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20–004 PDF 2005

S. HRG. 109–3

EIA 2005 ANNUAL ENERGY OUTLOOK

HEARING

BEFORE THE

COMMITTEE ON 

ENERGY AND NATURAL RESOURCES 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

TO

RECEIVE TESTIMONY REGARDING GLOBAL ENERGY TRENDS AND 

THEIR POTENTIAL IMPACT ON U.S. ENERGY NEEDS, SECURITY, AND 

POLICY

FEBRUARY 3, 2005

(

Printed for the use of the 

Committee on Energy and Natural Resources 

(II)

COMMITTEE ON ENERGY AND NATURAL RESOURCES 

PETE V. DOMENICI, New Mexico, Chairman 

LARRY E. CRAIG, Idaho 

CRAIG THOMAS, Wyoming 

LAMAR ALEXANDER, Tennessee 

LISA MURKOWSKI, Alaska 

RICHARD M. BURR, North Carolina, 

MEL MARTINEZ, Florida 

JAMES M. TALENT, Missouri 

CONRAD BURNS, Montana 

GEORGE ALLEN, Virginia 

GORDON SMITH, Oregon 

JIM BUNNING, Kentucky 

JEFF BINGAMAN, New Mexico 

DANIEL K. AKAKA, Hawaii 

BYRON L. DORGAN, North Dakota 

RON WYDEN, Oregon 

TIM JOHNSON, South Dakota 

MARY L. LANDRIEU, Louisiana 

DIANNE FEINSTEIN, California 

MARIA CANTWELL, Washington 

JON S. CORZINE, New Jersey 

KEN SALAZAR, Colorado

ALEX FLINT, Staff Director 

JUDITH K. PENSABENE, Chief Counsel 

BOB SIMON, Democratic Staff Director 

SAM FOWLER, Democratic Chief Counsel 

LISA EPIFANI, Counsel 

JENNIFER MICHAEL, Democratic Professional Staff Member 

(III)

C O N T E N T S 

STATEMENTS 

Page

Alexander, Hon. Lamar, U.S. Senator from Tennessee ........................................ 2

Bingaman, Hon. Jeff, U.S. Senator from New Mexico .......................................... 3

Bunning, Hon. Jim, U.S. Senator from Kentucky ................................................. 23

Caruso, Guy, Administrator, Energy Information Administration, Department 

of Energy ............................................................................................................... 7

Domenici, Hon. Pete V., U.S. Senator from New Mexico ..................................... 1

Feinstein, Hon. Dianne, U.S. Senator from California ......................................... 2

Logan, Jeffrey, Senior Energy Analyst and China Program Manager, International Energy Agency ....................................................................................... 15

Martinez, Hon. Mel, U.S. Senator from Florida .................................................... 3

Salazar, Hon. Ken, U.S. Senator from Colorado ................................................... 4

Slaughter, Andrew J., Senior Economist, Shell Oil Company ............................. 24

Smith, Hon. Gordon, U.S. Senator from Oregon ................................................... 5

Verrastro, Frank A., Director and Senior Fellow, Energy Program, Center 

for Strategic and International Studies ............................................................. 31

Wyden, Hon. Ron, U.S. Senator from Oregon ....................................................... 3

APPENDIXES 

APPENDIX I 

Responses to additional questions .......................................................................... 71

APPENDIX II 

Additional material submitted for the record ........................................................ 73

(1)

EIA 2005 ANNUAL ENERGY OUTLOOK 

THURSDAY, FEBRUARY 3, 2005

U.S. SENATE, COMMITTEE ON ENERGY AND NATURAL RESOURCES, Washington, DC. 

The committee met, pursuant to notice, at 10:05 a.m., in room 

SD–366, Dirksen Senate Office Building, Hon. Pete V. Domenici, 

chairman, presiding. 

OPENING STATEMENT OF HON. PETE V. DOMENICI,

U.S. SENATOR FROM NEW MEXICO 

The CHAIRMAN. The hearing will please come to order. 

First, I want to thank everyone who is here and particularly the 

Senators who are here. I will be brief and then, of course, any Senators that want to comment, I will be glad to have that occur this 

morning. 

The three questions that we are going to focus on today at this 

hearing are: first, what are the United States’ current and future 

energy needs? How will they be met, and how will global energy 

trends impact on the United States? 

With demand for energy ever increasing, the need to understand 

the answers to these three questions seems to me to be critical. In 

consultation with others, we have decided that we would hear from 

those either in Government or in the private sector that we 

thought might shed significant light on these three issues. 

For example, in 2004, the United States consumed about 20 million barrels of oil a day. In 2025, the United States is predicted to 

require 27.9 million barrels a day. What is oil world demand projected to be? And oil demand would increase from about 82 million 

barrels a day to 121 million barrels a day by 2030. Now, that 

sounds like a very large increase, but remember, there are large 

users in the marketplace whose needs are going to increase dramatically also. So will this additional oil be enough for America’s 

economy, and where will it come from? How will it affect the 

United States’ relations with other countries in Asia, the Middle 

East, Russia, Canada, South America, et cetera? 

Our natural gas situation also presents many challenges that 

need our immediate attention. The U.S. consumption is growing, 

mainly to meet electricity and industrial application demands. Our 

production faces a number of constraints, and natural gas importation, which I assume will be discussed here substantially, known 

as LNG, faces a variety of obstacles. According to the EIA, which 

is here and going to testify, we are going to go from importing .7 

trillion cubic feet of liquified natural gas to what they estimate to 

2

be 6.4 trillion cubic feet in 2025. Now, that sounds rather incredible, but they will talk about it. I guess we will talk about how we 

can meet that and what would be needed to do that. That means 

that we would have a 20-plus increase by 2025. 

Our witnesses today will share their perspectives on these challenges and in advance we thank them, both for being here today 

and for their thoughts. 

Now, with that, I would like Senator Bingaman, if he cares to, 

to make some comments, and then each of the Senators who is 

here. 

Senator Bingaman. 

[The prepared statements of Senators Alexander and Feinstein 

follow:]

STATEMENT OF HON. LAMAR ALEXANDER, U.S. SENATOR FROM TENNESSEE

We live in unprecedented times. If someone from Mars landed in the United 

States and looked at our energy policy, they would see that it makes no sense. We 

are a nation at war. We rely on energy from a part of the world that bitterly resents 

our nation. World energy demand is growing significantly. According to the World 

Energy Agency, world energy demand is projected to rise by 59 percent from now 

until the year 2030. Two-thirds of this new demand will come from the developing 

world, especially from China and India. 

China is the driver of world oil demand. Listen to these statistics:

• China is adding the equivalent energy demand of one middle-sized country 

every two years. 

• China aims to quadruple its gross domestic product by 2020. This means that 

the equivalent of three more economies the size of China could be added in less 

than two decades. 

• About 70 percent of the new power plants being built in the world are being 

built in China. Last year, China built 37,000 Megawatts of new power—that’s 

the equivalent of American Electric Power, the largest power company in America. And they are still short power—two-thirds of China normally experiences 

blackouts. 

• Last year, China overtook Japan as the second-largest consumer of oil. In 2004, 

China’s fuel demand grew 15 percent. 

• China just completed its first LNG terminal and there are potentially nine more 

in the next few years. We are competing with China for the same LNG supply.

China is going to get its oil from the Middle East and South America—the same 

places we get our oil. This dynamic will increase the chance of resource conflicts and 

competition between countries, such as China and the United States. This year’s 

price spikes are partly a result of China’s increased thirst for oil. 

The challenges here don’t stop at the price that we will pay for our gasoline and 

threatening our manufacturing sector’s competitiveness. 

Coal supplies about 65 percent of China’s energy needs. By 2030, China and India 

will account for 44 percent of worldwide coal-based electricity generation. We need 

to commercialize clean coal technology, like coal gasification—not only for use in our 

country—but in developing countries as well. If the coal plants in China are dirty, 

then this impacts our air quality in the United States as well. 

The growing demand for energy in developing countries underscores that we must 

get serious about reducing our reliance on foreign oil. We must get serious about 

talking about conservation—for oil and natural gas. We must get serious about talking about more domestic supply. We must get serious about commercializing clean 

coal technology. And yes, the United States needs to get serious in doing more on 

climate change—but so does the developing world. 

I look forward to this hearing and learning how we can incorporate this important 

discussion into the upcoming discussions on the Energy Bill. 

STATEMENT OF HON. DIANNE FEINSTEIN, U.S. SENATOR FROM CALIFORNIA

Thank you, Mr. Chairman, for holding this hearing today. The topic of the hearing 

is of particular interest in light of the increased global demand for energy, which 

will only continue to grow. 

3

According to the Energy Information Administration, the United States’ demand 

for oil is expected to grow by about 40% by 2025—from 20 million barrels per day 

to 27.9 million barrels per day. World demand is expected to increase from 49.2 million barrels per day in 2001 to 66.3 million barrels per day in 2025. Much of this 

growth is due to growing demand for oil in Asia. 

I cite these numbers to show that any energy policy considered by this Committee 

must not be considered in a vacuum. We must recognize the stress on our natural 

resources and our environment if we continue to implement energy policies that 

only stress traditional energy sources. 

If our goal is to provide our constituents with access to low-cost, reliable energy 

supplies, any energy policy must include real energy efficiency standards and incentives, a robust renewable energy portfolio standard, and aggressive fuel economy 

standards. 

All choices have consequences. If we maintain our current energy use the EIA estimates that carbon dioxide emissions are projected to increase from 5,789 million 

metric tons in 2003 to 8,062 million metric tons in 2025, an average annual increase 

of 1.5 percent. 

As the world’s largest emitter of greenhouse gases, we must act to reduce our 

emissions, not increase them. While the United States is on a path to increase emissions by 1.5 percent per year, the United Kingdom, a Kyoto signatory, must reduce 

emissions by 20% by 2010. 

The Kyoto Protocol will enter into effect on February 16, 2005. The United States 

is the only developing nation besides Australia that has not signed onto the treaty. 

Australia has not signed onto the treaty but is expected to reduce emissions in line 

with Kyoto. 

I am concerned that by the time we recognize that climate change is a problem, 

it will be too late to change our way of life. I am also worried that our determination 

to continue the status quo and to forego any action on climate change only further 

isolates us in the international community. 

I look forward to hearing the witnesses’ thoughts on our energy future. Thank you 

Mr. Chairman.

STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR

FROM NEW MEXICO 

Senator BINGAMAN. Thank you very much, Mr. Chairman. I really appreciate you holding the hearing and appreciate this excellent 

group of witnesses coming to advise us of their views on future 

global energy trends. I will just stop with that and wait until the 

question period. Thank you. 

The CHAIRMAN. Thank you. 

Senator Martinez. 

STATEMENT OF HON. MEL MARTINEZ, U.S. SENATOR

FROM FLORIDA 

Senator MARTINEZ. Mr. Chairman, thank you again for holding 

this hearing. As a new committee member, I am looking forward 

to the hearing. I think it is an important moment for me to learn 

from the panel, and I look forward to hearing their testimony and 

then perhaps I will have some questions. 

I do believe that I share the concern that we do need to have a 

comprehensive energy policy, and I look forward with the chairman 

and the ranking member to move an energy bill this year. 

The CHAIRMAN. Thank you very much. 

Senator Wyden. 

STATEMENT OF HON. RON WYDEN, U.S. SENATOR

FROM OREGON 

Senator WYDEN. Thank you, Mr. Chairman. I am going to be in 

and out a bit this morning. I appreciate the chance to make a brief 

statement. 

4

* The report (S. Rpt. 108-54) has been retained in committee files. 

Mr. Chairman and colleagues, in terms of energy security, I am 

now convinced that taxpayers are not getting the best bang that 

they can get for their buck. According to the Congressional Research Service, two of the current tax incentives for oil exploration 

and production are especially inefficient. These two subsidies cost 

the taxpayers alone about $1.3 billion per year, and I would ask, 

Mr. Chairman, if that Congressional Research analysis could be 

put into the record at this point.* 

The CHAIRMAN. Absolutely. 

Senator WYDEN. Mr. Chairman and colleagues, at the same time 

we are wasting taxpayer funds, our country is not providing 

enough incentive for oil producers to use enhanced oil recovery 

techniques that could go a long way toward reducing our Nation’s 

dependence on foreign oil. According to the Congressional Research 

Service, it is estimated that nearly 400 billion barrels of oil remain 

in abandoned reserves. The Congressional Research Service also 

says that 10 percent of that oil consists of known recoverable reserves that could be produced with the proper techniques if the appropriate financial incentives were there. 

So according to my math, that is an additional 40 billion barrels 

of oil that could be produced right here in our Nation. At the current level of about 10 million barrels per day, 40 billion barrels is 

roughly what the United States will import over the next 10 years. 

So I think as we go forward, with respect to this whole discussion, Mr. Chairman and colleagues, we ought to look and look in 

a bipartisan way at using, particularly, tax incentives that are now 

in place and are not particularly efficient and reconfigure those incentives so as to increase production. 

One last point that I am going to want to explore with Mr. Caruso is that I cannot understand why U.S. oil producers are allowed to pocket more than a billion dollars in subsidies and then 

are allowed to export more than 1 million barrels of U.S.-produced 

oil each day. It seems to me that if taxpayers are subsidizing an 

oil company’s production, the United States ought to get to keep 

that company’s oil production in our Nation. 

Mr. Chairman, again, I thank you for your thoughtfulness and 

being able to make this statement. I look forward to working with 

you and our colleagues. 

The CHAIRMAN. Thank you very much, Senator. 

Senator Salazar. 

STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR

FROM COLORADO 

Senator SALAZAR. Thank you, Mr. Chairman. I have a statement 

for the record that I will submit, if there is no objection. 

The CHAIRMAN. It will be made a part of the record. 

Senator SALAZAR. I want to just make a quick statement. Your 

forecasts are very important to us and I very much look forward 

to those forecasts. I have a particular interest in your long-term 

forecasts on the role that renewable energy can play here in our 

Nation and in our world. In my own State, we have an abundance 

of natural resources. We are developing many of those natural reVerDate 0ct 09 2002 11:48 Apr 04, 2005 Jkt 000000 PO 00000 Frm 00008 Fmt 6633 Sfmt 6602 P:\DOCS\20004.TXT SENE3 PsN: SCAN
5

sources in coal, oil and gas. But we also have a significant initiative underway to move forward with the development of renewable 

energy, and it would be good to have some good science with respect to where you think the renewable energy component of our 

whole energy equation is going to go. So I very much look forward 

to your comments, and thank you. 

[The prepared statement of Senator Salazar follows:]

PREPARED STATEMENT OF HON. KEN SALAZAR, U.S. SENATOR FROM COLORADO

Good morning Mr. Chairman, Senator Bingaman, and members of the committee. 

I would like to welcome our guests who are here today to offer their perspectives 

on the energy future of the United States and of the world. This Committee will 

be responsible for many of the decisions that will directly affect that future. 

My own state of Colorado contributes substantially to the energy resources of our 

country. We are blessed with an abundance of natural energy resources, and the oil 

and gas industry plays a significant part of our state economy. But as long as the 

United States is dependent on foreign oil for a significant part of our energy needs, 

our economy and our national security are at risk. We need to move rapidly toward 

energy independence and energy security. 

I am particularly interested in your forecasts with respect to renewable energy 

sources and the effects of world energy supply and demand on the development of 

renewable and alternative sources of energy in the United States. And with respect 

to traditional sources of energy, I hope you will tell us how you think this body can 

encourage the development of new, cleaner, and more efficient technologies for coal 

and natural gas. 

I note that this year the International Energy Agency (IEA) produced an ‘‘Alternative Policy Scenario,’’ which considers the effects of more vigorous government efforts to combat environmental problems and to reduce energy-security risks. According to IEA, under such a scenario energy demand would decrease by 10% in the 

next 25 years and carbon emissions would decrease by 16%. At the same time, world 

dependence on the Middle East for supplies of oil and gas would be significantly reduced. These results can be achieved through government policies that encourage 

more efficient use of energy in vehicles, electric appliances, lighting and industry, 

as well as a greater emphasis on the use of renewable sources of energy. 

