economies of the Organisation for Economic Co-operation and Development (OECD). We expected global oil demand to rise once again in 2010, after declining for two years in a row, but nearly all the demand growth would be concentrated in the BRIC countries (Brazil, Russia, India and China) and emerging economies, which have become the new epicenter of global oil demand.

We noted that commercial inventories at the beginning of the year were still at very high levels relative to historical norms, and that a wide margin of spare capacity in both upstream oil production and downstream refining and distribution had opened up. In fact, there was enough spare capacity to push “peak oil” concerns to the back burner for the time being. We said that there was enough oil around to supply even the most optimistic growth scenarios for the next few years.

We expressed our opinion that the energy policies already in place to promote energy efficiency and the development of new and renewable energy resources would continue to nibble away at the demand for oil and other carbon-based fuels this year and in the foreseeable future. For the medium and long term, we noted that a race was developing between rising oil and other energy demands, and the ability of the global economy to both improve efficiency and develop clean and affordable supplies of conventional and new forms of energy. In this environment, and in spite of the strength of the emerging economies, it seemed to us that global oil demand over the medium-term was likely to grow slower than it has in the past.

We concluded that on the basis of fundamentals alone, and in the absence of unexpected shocks to the system in the form of natural or man-made disasters, 2010 could be a fairly calm year for the oil market and an orderly transition from recession to renewed growth. We also noted that the outlook contains a large number of unknowns on both the political and economic fronts that all have the potential of producing considerable volatility in oil markets.

At the beginning of the year, we thought that the market appeared ready to support a price higher than 2009’s average annual price of $62 per barrel (NYMEX WTI), but not as high as 2008’s average price of $99 per barrel.  We thought at the time that average prices for the year could wind up somewhere in the $80 to $90 per barrel range. This was a fairly bullish outlook, given the high inventory levels, the amount of spare capacity that had opened up, and the underlying fundamental weakness of the market.

Our view was colored in part by an expectation that OPEC would continue to act largely in its own self interest, and in part by an expectation that demand prospects would gradually turn around and strengthen with the global economic recovery. We also felt that there was a good chance that investors would turn to commodities and oil futures as a hedge against possible inflation and erosion in the relative value of the dollar.

Mid-year Review: More Strength. Where are we today? As always, the year has unfolded both in ways we expected and in ways that were full of surprises. If anything, the global economic recovery is a bit stronger today than it appeared at the beginning of the year and economic optimism is growing. Fears about the possibility of a double-dip recession have receded into the background. At one point, activity in China threatened to overheat its economy, and China’s government took steps to withdraw some stimulus. The Dow Jones Industrial Average settled above 11,000 in early April for the first time in 19 months. Many people take this as a clear sign of optimism.

Both the real GDP numbers for 2009 and the forecast for 2010 have been revised upward slightly for most regions, with the exception of the Euro region where GDP has been marked down slightly. Growth expectations for India and China have been raised the most, but expectations for the United States and Japan have improved as well. The OECD’s index of composite leading economic indicators for 29 of its 30-member countries rose to 103.6 in February from 102.9 in January, one of the highest levels in years.  (Anything over 100 indicates an expansion of economic activity.) It now appears that the economic recovery is clearly underway, but employment gains will be slow and continue to lag during the recovery.

Oil demand, primarily in the emerging markets but also to a lesser extent in the U.S., appears to be a bit stronger. While oil demand for the OECD as a whole is still generally expected to remain flat in 2010, U.S. oil demand so far this year has been running about 1 percent, or 100,000 barrels per day (bpd), above the same period last year. For the last four weeks, U.S. oil demand has picked up a bit and is now about 2 percent above the same four-week period of 2009.

At the beginning of the year, the consensus view of the International Energy Agency (IEA), the Energy Information Administration (EIA), and OPEC monthly oil market reports expected global oil demand to rise by an average of 1.0 mmbd in 2010.  This view has gradually moved upward in the last few months along with expectations for economic recovery. Today, the latest monthly (April) round of forecasts by these organizations expects global oil demand to rise by an average of 1.5 mmbd this year. OPEC’s forecast gain (+1.0 mmbd) is at the low end, and the IEA’s forecast (+1.7 mmbd) is at the high end, with the EIA in between. The EIA, the only one of the three so far to produce a demand forecast for next year, expects global oil demand to rise by 1.6 mmbd in 2011.

Nevertheless, supplies are still plentiful. OPEC production has continued to run well above its quota. The margin of spare crude oil production capacity, primarily in OPEC, continues to inch upwards, as ongoing capacity additions are completed, towards 6.0 mmbd, its highest level in 10 years.  Non-OPEC oil and other liquid supplies (biofuels, OPEC and non-OPEC NGLs, and other non-conventional sources, taken together) have continued to show net annual gains of 0.5 to 1.0 mmbd since 2007. They are expected to register net annual gains close to 1.0 mmbd this year and next.

As a result, inventories have generally remained at or above the upper end of their historical average range. OECD commercial inventories in particular, at nearly 60 days of forward demand cover, remain at very high levels.  Surplus inventories on land have not come down as fast as OPEC would have preferred, but there is some evidence to suggest that the large buildup of inventories at sea is beginning to retreat.

Lingering Concerns. In spite of growing optimism about the recovery, major uncertainties persist related to the political situations in Nigeria and Venezuela (to name only a few) and the ongoing war on terror. Recent developments in post-election Iraq and Afghanistan—and a possible looming showdown with Iran over its nuclear weapons program that might lead to tougher sanctions—could all cause problems in the market. U.S. relations with Israel, China and Russia over a broad range of political and economic issues have been on a rollercoaster ride lately, which only adds to the potential for instability.

In addition, as the economic situation with Greece and the ongoing EU financial crisis clearly demonstrate, the issues of rising debt, reduced spending, higher taxes and an eventual withdrawal of economic stimulus continue to cloud the economic recovery prospects of many developed nations. Unemployment continues to be persistently high, and will likely remain so in the period immediately ahead. Even though the economic recovery now is firmly gaining strength, the need to cut spending, raise taxes and deal with rising debt could still have a dampening effect on medium and longer-term growth prospects.

Oil Prices. Front month WTI closing prices recovered briefly to hit $70 per barrel as early as June 2009. Prices then hit $80 briefly in October, and wound up averaging around $76 for the last quarter of last year. After flirting with $80 per barrel prices in the opening week of this year, WTI prices retreated as we expected and gradually settled into a fairly stable trading range of $70 to $80 per barrel for most of the year thus far. WTI wound up averaging  $78 per barrel for the first quarter of 2010. Prices in early April then broke out of that range to hit an 18-month high, settling at $86.89 on April 6.

Nevertheless, and considering how the year has unfolded so far, we continue to expect oil prices to average somewhere in the $80 to $90 per barrel range for the year as a whole. If anything, given the current fundamentals in the market, the 2009 recovery in oil prices and their recent strength is somewhat of a mystery. The IEA’s latest Monthly Oil Market Report referred to the oil market as “overheated”, and we would also not be surprised to see some correction in the short term.

The only explanation for these higher prices appears to be a widespread expectation that the coming rebound in economic activity will gradually push oil demand to the point where the market’s ability to meet rising global demand is once more brought into question. Many investment banks (Barclays, Goldman Sachs and Bank of America, to name a few) subscribe to this view, expecting crude oil prices to continue to rise as long the economic recovery persists. Investment inflows into commodity indices, ETFs and oil futures have been gaining strength so far this year. In the opening weeks of April, investors have extended the number of net long positions in the NYMEX oil futures market to record highs.

While most banks continue to see oil prices averaging in the $75 to $95 per barrel range for the year as a whole, many more now see higher demands driving prices to the $90 to $100 per barrel range briefly sometime during the next three to six months. T. Boone Pickens, speaking in Washington on April 14^th said he expects to see oil at $95 by the last quarter of the year. Price expectations of $130 to $150 per barrel by 2014–2015 are not uncommon.

The EIA has raised its view of 2010 oil prices from $79 per barrel at the beginning of the year to $82 per barrel now, and to $85 per barrel by the end of 2011. U.S. gasoline prices are now averaging $2.85 per gallon, up $0.80 from this time last year. Prices are already flirting with and have exceeded $3.00 per gallon in some parts of the country, and could go higher as the summer driving season progresses. Given our high unemployment and the fragile nature of the U.S. economic recovery, higher oil prices could produce some retrenchment in economic activity, and a reduction in demand.  There is some evidence that this might be happening. Oil inventories in the U.S. have risen for 10 out of the last 11 weeks in a row.

OPEC and the Preferred-Price Target of $70 to $80 per Barrel. OPEC Ministers met in December, and again in March, and reaffirmed their support for their previously agreed production quotas. At both meetings they were willing to overlook a growing amount of non-compliance with their production quota system (that reached nearly 2.0 mmbd in March) as long as the global economy was on the mend. Their task was made easier by the fact that oil prices remained in their preferred range of $70 to $80 per barrel.  However, not everything has gone as smoothly as they would have preferred. The inventory overhang has failed to come down as they had planned. OPEC is not scheduled to meet again until October.

OPEC Ministers met again at the International Energy Forum (IEF), the producer-consumer dialogue venue, in Cancun at the beginning of April. In the ongoing dance of the shadow puppets (that has been going on, non-stop for close to 40 years now, with consumers on one side and OPEC on the other side) a great deal was said once more about the fact that oil price volatility is the enemy of both producers and consumers alike. In OPEC’s view, prices much lower than its preferred range of $70 to $80 per barrel are not sustainable. Lower prices choke off investments in future oil and alternative supplies, while encouraging demand growth, setting the stage for insufficient supplies, tight global energy markets and low growth. On the other hand, prices much above the preferred range threaten economic growth, strengthen political resolve to move away from expensive oil, encourage efficiency and the development of alternatives, and threaten to destroy oil demand way before the resource becomes scarce.

In the course of the dialogue over the years, several key conclusions repeatedly emerge:

• Security of supply to consumers is just as important as security of demand to producers.
• Oil price volatility drives both consumers and investors away from oil towards more secure, reliable and dependable resources.
• If you want to manage the market to prevent major price spikes, you have to also prevent major price declines.
• Managing the oil market is not easy.

The issue has always depended on where you draw the line.  Consumers want to reduce their dependence on potentially unstable supplies of volatile, expensive, imported and now carbon-based fuels. OPEC has offered to guarantee reliable oil supplies at reasonable prices and a comfortable margin of spare production capacity to meet global requirements in exchange for a secure, long-term market for its major, and sometimes only, export.

In the past, however, OPEC has demonstrated a general ability to move quickly during periods of market weakness to act in its own self interest and shore up prices. When prices begin to rise, however, as they did in 2007 and 2008, and again in the past few weeks, additional OPEC supplies have usually been slow in forthcoming. As in the past, OPEC is once again claiming that the market is adequately supplied, that inventories are at high levels and that financial speculators are responsible for the recent run up in prices. OPEC appears once again to be preparing to distance itself from any responsibility for the current rise in prices.

So the question now becomes how serious is OPEC about defending its preferred price range when oil prices are on the rise? It will be interesting to see how all this plays out. The market could be preparing a real test of OPEC’s willingness and ability to keep oil prices within their preferred range. A test of the underlying value of the producer-consumer dialogue and the IEF could also soon occur.

At the IEF meeting in Cancun, there were rumors about a draft statement circulating among the OPEC Ministers. Rumors suggested that the statement confirmed that investment in new OPEC supplies was ramping up and that OPEC stands ready to meet future oil demands. The draft also noted that the price of oil could be expected to stay in OPEC’s preferred range of $70 to $80 per barrel for years to come. In the end, however, OPEC issued no formal statement along these lines.

OPEC could add more oil to the market and dampen near-term prices, but it probably won’t just yet. With inventories already running at near record levels, OPEC is probably worried that the market could overreact to an increase in supply and push prices below $70 per barrel. From OPEC’s perspective, it’s probably better to err on the side of higher prices and give the market some extra time to correct itself. OPEC knows that to control the oil market, it really has to control oil futures markets, and it may not be ready to overtly play that game.

On the other hand, if OPEC doesn’t act, and if prices continue to rise, the economic recovery could falter, with the blame being placed squarely on OPEC’s shoulders. More importantly, if prices continue to rise they could once again create the crisis conditions that will serve to strengthen consumer countries’ resolve to promote efficiency and the development of alternatives to OPEC oil. The coming months will be interesting. No one ever said that managing the market was easy, and OPEC is beginning to feel the heat.

Peak Oil Is Dead.  Long Live Peak Oil. How this plays out in the medium-term is an open question. Supplies appear to be more than plentiful to meet requirements for the years immediately ahead, no matter how you postulate a mix of supply and demand growth scenarios. But as we are seeing in the market today, the actual supply and demand numbers may not matter as much today and in the future as they once did.

The balance of market expectations about a number of key factors is the principal driver of oil prices in both the short and medium-term market today. In the absence of an unexpected shock to the oil market, such as a natural or man-made disaster that suddenly reduces supply, we don’t have to experience actual market tightness to see oil prices rise today, we only have to expect market tightness to get the market to react. If the market works, if it becomes flexible enough, we may never actually get to the point of tightness in a supply and demand sense. This is the “plateau” view of the market. Be that as it may, let’s look at some numbers anyway.

According to the EIA, world oil consumption (of all liquid fuels) reached a peak of just over 86 mmbd in 2007, declining after that for the next two years in a row. Based on current expectations, global oil demand will recover this year and next to surpass the previous peak sometime next year.  In this scenario, we assume that annual global oil demand rises by 1.5 mmbd in 2010 and 2011, and by 1.0 mmbd per year beyond that.

Net non-OPEC supplies of all liquid fuels and OPEC NGLs (not subject to production quotas) taken together have been growing at an average rate of about 600,000 barrels per day each year since 2007. They are expected to grow slightly faster this year and next, at a rate of about 1.0 mmbd per year.  In this scenario, we assume net non-OPEC supplies and OPEC NGLs together grow at an annual rate of 0.5 mmbd beyond 2011.

When we take account of current OPEC spare production capacity of 6 mmbd, along with net OPEC capacity additions, assumed to be 0.5 mmbd in the coming years, it is possible to construct a scenario about how the future might play out. Assuming inventories are neutral, OPEC spare production capacity in this scenario, based on the assumptions above, never falls below the current level of 6.0 mmbd.

Other scenarios are possible. For example, if global oil demand grows faster, at 1.5 mmbd in 2012 and beyond, and everything else stays the same, OPEC spare production capacity falls to 3.0 mmbd by 2017. If we assume oil demand grows at the faster rate of 1.5 mmbd, and that non-OPEC liquid fuel supplies and OPEC NGLs together stop growing after 2011, OPEC spare production capacity falls to 3.0 mmbd by 2014. While there is nothing magic about an OPEC spare production capacity level of 3.0 mmbd, according to the EIA, the level of OPEC spare production capacity in the past 10 years has averaged 2.8 mmbd. Spare production capacity below this level is but one indicator of market tightness.

By AER Contributing Editor John R. Brodman

The effort comes at a particularly odd time in Washington given the amazingly bitter negotiations around health care legislation that have proved so contentious that they threaten the viability of the Democratic majorities in both the House and Senate this fall. Still, the administration continues to pursue seemingly incongruous dual track efforts. Legislative strategists are using the threat of carbon regulation by administrative fiat to spur congressional action. Meanwhile, environmental activists see this as an opportunity to bypass Congress and regulate carbon.

In the next few weeks, the Environmental Protection Agency (EPA) is expected to issue new rules for limiting carbon-dioxide emissions from motor vehicles, and it could start laying the groundwork for regulating stationary sources by spelling out which facilities will need emission permits under the Clean Air Act.

EPA Administrator Lisa Jackson has pledged that the permitting process won’t begin until next year, and CO2 limits won’t be set for large emitters such as coal-fired power plants until late 2011 at the earliest. Jackson also committed to keeping the threshold for regulating emissions to well above 25,000 metric tons per year, which would exclude thousands of smaller plants and businesses, at least in the short term. But EPA’s plans have coal-state senators and others pushing hard to block or delay regulations while they continue working on climate and energy legislation.

Sen. Jay Rockefeller, D-W.Va., is drafting a proposal to postpone regulations for up to a year beyond EPA’s timetable, so Congress would have more time to develop an alternative to using the Clean Air Act to address climate change. Sen. Lisa Murkowski, R-Alaska, also has a resolution to block EPA action that has some Democratic support, reflecting the consensus in both parties that new legislation is preferable to administrative action using existing authorities.

“Congress is the appropriate body to address climate policy,” Murkowski said. “Until the specter of command-and-control regulations goes away, it will remain a counterproductive threat hanging over the work that must be done to find common ground.

“EPA regulation of greenhouse gases will increase consumer energy prices, add greatly to administrative costs for businesses, and create massive new layers of government bureaucracy. Such regulation, even slightly delayed, will endanger job creation, economic growth, and America’s competitiveness,” she added.

The bids to delay EPA regulations have taken on more urgency as Senate negotiations on climate legislation have bogged down. A bipartisan trio of Sens. John Kerry, D-Mass.; Joe Lieberman, I-Conn.; and Lindsey Graham, R-S.C., has been leading the effort to craft a climate bill that could get the 60 votes needed to break a likely filibuster. But Graham is threatening to drop out of the group if Democrats use budget reconciliation to enact health care legislation, a move he says would be “catastrophic.”

Graham’s withdrawal would put climate legislation on its deathbed, with no Republicans on board. Regardless, the chance of action on such a sweeping program is already growing slimmer as the midterm elections draw nearer.

Backers of energy and climate legislation haven’t given up yet, though. President Obama has stepped up pressure in recent weeks, telling 100 corporate leaders on Feb. 24, “we need to put a price on carbon pollution.” The administration also unveiled new incentives for nuclear power, carbon-sequestration technologies and solar energy last month.

Obama met on March 9 with key senators involved in the legislative effort, including a handful of Republicans, and asked for more details on a proposal by Sens. Maria Cantwell, D-Wash., and Susan Collins, R-Maine, to establish a “cap-and-dividend” program, in which most revenues from carbon permits sold to fossil fuel producers would be returned directly to U.S. consumers.

There is general agreement on one thing from all sides in the debate:  The cap-and-trade plan approved by the House last year is a non-starter in the Senate.

While the debate goes on, the administration is pushing ahead with its regulatory scheme, arguing it was forced to act after the U.S. Supreme Court ruled in 2007 that greenhouse gases are covered by the Clean Air Act if it is shown they threaten public health. The EPA issued an endangerment finding last year that went on the books in January, and the stage was set for rules limiting CO2 emissions from vehicles and other sources.

“They are definitely on a glide path toward regulation,” said Roger W. Patrick, an environmental attorney at Mayer Brown LLP.  “There is a school of thought that it’s a mechanism to put pressure on Congress, but these things tend to take on a life of their own. Once they start down that path it’s pretty hard to put the stopper back in the bottle.”

Overall, the Obama administration is seeking $1.1 billion for EPA’s clean air and global climate change program in its FY11 budget proposal, with $169 million for reducing greenhouse gases.  It proposed substantial increases in several programs, including $4.1 million more for administering its GHG reporting rule (which would bring the program to $20.8 million), $7 million to develop New Source Performance Standards to control GHG emissions from major stationary sources, $6 million to develop regulations for mobile sources, and $5 million to develop guidance for Best Available Control Technologies to control GHGs.

The administration is also moving to require agencies to include climate impacts in all environmental reviews of federal projects, and it seeks $171 million for adaptation initiatives at the Interior Department, an increase of more than $35 million from 2010 levels.

Other agencies are also getting into the act. The Securities and Exchange Commission voted 3-2 in January to provide guidelines for public companies to evaluate the impact of climate-change laws and regulations when assessing what information to disclose to investors.

The pace of the administration’s initiatives has raised concerns, even within the government. The Small Business Administration’s Office of Advocacy wrote the EPA late last year complaining that it failed to conduct a Small Business Advocacy Review for its proposed GHG regulations. “Instead, EPA certified under the Regulatory Flexibility Act (RFA) that each rule would not have a significant economic impact on a substantial number of small entities,” since small emitters would not be regulated for at least six years, wrote the office’s assistant chief counsel, Keith Holman.

“Advocacy believes that EPA’s RFA certifications are improper because they lack a factual basis,” Holman said. “More than 6 million small businesses will be regulated by GHG permitting requirements after the six-year deferral ends, while at least 1,200 small businesses will immediately become subject to GHG permitting. The economic impact on each small entity can be significant, including permitting application costs, delay costs, and consultant’s and attorney’s fees.”

Energy companies are clearly worried about the cost impacts as well, with some already saying the threat of regulations has created enormous investment uncertainty. Karen St. John, director of regulatory affairs for BP America, recently told an environmental conference that permitting requirements could delay many natural gas and refinery projects, or even lead to some new construction being scrapped.

Other delays will be caused by litigation that is certain to follow every EPA action. The Competitive Enterprise Institute (CEI) and several other groups are already challenging the GHG endangerment finding in federal court, and the CEI, a free-market think tank, has raised questions about EPA’s ability to change the threshold level for regulating gases considered harmful under the Clean Air Act.

The National Cattlemen’s Beef Association also filed a petition in the U.S. Circuit Court in December, arguing that EPA climate regulations would hurt large farms. And in February, the state of Texas joined a coalition of groups asking the federal appeals court to review EPA’s endangerment finding, calling it scientifically invalid. “Texas is aggressively seeking its future in alternative energy through incentives and innovation, not mandates and overreaching regulation,” said Gov. Rick Perry, a Republican. “The EPA’s misguided plan paints a big target on the backs of Texas agriculture and energy producers and the hundreds of thousands of Texans they employ.”

Other states have joined the chorus against federal regulations. The Louisiana Department of Environmental Quality wrote EPA in December that efforts to mandate GHG reductions would have a ‘‘devastating economic impact.’’ And Arizona’s Republican Gov. Jan Brewer recently pulled the state out of a regional cap-and-trade market that was organized by California and is scheduled to open in 2012.  Brewer said the program would raise costs for consumers and slow the state’s economic recovery.

Both sides in the climate debate argue that we are entering a period of peak uncertainty which is having a dampening effect on business investment and job creation.

The Heritage Foundation’s Patrick Tyrrell makes this point in The Foundry blog.  “Businesses have to deal with nearly unprecedented levels of uncertainty due to Washington’s inability to give them a clear roadmap of what policy changes lay ahead. A large part of this uncertainty is about the level of future taxes and increased regulations. Businesses are reluctant to hire when they could be facing additional labor costs due to government policies.  This, at a particularly vulnerable time due to the credit crunch and financial crisis, spells a death sentence for many small businesses, and stunts the growth of others.”

Michael Tubman of the Pew Center on Global Climate Change argues in his blog post on the Alaskan natural gas pipeline that the lack of a carbon policy is hindering growth.  “Backers of the gas pipeline are excited about its prospects to bring about a new round of growth in the local and national economies.  Yet the project needs regulatory certainty to move forward, and national climate legislation this year is an important step in that direction.  It should be no surprise that major companies involved in discussions over a gas pipeline, including USCAP members BP and ConocoPhillips, are, for a variety of reasons, looking for certainty in climate regulation; without this certainty, investment will almost certainly be stalled.  Congress needs to act this year in order for business to move forward with new projects, innovate, and grow our economy.”

For our part, we continue to believe that climate change legislation is highly unlikely this year, and surely dead if Republicans take control of either chamber in the November election.  We have made this prediction several times in the Report but it has become increasingly clear in recent weeks, even proponents of climate change.

While administrative action might provide some certainty, the EPA has started down the road of no return on carbon regulation.  What started as a strategic tactic to spur Congress to take action on climate change may have turned into its own Don Quixote-like crusade, despite the widespread opposition from Democrats and Republicans in Congress and the statehouses. Given the current melee over health care legislation and lack of legislative success on climate change, the real concern is that the Obama administration’s approach will harden and it will seek to enact its carbon policy through regulation only. Unfortunately, the period of peak uncertainty is here to stay.

For 2010, continuing economic improvement could resuscitate domestic demand, particularly in the industrial and commercial sectors, supporting continued strong domestic production.   While U.S. imports of pipeline gas from Canada likely will decline further, LNG imports will increase.

Demand Factors

Domestic demand. The U.S. Department of Energy’s (DOE) Energy Information Administration (EIA) estimates that total U.S. natural gas consumption dropped 1.5 percent in 2009 below the previous year’s usage of 23.2 trillion cubic feet (tcf).  Although lower gas prices enticed higher use of the fuel for electric power generation in 2009, the recession and other factors such as weather more than offset declines in gas consumption in the industrial, commercial and residential sectors. EIA expects consumption in 2010 to rise 0.7 percent to 62.9 bcf per day, but anticipates that higher gas prices will cause the electric power sector to reduce gas use by 2.8 percent, not fully offset by higher industrial, commercial and residential demand as the U.S. economy continues to grow out of the 2008-2009 recession.

International demand. Generally, the worldwide economic slowdown in 2009 was reflected in weakened demand among major gas consuming countries. Asia performed best during the global recession, with key countries such as China and India posting significant economic growth for the year. Their demand for natural gas reflected their economic resilience.  At the end of 2009, India’s Petronet LNG signed contracts for long-term supplies of an additional 2.5 million metric tons of LNG (120 bcf) annually from RasGas of Qatar, making India Qatar’s largest customer. Meanwhile, China plans to open several new LNG import terminals in 2010, and in 2009 China’s Sinopec signed its first LNG agreement.  The deal with ExxonMobil will ship 2 MMT (95 bcf) of LNG annually for 20 years from Papua New Guinea to the import terminal Sinopec expects to complete in 2014 in Shandong.

The shutdown of all seven units of Tokyo Electric Power Co.’s (TEPCO) Kashiwazaki Kariwa nuclear power station, caused by a July 2007 earthquake, continued to boost Japan’s demand for LNG imports, but during 2009 TEPCO began to bring the units back on line. Each of its seven units burns about 90 bcf annually, so TEPCO’s need for spot purchases of LNG will drop as each unit goes back into operation.

And Spain, which in recent years has bid up spot LNG prices to cover hydroelectric shortfalls, will see the completion in early 2010 of the Medgaz Pipeline that will carry 280 bcf of Algerian gas to meet its needs.

Supply Factors

Domestic supply. The United States produced 22.045 tcf of natural gas in 2009; the first time domestic marketed production has exceeded 22 tcf since 1973. The boost in homegrown gas pushed America ahead of Russia as the world’s leading natural gas producer.

Unconventional gas production lies behind the reversal in the decline of American gas production, especially shale gas. Over the last decade coalbed methane has accounted for 6-9 percent of domestic gas production, but shale gas has been the headline story, rising from a negligible amount 10 years ago to 2 tcf or more than 10 percent of domestic production in 2008. Initial estimates place 2009 U.S. shale gas production at around 3 tcf—a 50 percent leap over 2008 production.

The entry of the oil majors into shale gas was the big energy story of 2009. Small independent producers such as Chesapeake Energy, XTO Energy, Devon Energy and Southwestern Energy led the exploration and development of shale gas plays such as Marcellus in Pennsylvania, Barnett and Haynesville in Texas and Louisiana, Fayetteville in Arkansas, and Devonian/Ohio between Kentucky, Virginia and West Virginia.  As gas prices plummeted from their peak of more than $12 per million British thermal units (MMBtu) in mid-2008 to less than $3/MMBtu early in 2009, the independents were forced to shut some production and scramble for cash.

ConocoPhillips was among the first majors to move, purchasing a leading position in Texas’s Eagle Ford shale before the stampede and also buying into Haynesville Shale. In 2008, British giant BP PLC and Norway’s Statoil struck deals with Chesapeake Energy Corp. for part of its U.S. holdings. In 2009, Italy’s state oil company Eni SpA paid $280 million for a Barnett Shale stake owned by Quicksilver Resources Inc. And at the end of 2009, ExxonMobil agreed to pay $31 billion for Fort Worth gas producer XTO.  By January 2010, French oil company Total SA announced a $2.25 billion deal for a 25 percent stake in Chesapeake Energy Corp.’s Barnett Shale, the largest U.S. gas field by production. The two companies also were considering joint shale gas ventures in Texas and Canada.

As a result of the activity in shale gas, the Potential Gas Committee in Colorado last year revised its outlook for American gas supply upward by 35 percent in just two years.

In its Short-Term Energy Outlook (STEO), EIA projects a 2.7 percent reduction in marketed natural gas production in 2010 over 2009, due to the sharp drop in working natural gas rigs in production last year, but sees production increasing by 1.1 percent in 2011.

International supply. Although shale gas remains primarily a North American story, the phenomenon is spreading.

Terminal capacity

China National Offshore Oil Corp. (CNOOC) brought its second LNG terminal online in March 2009 in Fujian province, and its third came online in September in Shanghai, raising its total LNG import capacity to about 400 bcf annually.  CNOOC intends to bring two additional terminals, in Zhuhai province and Hainan, online in 2010. Rival PetroChina plans to commission two LNG import terminals next year, one in eastern Jiangsu province and the other in northeastern Liaoning province, while China’s third major petroleum company—Sinopec—expects to open its Guangxi LNG terminal this year. Taiwan’s China Petroleum Corp. opened a 140-bcf/y terminal at Taichung in 2009 to accommodate its contract with Qatar’s RasGas.  Elsewhere in Asia, companies in India, Pakistan and the Philippines plan to open LNG terminals in 2010.

In Europe, the Adriatic LNG terminal in Italy, Fos Cavaou in France, South Hook in Wales, and Dragon LNG in the United Kingdom began operation in 2009, adding more than 1.1 tcf of annual capacity.  Phase 2 of the South Hook facility should come on-stream in the spring of 2010.