I look forward to your testimony.

The CHAIRMAN. Thank you very much, Senator. 

Let us proceed then with our witnesses. Are we going to go in 

this order? All right. The Administrator of the Energy Information 

Administration from the Department of Energy, Guy Caruso. We 

will call on you, but I note another Senator arrived. Let us see if 

he wants to comment. 

Senator Smith. 

STATEMENT OF HON. GORDON SMITH, U.S. SENATOR

FROM OREGON 

Senator SMITH. Thank you, Mr. Chairman. If you would like to 

proceed, I will put mine in the record and just state the summary 

of what my written statement is. 

And that is, from what I read of your testimony, our Nation 

needs an energy bill. I think President Bush was wise to call on 

us to pass an energy bill because we are clearly too dependent 

upon foreign sources. I guess by 2025, according to your testimony, 

38 percent of our energy will come from abroad, and that has dire 

consequences to consumers and to our national security. Specifically natural gas and LNG terminals, we have got to find a way 

to expand those. If we do not, farmers and all consumers will continue to bear very high prices, and we owe them better than that. 

We can do better than that. 

6

Without objection, Mr. Chairman, I would like to put this statement in the record. 

The CHAIRMAN. Thank you very much. Your statement will be 

made a part of the record. 

[The prepared statement of Senator Smith follows:]

PREPARED STATEMENT OF HON. GORDON SMITH, U.S. SENATOR FROM OREGON

Mr. Chairman, as we begin the debate on national energy policy in the 109th Congress, I appreciate your willingness to schedule this hearing on global energy trends, 

and their potential impact on this nation’s vital energy supplies—particularly oil 

and natural gas. 

The short-term outlook is not good for consumers, as energy prices remain at or 

near historic highs. While all Americans are feeling the effects on their wallets, high 

prices harm our financially vulnerable constituents the most. Low-income families 

and those on fixed incomes should not have to choose between eating and paying 

their utility bills. 

Even more disconcerting are the projections of our growing dependence on imported energy resources. This vulnerability will be exacerbated in the coming decades because the United States will be competing for energy resources against the 

emerging economies of other nations, particularly China and India. 

In its testimony, the Energy Information Agency indicates that net imports of energy are expected to constitute 38 percent of total U.S. energy consumption in 2025, 

up from 27 percent in 2003. This heavy reliance on imports will deepen our trade 

deficits, and undercut our economic security. There are also broad foreign policy implications of relying on imported energy resources to sustain our economy. 

The EIA now forecasts that, by 2025, the United States will be dependent on imports for 68 percent of its oil and about 22 of its natural gas. Liquified natural gas 

will make up an increasing percentage of gas imports as the availability of Canadian gas declines. 

There are only four existing U.S. LNG terminals, and three of them are expected 

to be operating at capacity by 2007. Siting, permitting and constructing new terminals will be expensive, and EIA forecasts that delays and regulatory costs are also 

expected to add to the price of natural gas for new facilities. 

Higher natural gas prices are having impacts throughout our economy. Much of 

the new electricity generation that has been permitted uses natural gas-fired turbines. Chemical manufacturers need natural gas as an input for manufacturing. 

Farmers are feeling the effects of higher fertilizer prices, and will continue to bear 

these costs so long as natural gas prices remaining high. There is strong correlation 

between the prices of natural gas and nitrogen fertilizer. 

As policymakers, we have an obligation to make the difficult choices today to ensure this nation’s economic and energy security in the decades ahead. We must 

strive to put incentives and policies in place that will enable market forces to meet 

the energy needs of the united States at a reasonable cost. We must encourage increased domestic production, coupled with energy efficiency and conservation, to 

meet our future energy needs. 

I look forward to hearing from the witnesses today, and to working with my colleagues in the weeks and months ahead to enact a responsible energy policy for our 

nation.

The CHAIRMAN. I thank you for your comments. I failed to mention in my opening remarks—and I probably should have—that last 

night the President in an address on far-reaching subjects took 

time out to give us a significant nudge in behalf of what he saw 

as our country’s needs and to get a bipartisan energy bill. I do not 

think we have had that significant a pressure on the part of the 

President to the American people as that statement in a State of 

the Union. 

For myself, Senator Bingaman, I was pleased that the President 

publicly—I do not know if any other President has—mentioned nuclear power. It seems like they all go right up to it and then go off 

on something else, but at least he mentioned it. I thank you for 

your support in the past and the committee’s and hope we can 

move on that front also. 

7

Let us go with you, Mr. Caruso, please. 

STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY 

INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY 

Mr. CARUSO. Thank you, Mr. Chairman, and members of the 

committee. Good morning. I am pleased to be able to present the 

Energy Information Administration’s long-term outlook, which we 

published in December. I am going to present some trends today 

which are based on current policies, rules, and regulations. These 

numbers are essentially where we are headed if we keep on the 

path we are on. And where we are headed is toward, as has already been mentioned, increased net import dependency. 

Our total primary energy consumption is going to increase by 

about one-third over the next 20 years by 2025, and because demand is increasing more rapidly than domestic supply, imports will 

meet a growing share of that demand. Net imports are projected 

to reach 38 percent of total energy by 2025, up from 27 percent 

today. Although these are primarily petroleum, also natural gas 

will play an increasingly important role in the imports. 

Our demand grows at about one-half the rate of the GDP over 

the next 20 years, with the strongest growth being in the commercial and transportation sectors. In the commercial sector, particularly electricity for computers and electronic equipment will lead 

the way. And of course, in transportation, increasing light-duty vehicles and vehicle miles traveled in both vehicles and aircraft will 

add to this growth. 

With respect to oil, our net import dependency will increase from 

56 percent last year to about 68 percent in this baseline forecast. 

Our oil projections do assume oil prices will decline from their current prices to about $25 by 2010. But we recognize that there is 

a great deal of uncertainty in that price outlook, and so in our full 

report, we will show a number of different alternative price cases 

which reflect the concerns over uncertainty over resources, infrastructure investment, and geopolitical trends. 

Our domestic supply will increase slightly over the next several 

years as deep-water oil in the Gulf of Mexico comes on stream from 

new discoveries, but even that will not be enough to keep production up, and production by 2025 will be lower than it is today. 

Therefore, that nearly 8 million barrel a day growth in demand will 

almost entirely be made up of increased imports, as I mentioned. 

Indeed, the largest share of that increase will have to come from 

the area where most of the oil reserves are, and that is the Middle 

East. And there is limited opportunity to switch out of oil because 

so much of it is used in the transportation sector, about 70 percent 

by 2025. 

The picture in natural gas, as the chairman mentioned, is moving in that same direction. Net imports are on track to increase 

sharply during the next 20 years, mainly in the form of liquified 

natural gas, LNG. Demand for natural gas will increase by about 

40 percent, mainly for electric power generation and industrial use. 

That is more than 8.5 tcf of growth over this 20-year period. And 

our domestic supply will not keep pace, not nearly, going only from 

about 19 tcf to less than 22 by 2025, so that 6.5 additional trillion 

cubic feet of gas will need to be imported, and that will be almost 

8

1World oil prices in AEO2005 are defined based on the average refiner acquisition cost of imported oil to the United States (IRAC). The IRAC price tends to be a few dollars less than the 

widely-cited West Texas Intermediate (WTI) spot price and has been as much as six dollars per 

all in the form of LNG. As the chairman mentioned, we look for 

about 6.4 tcf of LNG imports by 2025. 

We were relying on Canada for much of our imports in the 

1990’s. That will no longer be available to us, as Canada’s depletion 

rates increase and their need for domestic use of natural gas as 

well increases. 

For electricity, both natural gas and coal will increase. Coal will 

maintain its share, about 50 percent of our electric power generation under this scenario. Natural gas will grow rapidly from 16 percent to about 24 percent of our electric power generation. Nuclear 

generating capacity will increase, but under the existing economics, 

we do not foresee any new nuclear plants built. Certainly renewables will grow, but their share will stay at about 9 percent of our 

electric power generation by 2025. 

The CHAIRMAN. Included in that word ‘‘renewable’’ is hydro? 

Mr. CARUSO. Yes. 

The CHAIRMAN. How much of that 9 is hydro? 

Mr. CARUSO. Of the 9 percent, 7 percent is hydro. 

The CHAIRMAN. So it will be 2 percent from other than hydro? 

Mr. CARUSO. That is correct, Senator. 

Turning to the global market, world energy consumption is expected to grow even faster at about 54 percent over the next 20 

years, and the most rapid growth will be in developing countries, 

particularly developing Asia. China, for example, will have triple 

the growth rate as the industrialized countries and the developing 

countries of Asia will double their consumption of energy in 20 

years. 

Natural gas will also grow outside of the United States, particularly for electric power generation, but coal will remain the dominant source of electric power generation in developing countries, 

particularly in China and India, which has important implications 

for carbon dioxide emissions. 

In summary, Mr. Chairman, the economic growth in the populous countries of the world, the United States, China, India, will increase energy demand, and fossil fuels, under the business-as-usual 

case I presented here, will remain the dominant source of energy. 

And dependence on foreign sources of oil and increasingly natural 

gas are expected to increase significantly not only in this country 

but in China, India, and elsewhere in Asia. This has a very important geopolitical implications, which I am sure we will hear from 

the following witnesses in more detail. 

Mr. Chairman, members of the committee, thank you once again 

for allowing me to present the EIA’s latest outlook. I look forward 

to the question and answer period. Thank you. 

[The prepared statement of Mr. Caruso follows:]

PREPARED STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY INFORMATION

ADMINISTRATION, DEPARTMENT OF ENERGY

U.S. ENERGY PRICES

In the AEO2005 reference case, the annual average world oil price1 increases from 

$27.73 per barrel (2003 dollars) in 2003 ($4.64 per million Btu) to $35.00 per barrel 

9

barrel lower than the WTI in recent months. For the first 11 months of 2004, WTI averaged 

$41.31 per barrel ($7.12 per million Btu), while IRAC averaged $36.28 per barrel (nominal dollars) ($6.26 per million Btu). 

* Figures 1-16 have been retained in committee files. 

in 2004 ($5.86 per million Btu) and then declines to $25.00 per barrel in 2010 ($4.18 

per million Btu) as new supplies enter the market. It then rises slowly to $30.31 

per barrel in 2025 ($5.07 per million Btu) [Figure 1]* In nominal dollars, the average world oil price is about $52 per barrel in 2025 ($8.70 per million Btu). 

There is a great deal of uncertainty about the size and availability of crude oil 

resources, particularly conventional resources, the adequacy of investment capital, 

and geopolitical trends. For example, the AEO2005 reference case assumes that 

world crude oil prices will decline as growth in consumption slows and producers 

increase their productive capacity and output in response to current high prices; 

however, the October 2004 oil futures prices for West Texas Intermediate crude oil 

(WTI) on the New York Mercantile Exchange (NYMEX) implies that the average annual oil price in 2005 will exceed its 2004 level before falling back somewhat, to levels that still would be above those projected in the reference case. To evaluate this 

uncertainty about world crude oil prices, the complete AEO2005 will include other 

cases based on alternative world crude oil prices paths. 

In the AEO2005, average wellhead prices for natural gas in the United States are 

projected to decrease from $4.98 per thousand cubic feet (2003 dollars) in 2003 

($4.84 per million Btu) to $3.64 per thousand cubic feet in 2010 ($3.54 per million 

Btu) as the availability of new import sources and increased drilling expands available supply. After 2010, wellhead prices are projected to increase gradually, reaching $4.79 per thousand cubic feet in 2025 ($4.67 per million Btu) (about $8.20 per 

thousand cubic feet or $7.95 per million Btu in nominal dollars). Growth in liquefied 

natural gas (LNG) imports, Alaska production, and lower-48 production from nonconventional sources is not expected to increase sufficiently to offset the impacts of 

resource depletion and increased demand in the lower 48 states. 

In AEO2005, the combination of more moderate increases in coal production, expected improvements in mine productivity, and a continuing shift to low-cost coal 

from the Powder River Basin in Wyoming leads to a gradual decline in the average 

Monmouth price, to approximately $17 per ton (2003 dollars) shortly after 2010 

($0.86 per million Btu). The price is projected to remain nearly constant between 

2010 and 2020, increasing after 2020 as rising natural gas prices and the need for 

baseload generating capacity lead to the construction of many new coal-fired generating plants. By 2025, the average Monmouth price is projected to be $18.26 per 

ton ($0.91 per million Btu). The AEO2005 projection is equivalent to an average 

Monmouth coal price of $31.25 per ton in nominal dollars in 2025 ($1.56 per million 

Btu). 

Mr. Chairman and Members of the Committee: I appreciate the opportunity to appear before you today to discuss the long-term outlook for energy markets in the 

United States and for the world. 

The Energy Information Administration (EIA) is an independent statistical and 

analytical agency within the Department of Energy. We are charged with providing 

objective, timely, and relevant data, analysis, and projections for the use of the Department of Energy, other government agencies, the U.S. Congress, and the public. 

We do not take positions on policy issues, but we do produce data and analysis reports that are meant to help policy makers in their energy policy deliberations. Because we have an element of statutory independence with respect to the analyses, 

our views are strictly those of EIA and should not be construed as representing 

those of the Department, the Administration, or any other organization. However, 

EIA’s baseline projections on energy trends are widely used by government agencies, 

the private sector, and academia for their own energy analyses. 

The Annual Energy Outlook provides projections and analysis of domestic energy 

consumption, supply, prices, and energy-related carbon dioxide emissions through 

2025. Annual Energy Outlook 2005 (AEO2005) is based on Federal and State laws 

and regulations in effect on October 31, 2004. The potential impacts of pending or 

proposed legislation, regulations, and standards—or of sections of legislation that 

have been enacted but that require funds or implementing regulations that have not 

been provided or specified—are not reflected in the projections. AEO2005 explicitly 

includes the impact of the recently enacted American Jobs Creation Act of 2004, the 

Military Construction Appropriations Act for Fiscal Year 2005, and the Working 

Families Tax Relief Act of 2004. AEO2005 does not include the potential impact of 

proposed regulations such as the Environmental Protection Agency’s (EPA) Clean 

Air Interstate and Clean Air Mercury rules. 

10

The U.S. projections in this testimony are based on the December 2004 ‘‘early release’’ of the AEO2005. The entire publication will be released later this month. In 

addition to the long-term U.S. forecast of energy markets, EIA also prepares a longterm outlook for world energy markets, which is published annually in the International Energy Outlook (IEO). The latest edition of this report, the IEO2004, was 

published in April 2004. These projections are not meant to be an exact prediction 

of the future, but represent a likely energy future, given technological and demographic trends, current laws and regulations, and consumer behavior as derived 

from known data. EIA recognizes that projections of energy markets are highly uncertain and subject to many random events that cannot be foreseen such as weather, political disruptions, and technological breakthroughs. In addition to these phenomena, long-term trends in technology development, demographics, economic 

growth, and energy resources may evolve along a different path than expected in 

the projections. Both the full AEO2005 and the IEO2004 include a large number of 

alternative cases intended to examine these uncertainties. AEO2005 and IEO2004

provide integrated projections of U.S. and world energy market trends for roughly 

the next two decades. The following discussion summarizes the highlights from 

AEO2005 for the major categories of U.S. energy prices, demand, and supply. It is 

followed by a discussion of the key trends in world energy markets projected in 

IEO2004. 

Average delivered electricity prices are projected to decline from 7.4 cents per 

kilowatthour (2003 dollars) in 2003 ($21.68 per million Btu) to a low of 6.6 cents 

per kilowatthour in 2011 ($19.34 per million Btu) as a result of an increasingly competitive generation market and a decline in natural gas prices. After 2011, average 

real electricity prices are projected to increase, reaching 7.3 cents per kilowatthour 

in 2025 ($21.38 per million Btu) (equivalent to 12.5 cents per kilowatthour or $36.61 

per million Btu in nominal dollars). 

U.S. ENERGY CONSUMPTION

Total energy consumption is projected to grow at about one-half the rate (1.4 percent per year) of gross domestic product (GDP) with the strongest growth in energy 

consumption for electricity generation and commercial and transportation uses. Delivered residential energy consumption is projected to grow from 11.6 quadrillion 

British thermal units (Btu) in 2003 to 14.3 quadrillion Btu in 2025 (0.9 percent per 

year) [Figure 2]. This growth is consistent with population growth and household 

formation. The most rapid growth in residential energy demand in AEO2005 is projected to be in the demand for electricity used to power computers, electronic equipment, and appliances. Delivered commercial energy consumption is projected to 

grow at a more rapid average annual rate of 1.9 percent between 2003 and 2025, 

reaching 12.5 quadrillion Btu in 2025, consistent with growth in commercial 

floorspace. The most rapid increase in commercial energy demand is projected for 

electricity used for computers, office equipment, telecommunications, and miscellaneous small appliances. 

Delivered industrial energy consumption in AEO2005 is projected to reach 30.8 

quadrillion Btu in 2025, growing at an average rate of 1.0 percent per year between 

2003 and 2025, as efficiency improvements in the use of energy only partially offset 

the impact of growth in manufacturing output. Transportation energy demand is expected to increase from 27.1 quadrillion Btu in 2003 to 40.0 quadrillion Btu in 2025, 

a growth rate of 1.8 percent per year. The largest demand growth occurs in lightduty vehicles and accounts for about 60 percent of the total increase in transportation energy demand by 2025, followed by heavy truck travel (12 percent of total 

growth) and air travel (12 percent of total growth). 

Total petroleum demand is projected to grow at an average annual rate of 1.5 percent in the AEO2005 forecast, from 20.0 million barrels per day in 2003 to 27.9 million barrels per day in 2025 [Figure 3] led by growth in transportation uses, which 

account for 67 percent of total petroleum demand in 2003, increasing to 71 percent 

in 2025. Improvements in the efficiency of vehicles, planes, and ships are more than 

offset by growth in travel. 

Total demand for natural gas is also projected to increase at an average annual 

rate of 1.5 percent from 2003 to 2025. About 75 percent of the growth in gas demand 

from 2003 to 2025 results from increased use in power generation and in industrial 

applications. 

Total coal consumption is projected to increase from 1,095 million short tons in 

2003 to 1,508 million short tons in 2025, growing by 1.5 percent per year. About 

90 percent of the coal is currently used for electricity generation. Coal remains the 

primary fuel for generation and its share of generation is expected to remain about 

50 percent between 2003 and 2025. Total coal consumption for electricity generation 

11

is projected to increase by an average of 1.6 percent per year, from 1,004 million 

short tons in 2003 to 1,425 million short tons in 2025. 

Total electricity consumption, including both purchases from electric power producers and on-site generation, is projected to grow from 3,657 billion kilowatthours 

in 2003 to 5,467 billion kilowatthours in 2025, increasing at an average rate of 1.8 

percent per year. Rapid growth in electricity use for computers, office equipment, 

and a variety of electrical appliances in the end-use sectors is partially offset in the 

AEO2005 forecast by improved efficiency in these and other, more traditional electrical applications and by slower growth in electricity demand in the industrial sector. 

Total marketed renewable fuel consumption, including ethanol for gasoline blending, is projected to grow by 1.5 percent per year in AEO2005, from 6.1 quadrillion 

Btu in 2003 to 8.5 quadrillion Btu in 2025, as a result of State mandates for renewable electricity generation and the effect of production tax credits. About 60 percent 

of the projected demand for renewables in 2025 is for grid-related electricity generation (including combined heat and power), and the rest is for dispersed heating and 

cooling, industrial uses, and fuel blending. 

U.S. ENERGY INTENSITY

Energy intensity, as measured by primary energy use per dollar of GDP (2000 dollars), is projected to decline at an average annual rate of 1.6 percent in the 

AEO2005, with efficiency gains and structural shifts in the economy offsetting 

growth in demand for energy services [Figure 4]. The projected rate of energy. intensity decline in AEO2005 falls between the historical averages of 2.3 percent per year 

from 1970 to 1986, when energy prices increased in real terms, and 0.7 percent per 

year from 1986 to 1992, when energy prices were generally falling. Between 1992 

and 2003, energy intensity has declined on average by 1.9 percent per year. During 

this period, the role of energy-intensive industries in the U.S. economy fell sharply. 

Energy-intensive industries’ share of industrial output declined 1.3 percent per year 

from 1992 to 2003. In the AEO2005 forecast, the energy-intensive industries’ share 

of total industrial output is projected to continue declining but at a slower rate of 

0.8 percent per year, which leads to the projected slower annual rate of reduction 

in energy intensity. 

Historically, energy use per person has varied over time with the level of economic 

growth, weather conditions, and energy prices, among many other factors. During 

the late 1970s and early 1980s, energy consumption per capita fell in response to 

high energy prices and weak economic growth. Starting in the late 1980s and lasting through the mid-1990s, energy consumption per capita increased with declining 

energy prices and strong economic growth. Per capita energy use is projected to increase in AEO2005, with growth in demand for energy services only partially offset 

by efficiency gains. Per capita energy use is expected to increase by an average of 

0.5 percent per year between 2003 and 2025 in AEO2005. 

U.S. ENERGY PRODUCTION AND IMPORTS

Total energy consumption is expected to increase more rapidly than domestic energy supply through 2025. As a result, net imports of energy are projected to meet 

a growing share of energy demand. Net imports are expected to constitute 38 percent of total U.S. energy consumption in 2025, up from 27 percent in 2003 [Figure 

5]. 

Petroleum. Projected U.S. crude oil production increases from 5.7 million barrels 

per day in 2003 to a peak of 6.2 million barrels per day in 2009 as a result of increased production offshore, predominantly in the deep waters of the Gulf of Mexico. 

Beginning in 2010, U.S. crude oil production is expected to start declining, falling 

to 4.7 million barrels per day in 2025. Total domestic petroleum supply (crude oil, 

natural gas plant liquids, refinery processing gains, and other refinery inputs) follows the same pattern as crude oil production in the AEO2005 forecast, increasing 

from 9.1 million barrels per day in 2003 to a peak of 9.8 million barrels per day 

in 2009, then declining to 8.8 million barrels per day in 2025 [Figure 6]. 

In 2025, net petroleum imports, including both crude oil and refined products (on 

the basis of barrels per day), are expected to account for 68 percent of demand, up 

from 56 percent in 2003. Despite an expected increase in domestic refinery distillation capacity, net refined petroleum product imports account for a growing proportion of total net imports, increasing from 14 percent in 2003 to 16 percent in 2025. 

Natural Gas. Domestic natural gas production is projected to increase from 19.1 

trillion cubic feet in 2003 to 21.8 trillion cubic feet in 2025 in AEO2005 [Figure 7]. 

Lower 48 onshore natural gas production is projected to increase from 13.9 trillion 

cubic feet in 2003 to a peak of 15.7 trillion cubic feet in 2012 before falling to 14.7 

12

trillion cubic feet in 2025. Lower 48 offshore production, which was 4.7 trillion cubic 

feet in 2003, is projected to increase in the near term (to 5.3 trillion cubic feet by 

2014) because of the expected development of some large deepwater fields, including 

Mad Dog, Entrada, and Thunder Horse. After 2014, offshore production is projected 

to decline to about 4.9 trillion cubic feet in 2025. 

Growth in U.S. natural gas supplies will depend on unconventional domestic production, natural gas from Alaska, and imports of LNG. Total nonassociated unconventional natural gas production is projected to grow from 6.6 trillion cubic feet in 

2003 to 8.6 trillion cubic feet in 2025. With completion of an Alaskan natural gas 

pipeline in 2016, total Alaskan production is projected to increase from 0.4 trillion 

cubic feet in 2003 to 2.2 trillion cubic feet in 2025. 

Three of the four existing U.S. LNG terminals (Cove Point, Maryland; Elba Island, Georgia; and Lake Charles, Louisiana) are all expected to expand by 2007, and 

additional facilities are expected to be built in the lower-48 States, serving the Gulf, 

Mid-Atlantic, and South Atlantic States, including a new facility in the Bahamas 

serving Florida via a pipeline. Another facility is projected to be built in Baja California, Mexico, serving a portion of the California market. Total net LNG imports 

in the United States and the Bahamas are projected to increase from 0.4 trillion 

cubic feet in 2003 to 6.4 trillion cubic feet in 2025. 

Net Canadian imports are expected to decline from 2003 levels of 3.1 trillion cubic 

feet to about 2.5 trillion cubic feet by 2009. After 2010, Canadian natural gas imports in AEO2005 increase to 3.0 trillion cubic feet in 2015 as a result of rising natural gas prices, the introduction of gas from the Mackenzie Delta, and increased 

production from coalbeds. After 2015, because of reserve depletion effects and growing domestic demand in Canada, net U.S. imports are projected to decline to 2.6 trillion cubic feet in 2025. 

Coal. As domestic coal demand grows in AEO2005, U.S. coal production is projected to increase at an average rate of 1.5 percent per year, from 1,083 million 

short tons in 2003 to 1,488 million short tons in 2025. Production from mines west 

of the Mississippi River is expected to provide the largest share of the incremental 

coal production. In 2025, nearly two-thirds of coal production is projected to originate from the western States [Figure 8]. 

U.S. ELECTRICITY GENERATION

In AEO2005, generation from both natural gas and coal is projected to increase 

through 2025 to meet growing demand for electricity. AEO2005 projects that 1,406 

billion kilowatthours of electricity (including generation in the end-use sectors) will 

be generated from natural gas in 2025, more than twice the 2003 level of about 630 

billion kilowatthours [Figure 9]. The natural gas share of electricity generation is 

projected to increase from 16 percent in 2003 to 24 percent in 2025. Generation from 

coal is projected to grow from about 1,970 billion kilowatthours in 2003 to 2,890 billion kilowatthours in 2025, with the share decreasing slightly from 51 percent in 

2003 to 50 percent in 2025. Between 2004 and 2025, AEO2005 projects that 87 

gigawatts of new coal-fired generating capacity will be constructed. 

Nuclear generating capacity in the AEO2005 is projected to increase from 99.2 

gigawatts in 2003 to 102.7 gigawatts in 2025 as a result of uprates of existing plants 

between 2003 and 2025. All existing nuclear plants are projected to continue to operate, but EIA projects that no new plants will become operational between 2003 

and 2025. Total nuclear generation is projected to grow from 764 billion 

kilowatthours in 2003 to 830 billion kilowatthours in 2025 in AEO2005. The share 

of electricity generated from nuclear is projected to decline from 20 percent in 2003 

to 14 percent in 2025. 

Renewable technologies are projected to grow slowly because they are relatively 

capital intensive and they do not compete broadly with traditional fossil-fired generation. Where enacted, State renewable portfolio standards, which specify a minimum share of generation or sales from renewable sources, are included in the forecast. AEO2005 includes the extension of the Federal production tax credit for wind 

and biomass through December 31, 2005, as indicated in H.R. 1308, the Working 

Families Tax Relief Act of 2004. Total renewable generation in AEO2005, including 

combined heat and power generation, is projected to increase from 359 billion 

kilowatthours in 2003 to 489 billion kilowatthours in 2025, increasing 1.4 percent 

per year. 

U.S. CARBON DIOXIDE EMISSIONS

Carbon dioxide emissions from energy use are projected to increase from 5,789 

million metric tons in 2003 to 8,062 million metric tons in 2025 in AEO2005, an 

average annual increase of 1.5 percent [Figure 10]. The carbon dioxide emissions inVerDate 0ct 09 2002 11:48 Apr 04, 2005 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 P:\DOCS\20004.TXT SENE3 PsN: SCAN
13

tensity of the U.S. economy is projected to fall from 558 metric tons per million dollars of GDP in 2003 to 397 metric tons per million dollars of GDP in 2025, an average decline of 1.5 percent per year. Projected increases in carbon dioxide emissions 

primarily result from continued reliance on coal for electricity generation and on petroleum fuels in the transportation sector. 

THE INTERNATIONAL OUTLOOK TO 2025

IEO2004 includes projections of regional energy consumption, energy consumption 

by primary fuel, electricity consumption, carbon dioxide emissions, nuclear generating capacity, and international coal trade flows. World oil production and natural 

gas production forecasts are also included in the report. The IEO2004 projects 

strong growth for worldwide energy demand over the projection period ending in 

2025. Total world consumption of marketed energy is expected to expand by 54 percent, from 404 quadrillion Btu in 2001 to 623 quadrillion Btu in 2025 [Figure 11]. 

World Energy Consumption by Region. The IEO2004 reference case outlook shows 

strongest growth in energy consumption among the developing nations of the world 

[Figure 12]. The fastest growth is projected for the nations of developing Asia, including China and India, where robust economic growth accompanies the increase 

in energy consumption over the forecast period. GDP in developing Asia is expected 

to expand at an average annual rate of 5.1 percent, compared with 3.0 percent per 

year for the world as a whole. With such strong growth in GDP, demand for energy 

in developing Asia is projected to double over the forecast, accounting for 40 percent 

of the total projected increment in world energy consumption and 70 percent of the 

increment for the developing world alone. Energy demand increases by 3.0 percent 

per year in developing Asia as a whole and by 3.5 percent per year in China and 

3.2 percent per year in India. 

Developing world energy demand is projected to rise strongly outside of Asia, as 

well. In the Middle East, energy use increases by an average of 2.1 percent per year 

between 2001 and 2025; 2.3 percent per year in Africa, and 2.4 percent per year 

in Central and South America. 

In contrast to the developing world, slower growth in energy demand is projected 

for the industrialized world, averaging 1.2 percent per year over the forecast period. 

Generally, the nations of the industrialized world can be characterized as mature 

energy consumers with comparatively slow population growth. Gains in energy efficiency and movement away from energy-intensive manufacturing to service industries result in the lower growth in energy consumption. In the transitional economies of Eastern Europe and the former Soviet Union (EE/FSU) energy demand is 

projected to grow by 1.5 percent per year in the IEO2004 reference case. Slow or 

declining population growth in this region, combined with strong projected gains in 

energy efficiency as old, inefficient equipment is replaced, leads to the projection of 

more modest growth in energy use than in the developing world. 

World Energy Consumption by Energy Source. Oil continues to be the world’s 

dominant energy source. Oil’s share of world energy remains unchanged at 39 percent over the forecast period. China and the other countries of developing Asia account for much of the increase in oil use in the developing world and, indeed, in 

the world as a whole [Figure 13]. Developing Asia oil consumption is expected to 

grow from 14.8 million barrels per day in 2001 to 31.6 million barrels per day in 

2025, an increase of 16.9 million barrels per day, representing 63 percent of the increment in oil use in the developing world and 39 percent of the total world increment in oil use over the forecast period. In the industrialized world, increases in 

oil use are projected primarily in the transportation sector. In the developing world, 

demand for oil increases for all end uses, as countries replace non-marketed fuels 

used for home heating and cooking with diesel generators and for industrial petroleum feedstocks. 

Natural gas demand is projected to show an average annual growth of 2.2 percent 

over the forecast period [Figure 14]. Gas is seen as a desirable option for electricity, 

given its efficiency relative to other energy sources and the fact that it burns more 

cleanly than either coal or oil. The most robust growth in gas demand is expected 

among the nations of the developing world, where overall demand is expected to 

grow by 2.9 percent per year from 2001 to 2025 in the reference case. In the industrialized world, where natural gas markets are more mature, consumption of natural gas is expected to increase by an average of 1.8 percent per year over that same 

time period, with the largest increment projected for North America at 12.9 trillion 

cubic feet. China and the other nations of developing Asia are expected to see among 

the fastest growth in gas use worldwide, increasing by 3.5 percent per year between 

2001 and 2025. 