In the United States, ExxonMobil’s 2-bcf/d Golden Pass terminal at Sabine, Texas is due to come online in the second half of 2010, bringing LNG from Qatar.  The first of two 450-mmcf/d expansions at El Paso’s Elba Island, Ga., LNG terminal is due for completion in mid-2010. Terminal capacity is hardly a restraint to U.S. LNG imports. The existing nine U.S. terminals used, on average, about 12 percent of their 3,900 bcf of capacity in 2009. Declining demand for LNG imports in the U.S. led both Sabine Pass LNG, La., and Freeport LNG, Texas, in 2008 to request authority to re-export LNG.  DOE granted their requests for a period of two years.

Stocks

Working gas in underground storage in the continental United States at the end of 2009 was 3,123 billion cubic feet.  This was 286 bcf higher than the same period in 2008 and 316 bcf or 11 percent above the five-year average, despite above-normal withdrawals the final week of 2009 due to colder weather.  Gas storage exceeded 3800 bcf throughout the month of November.

Pricing

Like oil prices, natural gas prices peaked in mid-2008 and dropped throughout the rest of that year. But unlike oil prices, which then turned up throughout the spring of 2009, leveling at $70-80 per barrel for the second half of 2009, gas prices continued to drop. Weekly futures prices for gas peaked at $13.46/MMBtu in early July 2008 and then steadily declined to less than $6 per MMBtu in 2008. The crash continued in 2009 with prices bottoming at less than $3/MMBt in August. Prices did not significantly recover, topping $5/MMBtu, until the second week of December 2009. With significantly colder weather in January, prices approached but did not reach $6/MMBtu at Henry Hub.

For 2010, the EIA projects less volatility in Henry Hub spot gas prices than in 2009, with prices moving between $5 and $6 per MMBtu and averaging $5.17 for the year, ultimately rising to an average of $5.65 in 2011.

While both oil and gas prices suffered from the recession, the link between oil and gas prices appears permanently broken. Unlike in Europe and Asia, where imported natural gas prices are linked to oil, although with a six- to nine-month lag, in the U.S. gas imports compete against domestic gas.  The sharp increase in domestic gas production—led by the boost from shale gas discoveries—combined with weakened demand, especially in the industrial and commercial sectors, has led to a growing divergence.  The traditional rule of thumb—based on energy equivalence—was that oil prices per barrel were about six times natural gas prices per million British thermal units. Thus, with natural gas prices at about $6/MMBtu, one would expect oil to trade at roughly $36 per barrel.  As the graphic illustrates (converting oil prices to MMBtu equivalents), this relationship held very strongly through 2006, comparing the U.S. average acquisition cost for oil to the average annual price for natural gas.  The far lower U.S. price for gas, compared to oil—and thus to European and Asian LNG imports—has made the U.S. the last choice for LNG exporters since 2006.

This divergence between oil and gas prices led several European gas importers to suggest last year that it was time to revise their long-term gas contracts with Russia and other suppliers to make gas more competitive with other fuels, including spot market gas. In mid-February 2010, Paolo Scaroni, CEO of Italy’s Eni SpA, announced that Eni had reached an agreement with Russia’s Gazprom OAO to make contract gas import prices more flexible. At the same time, in a press conference, Gazprom Deputy Chairman Alexander Medvedev reported said that while Gazprom had renegotiated its European gas contracts to take “into account the trends in the European market and the [economic] crisis,” that the “base principles” of the long-term contracts remained.

Conclusion

When we look back, we may consider 2009 to have been a watershed year in global and U.S. gas markets. The huge surge of U.S. shale gas production fundamentally changed perceptions of U.S. gas supply prospects and may alter future gas production prospects in Europe and Asia as well. The combination of rising shale gas production in gas-importing countries with a glut of capacity in LNG exporting countries finally may break the long-term, oil-linked pricing model for pipeline gas and LNG export contracts, one that has been maintained since the 1970s.  Finally, more attractive gas pricing, along with increasing pressure to lower greenhouse gas emissions, could boost gas markets in the industrial, power and even transportation sectors worldwide.

Analysis by Abraham Energy Report Contributing Editor Robert S. Price

In just the first three weeks of the year, one of the key players on energy policy, Sen. Byron Dorgan, D-N.D., has announced his retirement and the special election to replace the late Sen. Edward Kennedy, D-Mass., has sent shock waves through the Democratic Party.

Republican state Sen. Scott Brown’s stunning victory over Democrat Martha Coakley not only takes away the Democrats’ 60-vote majority in the Senate, it puts a chill on major initiatives in this Congress. The unexpected result in the bluest of blue states sent a strong message against the current direction in Washington and is likely to make Democrats very nervous about enacting any new big government programs like a cap-and-trade law.

The retirement announcements by Dorgan, chairman of the Senate Appropriations Subcommittee on Energy and Water Development; Sen. Christopher Dodd, chairman of the Senate Banking Committee; and a half dozen Democrats in the House, including Science and Technology Committee Chairman Bart Gordon, D-Tenn., and Rep. Brian Baird, D-Wash., chairman of the Science and Technology Subcommittee on Energy and Environment, have added to a sense of turmoil in the Democrat majority.

Dorgan’s decision not to seek a fourth term in the Senate this year is especially unsettling for energy policy. Dorgan, a House member for 12 years and a senator for 18, was among the top candidates for Energy Secretary at the start of the Obama administration. In his retirement announcement, Dorgan said that after Congress he would “like to work on energy policy in the private sector.” The odds are it would be for the coal industry, since North Dakota is a major coal state.  That makes it even more likely Dorgan will oppose a cap-and-trade system to control greenhouse gas emissions, which would be costly for coal-fired power plants.

Dorgan has already come out against an emission-trading system run by the financial markets.  “I want to find ways to protect our environment and I support reducing carbon,” he said in a recent op-ed for North Dakota newspapers. “But it makes no sense to me to hand Wall Street a new trillion-dollar carbon securities market so they can engage in the kind of speculation that steered our economy into the ditch.”

Opposition from key Democrats like Dorgan makes one thing crystal clear: Climate-and-energy legislation passed by the House last summer is a non-starter in the Senate.  Even some House Democrats who voted for the bill, including Agriculture Committee Chairman Collin Peterson, D-Minn., now say they would oppose the measure if it comes back for final action.

Senate Energy and Natural Resources Committee Chairman Jeff Bingaman, D-N.M., has acknowledged there is little chance of the Senate approving the kind of cap-and-trade program included in the House bill.  “I do think opponents of cap-and-trade legislation have done a pretty effective job of portraying the proposal as a tax on energy use,” Bingaman told New Mexico reporters on Jan. 11.

“My own sense is at this time that we have strong support in the Senate to do something significant to move toward more use of renewable energy and more efficient use of energy,” Bingaman said.  “I don’t know that we have the votes for any cap-and-trade proposal that I have seen floated here in the Senate.”

Bingaman and Dorgan want the Senate to at least move forward on the bill approved by the Energy and Natural Resources Committee last June, with provisions for more alternative energy, grid development, carbon-storage technology and conservation. Dorgan also added a section to expand drilling in the eastern Gulf of Mexico, which geologists say includes at least 21 trillion cubic feet of natural gas and 3.7 billion barrels of oil.

Of course, many Democrats are still advocating for a broader approach that includes some effort to tackle climate change. Sen. John Kerry, D-Mass., a chief sponsor of the bill approved in November without Republican participation by the Senate Environment and Public Works Committee, acknowledges it will be difficult to move the measure, largely modeled after the House-passed bill.  But Kerry argues that the pressure for an international agreement on climate change—even the minimal goals outlined in Copenhagen in December—“can be a catalyzing moment” for the Senate.

Environmentalists like Daniel Weiss, a former Sierra Club lobbyist now with the Center for American Progress, note that China and India made their first real commitments in Copenhagen to reduce rates of pollution growth relative to their economies, which should help convince skeptics that the United States needs to show leadership, too. Weiss also said on the environmental news Web site Grist that with the EPA poised to act on greenhouse gases if Congress does not, there is a “sword of Damocles hanging over the Senate should it fail to act.”

Sen. Lisa Murkowski, R-Alaska, the ranking member of the Energy and Natural Resources Committee, has pledged to bring a bill to the Senate floor soon aimed at blocking EPA regulation of greenhouse gases for at least a year. Murkowski appears to have some support from Democrats who prefer that Congress act first, but even if her measure passes it would be difficult for both the House and Senate to muster the two-thirds majority needed to overcome a certain veto by President Obama.

But the biggest obstacle to climate legislation is probably the struggling economy. After the wrenching and divisive debate on health care, it is unlikely many Democrats have the stomach for another bruising battle in which they would be accused of killing jobs and hindering economic growth.

The anxiety will only intensify in the buildup to the November elections. Democrats know that the party in the White House historically loses congressional seats in midterm elections, and political analyst Charlie Cook says Democrats hold 40 of the 50 most competitive House districts at the start of the 2010 campaign season.

In the Senate, Majority Leader Harry Reid is well down in the polls as he seeks a fifth term in Nevada.  And several strong GOP candidates—former Hewlett Packard CEO Carly Fiorina, state Sen. Chuck DeVore and former U.S. Rep. Tom Campbell—are vying to take on Sen. Barbara Boxer, D-Calif., leader of the Environment and Public Works Committee.

While Republicans have worries of their own in the Senate with six announced retirements, none of them are game-changers on the climate change legislation. The six retirements are Sens. George LeMieux of Florida, Sam Brownback of Kansas, Jim Bunning of Kentucky, Kit Bond of Missouri, Judd Gregg of New Hampshire and George Voinovich of Ohio.

What spells more trouble for climate change proponents are recent and continuing developments at the state level. The election of Republican Gov. Bob McDonnell in Virginia signals the kind of changes that may be in store for the states, as well. McDonnell pledged in his Jan. 16, 2010, inaugural speech to open more offshore areas to drilling in his administration.

And California Gov. Arnold Schwarzenegger, a Republican who has made action on climate change a hallmark of his administration, is on his way out this year after opting not to seek another term. He won a special recall election in 2003 and a full term in 2006. During his tenure Schwarzenegger pushed through a law capping the state’s greenhouse gas emissions at 1990 levels by 2020, with a goal of cutting emissions to 80 percent below 1990 levels in 2050.

Critics say the climate effort is one reason California has an unemployment rate over 12 percent, but it remains to be seen whether state leaders will try to backtrack on climate regulations once Schwarzenegger leaves office.

With an uncertain electoral future ahead, Democrat leaders are still clinging to the notion that a climate bill can be passed by this spring. The Abraham Energy Report believes it is unlikely as the election heats up in states that have been hit hard by the economic crisis and that are still powered by heavy industry.

The more likely scenario is that the renewable and other clean energy provisions pushed through Bingaman’s Senate Energy and Natural Resources Committee will pass as a stand-alone bill or be attached to the Senate “jobs” stimulus bill, which is currently being assembled by Majority Whip Dick Durbin and Dorgan.  Without such an innovative compromise, energy legislation—and most certainly a climate bill—will be on hold until 2011 at the earliest.

The Economy.  According to the World Bank and others, global real GDP contracted by approximately 1.5 percent in 2009.  Hopefully the worst is behind us. Expectations now put global real GDP growth at around 3.2 percent in 2010, but the growth is likely to be very uneven, with the BRIC countries (Brazil, Russia, India and China) and emerging markets rapidly establishing their dominant position in the global economy.  High and rising government deficits, high unemployment and growing protectionism increase the possibility of a slower than normal economic recovery in the Organisation for Economic Co-operation and Development (OECD) nations.

The positive initial effects of the G-20’s coordinated response to the financial crisis and the ensuing economic meltdown may not be sustainable in all countries.  Many problems persist, particularly in the developed world, in housing, autos, household expenditures, and public sector balance sheets.  This coincides with a rapid rebound in economic activity in the emerging economies in the past two quarters. This growth has already sparked fears of a new economic bubble in some areas and talk of mounting international imbalances.  Just how these divergent paths will interact to steer global economic prospects is largely unknown and a major source of uncertainty for the year ahead.

Oil Market.  The oil market has weathered another boom-and-bust cycle, and global oil demand, after declining for two years in a row (the first time in 25 years), appears set to grow once again.  Commercial oil inventories are high, and there are comfortable margins of unused production capacity both upstream in crude oil production and downstream in the refining sector.  Peak oil fears about supply constraints have been pushed to the back burner for the time being, and there is enough supply around to fuel even the most wildly optimistic economic growth scenarios for the next two to three years at the very minimum.  How peak oil scarcity plays out in the medium- and long-term is still an open question, but in the absence of some outside shock to the system, it shouldn’t be a factor in 2010.

On the basis of market fundamentals alone then, 2010 should be a fairly calm year for the oil market.  Demand prospects should gradually turn around and are likely to strengthen throughout the year.  Oil prices (average NYMEX closing price for the front-month WTI contract), which were about $62 per barrel on average in 2009, could be expected to gradually strengthen further as the global economy continues to transition from recession to renewed growth.

While the demand side could be expected to exert some upward pressure on prices, high inventory levels and ample margins of spare production capacity should keep any price increases to moderate levels.  Oil futures prices indicate that investors generally expect oil prices to rise in 2010, but in the absence of any major unexpected shock to the system, which could turn out to be an understated qualification, an oil-price spike seems unlikely.

The market appears set to support an oil price this year that is higher than 2009’s average of $62 per barrel, but not as high as the $99 per barrel average seen in 2008.  Prices at the higher end of this range may not be sustainable.  They could undermine the economic recovery and oil demand.  They are also likely to provoke additional regulatory responses aimed at restricting “speculation” in the oil-futures markets.

Other Views.  As economic growth and oil demand recover, most large investment banks expect oil prices in 2010 to average between $75 and $92.50 per barrel, a 20 percent to 50 percent increase year-on-year.  The latest U.S. Department of Energy Short Term Energy Outlook predicts prices will average about $79 per barrel in 2010, which is close to but higher than the pre-crisis average of $73 per barrel of 2007.  Most analysts expect the first half of the year to be weaker than the second half.

The more bullish members of this group see the market’s preoccupation with weak demand and surplus inventories gradually turning, once more, into supply-side concerns about the oil market’s ability to fuel rising global demand in the years ahead.  They believe that traders and investors will begin positioning themselves to take advantage of tighter markets in the future, and that supply-side concerns will again dominate market expectations and oil price formation.  The most bullish of these analysts say they would not be surprised to see oil prices make a few, brief excursions to $100 per barrel or more in 2010.

The role that geopolitical concerns and other developments play in these forecasts of potential price spikes in 2010 is unclear at best.  In addition, while it is clear that a transition is underway and that demand is set to resume its overall growth path, the strength of this transition and its exact arrival will depend on a number of factors.  The timing and magnitude of inflows to oil and commodity futures markets in the period ahead will mark the strength of investors’ belief in future supply tightness and higher prices.  These flows of funds will depend not only on the forecast for the recovery itself, but also the outlook for major geopolitical upsets, inflation, the status of the dollar, and equity and bond market performance across a diverse group of investment vehicles.

Expect the Unexpected.  Most forecasts are predicated on the absence of unforeseen developments or unexpected shocks to the global oil market, of which there could be plenty in 2010.  In the first few days of trading in 2010, oil prices broke out of their fairly stable trading range and rose to a 15-month high of more than $83 per barrel.  Prices were being driven by news that Russia had cut off oil shipments to Belarus, that production in China’s industrial and manufacturing sectors was exceeding all growth expectations, and that persistent, colder-than-normal temperatures had overtaken much of the Northern Hemisphere in North America, Europe and Asia.  A declining dollar and expectations of a stock market correction also fueled the flow of funds into oil futures.

These day-to-day fluctuations are to be expected, but they accumulate and affect our view of the long-term outlook. The volatility in the first week of trading could be only a sneak preview of the uncertainties that lie ahead in 2010—uncertainties that could turn what otherwise might be a fairly stable-but-growing market into a wildly schizophrenic, volatile ride.

On the economic side, 2010 is likely to be affected by persistent declines in home prices, tight credit, and high unemployment, which will plague household balance sheets, particularly in the U.S. and the European Union.  Business investment and confidence will continue to be shaken by uncertainties over high and rising government deficits, and unresolved political issues related to future taxation, revenue shortfalls, social entitlements, carbon mitigation policies, financial sector regulatory reform, and growing protectionism in trade policy.  G-20 governments all face issues regarding the future timing and pace of their fiscal and monetary stimulus programs.  On the political side, upcoming elections in Iraq, Brazil, the U.S., U.K. and many other countries are looking more and more contentious, with outcomes that are highly uncertain.

On the geopolitical side, even the unthinkable is quickly becoming possible in 2010.  Most of the uncertainty here stems from escalation of the war in Afghanistan, and the start of new efforts to rein in terror, not only in Yemen, Pakistan, Iraq and other parts of the Middle East and Africa, but across the globe.  Potential developments in Iran are likely foremost on everyone’s mind.  Negotiations over its contentious nuclear program could come to a head in 2010 and possibly lead to responses as diverse as increased sanctions and outright military confrontation, which could have direct and possibly severe consequences on global oil markets.  Growing dissatisfaction with the clerical government could also lead to major internal strife, a leadership crisis, possible regime change, and a temporary crippling of Iran’s already weakened economy.

Depending on how all these things play out, 2010 could go from being an orderly transition from recession to growth to a wild, volatile ride.  That’s the question, and it all depends on a large number of unknowns that more than stretch human ability to see around corners and into the future.  While admitting that anything can happen, and that 2010 will bring its own share of surprises to the market, it is nevertheless useful to review what we think we do know about the things most likely to affect the market in business as usual circumstances.

Economic Outlook.  World real GDP now appears to have contracted by 1.5 percent in 2009, with the industrialized OECD economies contracting at –3.5 percent and accounting for most of the decline.  Global growth is expected to return to positive territory in 2010, and register real GDP growth of around 3.5 percent, which is fairly anemic when compared with past recoveries.  Again, BRIC countries and emerging markets are expected to lead the expansion in both the timing and pace of recovery, with real GDP growth rates of 5 percent to 6 percent for the group.  China is expected to grow by 9 percent or more in 2010.  The Middle East, parts of Africa, and Asia (except Japan) are all expected to experience the most robust growth.

The OECD recovery is expected to begin a bit later, with real GDP growing somewhat slower than in past recoveries, at less than 2 percent in 2010.  The U.S. is expected to grow the fastest, at nearly 2.5 percent, with EU growth of less than 1 percent and Japan somewhere in between.  If anything, we entered the New Year on a positive note, with fresh reports of inventory rebuilding and industrial output around the globe generally exceeding expectations.  Unemployment in the OECD is likely to remain persistently high in 2010.  Views about the strength of the economic recovery in the OECD nations shift almost daily from optimism to pessimism and back again, depending on the latest economic reports.  Expectations of a double-dip back into recession or a prolonged L-shaped recovery still abound, but they’re not as prevalent as before.

Oil Demand.  World oil demand reached a peak in 2007, and has declined for two years in a row in 2008-09—a first in 25 years.  Most forecasts expect world oil demand to turn around and grow in 2010 by somewhere in the range of 0.5 to 1.5 million barrels per day (mmbd).  If demand grows at the midpoint of this range (1.0 mmbd), global demand in 2010 will rebound to about the same level last seen in 2006, but it will still be about 1.0 mmbd below the previous peak in 2007.

The BRIC countries alone were responsible for almost 60 percent of the entire growth of world oil demand in the last decade.  Together the BRIC countries and emerging market economies are the new epicenter of oil demand, and they are expected to account for virtually all of the growth in global oil demand in the years ahead.  It is interesting to note that more than 13 million new cars were sold in China alone in 2009, compared with about 10 million in the U.S.

Oil demands in the U.S. and in the OECD as a whole have been declining at a rate of just over 1.0- percent per year for the last four years from the peaks reached in 2005.  Some forecasts expect this long-term trend away from oil to continue in 2010, with OECD demand falling by 0.2 mmbd, in spite of the projected economic recovery. Others expect demand to recover and grow by about 0.2 mmbd.  Most forecasters see demand in Europe and Japan continuing to stagnate or decline, so the disparity is largely due to differences in opinion about the strength of U.S. oil demand in 2010.  We are inclined to take the middle road and assume that OECD oil demand (and U.S. oil demand) will remain flat in 2010.

Oil Supply.  Non-OPEC supplies of all conventional and non-conventional liquid fuels rose about 0.5 mmbd in 2009, and are expected to grow by about 0.2 mmbd in 2010.  Biofuels and other non-conventional fuels have managed to slightly offset the trend decline in non-OPEC conventional crude output for the past five years.  Near the end of 2008 and early 2009, biofuels briefly lost some ground during the oil price collapse, but appear set to recover in 2010 and beyond.

Exploration and development expenditures are on the rise again, stimulated in part by the decline in the prices of oil field equipment and services.  Natural decline rates in many oil-producing countries are a force to be reckoned with. Nevertheless, the eventual production of new offshore reserves in West Africa, Brazil and many other places, plus planned expansions of biofuels and unconventional resources, could hold the overall non-OPEC supply curve level for some time to come.  Brazil is set to pass Venezuela as Latin America’s largest producer this year.  They have been invited to join OPEC but declined.

OPEC crude oil production fell by about 2.2 mmbd from 2008 to 2009, while its overall production capacity, as a result of ongoing investment, continued to rise.  As a result, OPEC’s surplus crude oil production capacity rose to near 4.5 mmbd by the end of 2009, a level not seen since the beginning of the last decade.  OPEC’s crude oil production capacity is expected to rise again in 2010 and beyond, due to ongoing expansion projects in Qatar and Angola, and new contracts in Iraq.  Extra production from Nigeria is also possible as a result of the cease-fire in the Niger Delta.   In addition, OPEC production of natural gas liquids (NGLs), which falls outside its production quota system, has been rising by about 0.5 mmbd per year in the past few years.

This trend is expected to continue in 2010 and beyond as OPEC members exploit their gas reserves for both domestic consumption and liquefied natural gas (LNG) exports.  Total liquids production capacity (crude and NGLs) in OPEC, including Iraq, could rise by 1.0 mmbd in each of the next several years.  This would just about meet the expected increases in world demand over that period while allowing OPEC to maintain its current level of spare production capacity.

OPEC. As expected, OPEC Ministers meeting in Angola on Dec. 22, 2009, on the heels of the Copenhagen climate talks, decided once again to roll over their previously agreed production quotas and keep output for the OPEC 11 unchanged at 24.845 mmbd.  In the communiqué issued following the meeting, it was clear that OPEC believed that the world economic recovery and the demand for oil was still weak, saying that its decision was intended to strike a balance between oil price stability and the needs of a growing world economy.

Declining compliance with the quotas was one of the major topics of the meeting, and the Members once again pledged to do their share for the common good.  They also called upon non-OPEC oil producers to become more involved in the process and undertake cooperative action with OPEC.  The non-OPEC countries of Egypt, Bahrain, Indonesia, and Oman attended as observers.

For the most part, OPEC members were happy to see a resumption of gradual and steady growth in oil demand, and most were satisfied with the price recovery that took place in 2009.  Saudi Minister Ali Naimi said after the meeting that the market was good and that “the price was excellent.”  It seems clear that as long as the price stays in a comfortable range above $70 per barrel, most OPEC Members are unwilling to risk the appearance of unity for an internal fight over compliance.  It also appears that rising production in Iraq, Angola, Qatar and Nigeria may eventually push the group to revise its quotas, but with some luck and growing demand, this is unlikely to happen in 2010.  OPEC’s own forecast expects the demand for OPEC oil to rise slightly in 2010.

Copenhagen and Carbon Mitigation.  The failure of the Conference of the Parties (COP) to agree on binding targets for carbon mitigation provided many oil producers with a temporary sigh of relief.  The upcoming elections in the U.S. are also likely to forestall any congressional action on cap and trade or new energy taxes this year.  Nevertheless, the energy policies already in place to promote energy efficiency and the development of new and renewable energy resources will continue to nibble away at the demand for oil and other carbon-based fuels this year and in the foreseeable future.

The automobile companies are slated to introduce plug-in electric and electric hybrid vehicles this year, and government incentives to scrap less efficient vehicles (like “Cash for Clunkers” in the U.S.) are ongoing in many countries.  In the medium- and long-term, a race is developing between rising oil and other energy demands, and the ability of the global economy to both improve efficiency and develop clean and affordable supplies of conventional and new energy.  In this environment, global oil demand is likely to grow more slowly than it has in the past.

Admittedly, the outlook contains a large number of unknowns on both the political and economic fronts.  Depending on how these factors play out, 2010 could turn out to be anything from a calm orderly transition from recession to growth to a wild, volatile ride.

Analysis by Abraham Energy Report Contributing Editor John Brodman

Key Concepts:

• The global economic recovery is underway, but growth is likely to be very uneven between the emerging and developed countries.  The possibility of a slower than normal economic recovery in the OECD is a major concern for the outlook.
• On a business as usual basis (that is, based on the assumption of no major, unexpected economic or political shocks to the system), global oil demand should recover and grow once again in 2010, with virtually all the gains registered by the emerging markets.
• Commercial oil inventories are high, and there are comfortable margins of spare production capacity in both crude production and refining. In the absence of some outside shock to the system, peak oil concerns should not be a factor in 2010.
• The market appears set to support a price higher than 2009’s average annual price of $62 per barrel, but not as high as 2008’s average price of $99 per barrel. Prices could wind up somewhere in the $80 to $90 per barrel range on average for the year.

Much of the country’s fate over the last decade has been tied to the ascendancy of Vladimir Putin, of course. His Presidency started on Jan. 1, 2000, and lasted eight years before he “stepped down” to serve as Prime Minister in 2008.  Russia’s fortunes changed dramatically during Putin’s tenure as the economy stabilized and grew significantly in the last 10 years, reflecting the rapid rise of the oil and gas markets on which so much of Russia’s economy is based. Not surprisingly given its over-dependence on energy markets, the global economic crisis and the collapse of energy prices had a disproportionate impact on Russia, causing its economy to falter and natural resources production to slow.

While the roller coaster ride is likely to continue in Russia and its energy markets, it does beg the question: What can Russian leaders do to encourage stability in its volatile oil and gas markets today and into the future?

Russia: The Past

Russian oil production showed tremendous growth early in the decade and then reached a plateau as it neared 10 million barrels per day.  Russian oil production averaged 6.9 million barrels per day for 2001 (the first year of the new century and decade). By the beginning of 2010, Russian oil production crossed the 10 million barrels per day threshold.  Growth was quite uneven, with annual average production surging in the early years between 500,000 and 700,000 barrels per day (2001-2004), and then tapering off to annual average increases of 200,000 barrels per day (2004-2007).  This high growth was due to a number of key factors, including:

• The significant increase in oil prices. World oil prices increased from an annual average of about $26.00 per barrel in 2001 to a high of an annual average of $100 in 2008, declining to an annual average of $62 in 2009. Today, the current oil price is just over $80 per barrel;
• The application of modern technology to Russia’s aging West Siberia oil fields; and
• The devaluation of the ruble, which lowered production costs.

Russia’s economy surged during this period as high taxes on oil production and exports contributed significant revenues for Russia’s expanding state budgets.  In 2004, a new oil export tax was imposed. Marginal tax rates on oil exports exceeded 90 percent, adding to the already-burgeoning monies in the oil trust fund and allowing Russia to use these tax funds for its growing annual budgets. With oil reaching a peak of $147 per barrel in July 2008, future prospects seemed rosy.

Yet the precipitous decline in oil prices in December 2008 to about $35 per barrel in conjunction with the world economic crisis led to a shift in Russian oil production.  As discussed in a previous article in the Abraham Energy Report [Russian Oil Production Slides, April 2009], the impact of lower oil prices and the high Russian oil export duty led to a decline in oil production starting in September 2008, lasting six months through February 2009.  By March 2009, Russian oil production increased year-on-year and has continued to increase to the present.

As increases in Russian oil production slowed and reversed in 2008, Russia enacted tax incentives to encourage new production in high-cost producing areas, especially in the northern provinces and in East Siberia.  New production from Sakhalin Island came on line in 2007-2008, which masked the decline in Russia’s old West Siberian oil fields.  The combination of new incentives, Sakhalin production and a small number of new fields in East Siberia led to the marginal increases in Russian oil production during the remainder of 2009 to the present.  As of January 2010, Russian oil production has increased nearly 45 percent since 2001.

Russian gas production did not fare as well, although it did grow over the same period by about 14 percent (latest annual figures are for 2008).  Since Gazprom accounts for about 85 percent of Russian gas production, the industry’s fortunes are tied strongly to Gazprom.  Growth in gas production and exports to Europe, Russia’s primary market, grew consistently from January 2001 until 2007.  A warm winter in 2007 in both Russia and Europe led to a decline in consumption and production.  Russian production rebounded in 2008, although Gazprom’s production hardly increased that year.  While figures for 2009 are not available, Russian gas production in 2009 is likely to decline precipitously because of the two-week disruption in gas supplies to Europe due to the Russian-Ukrainian gas dispute in January 2009 (80 percent of European gas supplies transit through Ukraine) and the sharp decline in European gas demand stemming from the economic crisis.  Gazprom has been stretching production at its existing gas fields and has postponed investments in new gas fields in Yamal (Bovanenko) and offshore (Shtokman).  As an interim strategy Gazprom buys large volumes of gas from Central Asia (66 billion cubic meters in 2008).