14

Coal remains an important fuel in the world’s electricity markets and is expected 

to continue to dominate fuel markets in developing Asia. Worldwide, coal use is expected to grow slowly, averaging 1.5 percent per year between 2001 and 2025 [Figure 15]. In the developing world, coal increases by 2.5 percent per year and will surpass coal use in the rest of the world (the industrialized world and the EE/FSU combined) by 2015. Coal continues to dominate energy markets in China and India, 

owing to the countries’ large coal reserves and limited access to other sources of energy. China and India account for 67 percent of the total expected increase in coal 

use worldwide (on a Btu basis). Coal use is projected to increase in all regions of 

the world except for Western Europe and the EE/FSU (excluding Russia), where 

coal is projected to be displaced by natural gas and, in the case of France, nuclear 

power for electric power generation. 

The highest growth in nuclear generation is expected for the developing world, 

where consumption of electricity from nuclear power is projected to increase by 4.1 

percent per year between 2001 and 2025. Developing Asia, in particular, is expected 

to see the largest increment in installed nuclear generating capacity over the forecast, accounting for 96 percent of the total increase in nuclear power capacity for 

the developing world as a whole. 

Consumption of electricity from hydropower and other renewable energy sources is 

expected to grow by 1.9 percent per year over the projection period. Much of the 

growth in renewable energy use is expected to result from large-scale hydroelectric 

power projects in the developing world, particularly among the nations of developing 

Asia. 

World Carbon Dioxide Emissions. In the IEO2004 reference case, world carbon dioxide emissions are projected to rise from 23.9 billion metric tons in 2001 to 27.7 

billion metric tons in 2010 and 37.1 billion metric tons in 2025 [Figure 16]. 

Much of the projected increase in carbon dioxide emissions is expected in the developing world, accompanying the large increases in energy use projected for the region’s emerging economies. Developing countries account for 61 percent of the projected increment in carbon dioxide emissions between 2001 and 2025. Continued 

heavy reliance on coal and other fossil fuels, as projected for the developing countries, would ensure that even if the industrialized world undertook efforts to reduce 

carbon dioxide emissions, there still would be substantial increases in worldwide 

carbon dioxide emissions over the forecast horizon. 

CONCLUSIONS

Continuing economic growth in populous countries of the world, such as China, 

India, and the United States, is expected to stimulate more energy demand, with 

fossil fuels remaining the dominant source of energy. Dependence on foreign sources 

of oil is expected to increase significantly for China, India, and the United States. 

These three countries alone account for 45 percent of the world increase in projected 

oil demand over the 2001 to 2025 time frame. A key source of this oil is expected 

to be the Middle East. 

Furthermore, although natural gas production is expected to increase, natural gas 

imports in these three countries are expected to grow faster. In 2001, India and 

China produced sufficient natural gas to meet domestic demand, but by 2025, gas 

production in these two countries will only account for around 60 percent of demand. In the United States, reliance on domestic gas supply to meet demand falls 

from 86 percent to 72 percent over the projection period. The growing dependence 

on imports in these three countries occurs despite efficiency improvements in both 

the consumption and the production of natural gas. 

This concludes my testimony, Mr. Chairman and members of the Committee. I 

will be happy to answer any questions you may have.

The CHAIRMAN. Well, thank you, Mr. Caruso. I want to take this 

opportunity to say to you, and through you, to all those who work 

for you, it used to be, 10 years or so ago, we did not know whether 

we believed you all, but you have become a very formidable organization. And we are glad to have you and we have great trust in 

what you tell us. So we hope you will keep the professionalism up 

because you are pretty important to us. 

Mr. CARUSO. Well, as I promised to then Chairman Bingaman, 

I would do my best to keep EIA a strong and independent organization, and I hope I have been able to achieve that. Thank you, Senator. 

15

The CHAIRMAN. Thank you. 

Our next witness is Jeffrey Logan, China Program Manager, 

International Energy Agency. Why do we have you here today? 

[Laughter.] 

STATEMENT OF JEFFREY LOGAN, SENIOR ENERGY ANALYST 

AND CHINA PROGRAM MANAGER, INTERNATIONAL ENERGY 

AGENCY 

Mr. LOGAN. That is a very good question, Mr. Chairman. 

The CHAIRMAN. No. I mean China must be important. Right? 

That is why we have you here? 

Mr. LOGAN. Originally the IEA planned to send someone——

The CHAIRMAN. I did not mean you personally. I mean the issue. 

I like you. You are fine. 

[Laughter.] 

Mr. LOGAN. Thank you, Mr. Chairman and members of the committee. 

The IEA is very appreciative of the chance to testify here this 

morning about China’s energy sector. What I hope to primarily discuss this morning are the oil and gas sectors in China. Clearly 

there are many other topics in the Chinese energy sector that are 

vitally important to the global energy sector, but I would like to restrict most of my remarks to those topics. And I would be happy 

to try to answer any questions you might have on other topics. 

But before I begin with oil and gas issues, I would like to say 

just a few words about a more general energy trend in China that 

could have very important long-term implications, and that general 

energy trend is related to the amount of energy that is needed to 

drive economic growth in China. 

From 1979 until the late 1990’s, China’s average reported energy 

consumption grew only half as quickly as the rate of GDP. This is 

called the energy elasticity. In other words, the energy elasticity 

was 0.5. For every 1 percent growth in GDP, the energy consumption would grow by .5 percent. So I think there remains a healthy 

degree of skepticism about energy and economics statistics that are 

published by China, but even taking those uncertainties into account, the energy elasticity in China is still below 1.0, meaning 

that the energy growth rate was not exceeding the growth rate of 

GDP. For a developing country, this was a remarkable achievement, and it resulted in significant savings of both energy consumption and greenhouse gas emissions. 

However, since the new millennium has begun, energy consumption in China has surged and the elasticity in 2004, for example, 

was 1.5, meaning that for every 1 percent growth in GDP, energy 

consumption was now growing by 1.5 percent. Still, there are some 

data uncertainties related to these numbers, but the general trend 

is clearly visible. 

No one, as of yet, has come up with a sufficiently satisfactory answer for why this sudden change has happened in the Chinese energy-economic relationship, and we think it is vitally important 

that we understand why over the past 5 years, the Chinese economy has been consuming so much more energy to drive its economy. Indeed, this changing energy-economic relationship in China 

caught many Chinese planners off guard and largely explains the 

16

very severe shortages that exist in many of the energy sectors in 

China right now. 

This change in behavior could be just a short-term phenomenon, 

but the impact of such a change over a longer period of time would 

have very profound impacts on global markets, energy security, 

and greenhouse gas emissions. So I think we should strive to more 

fully understand just what is happening in China’s economy right 

now because it will have long-term implications for everyone on the 

globe. 

China’s opaque oil sector has attracted immense attention over 

the past few years. Oil demand in China grew by 27 percent over 

the past 2 years, while domestic production has been largely stagnant. As a result, crude imports have climbed by 75 percent since 

2002. China now relies on imported crude for 4 of every 10 barrels 

it consumes. Perhaps surprisingly, China’s oil demand in 2004 still 

only equalled one-third the level of consumption in the United 

States. IEA forecasts envision Chinese demand to continue growing 

through the year 2030 when it reaches nearly 14 million barrels 

per day. At that time, Chinese crude imports would roughly equal 

those of the United States today. Still, total Chinese demand then 

would be about one-third less than what the United States consumes right now. 

Three drivers account for much of the recent growth in China’s 

oil sector: increasing vehicle ownership, which we have all heard 

about, the growing industrial demand for petrochemical feedstocks, 

and most unusually, the surge in oil-fired backup power generation 

that is needed due to severe electricity generating shortages in 

China right now. 

The vehicle and petrochemical sectors are likely to continue 

growing steadily in the future, but we anticipate a fall-off in the 

amount of oil that is needed for this backup power generation 

using oil as more coal and hydroelectric plants come on line. 

Now, as this oil demand falls off the from power generation sector, we do anticipate that some of that will be replaced by the 

stockpiling of oil in China in the strategic petroleum reserves 

which they are now developing, but we believe that those amounts 

put into the stockpile will be less than what is currently being assumed for power generation using oil. 

Rising imports in China have alarmed government policymakers. 

The CHAIRMAN. Where do they put their petroleum reserve? 

What is it? 

Mr. LOGAN. They have just started construction of their strategic 

petroleum reserves. There are four sites where they are building 

the reserves. Currently only the Chinese oil companies hold commercial stockpiles, but not strategic government stockpiles. Those 

government stockpiles will begin being filled later this year. 

The CHAIRMAN. I mean how do they do it. We know what we do. 

What do they do? 

Mr. LOGAN. Above-ground steel tanks. 

Rising imports in China have alarmed government policymakers. 

They have developed a multi-pronged approach to help address the 

country’s looming oil insecurity. The measures include promoting 

state-owned oil companies to purchase overseas equity oil, diversifying sources of oil supply, launching construction of strategic peVerDate 0ct 09 2002 11:48 Apr 04, 2005 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6602 P:\DOCS\20004.TXT SENE3 PsN: SCAN
17

* Figures 1-4 have been retained in committee files. 

troleum reserves, and enacting demand-side efficiency measures. I 

have outlined each of these measures in my written testimony. 

The IEA continues to believe that global oil reserves are sufficient to accommodate global demand through 2030 and beyond. 

More important uncertainties relate to maintaining stable output 

among major producers, dealing with environmental issues like climate change, and marshalling the necessary investment in each 

link of the oil supply chain. 

China has taken major steps to boost the use of natural gas, primarily to improve urban air quality, but China’s natural gas policy 

is fragmentary and development occurs on a project-by-project 

basis rather than by focusing on the needs of the entire gas chain. 

But developments in China’s gas sector have surprised many 

critics. The first gas pipeline to Beijing in the late 1990’s was widely predicted to be an economic failure, the main criticism being 

that the government focused only on a supply push strategy and 

seemed to ignore the needs of potential end-use consumers. Gas demand has developed fairly quickly, however, and a second pipeline 

to Beijing is now under development. 

The new cross-country west-east pipeline faces similar criticism. 

Potential users have little incentive to switch from coal. The pipeline started commercial operation in late 2004, 1 year ahead of 

schedule, and will slowly ramp up to design capacity in 2007. The 

pipeline faces potential competition from imported LNG in cities 

like Shanghai, and it will be very interesting to see how the competition between pipeline gas and LNG imports develops in China. 

In my mind, promoting natural gas use in China is the most 

cost-effective supply side measure to simultaneously eliminate local 

pollution, slash greenhouse gas emissions, and promote efficient industrial technology use. U.S. assistance to China focusing on natural gas policy, project development, and capacity building would 

advance our mutual interests. 

In conclusion, although Chinese energy companies will face increasing challenges in global energy markets, they have demonstrated a growing capacity to compete. More than ever, U.S. policies should be focused on engaging China on energy issues because 

the security, commercial, and environmental implications are too 

great to ignore. 

Thank you for your attention, and I would be happy to take any 

questions you might have. 

[The prepared statement of Mr. Logan follows:]

PREPARED STATEMENT OF JEFFREY LOGAN, SENIOR ENERGY ANALYST AND

CHINA PROGRAM MANAGER, INTERNATIONAL ENERGY AGENCY

ENERGY OUTLOOK FOR CHINA: FOCUS ON OIL AND GAS

China has charted a bold course of economic reforms over the past 25 years, 

achieving mixed, but often remarkable results given the development challenges it 

faces. Reported average annual GDP growth of over nine percent has improved living standards for hundreds of millions of Chinese people to a level unmatched in 

any point of Chinese history. China now plays a key role in the supply and demand 

of many global commodity markets including steel, cement, and oil. (See Figure 1.)* 

If sustained, China’s development will likely create the world’s largest economy, as 

measured in purchasing power parity, in about two or three decades. Per capita 

wealth, however, will remain far below OECD levels. Enormous opportunities and 

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challenges await commercial, governmental and social interests across the globe as 

China develops. 

This document provides an update on current oil and natural gas trends in China, 

and looks at future growth projections. It is based largely on the International Energy Agency’s dialogue and collaboration with China as a Non-Member Country participant. It begins with an overview of recent changes in the Chinese energy-economy relationship. 

A CHANGING ENERGY-ECONOMIC RELATIONSHIP

Chinese energy demand has surged since the arrival of the new millennium, when 

a new round of investment-driven economic growth began. Preliminary Chinese data 

indicate that the energy elasticity of demand (the growth rate of energy consumption divided by that of GDP) surpassed 1.5 in 2004. In other words, for every one 

percent increase in GDP, energy demand grew by over 1.5 percent. The shift reverses China’s recent historical trend of maintaining energy elasticity below 1.0. 

(See Figure 2.) For most developing countries, including India, Brazil, and Indonesia, energy elasticities greater than 1.0 are normal, but for China it is a 

groundbreaking change. 

Many analysts rightly question the validity of Chinese economic and energy statistics; GDP is likely underreported right now, although from the late 1970s until 

the end of the 1990s, it was probably overstated. Likewise, Chinese energy consumption, coal in particular, is tracked poorly. Coal use from 1996-1999 is now regarded as massively underestimated by analysts both inside and outside of China 

due to untracked output from small coal mines. One of the contributing factors behind China’s current energy crunch is indeed these poorly tracked energy statistics: 

good energy policy and energy planning require accurate data. 

Despite the problems with data quality, the general trend raises concern. Is this 

new energy-economy relationship in China temporary or does it indicate a deeper 

structural change within the economy? The difference could have a profound impact 

on future global energy markets, energy security, and environmental quality. Almost no authoritative research has been published to explain the surging elasticity. 

A clearer understanding of what is happening in Chinese energy markets may never 

be uncovered, but more research into the new energy-economic relationship would 

benefit the international community and China. 

OIL SECTOR: THE SEARCH FOR SECURITY

China surpassed Japan in late 2003 to become the world’s second largest petroleum consumer. In 2004, Chinese demand grew 15 percent annually to 6.37 million 

barrels per day (b/d), about one-third the level in the United States. Domestic crude 

output in China has grown only very slowly over the past five years. At the same 

time, oil demand has surged, fueled by rapid industrialization. (See Table 1.) Imports of crude oil grew alarmingly in 2003 and 2004 to meet demand, increasing 

nearly 75 percent from 1.38 million barrels per day (b/d) in 2002 to 2.42 million b/

d in 2004. Imports now account for 40 percent of Chinese oil demand.

Table 1.—GLOBAL OIL DEMAND BY REGION 

[in millions of barrels per day] 

Demand Annual Change Annual Change (%) 

2004 2003 2004 2005 2003 2004 2005

North America .. 25.14 0.47 0.57 0.23 1.9 2.3 0.9

Europe ............... 16.47 0.20 0.26 0.10 1.2 1.6 0.6

China ................ 6.37 0.55 0.85 0.36 11.0 15.4 5.7

Other Asia ........ 8.54 0.22 0.44 0.21 2.8 5.4 2.5

FSU ................... 3.69 0.12 0.11 0.14 3.5 3.1 3.9

Middle East ...... 5.88 0.20 0.32 0.26 3.7 5.7 4.5

Africa ................. 2.81 0.04 0.07 0.09 1.7 2.4 3.3

Latin America ... 4.89 ¥0.09 0.16 0.10 ¥1.9 3.5 2.1

World ......... 82.45 1.85 2.66 1.44 2.4 3.3 1.7

Source: Oil Market Report, December 2004, IEA. 