A December 2009 article in the Abraham Energy Report [Central Asia: Pipelines are the New Silk Road] examined the fight over natural gas hegemony in Central Asia. The article concluded that Russia’s dominance was dwindling as Azerbaijan, Kazakhstan and especially Turkmenistan sought alternatives to Russia for selling their natural gas.  In December 2009, Turkmenistan opened its gas pipeline to China.  The opening of the pipeline was a wake-up call for Russia.  Within weeks, Russian President Dmitry Medvedev was in the capital of Turkmenistan, Ashkabad, seeking to improve relations with Turkmen President Gurbanguly Berdymukhammedov.  At the same time, Gazprom indicated that it had smoothed over its gas pipeline dispute with Turkmenistan stemming from an April explosion that halted all Turkmen gas exports to Russia.  Gazprom’s Alexander Medvedev said that it will resume purchases of Turkmen gas in 2010.  Gazprom also agreed to expand the Prikaspiiski pipeline running along the Caspian to Russia and to build the east-west pipeline linking eastern Turkmen gas fields to the Prikaspiiski pipeline route.  Obviously, the fear of losing Turkmenistan’s natural gas market to China and possible western routes spurred Gazprom and Russia to renew its energy relationship with Turkmenistan.  The open question is whether Russia’s effort is too little, too late.

A previous Abraham Energy Report article [The EU and the Great Pipeline Game, June 2009] discussed the many new pipelines (oil and gas) that Russia is proposing to construct to enhance its export opportunities or to bypass recalcitrant partners.  The proposed Nord Stream natural gas pipeline to carry gas from Russia to Germany under the Baltic Sea now has garnered all the construction permits required by the affected states—Finland, Sweden and Denmark—with German and Russian permits either in hand or to be issued soon.  The U.S. also appears to have scaled back its criticism of this pipeline as it increasingly becomes a reality.  On the other hand, the South Stream pipeline that would carry gas across the Black Sea to Bulgaria and then into Central Europe still appears mired in problems, including its astronomical cost, and does not appear to be any closer to reality.

Russia is proceeding with its oil pipeline across East Siberia to the terminal at Kozmino, near the port city of Nakhodka and near Vladisvostok in Russia’s Far East.  The first phase of the East Siberian Pacific Ocean (ESPO) is some 1,700 miles long. It is complete from the existing West Siberian pipeline system connecting at Taishet in the Irkutsk region and extending to Skovorodino, 45 miles from the Chinese border.  Transneft, Russia’s oil pipeline monopoly, is building a pipeline connection to its border with China in order to connect with China’s oil pipeline system. The pipeline will be able to carry up to 300,000 barrels per day, supplementing rail shipments of oil to China. This oil pipeline connection is part of the deal worked out earlier in 2009 between Russia and China in which China loaned Russia $25 billion for future oil deliveries. The remaining 1,300-mile section of the ESPO pipeline is under construction and expected to be completed by 2012.  Total cost of the pipeline is about $22 billion. Until the pipeline is completed to Kozmino, Russian oil will move by rail from Skovorodino to Kozmino, with Rosneft, TNK-BP and others planning to use this new port for oil exports to Far East customers.

Russia: The Present

The start of a new year almost invariably brings another crisis between Russia, Europe and its transit countries.  In January 2006 and January 2009 Russia created turmoil in natural gas markets when it halted gas deliveries to Ukraine.  Ukraine’s natural gas pipelines, built during the Soviet era when it was part of the USSR, carry 80 percent of Russia’s natural gas exports to Europe.  Russian gas accounts for between 25 percent and 30 percent of European Union gas consumption and about 35 percent of its natural gas imports. Some European countries depend on Russia for most of their gas supply, so any disruption has serious repercussions.  A similar gas disruption was averted this year as Russia and Ukraine agreed on terms of a new gas agreement, including market pricing. However, Ukraine’s ability and inability at times to pay its gas bills has left many Europeans on edge since Russia threatens to cut off Ukraine if it fails to pay its bills. Serious economic problems exist in Ukraine due to the world economic crisis, and it remains on IMF life support to prop up its economy. Another factor is the Presidential election in Ukraine. Incumbent President Viktor Yuschenko of Orange Revolution fame lost in the first round of voting. Opposition leader Viktor Yanukovych and Prime Minister Yulia Tymoshenko face each other in the run-off on Feb. 7. All these factors leave Europe in suspense as to whether Ukraine can meet its monthly gas bills.

Even as a crisis was averted in Ukraine, Belarus reared up to present additional problems.  On Jan. 1, 2010, Russia cut off oil shipments through the Druzhba pipeline (Druzhba means “Friendship”) that transits Belarus and provides about 10 percent of Europe’s oil supplies.  This stoppage is reminiscent of a similar dispute in January 2007, when Russia halted similar oil shipments.  Oil flows to Europe (primarily Germany and Poland) continued despite the Jan. 1 stoppage, while supplies to refineries in Belarus were directly affected. Why cut off the flow? Belarus refiners pay about one-third of Russia’s export tax rate due to previous tariff agreements between Russia and Belarus, so surplus products refined in Belarus are sold in Europe at a lower price than products from Russian refiners.  Russia wanted to raise tariffs for the Belarus refiners after the tariff agreements expired on Dec. 31, 2009, so that Belarus refiners would pay the same export tax rate as all others.  The new tax could cost Belarus as much as $5 billon annually, more than 10 percent of its gross domestic product.  The dispute escalated on Jan. 4, 2010, when Belarus threatened to cut off electricity to Russia’s Kaliningrad region, a small Russian enclave sandwiched between Poland and Lithuania and adjacent to Belarus. Russia immediately resumed all oil shipments. Negotiations between Russia and Belarus are ongoing. For the EU, the stoppage came as an unexpected and unwelcome New Year surprise, despite the EU and Russia putting an early warning mechanism into place last year to avoid these kind of bombshells.

Russia: The Future

For the future, Russian energy will continue to be an important part of the country’s domestic economy until it finds a way to diversify away from oil and gas.  Russia is pulling out of its economic crisis, assisted by higher oil prices in the last six months.  Oil production has stabilized and is increasing slowly, surpassing the 10 million barrel-per-day level in late 2009 and headed for 10.2 to 10.5 million barrels-per-day by the end of 2010, due to increasing production from East Siberian oil fields. Natural gas prices are likely to increase in 2010 since natural gas contracts with European buyers are linked to oil prices, although with a six to nine month lag.  If oil prices stay in the $70 to $80 range (or higher), expect European prices for Russian natural gas to rebound later this year.  Russia is keeping a careful eye on developments in Central Asia, its economic backyard, and is working to offset gains made by China and the EU.  Russia is slowly moving forward with its natural gas pipelines, with Nord Stream the most advanced.  In oil, it is moving rapidly ahead on its pipeline to the Far East, which can give Russia another outlet for its oil and will lessen its reliance on western oil markets.  It also is working to complete oil pipeline bypasses to Belarus, eliminating another thorn in its energy picture.

As the nation with the largest natural gas reserves and the eighth largest oil reserves, Russia’s energy future appears more than stable. The question is whether Russian leaders are able to leverage their natural resources to keep their economy afloat, maintain a reliable level of oil and gas production, and preserve viable trading relationships. In oil, after almost a decade of rapid growth, its oil production is reaching a plateau, and its success going forward will depend on its ability to provide sufficient incentives for development to occur in East Siberia and its Arctic offshore tracts. At present, its strategy appears to be working.

In natural gas, Gazprom continues to delay investments in new production, seeking to buy gas from other countries or from other domestic producers.  How long it can continue to play this game is an open question.  Its delays are worrisome to its long-term stability and to its ability to meet its long-term export commitments.

The Soviet Union changed the region’s political dynamic, especially around energy, when it brought the five “stans” and the Caucasus within its sphere.  Under Soviet rule, the energy trade developed in a north-south pattern, with all pipelines moving north into Russia and avoiding the traditional east-west paths of the Silk Road.

Since the demise of the Soviet Union in 1991, many cracks developed in Russia’s energy hegemony over Central Asia and the Caucasus.  Diversification of oil routes occurred first, starting in the mid-1990s and continuing to the present.  Diversification of gas routes occurred much later and is only now resulting in multiple gas export routes.

Today, the players in the region are numerous: Russia, which is attempting to maintain its political and economic hegemony over the region; China, which is entering into long-term relationships to sustain economic growth and energy security; the European Union, which is developing new sources of gas to meet future demand and to enhance its energy security; the United States, which is seeking to augment its influence to counterbalance Russia and China; and the nation’s that make up the region are attempting to forge a delicate balance among these competing interests.

The international effort to break the Russian monopoly on transport routes is at the forefront of the new energy politics in the region. In this heightened political atmosphere, the oil and gas pipelines crisscrossing the area have become, in effect, the modern version of the Silk Road.

OIL PIPELINES

In the post Soviet era many cracks developed in the Russian oil pipeline monopoly.  The United States, with European backing, supported this diversity with its multiple pipeline strategy.  Today, route diversity and competition undermine Russia’s former monopoly.

The first crack developed in Azerbaijan in the 1990s with pipeline and rail routes starting in Baku, Azerbaijan and transiting Georgia carrying oil to the Black Sea ports of Supsa and Batumi.  The second crack, the Caspian Pipeline Consortium (CPC) pipeline, opened in October 2001 carrying oil from Kazakhstan’s Tengiz oil field to the Black Sea via Russia. CPC was the first and remains the only oil pipeline within Russia not controlled by state-owned Transneft, Russia’s oil pipeline monopoly.  The third crack, the Baku-Tblisi-Ceyhan (BTC) pipeline open in July 2006, from Baku to Ceyhan, Turkey, a deepwater port on the Mediterranean.

The next crack was the completion of the Kazakhstan to China oil pipeline in July 2006, now extended across Kazakhstan to Atyrau to link up with its western oil fields.  Finally, Kazakhstan developed a trans-Caspian barge system shipping oil from the port of Aktau via barge to the BTC pipeline.

GAS PIPELINES

In Soviet times, all gas pipelines went north and connected with the Russian gas system. The emergence of Gazprom in the 1990s as Russia’s state controlled gas monopoly continued Russia’s domination of Central Asian gas transportation. The Central Asia Center Pipeline (CAC) connected Kazakhstan, Turkmenistan, and Uzbekistan for distribution of gas within the region and export to Russia. Gazprom contracted with the three countries to buy all the available capacity in the CAC system maintaining Russia’s dominance.

Alternatives are dissipating Russia’s gas monopoly.  Azerbaijan’s Shah Deniz Caspian gas field development led to the South Caucasus Pipeline (SCP) that carries gas from Baku through Tbilisi, Georgia to Erzurum, Turkey (or BTE pipeline), connecting to the Turkish gas pipeline network.  SCP began gas exports in 2007, marking the change of Azerbaijan from a net importer of Russian gas to a net exporter of its own gas.

In June 2009, Azerbaijan’s President Aliyev signed an agreement with Russia’s President Medvedev for Azerbaijan gas exports to Russia.  An implementing agreement was signed in October 2009 running from 2010 to 2014 for the sale of 500 million cubic meters per year.

Russia thought it staged a coup by buying Azeri gas precluding Azerbaijan’s commitment to Nabucco.  Closer analysis revealed that Azerbaijan did better since it sold its surplus gas for a limited period of time at world prices, but retained the ability to commit gas in the future to Nabucco since Nabucco is not expected to begin operations until 2015, a year after the Russian contract expires.  Azerbaijan continues to seek gas export alternatives and is working with Bulgaria for pipeline and tanker movements of compressed natural gas for additional gas exports.

Turkmenistan is opening another wedge in Russia’s dominant gas position.  Gazprom turned to Turkmenistan when its own Russian production leveled off and found that it was cheaper to buy Turkmen gas than to develop its own Yamal gas fields.  Under President Niyazov, Turkmenistan sold its gas to Russia or Ukraine, while making overtures to the west about a trans-Caspian pipeline.  This situation continued until the death of Niyazov in December 2006.

Turkmen President Gurbanguly Berdymukhamedov was elected in February 2007.  Later in 2007, he signed an agreement with Russia to expand the Prikaspiiski pipeline system running along the eastern shore of the Caspian.  With Gazprom’s contracts for all the capacity of the CAC gas pipeline system and the expansion of the Prikaspiiski pipeline, it appeared that Russia re-asserted its hegemony over Central Asia gas.

This illusion did not last long.  Turkmenistan and China signed a gas export deal in December 2006 (weeks before Niyazov’s death) for the export of gas to the east.  Construction of the Turkmen section began in August 2007 and completed in November 2009.  The Uzbek section began construction in June 2008, while the Kazak section began construction in July 2008.  The Chinese National Petroleum Company (CNPC) is providing most of the financing for the pipeline.  China and Turkmenistan expect that gas will start flowing in the Turkmen section in December 2009 and small volumes of gas will reach China in early 2010. The initial agreement was for 30 billion cubic meters per year for 30 years, now increased to an additional 10 billion cubic meters per year.

In the meantime, negotiations with Gazprom over the expansion of the Prikaspiiski pipeline continued and still have not been completed primarily due to lack of agreement over price terms. A 600 km east-west spur line also was to be built and financed by Gazprom to connect central Turkmenistan gas fields with the expansion.  Rather than rely on Gazprom financing, Turkmenistan requested tenders from international companies for the pipeline’s construction. Turkmenistan now thinks that Gazprom lacks the financial capacity to complete the east-west spur.

The recession of 2008-2009 changed Gazprom’s situation. Gas demand from Europe, Gazprom’s prime export market, fell by 25-30% or more.  In 2009, Gazprom’s gas prices fell as its gas contracts are oil price linked following oil prices with a six to nine month lag.  With Gazprom paying “world prices” for Turkmen gas in Central Asia, Gazprom was losing significant amounts of money on every cubic meter of Turkmen gas it was selling in Europe or at home.  Gazprom needed relief from its Turkmen gas contracts.

On April 9, 2009, a blast occurred on the CAC-4 section of the Turkmen-Russian pipeline stopping all Turkmen gas shipments to Russia. Whatever the cause, no gas flowed from Turkmenistan to Russia since the explosion.  On April 24, 2009, at a two- day international energy conference in Ashgabat, President Berdymukhamedov declared Turkmenistan’s energy independence from Russia.  Berdymukhamedov’s statements have important implications for China, EU and the US.  He said, “Today we are looking for conditions to diversify energy routes and the inclusion of new countries and regions….Turkmenistan must create a new system of relations with Europe.  In the current situation, the diversification of energy routes could help to stabilize the global economy.”  He continued  that “it is normal and absolutely justified…for any energy producer country wishing to maintain its economic and energy security to assert its national interests….Energy security has been the cornerstone of the foreign economic strategy of Turkmenistan.”

Representatives from the United States in attendance at the conference expressed interest in having Turkmen gas committed to a trans-Caspian pipeline route.  European representatives also in attendance were seeking commitments to supply gas to Europe.

Turkmenistan is working with China to develop its South Yoloten gas field in eastern Turkmenistan.  Some estimates have placed the reserves in this field as high as 14 trillion cubic meters, which is about twice current total Turkmen reserves.  CNPC is the first foreign company to develop a major onshore field under license in Turkmenistan. China has provided a $4 billion line of credit for the development of South Yoloten. China also is financing a fertilizer plant that will export its output to China.  Additional incentives have been offered as well.

The EU is seeking commitments from Turkmenistan for its proposed Nabucco pipeline, from Azerbaijan through Turkey to Europe. President Berdymukhamedov indicated  recently that South Yoloten has enough gas to also supply Europe through Nabucco. On July 13, 2009, Nabucco and its partners signed transit agreements with Turkey and European countries (Bulgaria, Romania, Hungary, Austria) to permit Nabucco to carry gas across each country’s territory.  The EU is now more optimistic than at any other time that Nabucco will be built.

A relatively new pipeline proposal, White Stream, a private venture, may provide an opportunity to carry Azeri gas directly to Europe, bypassing Turkey.  The private companies would transport gas across Georgia (relying on a 100 mile pipeline from the South Caucasus Pipeline to Supsa), then under the Black Sea to the Romanian coast near Constanta and then using Romania’s gas transmission on to EU markets.

Since the demise of the Soviet Union in 1991, many cracks developed in Russia’s energy hegemony over Central Asia and the Caucasus.  Diversification of oil routes occurred first, starting in the mid-1990s and continuing to the present.  Diversification of gas routes occurred much later and is only now multiplying gas export routes.  All the countries of the region rely on pipelines for their energy trade, the modern day version of the old silk routes.

Analysis by Abraham Energy Report Contributing Editor Leonard L. Coburn

The “U.S.-China Joint Statement” highlighted a panoply of areas in which bilateral cooperation would be increased:  military, civilian aviation, space, health, agriculture, culture and education, legal, economic, trade and investment, counter-terrorism, nuclear non-proliferation and security.

But an entire section of the Statement was reserved for “Climate Change, Energy and Environment.”  This is hardly surprising, given the leading roles of the U.S. and China in the global climate change debate, particularly since the U.S. never joined the Kyoto Protocol and China, as a developing country, was not obliged to do so.

Yet, China is the world’s largest coal producer and consumer and the U.S. is second; combined, the two countries account for more than 60 percent of worldwide coal production and use.  China recently surpassed the U.S. as the largest source of greenhouse gas emissions.

With so much at stake, the two sides reached agreement on cooperation in seven specific areas:

1. A U.S.-China Clean Energy Research Center.  The two presidents announced the establishment of the center to facilitate joint research and development of clean energy technologies, with public and private funding of at least $150 million over five years.  Initial research priorities will be energy efficiency in buildings, clean vehicles and clean coal technology, including carbon capture and storage.
2. A U.S.-China Electric Vehicles Initiative. The initiative will include demonstration projects in more than a dozen cities, joint standards development, technical road mapping and public education projects.
3. A U.S.-China Energy Efficiency Action Plan. Under the plan, the U.S. and China will work on improving the energy efficiency of buildings, industrial facilities and consumer appliances.  They will develop, with their business sectors, energy efficient building codes and rating systems, benchmark industrial efficiency, train building inspectors and industrial facility energy auditors, harmonize test procedures and performance metrics for consumer products and exchange best practices in energy efficiency labeling systems.  A new U.S.-China Energy Efficiency Forum will be held annually, rotating between the two countries.
4. A U.S.-China Renewable Energy Partnership. They will develop roadmaps for widespread renewable energy deployment in both countries, including support for state and regional efforts.  A new U.S.-China Renewable Energy Forum will be held annually, rotating between the two countries.
5. 21^st Century Coal. In addition to efforts under the Clean Energy Research Center, the two countries are actively engaging industry, academia, and civil society in advancing clean coal and CCS solutions.  The two presidents also welcomed a number of bilateral commercial clean coal technology efforts.
6. A Shale Gas Initiative. Both countries will use experience gained in the U.S. to assess China’s shale gas potential, promote environmentally sustainable development of shale gas, conduct joint technical studies, and promote shale gas investment in China through the U.S.-China Oil and Gas Industry forum and other venues.
7. A U.S.-China Energy Cooperation Program. The program will leverage private sector resources for project development work in China on renewable energy, smart grids, clean transportation, green buildings, clean coal, combined heat and power, and energy efficiency.  More than 20 companies are founding members of the program.

During the Asia-Pacific Economic Cooperation (APEC) Leaders’ Meeting in Singapore,  President Obama joined in a statement that lowered expectations for Copenhagen.  The President expressed support for a proposal from Danish Prime Minister Lars Lokke Rasmussen to pursue a two-step process at the Copenhagen summit:  formulation of a nonbinding, but comprehensive and operational agreement by the 192 nations at the summit for reductions in greenhouse gas emissions and aid for developing nations to adapt to climate change, while also promising to work toward a binding global pact in 2010.  The binding pact would include firm emissions targets, enforcement mechanisms and specific pledges of aid to poorer nations.

A week after his return from Beijing, President Obama announced that he would attend the Copenhagen climate talks and pledge a provisional target for a reduction in U.S. greenhouse gas emissions.  According to Administration officials, the pledge would be to reduce GHG emissions 17 percent below 2005 levels by 2020 and 83 percent by 2050.

The day after the President’s announcement, China’s Foreign Ministry spokesman Qin Gang announced that Chinese Premier Wen Jiabao also would attend the Copenhagen climate summit.  The same day, China’s State Council, its highest policy-making body, stated that China would reduce the intensity of carbon dioxide emissions per unit of GDP in 2020 by 40 to 45 percent compared with the 2005 level.  Since China’s economy is expected to continue its strong growth, the “carbon dioxide intensity” reduction does not imply any actual reduction in carbon dioxide emissions.  Perhaps China learned from the U.S.  Reducing carbon dioxide intensity, rather than carbon dioxide emissions, was an alternative solution that then President George W. Bush unveiled to skepticism in February 2002.  But unlike the Bush plan, the Chinese energy intensity proposal is receiving positive reviews.  The White House reportedly welcomed “China’s intention to cut the growth of their emissions” and noted “the international community will be closely analyzing this proposal.”

Connie Hedegaard, Danish minister for the UN Climate Change Conference in Copenhagen and, until Nov. 24, Danish climate and energy minister, observed that the “U.S. and China have come forward.   This is good news.  However, we must analyze more carefully what the new Chinese announcement translates to” compared to business as usual. On the U.S. targets, she commented that they “might not be what the world has been hoping for, but that the U.S. seems to know that the price for coming late is that the pathway for reductions after 2020 will be extra steep.”  Hedegaard has been named the next EU climate commissioner.

The President had to navigate treacherous waters between China and the U.S. Congress on climate change.  While the U.S. House of Representatives already has passed a climate change bill with cap-and-trade provisions and U.S. emissions targets, consideration of a bill by the U.S. Senate will not occur until next year.  China has made clear that developing nations, including China, should not be asked to take on binding targets before developed countries, including the U.S., who contributed most of the existing greenhouse gas concentrations do.  Congress, especially the Senate, has made it equally clear that the U.S. should not be expected to take on binding emissions targets—and the trade disadvantages that could ensue—without binding targets on the large developing countries—particularly coal-dependent China and India, both of which will account for the bulk of emissions growth.

Whatever the outcome at Copenhagen, both the U.S. and China, in their national stimulus programs and in the joint efforts announced during the President’s visit in Beijing, are committing their countries to lower-carbon futures. Those commitments have come in economic and policy incentives to become more energy efficient, to advance the penetration of renewable and nuclear energy, to foster alternative fueled vehicles, to use coal more cleanly, and to promote domestic production and use of natural gas.

The extensive effort put forward by the Administration on energy and environmental cooperation with China is unprecedented, and it opens up a realm of possibilities going forward for both nations in terms of their economic, energy and environmental futures.

Analysis by Abraham Energy Report Contributing Editor Robert Price

The hostile rhetoric directed at OPEC during last year’s surge in prices and the ensuing financial crisis has diminished, and the speculative pressures on oil prices appear to be remaining in check, in spite of long-term inflation fears and renewed capital inflows to commodity markets. The global push to reduce consumption of fossil fuels in the name of climate change has been muted by the economic effects of the recession and the apparent lack of a national and international consensus on the path forward.  OPEC has just moved its headquarters to a new state-of-the-art facility in Vienna, just in time for the 2010 celebration of the 50^th anniversary of the founding of OPEC in 1960.

While prospects are clearly better than last year, not everything is rosy.  The strength of the recovery is still in doubt in several parts of the world and, as the Dubai debt crisis demonstrates, the full effects of the credit bubble are still playing themselves out.  The gradual unwinding of government stimulus programs and the global economy’s ability to deal with long-term debt in a sustainable manner remain in question.  Financial sector reforms are being formulated that could dramatically affect how oil and energy trades are conducted in the future.

New technologies are adding to oil, natural gas and other clean and renewable energy supplies while helping to reduce global demand.  A renewed push to deal with global climate change and reduce fossil fuel consumption is probably only a matter of time.  Finally, regional stability in the Middle East remains a problem, and Iran appears to be on a collision course with the rest of the world.

Recap. OPEC met every month from September to December in the fall of 2008 in a concerted effort to understand the rapid deterioration in the economic outlook, and the demand and price for oil.  They pledged to cut output several times in the fall of 2008 in an attempt to keep up with declining demand. The outlook at that time was gloomy, and analysts couldn’t revise their forecasts downward fast enough to keep up with the reality of the marketplace.

In spite of their efforts to trim output last fall, the downward momentum in prices related to the decline in oil demand and economic news, creating a perfect set of circumstances for traders to short the market.  This put additional downward pressure on prices in what became a self-fulfilling prophecy.  The front-month contract for WTI on the NYMEX fell to near $40 per barrel during the week before the December 2008 OPEC meeting, and to a low of $33.87 per barrel at the close of the market on Dec. 19, 2008.  At its meeting last December, OPEC agreed to cut 4.2 million barrels per day (mmbd) from its actual September 2008 production levels. At the time, this was the largest production cut the organization had ever attempted at any one time in its history.

After last December’s OPEC meeting, the Abraham Energy Report concluded (see “December OPEC Meeting: Shock Therapy for Declining Demand,” AER January 2009) that OPEC hoped to deliver a dose of shock therapy to the market in an attempt to stem the decline in prices. We said that the financial crisis was evolving into a synchronized global recession of uncertain magnitude and duration, and that 2009 would be a very difficult year.  We wrote that the inventory overhang would be particularly troublesome, especially in the first half of the year, and that the supply overhang could persist throughout and possibly beyond 2009.

Given how far prices had already fallen, we expected OPEC would have some limited success in preventing oil prices from falling much further. We also thought that it was doubtful that OPEC would have any immediate success in raising prices to anywhere near the $75-per-barrel level that many OPEC Ministers were calling a “fair” price for oil at the time. Sustained higher prices would only be possible when the global economy began to show definite signs of recovery large enough to produce renewed growth in oil demand, we concluded.

In retrospect, 2009 unfolded in some ways as expected, and in other ways that were unexpected, but eventually with great clarity in the rearview mirror called hindsight.  The G-20 process produced unprecedented levels of economic stimulus that began to have an effect on the real economy in much of the world by the beginning of the third quarter.  At the same time, however, the deficits accompanying the stimulus gave rise to inflation fears and a flow of money into gold, equity and commodity markets as a hedge.

This helped to pull oil prices up in spite of continuing weakness in the supply and demand fundamentals.  The front month closing price of WTI on NYMEX rose gradually from about $43 per barrel in the first quarter of 2009 to $60 and $68 per barrel in the second and third quarters, respectively.  If prices remain in the $75 to $80-per-barrel range where they have been trading for the last five to six weeks, the fourth quarter price will average around $77 per barrel, and the average price for the year should come in at about  $62 per barrel.  This is slightly above the $60-per-barrel high-end of the range we expected at the beginning of the year.

OPEC’s compliance with the announced production cuts was largely delayed last fall and it improved only marginally in the early months of 2009.  The production cutbacks were finally implemented with a good (70 to 80 percent) degree of compliance from March 2009 onward, but not before inventories grew to levels way above the 5-year average range.  The upward move in oil prices from May to August did little to induce higher levels of OPEC output and greater non-compliance as some had expected, but weak demand kept inventories at record-high levels.

Demand prospects for 2009 continued to be marked down through mid-year, and have just recently been ticking upward in the last few months, with robust growth reappearing especially in Asia.  Oil prices remained volatile through much of the year until late August, but have settled in to a relatively calm trading range of $75 to $80 per barrel since then.  By some measures, the volatility of oil prices has been at its lowest level in years in the past month.

Unlike the fall of last year, OPEC hasn’t met since its September meeting in Vienna, and the relative calmness in the oil market and gradual, if slight, improvements in the underlying fundamentals have encouraged the members to stick with their current production agreement.  In fact, OPEC has been fairly quiet lately.  With the OPEC basket price and WTI trading in a fairly stable and acceptable band of $75 to $80 per barrel, there hasn’t been much reason for OPEC to intervene.

In addition, as OPEC approaches its December meeting, the economic and energy outlooks this year are as different as day from night when compared to last year.  Production costs have come down, demand is starting to grow once again, albeit slowly in the OECD area.  A comfortable margin of spare oil production capacity has opened up, and OPEC seems more than willing to stay out of the spotlight and watch the recovery unfold.

The latest (November) round of short-term oil market forecasts—coming from the International Energy Agency (IEA), OPEC and the U.S. Energy Information Administration (EIA)—now expect world oil demand to decline by an average of 1.5 mmbd in 2009, following a decline of about 0.3 mmbd in 2008.  All three forecasts now expect oil demand to show year-on-year growth in the fourth quarter of this year, and to grow by an average of 1.1 mmbd in 2010.  The next round of monthly short-term forecasts, which will be available in the second week of December before OPEC meets, is expected to confirm these trends.

The return of robust oil demand growth is much more pronounced in China, and Asia in general, than in the OECD area.  OECD oil demand, which has been declining since 2005, could falter once again next year if the economic recovery loses steam, as additional carbon-reduction policies are implemented (with or without agreement in Copenhagen), and as competition from cheap natural gas supplies puts pressure on the middle of the barrel.  Nevertheless, in spite of possible continued declines in the OECD, oil demand for the world as a whole seems set to rebound.

The inventory overhang continues to be a problem, though.  The IEA and the EIA show commercial inventories in the OECD at nearly 61 days of forward consumption coverage.  This is well above the 54 to 56 days of forward cover considered normal for this time of year.  As a result, OPEC will probably once again pledge to “strictly adhere” to its existing production targets at its upcoming meeting.  The demand for OPEC crude oil fell by 2.3 mmbd in 2009, and it is expected to remain relatively flat in 2010.  All three of the monthly outlooks expect inventories to gradually come down during the course of next year.

OPEC oil production is rising in Nigeria as a result of the cease-fire in the Niger Delta, as well as in Angola as a result of new developments. Production appears set to rise somewhat in Iraq over the next few years as the security situation improves.  However, none of these developments are likely to upset the organization’s production agreement.  Production has been higher than expected this year in Russia and in the U.S., but lower in Europe, Mexico and Canada.