As described in the IEA’s December 2004 Oil Market Report, a significant driver 

of recent oil demand growth in China—perhaps on the order of 250-300 thousand 

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barrels per day—has been the need for oil-fired back-up power generation in the 

face of serious electricity shortages. Other contributing factors are the rise in personal car ownership and growing industrial petrochemical needs, which are likely 

to continue growing fairly steadily. However, the amount of fuel oil and diesel used 

for back-up power generation will likely decline, as China closes the generation 

shortage by installing new coal, natural gas, hydro, and nuclear power plants. It has 

also promised to institute tougher new demand-side efficiency measures. 

Chinese policymakers and state-owned oil companies have embarked on a multipronged approach to improve oil security by diversifying suppliers, building strategic 

oil reserves, purchasing equity oil stakes abroad, and enacting new policies to lower 

demand. 

Diversifying Global Oil Purchases 

Over the past decade, Chinese crude imports have come from a much wider and 

more diverse set of suppliers. In 1993, almost all of China’s crude imports came 

from Indonesia, Oman, and Yemen. By 2004, Saudi Arabia was China’s largest supplier accounting for 14 percent of imports, with Oman, Angola, Iran, Russia, Vietnam, and Yemen together supplying another 60 percent, and the remainder which 

came from a long list of other suppliers. 

Establishing Strategic Oil Reserves 

China’s 10th Five-Year Plan (2001-2005) called for the construction and use of 

strategic petroleum reserves by 2005. Construction has begun at one of four sites 

slated to store government-owned supplies. Chinese officials plan to gradually fill 

up to 100 million barrels of storage by 2008 (equivalent to 35 days of imports then). 

Original plans called for boosting stocks to 50 days imports in 2010, but this may 

be slightly delayed. On the other hand, the recent surge in imports has led Chinese 

policymakers to consider an even more aggressive long-term plan for 90 days of 

stocks, perhaps by 2020. 

The IEA has shared experiences with China on member country stockpiling practices since 2001. Chinese officials have stated their intent to slowly fill their new 

stocks depending on global conditions. They have demonstrated less concern, however, in coordinating release of their future stocks as part of a larger global system. 

In other words, China may be more inclined to use strategic stocks to influence 

prices even without the threat of severe supply disruptions. We are exploring this. 

Overseas Equity Oil 

Chinese state-owned oil companies have accelerated their hunt for overseas oil assets as part of the country’s larger ‘‘going out’’ strategy. Growing foreign exchange 

holdings fuel the general outward drive of Chinese companies. While a significant 

number of oil-related announcements have been made in the press since 2001, much 

of this activity is still waiting to be finalized. The lack of transparency over investment amounts, production sharing contract details, and proven petroleum reserves 

may create a more successful image of Chinese companies than is actually the case. 

Until recently, Chinese companies seemed most comfortable operating in locations 

not dominated by the oil majors. This meant countries like Sudan, Angola, and Iran. 

For example, over half of Chinese overseas oil production currently comes from 

Sudan. Activity has picked up in other areas recently, however, including Russia, 

Kazakhstan, Ecuador, Australia, Indonesia, and Saudi Arabia to name just a few. 

Chinese companies appear to be improving their ability to purchase assets without 

overpaying, as earlier reports suggested, but this conclusion is only supported with 

anecdotal information. 

In 2003, Chinese state-owned oil companies pumped 0.22 million b/d of equity oil. 

The figure is projected to rise by 8 percent annually thru 2020 when it hits 1.4 million b/d. Leading the drive among Chinese state-owned companies, China National 

Petroleum and Gas Company (CNPC) claims to have petroleum assets in 30 countries. It plans to spend $18 billion in overseas oil and gas development between now 

and 2020. Most of CNPC’s overseas production currently comes from Sudan, 

Kazakhstan, and Indonesia. Many speculated that CNPC would take a share in the 

restructured assets of Yukos; rumors in late January 2005 foresaw a $6 billion 

‘‘loan’’ to Rosneft for long-term oil purchases, but no equity investment. 

A disappointment for China during the year included the Russian decision to 

build an oil pipeline to Nakhodka with Japanese contributions, rather than to 

Daqing in northeast China with CNPC’s participation. Discussions are still ongoing 

regarding a potential spur line that would feed China’s northeast. In contrast, 

China and Kazakhstan made rapid progress in negotiating and starting construction 

on a cross-border pipeline that will initially deliver 0.2 million b/d of crude and 

products to Xinjiang province, and possibly later doubling to 0.4 million b/d. China 

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appears to have made a geopolitical decision to secure its oil supplies with this line 

as costs would probably not pass a commercial test. 

China Petroleum Company (SINOPEC) is newer to the international game than 

CNPC and hopes to start pumping smaller quantities of equity oil in 2005 from activities in Yemen, Iran, and Azerbaijan. Perhaps the largest story in 2004 was 

SINOPEC’s agreement in Iran to spend $70 billion over 25 years to purchase LNG 

cargoes and participate in upstream oil activities there. Many uncertainties remain, 

however, before the investment is sealed. 

China National Overseas Oil Company (CNOOC), the most progressive and outwardly-oriented of the Chinese state-owned oil companies, has been very active in 

Australia and Indonesia. In 2004, it succeeded in securing significant natural gas 

stakes in both countries. CNOOC surprised the global community in early 2005 

when it was rumored to want to purchase Unocal for roughly $13 billion. Little additional information has appeared in the press since then. These types of announcements tend to create an image of Chinese companies wearing bigger shoes than they 

actually do. 

In summary, Chinese companies are increasingly active abroad and appear to be 

improving their business skills. They have not yet demonstrated that they can improve long-term oil security in a cost effective manner, however, as other Asian 

state-owned oil companies have learned. 

Demand-Side Measures 

Per capita oil consumption in China is only one-fourteen the level in the United 

States, indicating that strong growth could continue for many years. The transport 

sector in China will likely experience the strongest demand for oil over the mid- to 

long-term. Currently, there are roughly 24 million vehicles in China, with projections anticipating 90-140 million by 2020. This would push transport demand from 

33 percent of total Chinese petroleum demand to about 57 percent (from 1.6 million 

b/d in 2004 to roughly 5.0 million b/d in 2020). 

To partially address this problem, China enacted new automobile efficiency standards in late 2004. In Phase I, running from mid-2005 until January 2008, no increase in fleet fuel consumption will be allowed without penalties. Phase II would 

then begin and require a 10 percent reduction in fleet fuel consumption. 

Another measure that has gained renewed attention is the imposition of a vehicle 

fuel tax. This policy would ban all road use fees instituted at the local level and 

replace them with a nationwide tax ranging from 30-100 percent of the current price 

of vehicle fuel. Gasoline prices in most Chinese cities, for example, are currently the 

equivalent of about $1.60 per gallon. The fuel tax, if enacted, would raise gasoline 

prices to $2-$3 per gallon. The initiative has been discussed for years but lacked 

uniform support from policymakers. It has gained new steam over the past year 

with the surge in imported crude volumes. 

THE LONG-TERM VIEW

Without measures to limit demand or create alternative fuels, Chinese oil consumption appears set to grow rapidly for the foreseeable future. The World Energy 

Outlook 2004 forecasts Chinese petroleum demand in 2030 at just under 14 million 

bpd, about one-third less than current demand in the United States. (See Figure 3.) 

China’s import dependency will continue to grow, however, reaching 75 percent. In 

2030, China would be importing as much oil as the United States did in 2004. China 

itself forecasts a lower figure in the future, but we will wait until the necessary policies are in place and in effect before we adjust our number down. 

The IEA believes there are enough worldwide petroleum reserves to meet global 

demand through 2030 and beyond. More important uncertainty relates to marshalling the necessary upstream investments, maintaining stable petroleum output in 

major producer countries, mid and downstream infrastructure among consumers, 

and dealing with environmental issues like climate change. 

THE PROMISE OF NATURAL GAS IN CHINA: WHITHER POLICY?

China has taken major steps since 1997 to boost natural gas use, mainly as a way 

to improve urban air quality. But gas was largely ignored for most of China’s modern history and new market-oriented measures are needed to fully encourage natural gas use. 

Domestic gas production currently stands at 40 billion cubic meters (BCM) and 

accounts for roughly 3 percent of the country’s total energy demand. Chinese policymakers envision gas use rising substantially through 2020, when demand would 

reach 200 BCM and account for 10 percent of total energy demand. Baseline IEA 

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1The World Energy Outlook 2004 forecasts natural gas accounting for 6 percent of China’s 

total final energy consumption in 2030. 2 Interested readers should consult this IEA publication for more complete information: ‘‘Developing China’s Natural Gas Market: Policy Framework and Investment Conditions,’’ International Energy Agency, Paris 2002. 

estimates are currently less optimistic of future gas markets in China,1 but the potential for dramatic change in China cannot be discounted. With the right policy 

framework, gas use could be significantly higher than even Chinese government 

forecasts. 

Chinese policymakers increasingly view natural gas as the fuel of choice for its 

environmental, security, and industrial advantages. But the gas industry is in its 

infancy and many barriers must be overcome before this relatively clean energy 

source can make a significant impact. The International Energy Agency recently 

completed a detailed study of China’s gas sector and delivered important recommendations to the Chinese government.2 Provided below is a summary of why 

China is promoting development of the gas sector, the challenges it faces, and how 

some of these barriers could be addressed. 

Drivers for Natural Gas 

China is taking new measures to promote the use of natural gas for three reasons. 

First, natural gas used in place of coal can help China address environmental problems that have become urgent economic and social issues. Replacing coal with natural gas basically eliminates emissions of sulphur oxides and particulates, the two 

most serious local and regional pollutants. Gas also offers steep reductions in nitrogen oxide and greenhouse gas emissions. 

Second, natural gas can help China diversify its energy resources and address 

growing concerns over energy security. Imported crude oil now accounts for 40 percent of annual demand and will likely continue to grow rapidly. Additionally, coal 

demand has soared since 2002, resulting in localized transportation bottlenecks. 

China could help alleviate these energy security concerns by increasing reliance on 

natural gas. 

Finally, natural gas has the potential to accelerate modernization of the country’s 

industrial facilities. Most of China’s industry is based on coal-burning technology, 

which is inherently less efficient than gas-fired equipment. Modern natural gas boilers, for example, convert about 92 percent of the energy contained in natural gas 

to useable heat. Coal boilers on the other hand, waste 20 percent or more of the 

input energy in the process. Similarly, advanced combined-cycle gas turbines used 

to generate electricity are nearly 60 percent efficient, while coal-fired steam turbines 

convert only about 40 percent of the energy in coal into useful electricity. 

Developments and Hurdles 

Important gas projects have been launched to support China’s ambitious development targets for natural gas. A 3,900 kilometre, $24 billion West-East Pipeline 

started commercial operation in late 2004. (See Figure 4.) Throughput will slowly 

ramp up to 12 BCM in 2007 as downstream projects and distribution networks are 

completed. The fact that CNPC completed the pipeline one year ahead of schedule, 

and without participation from its planned investment partners (Shell, Exxon-Mobil, 

and Gazprom), is testament to the drive and ability of Chinese energy companies. 

Although many outside observers question the economics of the pipeline, similar 

doubts were raised when China built its first gas pipeline to Beijing. The economics 

were shaky at the time, but that line is now oversubscribed and a second line will 

begin delivering gas to the capital in 2006. 

Two LNG terminals are also under construction in southeastern China, with perhaps a dozen more under discussion and consideration. LNG imports in China became an extremely hot topic in 2004 as coal prices rose substantially, along with 

incomes and air pollution. If even half of the LNG terminals currently under discussion are built, China could be importing 30-35 BCM of natural gas by 2015. 

Talks continue on international natural gas pipelines with Russia and 

Kazakhstan as well, but progress has been slow. A joint feasibility study funded by 

Russia, China, and South Korea that would deliver 20 BCM of Russian gas to China 

and 10 BCM to South Korea is currently under evaluation. This pipeline may also 

have been ahead of its time, but Russia’s Gazprom blocked any further discussion 

of the deal. 

Important hurdles exist for natural gas market development, including:

• Natural gas is expensive compared to coal if environmental costs are not included; 

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• China is not believed to be endowed with abundant and cheap gas reserves, and 

known supplies are often located far from the main centers of demand; 

• Gas supply infrastructure is fragmented and huge investment is needed to finance its expansion; 

• China lacks a legal and policy framework to encourage investment in the gas 

sector; and 

• There is a lack of knowledge over how to best develop natural gas technology 

and markets.

Perhaps the weakest link in China’s current natural gas chain is the perception 

of high costs that results in weak demand for gas. Without stronger market pull 

for gas, the entire natural gas chain will remain weak, no matter how much the 

government tries to development the market by administrative dictate. 

Recommendations from the IEA Study 

General recommendations from the IEA study to improve the situation in China 

include:

1. Publishing a ‘‘White Paper’’ on natural gas policy as part of a coherent national 

energy policy framework; 

2. Establishing a legal basis for natural gas; 

3. Making environmental protection a component of energy pricing; and 

4. Creating a central administration for energy. 

Policy Framework for Natural Gas 

To realize the ambitious target for gas market development in China, there is a 

need for the government to go beyond the ‘‘project-by-project’’ approach by publishing a comprehensive national natural gas policy. Such a policy could address 

issues of gas exploration, development, distribution, pricing, marketing as well as 

imports. It should be part of a coherent national energy policy, as China’s gas industry is intertwined with the coal and the electrical power industry, and with environmental policy. 

Through the elaboration of the ‘‘White Paper’’, the government can make a clear 

and formal statement of its policy objectives and long-term strategy for natural gas 

in China. The process of elaboration and consultation is critically important: the 

government should consult as many actors as possible within and outside the central administration. 

Legal Framework for Natural Gas 

Preparation of a national natural gas law is an urgent priority. Such a framework 

would provide a clear legal expression of the government’s policy and strategy for 

gas industry development and the ground rules for operation of the gas industry. 

Almost every country where a natural gas industry has been established, whether 

based on indigenous resources or imports, has adopted a gas law in the early stages 

of market development. Adopting such a law would help create a more stable environment for investment and operation, reduce uncertainty and investment risk, and 

consequently lower the cost of capital. 

It should codify the roles, rights and responsibilities of different players as well 

as regulatory principles in the industry to reduce conflicts of interest and to ensure 

a level playing field for all. It should provide the legal basis for short-term gas market development activities, such as gas contract negotiations and enforcement. It 

should also be flexible enough to cope with market evolution over the medium and 

long-term. 

Price Energy to Account for the Economic and Environmental Costs 

Theoretically, environmental protection, in particular the reduction of local atmospheric pollution, is the key driving force for increased gas use in China. However, 

important challenges remain in turning this theoretical driver into a real market 

mover. China has put in place a whole set of environmental laws and regulations 

on air pollution, but a lack of adequate means for enforcing implementation makes 

most of them ineffective. 

In power generation and industrial boilers, in addition to strengthening the enforcement of existing regulations, the use of economic instruments must be extended. To start with, the price penalty per ton of emissions (SO2, NOX, particulates) should fully reflect the market value of emission permits and take into consideration the health damage to the public. Many OECD countries include the price 

of environmental externalities in power generation, at least in planning exercises to 

determine the best choices for future power plant additions. 

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A Central Administration for Energy 

At the time of the IEA study, China lacked a central body to address the country’s 

overall energy strategy. Since the abolition of the Ministry of Energy in 1992, China 

did not have a single central-government entity in charge of energy policy and regulatory matters. Energy sector responsibilities were spread across several ministries. 

As the government is strongly committed to removing the policy-making and regulatory functions from state-owned companies, it needs to strengthen its own resources for governing them. 

This recommendation by the IEA was recently implemented by the Chinese, although the newly formed Energy Bureau within the National Development and Reform Commission does not have enough staff or resources to perform all the necessary functions. There are roughly 30 employees at the Energy Bureau in China, 

while most OECD countries would have hundreds, if not thousands, of employees 

to create the policy framework and oversight needed to steer a modern energy industry. Given the current shortages of electricity and coal, Chinese planners are 

again considering restructuring of the central energy planning body. 