There will be plenty of issues for OPEC Ministers to discuss on the margins of the formal meeting, covering the prospects for economic recovery, Copenhagen, the IEA’s latest World Energy Outlook, the emerging surplus of natural gas in some markets, the continuing emergence of China as a powerhouse in the oil demand market, prospects for the dollar, and the declining usefulness of NYMEX WTI as a benchmark for crude oil prices.  Above all, we believe that the Ministers will be thankful to have the past two years behind them, and to be looking forward to better times in 2010, with a comfortable degree of confidence that OPEC as an organization has once again served them well, as it has for much of the past 50 years.  The events of 2009 demonstrated to OPEC once more the veracity of the old adage “united we stand but divided we fall.”

Analysis by Abraham Energy Report Contributing Editor John Brodman

Even without a formal, legal agreement emerging from this month’s climate negotiations in Copenhagen, the historic gathering of 192 nations still could provide important signals of what a future international accord may look like.

Coal and oil will still be kings for at least a few more decades, to be sure. The International Energy Agency (IEA), in its annual World Energy Outlook report last month, estimated a 40 percent rise in energy demand by 2030, with 77 percent of the increase being met by fossil fuels.

The United Nations’ Intergovernmental Panel on Climate Change (IPCC) has urged developed nations to reduce emissions as much as 40 percent from 1990 levels by 2020 so that climate change can be stabilized, and in the long term, to reduce emissions at least 80 percent by 2050.  Advocates for action on global warming have long hoped that the talks in Copenhagen, being described as the largest environmental meeting in history, would result in a treaty that put the world on track to reach those goals.

However, all the goals set by industrialized nations heading into the conference fall short of the IPCC targets.  The Obama Administration recently pledged to cut U.S. emissions 17 percent below 2005 levels by 2020, which amounts to a 4 percent reduction from 1990 levels. China, which recently surpassed the United States as the biggest emitter of carbon dioxide, has pledged to reduce its “carbon intensity,” or the amount of CO2 released for each unit of GDP, by 40-45 percent from 2005 levels by 2020, but the result could be little actual reduction in emissions, considering the expected growth of China’s economy.  The European Union, the third-largest source of emissions, proposes cutting 20 percent below 1990 levels by 2020, and by 30 percent if other wealthy nations follow suit.

Leaders of the Copenhagen summit have already conceded that a binding agreement will not be reached before the talks close Dec. 18. The head of the host country, Danish Prime Minister Lars Lokke Rasmussen, has proposed that participants instead negotiate a political deal, and then set a firm deadline for writing a formal treaty.  “We are not aiming to let anyone off the hook,” Rasmussen said when he unveiled his plan in mid-November.

In addition to developing a scheme for reducing emissions, negotiators need to address how mitigation efforts will be verified, how much money rich nations will provide poorer nations to deal with climate change, and how intellectual property rights will be protected in technology transfers.

Many climate advocates cite as a chief reason for the lowered expectations at Copenhagen as the failure of Congress to enact climate legislation, leaving U.S. negotiators with nothing to back up their verbal promises. President Obama plans to attend the start of the summit on his way to Oslo to pick up his Nobel Prize, but his presence alone cannot guarantee to other nations that U.S. action will follow.

“The administration has spent the last month or so really reducing the expectations for the conference,” says Bracewell & Giuliani partner Scott Segal, who represents energy companies on climate issues. “They are expecting limited results, and I am not sure the pieces are in place to change that.”

In fact, the U.S. pledge to cut its emissions by 17 percent below 2005 levels is merely a statement of the goal established in the climate bill that passed the House in May.  A 20 percent goal is outlined in legislation pending in the Senate, but the administration’s use of the House number in its announcement that Obama would go to Copenhagen implied a lack of confidence that the Senate will pass a stronger bill.

Some observers believe a dose of reality in the lead-up to Copenhagen is not all bad.  “A year or two ago, people expected Copenhagen to produce the equivalent of the Kyoto Protocol—a comprehensive climate roadmap for the next decade or more,” said Dan Farber, director of the Environmental Law Program at the University of California, Berkeley, on his blog.  “It seems unlikely that the Copenhagen meeting will live up to those expectations, although there’s always the chance of a last-minute surprise.”

At the same time, Congress is inching ahead on legislation, many states are adopting climate programs, the EPA is strengthening regulations, and major developing nations like China and India are showing signs of flexibility on mitigation efforts, Farber noted.  “So there is reason to be optimistic looking forward, even if nothing major comes out of Copenhagen,” he said. “One way or another, Copenhagen is just one stopping point on a long road.”

The big question is whether that road will lead to more of the same policies that doomed U.S. participation in the Kyoto agreement—caps on emissions for developed countries; no limits on emissions from developing nations like China and India—or whether a genuine transition from carbon-based energy to cleaner sources can be engineered.

Top U.S. climate negotiator Todd Stern has made clear that any framework based on Kyoto will be rejected again. “We have to send the message, in word and deed, that the effort to reach a new climate change agreement is not simply about putting a cap on emissions, it is about development—low-carbon development,” Stern told the House Foreign Affairs Committee in early November.

Numerous studies this year have argued for wholesale restructuring of the global energy economy. One by the office of former British Prime Minister Tony Blair and the London-based Climate Group said direct investment in clean-energy development on a worldwide collaborative basis would be less costly and more effective than capping emissions and spending on mitigation.

Another report in November by World Wildlife Fund International concluded: “Runaway climate change is almost inevitable without specific action to implement low-carbon re-industrialization over the next five years.”  The study conducted by Climate Risk Pty. Ltd. of Great Britain and Australia said achieving an 80 percent reduction in greenhouse gases by mid-century will require worldwide investment of $400 billion annually until 2025 in energy efficiency and clean generation technologies, low-carbon agriculture and sustainable forestry.

The IEA made a similar estimate in its World Energy Outlook 2009 report. The agency said “cumulative incremental investment of $10.5 trillion is needed” in low-carbon energy technologies and energy efficiency by 2030, but it said those costs would be mostly offset by $8.6 trillion in savings on energy costs in transportation, buildings and industry from 2010 to 2030.

None of this means investments in fossil fuels will decline in the coming decades as the oil, gas and coal industries scramble to meet energy demands that will begin rising quickly once the global recession ends.

The head of British Petroleum, Tony Hayward, projects that $1 trillion a year will be invested in energy development worldwide until 2030, with much of the money going for crude oil and other fossil fuels. “I don’t believe there’s a shortage of fossil fuels…We have around 40 years of oil and 60 years of gas at the current consumption rates,” Hayward told the Commonwealth Business Forum, a meeting of more than 50 countries, in late November.

Peter Voser, CEO of Royal Dutch Shell, made a similar forecast in an October speech to the World Business Forum in New York, saying that “even with rapid growth of renewable energy, fossil fuels and nuclear power will still supply at least 70 percent of the world’s energy in 2050.”

The transition to cleaner forms of energy will take decades, Voser said, noting that it typically takes 25 years for a new source to capture just 1 percent of the energy market.

China provides a perfect example of the problem. While the government’s goal in the world’s largest and fastest-growing nation is to have 20 percent of its energy come from renewable sources by 2020—and it has doubled the number of wind-energy plants in each of the last four years and committed to building 30 new emission-free nuclear power plants—China also has plans to build more than 550 new coal-fired power plants over the next eight years. As a result, some experts expect China to account for half the world’s growth in greenhouse gas emissions over the next 20 years.

To help address that dilemma, the IEA in a separate report this fall called for construction of 3,400 carbon-capture and storage projects by mid-century, mostly in developing nations that will account for 97 percent of the growth in emissions. The cost would be more than $5 trillion, with $275 billion needed in China and India just for construction of 62,000 miles of underground pipelines. Indeed, one of President Obama’s key achievements on his recent Bejing trip was the establishment of a robust new initiative with U.S. and China cooperation on clean coal research and development.  Norway has suggested a World Bank trust fund should finance CCS projects, as a way to meet the demands of developing nations and that the industrialized world bears the brunt of climate change mitigation costs.

Yvo de Boer, executive secretary of the United Nations Framework Convention on Climate Change, has called for global spending of $100 billion annually to help vulnerable nations adapt to climate change and $200 billion annually to develop clean energy sources.

Thanks largely to the recognition of de Boer and other negotiators that there is insufficient time and consensus among nations to craft a legally binding agreement, it seems more realistic to develop something akin to a political agreement—one where the President’s and China’s aspirational limits on carbon emissions can set the stage for longer-term negotiations.  In the meantime, the U.S. and global economies need time to recover.  Until the U.S. economy is growing again and the 2010 elections are completed, it is highly unlikely that Congress will take any action on climate legislation.

Buried in the legislation was language that could, ultimately, block construction of some new U.S. maritime terminals for “especially hazardous materials,” which includes liquefied natural gas (LNG) and some agricultural chemicals.

The language was proposed by U.S. Rep. Elijah Cummings, D-Md., who has expressed reservations about the security of LNG tankers and terminals along urban waterfronts. Cummings’s district includes part of the Baltimore port.

LNG terminals and tankers have an exemplary safety record over the last 40 years.  But environmental groups and other critics contend that LNG can be a volatile resource to transport and store.

Cummings and his allies acknowledge the sterling safety record, but say they’re worried about terrorists choosing to assault tankers and terminals in heavily populated port cities. As a result, they have supported a number of initiatives to give the U.S. Coast Guard additional responsibility and dollars to monitor the comings and goings of LNG tankers.

The latest Cummings amendment would require the Coast Guard to guarantee the security of vessels and facilities handling LNG and agricultural resources before any such facility is even built. Like all shore-side U.S. facilities, these terminals are already required to operate in strict compliance with current safety standards, including local and state regulations, before tankers carrying hazardous materials can use a facility. The rule, if enacted, would prevent terminals from being used if the Coast Guard says it doesn’t have enough resources to guarantee the security of a facility.

“My amendment would not stop LNG terminals, or anything else, from being built,” said Cummings. “The only thing my amendment does is ensure that especially hazardous materials are protected with security measures meeting standards set by the Coast Guard for these materials. These are chemicals that can do massive, catastrophic damage if they are not properly secured. I believe my amendment ensures that they are.”

Part of the bill’s proposed language reads:

“Sect. 17_Part (c), Determination Required for New Terminals. The Secretary of the department in which the Coast Guard is operating, acting through the Commandant of the Coast Guard, may not approve a facility security plan under section 70103 of title 46, United States Code, for a new especially hazardous material terminal the construction of which is begun after the date of enactment of this Act unless the Secretary determines that the Coast Guard sector in which the terminal is located has available the resources, including State and local government resources in accordance with subjection (b), to carry out the navigation and maritime security risk management measures identified by the Coast Guard pursuant to the Ports and Waterways Safety Act.”

The legislation defines “especially hazardous materials” as “anhydrous ammonia, ammonium nitrate, chlorine, liquefied natural gas, liquefied petroleum gas, and any other substance identified by the Secretary as an especially hazardous material.”

Republicans and Democrats alike expressed concerns about the provisions. “The amendment creates unnecessary and duplicative requirements that will be impossible to implement, and may simply seek to prevent the construction of new facilities to handle important energy and agricultural resources,” said Rep. Frank LoBiondo, R-N.J., the ranking member of the Coast Guard and Maritime Transportation Subcommittee. “I hope we can address these concerns as this legislation progresses.”

The reauthorization bill is pending in the House, and a number of members have vowed to eliminate the provision before the bill is signed into law.

“As our nation’s energy needs are expected to grow by 50 percent over the next two decades, it is imperative that we pursue an ‘all of the above’ approach,” said Rep. Fred Upton, the top Republican on the House Energy and Environment Subcommittee.  “Natural gas is of critical importance as we seek to meet our energy demands of tomorrow. However, the shortsighted provision tucked into the Coast Guard bill has the potential to derail all new liquefied natural gas terminals with unlimited government red tape. Such an effort defies common sense, especially with such stringent laws already on the books.”

The legislation comes on the heels of a Coast Guard rule that would set steep notice requirements for operators looking to construct LNG or liquefied hazardous gas (LHG) facilities in U.S. ports.

In April 2009, the Coast Guard proposed a rule requiring prospective operators to notify the Coast Guard at least one year before the start of any construction. The operators would be required to submit a preliminary Waterway Suitability Assessment (WSA) to outline the type of facility, tanker route, risk assessment for maritime safety and security, and resource needs for security.

When the rule was submitted, the Coast Guard explained its rationale by noting, “U.S. natural gas consumption is projected to increase by 40 percent, and our domestic gas production is not expected to meet this need,” explained the Coast Guard in a written statement. “Therefore, this likely shortfall may be resolved by increasing marine LNG imports.”

Currently operators need only give a 60-day notice. The Coast Guard estimates that it could cost between $80,000 and $1.2 million to prepare and submit a single WSA. The comment period on the rule closed June 29, and the Coast Guard is reviewing comments before submitting a final rule.

There are 11 LNG facilities in the U.S., according to the Federal Energy Regulatory Commission (FERC). Twenty new LNG terminals have been approved and are under construction (four) or awaiting construction (16), as of Sept. 15, 2009, and another nine have been proposed.

Over the objections of Cummings and other Maryland lawmakers, the FERC approved in January 2009, with some conditions, a new liquefied natural gas (LNG) import terminal and connecting interstate pipeline proposed at Sparrows Point, located southeast of Baltimore in Baltimore County. FERC estimates the number of ships going to and from the Sparrows Point terminal will increase commercial marine traffic in the Chesapeake Bay by 5 to 7 percent. In addition, the Cove Point LNG facility, owned by Dominion Resources, is located nearby in Calvert County, Maryland also on the Chesapeake Bay.

The Energy Information Administration in its Annual Energy Outlook 2009 estimates that natural gas demand in the United States could be 24.36 Tcf by the year 2030. That is an increase of 6 percent over 2007 demand levels, as compared to an expected total energy consumption increase (from all sources) of 12 percent (from 101.89 quadrillion British thermal units to 113.56 by 2030). The EIA predicts an annual demand increase of 0.5 percent over the next 21 years. It is important to note that this steady climb in demand for natural gas could increase even more as climate change legislation grows demand for low-carbon fuels such as clean natural gas. These projections illustrate that demand for natural gas will increase steadily for the foreseeable future, which makes LNG imports a crucial component to U.S. energy security.

Key concepts:

• The Coast Guard Reauthorization bill contains language that could, in effect, block construction of some new U.S. maritime terminals for “especially hazardous materials,” which includes liquefied natural gas (LNG) and some agricultural chemicals.
• The amendment’s supporters contend that tankers and terminals in heavily populated port cities are terrorist targets, and have supported a number of initiatives to give the U.S. Coast Guard additional responsibility and dollars to secure these especially hazardous materials.
• Republicans and Democrats of the committee expressed concerns about the provisions, saying they are “unnecessary and duplicative requirements that will be impossible to implement, and may simply seek to prevent the construction of new facilities.”