SYNOPSIS

China’s rapid economic growth is creating dislocations both at home and, increasingly, around the globe. These changes create both challenges and opportunities. 

China’s rapid growth over the past few years should also be kept in perspective: 

China’s 1.3 billion people currently consume only one-half the energy as the 290 million citizens in the United States, and Chinese oil demand is only one-third as large. 

While Chinese policymakers have done a laudable job of steering economic reform, 

a huge number of challenges—from population imbalances and environmental pollution to corruption and AIDS—await solutions before the country can raise individual 

standards of living to anywhere near current OECD levels. The international community must engage China in order to minimize the challenges and maximize the 

opportunities that lie ahead.

The CHAIRMAN. Thank you very much. I want to just clarify one. 

It seems to me that you were saying the future for them is natural 

gas in China, and we should be interested in pursuing with them 

how that might happen. What kind gas and where would they get 

it? Are you speaking of LNG or just straight natural gas? 

Mr. LOGAN. I am speaking about both the domestic natural gas 

that is available in China and pipeline gas from Russia, from 

Kazakhstan, and LNG imported from a host of potential countries. 

The CHAIRMAN. Thank you. 

I note that Senator Thomas from Wyoming is here. Senator, 

there were brief remarks by each Senator. Would you like to make 

some? Oh, Senator Bunning, you are first. 

Senator BUNNING. I will put mine in the record. 

Senator CRAIG. Thank you very much, Senator. 

[The prepared statement of Senator Bunning follows:]

PREPARED STATEMENT OF HON. JIM BUNNING, U.S. SENATOR FROM KENTUCKY

Mr. Chairman, I am pleased we are having this hearing today. 

Understanding our energy needs is important so that our country can plan for its 

future. 

As we have seen in recent years, energy prices can have a tremendous impact on 

our economy. Many businesses and consumers are begging for some relief from the 

current high energy prices. 

I hope that we are able to pass an energy bill this year that will provide an energy policy that we have need for some time now. 

Coming from a coal state, I want to work to make sure that coal continues to be 

a vital energy source. It produces fifty percent of our electricity today and should 

play a large role as a cheap energy source for our future. 

I hope that we can continue to work to bring new clean coal technology quickly 

into the commercial sector. 

I thank the witnesses for appearing before us today. I look forward to hearing 

their testimony. 

Thank you, Mr. Chairman.

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Senator THOMAS. I will not comment right now, sir. 

The CHAIRMAN. Thank you very much. 

Please proceed. Tell us what you do please. 

STATEMENT OF ANDREW J. SLAUGHTER, SENIOR ECONOMIST, 

SHELL OIL COMPANY 

Mr. SLAUGHTER. Good morning, Mr. Chairman and members of 

the committee. My name is Andrew Slaughter. I am a senior economist with the Shell Oil Company here in the United States, and 

I would like to thank you for the opportunity to come to this morning’s hearing. I am here to give you some insights about Shell’s 

most recent global scenarios. They are in my written statement, 

and I will summarize the main points to you this morning. I am 

going to focus on the global scenarios, not so much on specific policy recommendations for the short term. 

We have used global scenarios for over 30 years in Shell, and 

they are a means for us to explore the future for the world and for 

the industry. They are not predictions. They are really frameworks 

for thinking, used to challenge our conventional wisdom, and characterize plausible alternative future paths for the world. I think 

they are of interest to you, as you look at the future of U.S. energy 

markets, and we find them useful when we are looking at options 

to deal with really the two major challenges for the global industry 

in the 21st century. 

Mr. Caruso and Mr. Logan have referred to the pace of energy 

demand growth globally and the United States, how do we meet 

that, once both growing very fast and shifting in nature, but also 

how will be responsive to the impact of energy use on natural systems not only here in the United States, but around the world. I 

think we have to consider those two points. 

If I can set the stage for where we started with these scenarios. 

In the 1990’s, the world was characterized by the forces of market 

liberalization, globalization, and technological progress both in energy and in many other sectors. As expected, the role of governments around the world shrunk in that environment. They had a 

smaller role to play. However, today since 2 years ago, the role of 

governments is increasing in response to the two crises we have 

faced: the security crisis following 9/11 and the market trust crisis 

following Enron and other corporate scandals. So governments 

have a greater role to play both in energy markets and in the general policy than we might have anticipated a couple of years ago. 

And that creates tensions between society’s aspirations for security, 

market efficiency, and social cohesiveness. 

Each of the three new global scenarios we have developed at 

Shell explores the tradeoffs between these three aspirations, only 

two of which can really be satisfied at any one time. The scenarios 

are called: Open Doors, Low Trust Globalization, and Flags. I am 

going to outline the main points from each of these three scenarios 

and suggest some energy market implications we need to think 

about when we are facing the challenges that I referred to. 

In Open Doors, the first scenario, the drive for market efficiency 

and society’s desire for social cohesion are satisfied, giving security 

more of a back seat. Governments choose to operate via incentives. 

Markets are open. Trade barriers globally are lowered, leading to 

25

strong economic growth in energy demand above historical trend 

rates. In Open Doors, energy markets evolve following free market 

principles and respond to consumer preference for cleaner fuels and 

equitable resolution of environmental externalities using the pricing mechanism. 

U.S. energy policy in this scenario would be driven by market efficiency. The United States would become more open to international gas trade, allowing market-based development of import 

infrastructure. Enhanced access to domestic gas would be acceptable if economic and balanced with environmental objectives. In 

this scenario, LNG imports would grow the most rapidly because 

of the connections to international markets. 

Renewable energies and unconventional fuels would be developed 

subject to the discipline of the market and not duly inhibited by 

regulation. Environmental costs will be internalized in energy pricing via market mechanisms like CO2 permit trading. And technological progress would drive the penetration of new energies such 

as hydrogen fuel cells. 

This would be an efficient world in terms of development of energy supplies, but it is not without risk. If the United States or 

major consuming markets like Europe follow an Open Doors philosophy and other major actors in the energy world do not, that is a 

risk. Most of the new oil and gas production is coming from nonOECD countries. Fossil fuel extraction is increasingly dominated by 

State-run national oil companies who have sometimes completely 

different drivers from the international oil companies in the western hemisphere. So that poses a potential risk to international energy security. 

In the second scenario, Low Trust Globalization, we still have a 

drive for market efficiency, but governments play a stronger role in 

terms of security and influencing choices. Government regulation 

and oversight guarantee public safety and investment security. But 

there are institutional barriers from that position which slow innovation, resulting in lower economic growth and energy demand 

growth. So energy markets have to respond to the security imperative in a greater way in this scenario. 

The U.S. policy here would use market incentives and increased 

regulation for long-term energy security. The need to proceed with 

caution with regard to public security and environmental protection 

could delay or reduce the scope of development of import infrastructure and the access to domestic gas resources. The United 

States would need to look to its neighbors for help in developing 

unconventional resources on a continental basis, and that might be 

an attractive solution. You could also envisage renewable and unconventional energy resources being subject to more favorable, 

proactive government policy like tax credits, investment subsidies, 

or R&D support, but it is still unlikely that the pace of take-up will 

be sufficient to offset lower availability of gas supply. You might, 

therefore, have to consider demand-side initiatives, for example, efficiency standards or energy taxation, to bring down overall price 

levels. 

In the third scenario, Flags, the role of government is even 

stronger, focusing on social cohesion and security. Regulation is 

more fragmented, tailored purely to national concerns. Bilateral 

26

trading arrangements are the norm. You still have tensions in 

international relations. These lower economic growth to below historical trends, with energy demand correspondingly slower. Domestic energy sources will be promoted, and competition for access to 

resources in markets could favor energy companies which are state 

controlled will have strong support from their host governments. 

There would be a greater focus on indigenous supply and demand 

of energy in this scenario, even at the expense, potentially, of cost 

competitiveness or environmental standards. The increasing challenges of balancing supply and demand could risk driving up U.S. 

energy prices and lead to stronger pressure to open up more domestic resource areas, such as moratoria areas or Federal lands, 

and again move to alternatives, such as unconventionals, biofuels, 

and nuclear. And there might have to be more stringent demandside measures. 

Over all the scenarios, I think there are four big risks and constraints our industry will follow now and into the future: resource 

depletion and access to new resources, rapid energy demand 

growth, increasing State control of resource development, and climate change. We cannot predict which direction the world will develop over the next 20 years. Therefore, we think U.S. energy policy should be prepared to envisage multiple possible outcomes, 

build bridges to international markets, develop pragmatic domestic 

energy policies over the full range of supply and demand in partnership between legislators, regulators, private companies, and 

other stakeholders. 

Very long lead times are necessary to shift the structure of energy supply and consumption in a mature energy market. There 

are sufficient warning signs now that we need to take precautionary policies for the future of energy security for our children 

and grandchildren. 

Thank you, Mr. Chairman, members of the committee. That concludes my statement. 

[The prepared statement of Mr. Slaughter follows:]

PREPARED STATEMENT OF ANDREW J. SLAUGHTER, SENIOR ECONOMIST,

SHELL OIL COMPANY

Andrew Slaughter represents Shell as a member of the global scenario and strategy team and as Shell’s specialist on North American energy markets. The views 

expressed here are intended as contributions to a discussion on possible long-term 

energy security alternatives for the U.S., from the perspective of Shell’s current scenario thinking. This submission is focused on the frameworks provided by Shell scenarios and does not discuss specific policy proposals that Shell might support or that 

Congress might consider. 

SUMMARY

Shell’s Global Scenarios are developed to provide a challenging framework for 

thinking about longer-term political, societal and economic trends and their potential impact on the global energy system. The main purpose of this is to test our business strategies and robustness of business plans. For over 30 years, successive Shell 

scenarios have been the source of powerful insights for the Shell Group. We hope 

these frameworks provide multiple perspectives on the choices available to develop 

U.S. energy security. 

The world’s energy system will face two key challenges in the 21 century:

• meeting expanding and shifting energy needs with secure supplies, and 

• responding to the impact of our energy use on the natural systems on which 

we all depend.

27

Energy security is increasingly becoming a factor of concern to major energy-consuming countries, such as the U.S., under the pressures of accelerating demand 

growth, anticipated constraints on future supply growth, and environmental objectives. This global issue can only be resolved over the long-term, taking full account 

of international interdependencies the rising needs of developing economies, and 

trust and cooperation between private and public sectors. 

The scenarios explore a number of different paths to energy security—depending 

in which direction our world will develop—whether through opening markets and 

facilitating international free energy trade, establishing diversity of supply in conjunction with pragmatic demand and market policies, or the continuation of the old 

ways of bi-lateral political agreements securing point to point long term supply lines 

and markets. 

Perhaps the most underestimated threat to domestic energy security would be an 

assumption by policy makers that all countries are heading towards the same scenario and at a similar pace, and design policies on that basis, even though reality 

may be more complex. 

A focus on supply and demand measures is critical. In the U.S., the supply side 

is heavily impacted by policies that allow or deny access to new resources. A scenario that allows greater access to resources will benefit supply, especially for natural gas. But energy systems can only evolve slowly, due to the longevity of capital 

stock; energy security of 2015 and beyond requires planning and policy today. 

Demand measures can have a much faster impact than changes on the supply 

side and need not result in adverse impacts on the economy, consumer welfare or 

lifestyles. 

INTRODUCTION

For over thirty years Shell has regularly prepared scenarios exploring potential 

future developments of our society, our business environment and the energy industry in which we work. These scenarios are not forecasts, preferences or the description of deterministic cause and effect patterns; rather, they are frameworks in which 

to challenge conventional wisdom, identify plausible alternative futures for our societal and business environment and bring critical uncertainties into the open, such 

that our business leaders can think through appropriate strategies and responses. 

Shell uses these scenarios both to think about the future and to test, in a very practical way, current strategies, plans and projects. 

We develop Global Scenarios that focus on societal, political, economical and institutional trends and key uncertainties, Long-Term Energy Scenarios that look at energy resources, supply and demand, and specific regional or sectoral scenarios to 

meet particular business needs. 

Over the past 30 years or so, scenario thinking has enabled the Shell Group to 

identify in advance some of the major turning points in our industry—the oil price 

shocks of the 1970s, the periods of low oil prices in the mid 1980s and late 1990s, 

the emergence of global concerns regarding sustainable development, and the radical acceleration of market liberalization, globalization and technological progress 

through most of the 1990s. 

We have recently completed a new round of Global Scenarios. I would like to review the principal themes and draw out some of the main implications for global 

and U.S. energy markets. Over the next twenty years or so development of energy 

markets may be facing increasing pressures. We need to prepare for a world in 

which continuing growing energy demand from rapidly developing countries, such 

as India, China and Brazil, as well as continued demand growth in North America 

creates more competition for traditional energy sources and might require faster 

penetration of new energy sources. A second challenge involves the sustainability 

of traditional energy, particularly oil and gas, in the face of the accelerating pace 

of demand growth. We can characterize these challenges in terms of energy security—not energy security as a function of short-term supply disruptions, changing 

stock levels or our ability to cope with extreme weather, but energy security in 

terms of sustaining a growing demand for energy over the long-term in a system 

where shifts in the market are incremental at best and lead times to build new alternatives can be very long. 

Scenarios are a useful framework for thinking about these issues, both informing 

us about potential directions of change and helping to initiate the debate today 

about actions we need to set in motion to secure a long-term sustainable energy future for our children, our grandchildren and ourselves. 

Today’s testimony will focus solely on Global Scenarios and will not include any 

specific policy recommendations. Last month, Shell shared specific policy recVerDate 0ct 09 2002 11:48 Apr 04, 2005 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6621 P:\DOCS\20004.TXT SENE3 PsN: SCAN
28

ommendations with the Committee in response to Senator Domenici’s request for 

public input on the natural gas supply and demand situation. 

THE NEW SHELL GLOBAL SCENARIOS

The new Shell Global Scenarios build on the worldviews developed in previous 

scenario rounds, in particular the onward march of market liberalization, 

globalization and technological progress (trends epitomized by former UK prime 

minister Margaret Thatcher’s rallying call ‘‘There is No Alternative’’). In the 1990s, 

these trends led to a diminishing role for the state as an actor in societal and market development. However, over the past four years, we have seen a resurgence in 

the activism and aspiration of states, with wide support from the public at large, 

as a response to the dual crises of security (9/11, Bali, Madrid) and weakening of 

trust in markets (Enron, WorldCom, Tyco). Our new scenarios describe a world in 

which there are constant tensions between the aspirations for economic efficiency, 

social cohesion and security. Since these three aspirations cannot all be completely 

satisfied concurrently, the world operates via trade-offs in which two of the aspirations become more dominant relative to the third. We have therefore described three 

possible worlds in which these tensions play out:

1. Our first scenario, named Open Doors, explores a world in which the drive for 

market efficiency is in balance with civil society’s ongoing concerns to maintain or 

improve social cohesion, inclusiveness and access to equity. In this world the state 

prefers to operate via incentives. Pragmatic regulatory harmonization, strong independent media, voluntary best-practice codes and close links between investors and 

civil society support open markets, cooperation, high innovation and rapid economic 

development. Open markets combined with strong free trade growth facilitated by 

multilateral lowering of trade barriers allow world economic growth to follow a 

strong path, just above the historical average, and consequently requiring a high energy demand growth path. Energy markets in this scenario evolve following free 

market principles, responding to consumer preference for cleaner fuels and equitable 

resolution of environmental externalities via the pricing mechanism. International 

natural gas trade would expand most rapidly in this world allowing greater access 

to a cleaner fuel. Renewable energy and clean coal technologies also become more 

prominent in response to societal preference, but need to be competitive as well. 

Take-up is consequently slower than in the other scenarios. 

2. Our second scenario, named Low Trust Globalization, is a world in which the 

aspiration for market efficiency remains strong but in which the state exerts a 

strong role in providing the public good of security, influencing choices, via regulation and other oversight instruments aiming to guarantee public and investor security. Institutional barriers and slower innovation would result in somewhat lower 

economic growth, slightly below the historical average, with world energy demand 

growing at about the same rate as has historically been the case. Energy markets 

in this scenario are more clearly focused on responding to policy objectives of achieving energy security, e.g. by proactively pursuing diversity of supply, being of the 

same commodity or alternative fuels, and by supporting interconnection of infrastructure networks, increasing regulation to accommodate cleaner fuels, like renewables, in the market and by demand policies. 

3. Our third scenario, named Flags, describes a world in which the strong role 

of the state focuses more on social cohesion than on market efficiency. Here national 

preference is more prominent; regulation tends to be more fragmented and tailored 

purely to national concerns; trade is conducted on a bilateral basis; and latent tensions in international and inter-community relations are sustained. The more fragmented nature of international economic relations in this scenario leads to a low annual economic global growth rate, almost a percentage point below historical averages, and consequently a low rate of world energy demand growth. For energy markets, this would mean a reversion to national policies promoting domestic energy 

sources and securing imports by bilateral contracts; global environmental initiatives 

would lose impetus with the focus shifting back to local pollution issues, leading to 

fragmentation of approaches to mitigation; and competition for access to energy resources and markets could favor energy companies which are either state-controlled 

or which receive strong support from their home governments.

The dynamic tensions between these three worlds are present today and will continue for the foreseeable future. We can expect conflicting pointers indicating that 

we may be heading for one world or another. We need therefore to monitor the multiple developments in societies, markets, the legal system, regulation and international relations to determine whether we are moving in a particular direction. It 

is also possible that different regions of the world, including countries and regions 

of vital importance in supplying energy markets, operate in different scenario 

29

worlds, inevitably leading to misunderstanding, confusion and the inability of actors 

to achieve their objectives. For example, if Europe acts in an Open Doors way, 

North America views the world through the lens of Low Trust globalization and the 

Middle East or Russia follows the path of Flags, and the parties do not recognize 

the different positions of the others, there will be little chance of any region achieving its objectives with regard to energy supply or access to markets in full. Energy 

security, in its broadest sense, will be at risk. 

SCENARIO IMPLICATIONS FOR U.S. ENERGY SECURITY

Over the next 25 to 30 years, global energy demand could rise by over two thirds. 

Although much of the demand growth will come from developing countries such as 

China and India, most projections also see fairly significant energy demand growth 

here in the United States. For example, the recently released EIA Annual Energy 

Outlook 2005 projects total U.S. energy consumption to be over 35% higher in 2025 

than it was in 2003. Oil, gas and coal are projected to remain the dominant fuels, 

growing by 39%, 40% and 34% respectively. The developing economies expect to see 

even faster energy consumption growth rates over a similar period as their economies expand. Our scenarios encompass these growth projections within a wider 

range of possibilities. Before going into that, let me first highlight some current 

trends and indicators:

• Increasing global oil and gas demand is resulting in faster depletion of existing 

resources. Although the overall global resource base is thought to be reasonably 

robust for the near future, issues of remoteness, increasing technical difficulty 

and therefore cost, and regulatory or fiscal uncertainties, may constrain development of these resources below the pace of demand growth. • Global oil and gas exploration success rates are decreasing. The recent trend 

for oil and gas companies to return cash to shareholders via share buybacks 

rather than reinvest in core activities may be perceived to indicate a declining 

set of accessible resource development opportunities. • The OPEC capacity squeeze in 2004 may have been a temporary phenomenon, 

but for the longer term several recent statements coming out of Saudi Arabia 

indicate a reluctance, or perhaps an inability, to expand its oil production capacity to much over 15 million barrels per day over the next two decades. Assumptions of old on the expandability of OPEC capacity to balance the oil market 

at almost any level of demand may therefore need reassessment. • Natural gas production in the U.S. has essentially stagnated over the past three 

years despite consistently higher wellhead gas prices and correspondingly elevated drilling activity levels. Despite the cost to U.S. industry and consumers 

and the lost opportunity for oil and gas companies this situation has not yet 

led to action to improve access to potentially rich new resources, currently off 

limits. • The pace of introduction of new sources of non-fossil fuel energy into the U.S. 

energy mix has remained slow and patchy, such that these alternative energies 

are not yet positioned to rapidly take up a more significant share of the market 

should the growth in the supply of fossil fuels to the U.S. fall below expectations, either through pressure on the resource base or through increased competition from fast-growing markets elsewhere.

The above factors are all signposts for potential vulnerability of global and U.S. 

energy markets in coming years. Responses and outcomes may be very different, according to the different ways the world evolves. Scenario thinking can help us in 

portraying these very diverse choices and outcomes. Each of the scenarios considers 

the full range of energy options in terms of fuel mix, policies and market solutions—

with the differences being mainly a question of scale and timing. 

The Open Doors world emphasizes resolution of these tensions through open markets and free trade, in energy as well as most other traded goods and services. In 

such a world an incentives based system with a minimum of state interference or 

conflicts, a stable regulatory framework and efficient competition and financial markets would deliver new production and infrastructure in a timely fashion. Such a 

system would need high trust, but would have the highest economic efficiency. 

U.S. energy policy in this scenario would likely be driven by the desire to deliver 

sufficient energy at an affordable cost to the user consistent with consumer preferences for a clean and safe environment. The U.S. would become more open to 

international gas trade by allowing market-based development of import infrastructure while enhanced access to domestic gas resources would be acceptable in balance 

with environmental objectives. LNG imports grow most rapidly under this scenario, 

and more LNG would delay the need to develop some of the more remote, higher 

cost domestic gas resources. Renewable energies and unconventional fuels would be 

30

subject to the discipline of the market, but would not be unduly inhibited by conflicting and onerous regulation, especially as true environmental costs could be internalized in energy pricing via market mechanisms, like CO2 permit trading. Technological progress reducing the cost of new energy sources such as hydrogen fuel 

cells for distributed power would be the prime driver behind accelerating market 

penetration. 

Such a world would lead to efficient development of energy supplies consistent 

with demand and consumer willingness to pay. However, pursuit of such an open 

markets policy in energy by the U.S. on its own bears the risk that other actors 

in international energy markets may not have the same assumptions nor follow 

similar models. With new oil and gas production coming increasingly from nonOECD countries, and where fossil fuel extraction is increasingly dominated by state 

run National Oil Companies with completely different drivers, this may be a real 

risk to energy security (see Flags below). 

The Low Trust Globalization world achieves energy security by proactively seeking to diversify supply and ensuring sufficient interconnection between energy networks to ensure back-up and alternative supply routes. Supply diversity here includes both geographical diversity of supply source to avoid over dependency on regions with high geopolitical risk and diversity of fuel mix such that the total energy 

system is not overexposed to shocks related to one particular fuel. The state steps 

in to ensure these objectives are met, even if they are not the most efficient in purely economic terms. 

U.S. energy policy in this scenario would likely encompass a mixture of market 

incentives and increased regulation to enhance long-term energy security. However, 

the perceived need to proceed with caution with regard to public security and environmental protection delays or reduces the scope of the development of import infrastructure, such as LNG terminals, and access to more domestic gas resources, either 

offshore or on federal lands onshore. The U.S. will certainly look at its immediate 

neighbors for help and the development of the unconventional resource base will 

look an attractive solution. While renewable and unconventional energy sources 

could be subject to more favorable and proactive government policies, through tax 

credits, investment subsidies or R&D support, it is unlikely that the scale of take 

up would be sufficiently strong or fast to compensate for lower availability of gas 

supply. Government policy will therefore have to shift somewhat towards demandside initiatives, encompassing, for instance, efficiency standards or energy taxation, 

if overall price levels are to be contained. 

The Flags world would involve a return to the ‘‘old order’’ in international energy 

markets, involving bi-lateral long term contracts, point to point connections and political horse trading to secure imports—in conjunction with strong government control on domestic demand and stimulation of indigenous supply—even if other objectives like cost competitiveness or environmental pollution are compromised. In such 

a world, it will be the national energy companies that will be favored in the producing as well as the consuming nations, and they have a different set of objectives 

and investment criteria, strongly driven—and backed-up—by their governments. 

Competition from these companies to access oil and gas resources may not result 

in delivery of greater volumes on to world markets but in capture of resources to 

meet domestic demand in their home countries. In this scenario, despite lower economic growth and consequent energy demand growth, the increasing challenge of 

balancing supply with demand in the U.S. would risk driving up domestic energy 

prices—and leads to strong pressures for the government to open up more domestic 

resources, bring access to moratoria areas and federal lands, or move to alternatives 

such as unconventional fuels, biofuels or nuclear. The portfolio of policy options in 

this scenario may also have to include stringent demand side measures. To the extent that the U.S. is forced to remain connected to international energy markets, 

a much closer link between energy policy and foreign policy would develop, in conjunction with policies for the energy industry structure. 

No one can predict in which direction the world will develop over the next twenty 

years. As of today, some would argue that the world is somewhere between Low 

Trust Globalization and Flags with at times aspirations towards Open Doors, but 

directional signposts are often unclear or seem conflicting. We therefore believe it 

is sensible for U.S. energy policy to consider and be prepared for multiple possible 

outcomes—build bridges to international markets through infrastructure development and international cooperation, in conjunction with pragmatic domestic energy 

policies over the full range of supply and demand and with partnership and cooperation between legislators, regulators and private companies. 

31

CLIMATE CHANGE—A WILD CARD

Scenarios explore trends, as well as ‘‘critical uncertainties’’, by raising the ‘‘whatif’’ question. The Shell scenarios do not take a particular position with regard to the 

possibility of climate change caused by increased greenhouse gas emissions. However, one could consider the possibility that a real threat to energy security may not 

be the availability or access to hydrocarbon resources, high demand growth from the 

Far East, terrorist acts, regulatory uncertainty, or foreign policy, but climate 

change. The world’s CO2 concentration is already more than a third higher than in 

all its history. We can therefore safely say that we are already in uncharted waters. 

What if the world accepts tomorrow that we can no longer afford to take a free rider 

on nature and must internalize the external costs by for example sequestering CO2? 

This is possible, but will require a new infrastructure, which takes decades to build. 

But also wind, temperature and rain patterns may change, which could put the already built renewable infrastructure in the wrong place. Whether or not the Kyoto 

Treaty is an appropriate or successful response to these risks, the pace of change 

in our energy systems, particularly in mature markets such as the U.S. or Europe, 

is such that it is prudent to take preparatory steps earlier rather than later to prepare for a shift to a lower carbon-intensive energy future.

The CHAIRMAN. Thank you very much. I do not know if I want 

to really thank you for what you told us, but I guess we have to 

hear it. 

[Laughter.] 

The CHAIRMAN. We have had a new Senator arrive. Senator Alexander, everybody has been offered an opportunity to make some 

comments. Would you like to? 

Senator ALEXANDER. Thank you, Mr. Chairman. I will listen. I 

have more of a question than a comment. Would you like me to do 

that later? 

The CHAIRMAN. Yes, please. You will do it later when you get 

your turn. 

Senator ALEXANDER. Thank you very much. The area that I 

would be interested in hearing more about is one we have discussed on both sides here, which is the extent to which coal gasification and carbon sequestration offers an option for us worldwide 

as we think about energy independence and environmental policy. 

I will listen for a while to that. When my turn comes, I will ask 

questions on that. I would be interested in what the private sector 

is doing and what they suggest we do to encourage that or if they 

even think that is a valid option. 

Thank you. 

The CHAIRMAN. Thank you very much. 

Now, let us see. We have one last witness, Frank Verrastro. 

STATEMENT OF FRANK A. VERRASTRO, DIRECTOR AND SENIOR FELLOW, ENERGY PROGRAM, CENTER FOR STRATEGIC 

AND INTERNATIONAL STUDIES 

Mr. VERRASTRO. Mr. Chairman, members of the committee, I too 

appreciate the opportunity to appear before you today to discuss 

emerging global energy trends and their implication for U.S. energy security, energy needs, and policy choices. 

The events of the past year have, once again, focused attention 

on the critical role which energy plays in our global economy. It is 

truly a strategic commodity, and consequently, I commend you and 

the committee for convening this hearing today. 

You already have copies of my testimony, which I submitted, so 

I will take my time and summarize highlights and emerging 

trends, which we have developed at CSIS. I do this with the caveat 

32

that identifying such trends is always easier in hindsight than in 

forecasting, but nonetheless, we go forward. 

We have identified 10 trends worth noting. Beginning with the 

demand side of the ledger, one of the most striking trends—and 

Andrew and Guy have both referenced this—is the acceleration in 

the growth of global energy and oil demand, especially that exhibited in Asia, principally in China, but also in the United States. It 

took the world almost 18 years, from 1977 to 1995, to increase demand for oil from 60 million to 70 million barrels a day, yet less 

than 8 years to grow from 70 million to in excess of 80 million 

where it stands today. EIA projects that in 2010, only 5 years from 

now, global oil consumption will again increase to over 90 million 

barrels a day. 

Current demand for the first quarter of this year is forecast to 

range between 83 and 84.5. Given the limitations on near-term 

OPEC and non-OPEC production capabilities, that range could well 

be the difference between a repeat of last year’s price volatility and 

a more predictable rise. The primary question is, however, is that 

growth sustainable? Is it worthy of a designation as a trend or is 

it simply a short-term anomaly? 

Demand growth for oil in Asia has, for the past few years, accounted for between 30 and 40 percent of all new global demand 

growth. Forecasts predict that global oil demand will continue to 

grow to between 120 million and 125 million barrels a day by 2025. 

That is 50 percent more than we currently consume. If true, the 

implications for world economies, infrastructure, and transport requirements, wealth transfers, the environment, and global geopolitics are indeed enormous. 

In this context, I would also draw your attention to America’s increasing reliance on imports of crude oil, refined products, and natural gas, and Guy referred to this earlier. To fill the gap between 

growing energy demand and declining production, EIA projects net 

oil imports to grow to almost 28 million barrels a day in 2025, with 

refined product imports accounting for a growing proportion of that 

demand. Absent the adoption of measures to increase domestic output, to improve efficiency, to ensure the construction of needed facilities and infrastructure, rationalize our fuel specification requirements, promote conservation, and pursue technological advancement, we run the risk of putting our transportation and power generation sectors, our economic well-being, and our national security 

at increased risk. 

An added complication to last year’s demand increase was that 

this growth surge came at a time when global inventories were low 

by historic standards and spare productive capacity, both in terms 

of crude quantity and quality, especially for lighter, sweet crudes, 

were both in support supply. In addition, the absence of spare capacity or properly configured U.S. and global refining capability 

made converting those available crudes into needed products more 

difficult, if not impossible. Global spare capacity at about 1.5 million barrels a day is at its lowest level in 30 years, declined from 

an average of about 2.5 million barrels a day in the 1990’s and 

from over 5 million barrels a day only 21⁄2 years ago. 

The confluence of these conditions, coupled with the concerns 

over increased global instability and supply disruptions in disVerDate 0ct 09 2002 11:48 Apr 04, 2005 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6602 P:\DOCS\20004.TXT SENE3 PsN: SCAN
33

parate parts of the world, ranging from strikes in Nigeria and Norway to concern over output from Venezuela and Russia, from the 

loss of U.S. gulf supplies as a result of Hurricane Ivan, and sabotage in Iraq, and for at least a portion of the summer when prices 

clearly exceeded levels that are attributable to market fundamentals, we saw an increased role of market speculators. Together, 

they combined to create a kind of perfect storm for oil prices in 

2004. 

As a consequence of these factors, assuming continued strong demand and limited supply, it is highly likely that we have moved 

to a higher price environment, especially for oil, substantially 

above the levels experienced over the last 20 years. 