More headlines from this issue:

» Climate Change Law “Not Going to Happen” in 2009
» Drill Baby Drill! The Moratorium’s End—One Year Later
» Russia: “End of the World” Gas Fields May be Open to the West
» Obama Administration Commits to Powering Up Batter Technology Development
» Outcome of the OPEC Meeting: Production Quotas Unchanged; Actual Output Likely to Fall
» U.S.-Russia Energy and Environment Working Group Update

For reprint information click here.

Certainly, there are some who view the enterprise as little more than corporate welfare for the nation’s power companies, or who think it’s main goal is some misguided and costly effort to speed the transmission of renewable energy from distant wind and solar resources.

Yet for a majority of private and public sector leaders, repairing the nation’s antiquated electricity transmission system is viewed as a necessity. And after years of debate, there are finally signs that the momentum is now moving toward a nationwide renovation of the power grid.

A sign that Smart Grid development is on a fast track can be found at the U.S. Department of Energy’s Office of Electricity Delivery and Energy Reliability, which announced in April that it would award $3.4 billion in matching grants for projects that “verify smart grid technology viability, quantify smart grid costs and benefits, and validate new smart grid business models.”

By the August deadline for applications, requests had been filed for $9.4 billion in grants, and “DOE is extremely pleased with the level of quality” in the project proposals, John Jimison, majority counsel for the House Energy and Commerce Committee, told a Sept. 24 conference sponsored by the GridWise Alliance, a public-private consortium advocating for the Smart Grid.

The grant program funded by the American Recovery and Reinvestment Act may be one of the least controversial components of the $787 billion stimulus package, Jimison said. “I have a great deal of confidence that in the long run the Smart Grid portion of that investment is going to be seen as extremely important,” Jimison said.

“The stimulus has stimulated the Smart Grid, no doubt about it,” added Rich Senado, director of the Regulatory Assistance Project, a non-profit that helps public officials with electric utility regulation. “A lot of people are trying to navigate this exciting technology.”

Steps toward modernization of the power grid are being taken across the country:

In June, a group of companies, including Xcel Energy and software company GridPoint Inc., launched the first Smart Grid City in Boulder, Colo. The system, which took about 18 months to build, includes 200 miles of fiber optic cable, 4,600 residential and small business transformers and 16,000 smart meters. “We can now read customer meters remotely, identify and reduce outages and false power outage calls more quickly,” said Jay Herrmann, Xcel Energy regional vice president.

Pacific Gas & Electric Co. has set a goal of installing nearly 10 million smart meters for its California customers by the end of 2011, and is one of the first utilities to seek Federal Energy Regulatory Commission (FERC) approval of its cost-recovery and interoperability plans under a new FERC policy issued in July. “We’re excited about that project, but we have not yet entered our decision on it,” said FERC Commissioner Suedeen Kelly.

More than 30 electric cooperatives in Minnesota have begun coordinating development of communications systems and advanced metering technology to enhance the grid statewide. “While many are talking about smart Grids, Minnesota is actually doing them,” said Ed Solar, CEO of Arcadian Networks, which is providing the two-way broadband network.

Minnesota Sen. Ellen Anderson, who chairs the state Senate’s Environment, Energy and Natural Resources Budget Division, said the goal of grid development in the state is to maximize the use of local and regional power sources, promote clean energy and increase efficiency in electricity delivery.

“No one is more excited than utility regulators,” said Rick Morgan, commissioner of the Washington, D.C., Public Service Commission, at the conference. “State PSCs are already rolling out projects.”

Energy Secretary Steven Chu announced at the conference that DOE would facilitate those efforts with $44 million from the stimulus program so states can hire new staff and retrain current employees so they can quickly review Smart Grid projects. Another $100 million will go to utilities for workforce development, he said.

Chu’s announcement followed DOE’s release of more than $57 million in July for Smart Grid projects, including a national information clearinghouse being developed by Virginia Tech with $1.3 million.

But the big push will come later this year when DOE announces recipients of the $3.4 billion in matching grants for Smart Grid investments and demonstration projects. The maximum investment grants will be $200 million and top awards for demonstrations will be $100 million.

FERC Commissioner Kelly lauded DOE’s decision to require open architecture for all projects that receive grants. “We think open architecture will facilitate Smart Grid development and will allow a large number of vendors to be involved,” she said. FERC has also provided input to DOE on how it should spend the stimulus money, Kelly said.

Morgan, of the D.C. Public Service Commission, voiced a word of caution on the pace of grid development. “We have to evaluate utility investments to ensure they’re in the public interest, and not “gold-plated” or “dead end” projects,” he said. “Federal funding could be helpful as a nudge, but we have to be sure we’re not getting pushed off the cliff in the process.”

Morgan also said PSCs will oppose the idea suggested by some in Washington that federal agencies should be able to override state regulations to speed grid development. But the states don’t want to hinder the Smart Grid, and most look forward to the benefits that will come in the way electricity is priced, Morgan said.

“Most utilities still use the legacy dumb meters that just measure kilowatt usage,” he said. “It’s like going to the grocery store and taking what you want and just getting a total bill each month. Customers will be much better off if they are given a choice of how and when to use electricity.  For example, they can decide how much they want to pay to stay cool on a hot day.”

Dynamic pricing can also help eliminate hidden charges for utility customers, he said. For example, most utilities use blending to keep rates stable while wholesale prices fluctuate, but these “hedge premiums” can add 15 percent or more to monthly bills, he said. “There’s no point in having smart meters if you’re going to have dumb rates,” Morgan said.

Alicia Jackson, a staffer on the Senate Energy and Natural Resources Committee, also warned states and utilities not to become too reliant on the federal gravy train. “There’s not going to be much more legislation after this because we just spent the money to jump-start the Smart Grid,” she told conference attendees.

The decision by the Administration and Congress to invest in Smart Grid research and development bodes well for both businesses and consumers. The Smart Grid is expected to cost an estimated $75 billion to develop, but it could save the nation trillions of dollars by more efficiently operating the grid, eliminating blackouts and possibly reducing the need to build additional power plants helping to meet growing U.S. electricity demand. More importantly, it will be a transformational technology, a so-called “energy Internet,” that could likely spark a revolution in energy-related technology development and deployment.

More headlines from this issue:

» Climate Change Law “Not Going to Happen” in 2009
» Drill Baby Drill! The Moratorium’s End—One Year Later
» Russia: “End of the World” Gas Fields May be Open to the West
» Obama Administration Commits to Powering Up Batter Technology Development
» Outcome of the OPEC Meeting: Production Quotas Unchanged; Actual Output Likely to Fall
» U.S.-Russia Energy and Environment Working Group Update

For reprint information click here.

In the last months, and in the wake of the May OPEC meeting, many market analysts were somewhat surprised by the run-up in oil prices (see Abraham Energy Report story on Oil Prices: How High Can They Go?). It appeared to some that the market was looking way ahead of itself to the day when the world economy and oil demand would recover, leading once more to tighter markets and higher oil prices. We look at the factors that have influenced the market in recent months in advance of the Sept. 9, 2009, OPEC meeting in Vienna.

Cloudy Skies Ahead for Climate Bill

The climate change steamroller hit a roadblock in Congress in late July and then received a near-death blow in late August as Democratic leaders in the Senate announced they were postponing the introduction of comprehensive cap-and-trade legislation until the end of September. Citing of series of factors—the death of Sen. Edward “Ted” Kennedy, Sen. John Kerry’s health woes and the problems around health care reform, the chief sponsors—Kerry, D-Mass., and Barbara Boxer, D-Calif.—decided to delay the bill’s introduction again.

More headlines from this issue:

» Japan Maintains Influence on Global Energy Policy and Markets
» U.S. Sen. Max Baucus: Power Player in Climate Bill
» Canadian Oil Sands Pipeline Secures Stable Energy Supply
» Reins Could Tighten on Energy Futures Trading
» Russia and LNG: A new Supplier in the Market

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The factors at work in the marketplace determining the level of oil prices in the short-term and long-term are a never-ending source of fascination and mystery. After sliding from a peak of $147 per barrel last July to a low near $33 per barrel in December, oil prices are now on the rebound.

With global demand still contracting in 2009, any real tightening of the fundamental supply/demand balance is unlikely to occur in the short term. Despite that, the price of oil has doubled to near $70 per barrel today, from the 2008 year-end lows.

Offshore Wind Must Be Integral Part of Nation’s Energy Mix

As Congress works on the issues of carbon emissions and energy security, one of the measures that has moved to the forefront in both the House and Senate bills is a provision that would establish a national renewable energy standard (RES). If it becomes law, the RES would require power companies to generate approximately 15–20 percent (depending on the legislation’s final outcome) of their energy from renewable sources and energy efficiency by 2021.

More headlines from this issue:

» CCS Technology Seen as Key to Resolving Climate Change Concerns
» Climate Change Update: Economy Looms Large Over Climate Bill
» OPEC: Looking Past the Fundamentals and Hoping for Recovery
» NRC Chairman Jaczko Redefining Role at Important Juncture
» The EU and the Great Pipeline Game
» Water: Rising as a Major Energy Industry Concern

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Looking back over the last 50 years, annual motor gasoline demand in the United States rose from 2.4 million barrels per day (mmbd) in 1949, to a peak of 9.3 mmbd in 2007, an annual average growth rate of nearly 2 percent. This analysis reviews the forces at work that are likely to affect U.S. motor gasoline demand, supply and prices during the 2009 summer driving season and beyond.

Climate Change Legislation Blocked Despite Concessions

Despite months of intense negotiations, and ongoing encouragement from President Obama, cap-and-trade legislation continues to be a difficult sell in Congress, and it remains unlikely it will be ready for the President’s signature in 2009.

In recent weeks, it’s apparent that members of the U.S. House—Republicans and Democrats alike—share the U.S. Senate’s concerns about the cost of cap-and-trade legislation and are proving a serious impediment to passage, despite optimistic forecasts from Energy and Commerce Chairman Henry Waxman (D-Calif.) that the bill would pass the House by Memorial Day.

More headlines from this issue:

» Russia: Resource Nationalism Waning?
» Salazar’s Expanded Role in Obama Energy Policies
» Energy Investments Down, Prices to Rise
» State Energy Policies Roundup
» GHG Registry Facing Criticism

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OPEC Ministers met in Vienna on March 15 to review trends in the oil market, the global economy, and the adequacy of their three previous attempts to reduce oil production in line with declining global demand. They also examined the degree of each OPEC member’s compliance with the existing production quotas set at their last meeting in December 2008.

Energy Challenges Call for Bold Action from President

In his recent speech to Congress and in his various actions since taking office, President Obama has suggested that one of his foremost priorities is to transform America’s energy landscape and move us away from high levels of carbon emissions and imported energy toward clean energy and energy independence.

These goals are commendable, and in terms of the President’s commitment to expanding America’s energy research efforts and providing broad incentives for the development of renewable energy such as wind, solar and geothermal, his policies have been highly consistent with these objectives. The truth is, though, there is nothing very bold about advocating for more renewable energy, which has enjoyed bi-partisan support in Washington for decades.

More headlines from this issue:

» EPA: Carbon Ruling Coming
» FutureGen Revival Signals New Opportunity
» US LNG Import Preview—2009
» Russian Oil Production Slides
» Climate Change Update: New Revenues Challenge
» IRENA: New NGO for Renewables
» Electricity Grid Improvements Moving Forward

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The Abraham Energy Report is pleased to present a wide-ranginginterview with Dr. Chakib Khelil, immediate past President of the Conference of the Organization of the Petroleum Exporting Countries (OPEC) and Minister of Energy and Mines for the People’s Democratic Republic of Algeria.

As immediate past President, Dr. Khelil has overseen OPEC at one of the most volatile periods in the organization’s history. Over the past year, OPEC has seen oil price fluctuations that have challenged historic trends, government expectations and public perceptions. The unpredictable nature of the international economy further destabilizes the oil markets and demands cautious and reasonable leadership.

Launching an Energy Tech Revolution

The Big Three automakers teeter on the edge of bankruptcy, the economy continues to slide, jobs are lost and credit remains elusive. In the midst of all the bad news, one economic number is giving people hope—the price of oil, which is around $100 cheaper than just a few months ago. This bright spot is, however, a mirage that could create a false sense of ease for consumers. Bottom line: The energy crisis is not going away. It will come roaring back once the world economy starts growing again.

More headlines from this issue:

» Russia-Ukraine Gas War
» Can China and India save OPEC?
» Nuclear Power: Untapped Potential
» President Obama’s First 100 Days: Energy Opportunities
» OPEC Update
» Climate Change Delay Likely

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While the first Cabinet posts announced were naturally President-elect Obama’s economic team, there is already great speculation about (and quiet campaigning for) the post of Energy Secretary. The President elect has ambitious plans when it comes to energy and climate change, and the person selected tolead the department will be central to the new administration’s success.

The Economy, Oil and the Fundamentals of Demand

The substantial reduction in the price of oil in recent months suggests that the global oil bubble may have finally burst, allaying once persistent fears that the demand for oil and its price would rise unabated far into the future.

That the hand-wringing over oil has come to an end is not surprising. After all, oil prices peaked at a historic $147 per barrel in July; today they hover near $55. For now, the flagging economy promises to put a damper on both demand and prices.

More headlines from this issue:

» SEC Proposes New Oil & Gas Rules
» OPEC Update: Chasing Demand Downward
» Carbon Capture & Storage: A Viable Solution for Climate Change
» China Moves Toward Reform
» Russia’s Strategic Asset Law

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As the world’s energy consumers consider the future—one where oil prices continue to rise and coal remains a less environmentally friendly option—liquefied natural gas (LNG) is quickly becoming a credible and likely alternative to meeting long-term global energy needs.

At the top of the list of nations poised to satisfy those needs is Qatar.

In an interview with the Abraham Energy Report, Qatargas Chairman and Chief Executive Officer, Mr. Faisal Al-Suwaidi, discussed the future of Qatargas and its role in supplying worldwide LNG production and demand.

Global Markets: A Sense of Urgency and Opportunity

As we launch the Abraham Energy Report, it is with the knowledge that global energy markets are at a critical juncture and the staggering challenges ahead demand both a sense of urgency and opportunity.

The urgency is unambiguous, confirmed by the International Energy Agency (IEA) in its most recent World Energy Outlook: The world faces a perfect storm of constrained fossil fuel supplies, unbounded energy demand and a new resolve to reduce greenhouse gas emissions—all of which qualify as significant economic and political stressors today and in the future.

More headlines from this issue:

» Europe Eyes AGP as Alternative to Russian Natural Gas
» No Matter the Election Results, Climate Change at the Top of New President’s Agenda
» Russia: Different Dance; Same Dance
» Why OPEC Won’t Raise Oil Production
» NRG Energy’s Nuclear Gambit
» US LNG Imports to Remain Strong

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