Against this backdrop, let me add three additional considerations 

that may well prove to be trend-worthy as we go forward, and 

those are the changing face of the global energy map, with distinct 

geographic separations between market givers and takers. We are 

also increasing concentration of supply clusters and demand centers which are not proximate to one another. As we go forward, the 

major supply centers look to be Russia and the Caspian, the Middle 

East, Africa, and unconventional supplies from Canada and Venezuela. When you pair that up against emerging demand centers, 

the United States, Europe, and Asia, mainly China, you can see 

that we have huge problems with transportation, security, and 

logistical support. 

We also have the evolving role of the national oil companies—

and Andrew has already highlighted that effect—and the substantial challenges faced by the international majors, both with regard 

to access to resource-rich areas, reserves replacement, and competition from nations rather than businesses. National oil companies 

currently control 72 percent of proven oil reserves worldwide, 55 

percent of gas reserves, and over half of the oil and gas that is produced today. 

Finally, the growing influence and power of non-state actors and 

the transformation of political governance, changes which have the 

potential for remaking global energy markets by refocusing nations’ 

priorities around more centralized, ideologically justified policies, 

often at the expense of traditional free market forces and foreign 

investment. In this regard, the increased significance of oil and energy will invariably mean that those sectors are quite likely often 

to be in play politically. 

Let me close with one final thought. Though it is too early to be 

identified as a trend, clearly a wild card issue as we go forward is 

global climate change and the follow-through activity with respect 

to Kyoto. 

With that comment, let me thank you for your attention, and I 

too would be pleased to answer any questions. 

[The prepared statement of Mr. Verrastro follows:]

PREPARED STATEMENT OF FRANK A. VERRASTRO, DIRECTOR AND SENIOR FELLOW,

ENERGY PROGRAM, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES,

WASHINGTON, DC 

Mr. Chairman, Members of the Committee, I appreciate the opportunity to appear 

before you today to discuss emerging global energy trends and their implications for 

U.S. energy needs, security and policy choices. I currently serve as Energy Program 

Director and Senior Fellow at the Center for Strategic and International Studies 

34

1 International Energy Outlook 2004 (IEO 2004), Energy Information Administration, U.S. Department of Energy, Washington, DC, April 2004; World Energy Outlook 2004 (WEO 2004), 

International Energy Agency/Organization for Economic Cooperation and Development, Paris, 

November 2004. 

(CSIS). My remarks this morning are the result of analysis conducted at CSIS as 

well as from impressions and personal experience gleaned from my prior government service in a variety of energy policy positions and over twenty years experience in the private sector as an executive for domestic and international oil and gas 

companies. 

OUR EVOLVING ENERGY WORLD

Mr. Chairman, the events of the past year have once again focused attention on 

the critical role which energy plays in our global economy. Rising global oil demand, 

concern over the adequacy, reliability, and pricing of energy supplies, the environmental implications of increased use of fossil fuels, the cost of those supplies for developed and developing economies alike, global geopolitics, trade and capital flows 

are issues that preoccupy business and governments around the globe. Consequently, I commend you and the committee for convening this hearing. 

Given the critical importance of energy as a strategic commodity, a pivotal question is raised as to whether or not we should be managing its production, delivery 

and use differently as part of a larger effort to return to the consumer more acceptable control of his energy future. I would submit that as a consequence of having 

worked off the surpluses of spare global oil production and United States and worldwide refining capacity, witnessing the emergence of aggressive new players in the 

market, increased concentration of supply sources that are not co-located with future demand centers, and taking into account the environmental, security and foreign policy implications of these changes, a new global energy map may well be 

emerging and a new geopolitical game afoot. 

U.S. consumers have come to both enjoy and expect a healthy domestic economy, 

which is underpinned by an energy supply that is at once available, affordable, secure, and environmentally benign. In this new world are those criteria unattainable 

or just beyond reach of current energy paradigms and policies? 

While the focus of my remarks here today necessarily highlight the importance 

of oil and natural gas, it is important to note that coal continues to play a significant role for many countries, particularly with respect to power generation. In addition, continuing energy supply concerns and high prices will encourage increased 

coal production as a reliable, diverse, and cost competitive fuel source. Coal gasification, coal liquefaction, and clean coal technologies, all currently available, if applied on a sufficiently broad scale offer coal-rich countries such as the United States, 

India, and China an opportunity to minimize those concerns deriving from an increasing reliance on imported liquid fuels. 

In addition, while not minimizing the contribution made by alternative energy 

forms, including nuclear and renewables, in the global picture for at least the next 

several decades these alternatives will remain cast in the roles of significant but 

clearly supporting actors. 

I should also note that CSIS has not constructed a model of its own for forecasting 

future energy supply and demand. Consequently, my comments today draw heavily 

on forecasts and data from CSIS, 2/3/05,1 a number of private sector and governmental sources, most notably those produced by the International Energy Agency 

(IEA) and the U.S. Energy Information Administration (EIA). 

After analyzing the various factors that could affect global and regional supply 

and demand as well as policy issues that could alter the direction and timing of the 

various projections, it is our contention that sustained high prices, environmental 

challenges, foreign policy developments, and technological advancements invariably 

will produce an oil future different from that portrayed by either the EIA or IEA. 

We believe, for example, that the demand growth and production required to meet 

the forecasted demand of 120-126 million barrels of oil per day (mmb/d) in the next 

few decades are unrealistic, in part owing to the belief that production and delivery 

of 50 percent more oil than currently done today will strain existing resources, infrastructure, delivery systems, and the environment so as to be unsustainable. 

PUTTING THE FUTURE IN CONTEXT—ENERGY CONSUMPTION TRENDS

The world of energy is changing and moving in directions that further complicate 

the tasks that lie ahead. If the world does not respond appropriately to these challenges, we risk confronting a future that is increasingly uncertain and defined by 

factors beyond our control or influence. At its present pace, the world population is 

35

2 ‘‘The Outlook for the World Oil Market,’’ Lord John Browne, Group Chief Executive, BP, 

Speech given at the Empire Club of Canada, Toronto, December 10, 2004. 

* Figures 1-8 have been retained in committee files. 

3See IEA forecast for developing Asia, ‘‘Chapter 8—Regional Outlooks,’’ WEO 2004, IEA. 

growing by almost 10,000 an hour almost a quarter million per day. These people 

will need food, housing and other products and services which invariably require energy to produce and deliver.2

For the next twenty years, most forecasts predict that the world will continue to 

rely on the same energy forms that fueled the past century—oil, natural gas, coal, 

nuclear and a broad grouping of renewables, including solar, hydro, biomass and 

wind energy forms. Indeed, although global energy demand is forecast to double between 2001 and 2025, little change is expected in the relative shares of the major 

fuel sources (Figure 1).* 

In 2001, 85 percent of global fuel needs were met with fossil fuels, with oil (39 

percent) being king, and renewables (8 percent) and nuclear (6 percent) playing supporting, but nonetheless important, roles. This global energy makeup, as expressed 

in percentage terms, was remarkably consistent even within disparate regions. Energy usage in North America, which currently comprises about 30 percent of worldwide consumption, essentially mirrored larger global trends. 

Increased reliance on nuclear energy in Europe, in contrast, slightly altered the 

total energy mix by reducing demand for coal and natural gas. In the developing 

countries, those often least able to afford or employ best available technology, the 

use of fossil fuels exceeded 90 percent. 

Given the long lead times necessary to develop and introduce new conventional 

supplies and alternative energy forms, absent an economic, foreign policy, or environmental crisis or a major technological breakthrough, demand for fossil fuels (oil, 

natural gas, and coal) is expected to continue to dominate the global energy mix for 

at least the next two decades. 

In the case of the developing world, this trend is particularly dramatic. The IEA 

projection calls for developing Asia, including China and India, to continue its current economic expansion with GDP growth (5 percent annually over the forecast period), several percentage points greater than global growth as a whole.3 As a consequence, the energy demand accompanying such robust economic growth is expected to double over the next 2 decades (Figure 2), accounting for 40 percent of 

the total increase in projected world energy consumption over that period. 

Although sustained high oil prices may ultimately moderate energy growth in 

Asia, the pace and level of the region’s energy consumption could place serious 

strains on global oil markets and consequently raises significant concerns for both 

capital flows and emissions growth. Between now and 2025, over 60 percent of new 

growth in CO2 emissions is projected to result from energy use in the developing 

world (Figure 3). The problem only gets worse with hyperurbanization. By 2025, 

CO2 emissions from the developing world will exceed those of the industrialized 

world, and by 2015 will achieve parity with the developed nations. 

Of the total energy consumed worldwide, approximately 40 percent serves power 

generation needs and another 20 percent goes to transportation. Half the world’s oil 

half of an 82 million barrel-a-day market is dedicated to transportation. In the absence of a substitute liquid fuel or changes to the gasoline combustion engine, this 

demand is becoming increasingly inelastic, especially in the United States, the 

world’s largest oil consumer. Without improved efficiency and fuel capability 

changes made to the power and transportation sectors, energy demand cannot materially be reduced. 

THE ROLE OF THE UNITED STATES

The United States is currently the world’s largest producer, consumer, and importer of energy. The United States has roughly 5 percent of the world’s population 

and produces 17 percent of the total energy supplied. Yet in the process of generating almost a third of global GDP, the United States consumes nearly a quarter 

of the world’s energy. 

The 2004 EIA forecast projects that overall energy usage in the United States will 

continue to increase at an annual growth rate of 1.5 percent for the next 20 years. 

Total U.S. demand for oil is projected to increase by 40 percent from current levels 

(slightly in excess of 20 mmb/d) to almost 28 mmb/d in 2025. Demand for all forms 

of petroleum fuels except for the bottom of the barrel increase, but total gasoline 

demand increases dramatically after growing slowly for the past 15 years, largely 

as a result of fuel efficiency standards adopted in the 1970s. 

36

4 James Boxell and Kevin Morrison, ‘‘Oil Majors Find New Rivals Snapping at Their Heels,’’ 

Financial Times, December 8, 2004. 

Assuming a continued decline in domestic crude oil production, and with U.S. refineries running at or near capacity, absent substantial new investment, increased 

domestic demand means expanding reliance on imported oil, both crude and, increasingly, refined products. U.S. oil import reliance is expected to grow from the 

current level of 58 percent to between 65 and 75 percent of demand by 2025, depending on assumptions about price and economic growth. 

The rise in oil import levels, both in absolute and relative terms, carries important infrastructure, logistical, environmental, financial, trade, security, and foreign 

policy implications. In particular, Carbon Dioxide Emissions 1990-2025 the projected 

rise in refined petroleum product imports increases U.S. vulnerability to supply disruptions and potentially undermines the value of the Strategic Petroleum Reserve 

(SPR), assuming investment continues to lag in the creation of additional refining 

capacity. 

A similar picture emerges for domestic natural gas. After an era in which gas was 

undervalued and in surplus supply, domestic production has plateaued and now 

begun to decline. As demand continues to grow and the EIA projects increased use 

of gas domestically primarily for power generation the United States will rely increasingly on nonconventional domestic production (e.g., tight sands and coal seam 

gas), gas from Alaska, on increased imports of pipeline gas from Canada (to the extent they are available), and on LNG from sources in Latin America, the Caribbean, 

Africa, the Middle East, Australia, and Russia. 

Projected supplies of LNG imports assume that additional regasification capacity 

will be permitted and constructed either within the United States or in areas proximate to U.S. borders an uncertain assumption. In addition to environmental, safety, 

competition, and siting issues, opponents of additional LNG regas projects increasingly name security and foreign policy concerns about exposing the U.S. electric grid 

system to reliance on imports from countries, many of whom are oil exporters found 

in troubled regions of the world. 

GLOBAL ENERGY RESERVES

Government owned or controlled companies control 72 percent of the world’s oil 

reserves, 55 percent of the gas reserves, and more than half of the current world 

production.4 While two-thirds of the world’s proven oil resources belong to OPEC 

members and 60 percent are found in the Middle East (Figure 4), non-OPEC producers, including the United States, Russia, Mexico, and Norway, currently provide 

significant global volumes, and will likely continue to do so for decades to come. As 

these resources are depleted, however, the world increasingly will come to rely on 

OPEC sources, in part as a function of their substantial reserves bases and partly 

the result of more favorable economics. Yet, these are sources where transparency 

issues and reserve numbers have been questioned and where production is generally 

controlled by national ministries or national oil companies (NOCs). Except under 

limited circumstances, these resources are currently inaccessible to international oil 

companies (IOCs). 

Russia, Iran, and Qatar, the three top countries for natural gas reserves, contain 

almost 60 percent of the world’s total (Figure 5). By contrast, the United States, 

Canada, and Venezuela account for just over 6 percent. OPEC member countries 

contain about half of global gas resources. 

Examining the list of major gas reserve holders highlights two facts: first, natural 

gas reserves throughout the world are ample; and second, much of this supply is 

‘‘stranded,’’ that is, far removed from major consumption centers. As a consequence, 

gas transportation becomes a prime consideration one that is accomplished either 

through overland pipeline routing or by cooling and liquefying the gas to move it 

in sea-borne tankers. 

The United States, Russia, and China hold over half of the world’s proven coal 

reserves (Figure 16). The advent of truly ‘‘clean coal’’ technology and the world’s 

ability to deal effectively with the environmental concerns related to mining and 

mining waste, could substantially improve coal’s role in power generation, reduce 

natural gas demand (possibly freeing up supplies for transport uses), and improve 

efficiency. 

RECONFIGURING THE GLOBAL ENERGY MAP—A NEW GAME FOR OIL

In the future, technology advancements and policy choices which re-rank security, 

environmental impacts, and foreign policy considerations could substantially alter 

the global energy mix and promote different fuel choices over traditional forms. That 

37

possibility may also have the impact of reconfiguring the global energy map, creating new regional and international commercial and strategic alliances, altering 

the environment, and changing the way in which the world generates, transmits, 

transports, and consumes its energy resources. 

The emergence of new regional and international commercial and strategic alliances may similarly mark the beginning of a ‘‘new game’’ in the geopolitics of oil. 

Although the implications for IOCs and especially for U.S. oil companies are not yet 

fully evident, this change comes at a time when access to new opportunities is a 

principal driver behind most corporate plans. That coincidence presents an unwelcome complication. 

Evidence of this new game may be found in the activities of the national oil companies of China and India, exploring the globe in search of equity oil. Deals are 

struck on a bilateral basis, often secured through the granting of considerable foreign aid to host governments. Moreover, political commitments between the representative governments, sometimes hidden, sometimes not, add a worrisome element. 

China currently receives 6 percent of its oil imports from Sudan and 15 percent 

from Iran. It is entirely conceivable that as a consequence of this oil dependence 

China could be expected to use its Security Council veto should the United States 

or other UN members attempt to impose oil-related sanctions on either nation. 

Similarly, in Russia where it is widely believed that oil and gas development will 

serve as the engine for broader economic growth, President Putin appears committed to ensuring that control over those resources rests in state hands. While Russia, in the past, has declined to play politics with the export of oil and gas to the 

West, it is not implausible to assume that those resources may now be used in a 

manner that advances the country’s national interests, sometimes discreetly, sometimes not. 

The viability of OPEC is questioned from time to time. While cooperation is easy 

to achieve during times of high oil prices, declining prices have member-countries 

concerned over their continued ability to meet internal budgetary requirements, taking actions that serve their own national interests rather than that of OPEC as a 

whole. 

Three factors may shape the future of OPEC. First is the conventional wisdom that oil prices have moved to a new level, above the $22-28 target; and that, absent 

any precipitous drop in demand, they are likely to stay high for some time. 

Second, the disappearance of OPEC spare producing capacity (currently at its lowest level in 30 years), and the unwillingness or inability of member-countries other 

than Saudi Arabia to expand measurably producing capacity beyond expected market requirements, supports continued oil price volatility. 

Third, in the coming decade, Libya, Iran, and Iraq are expected to be in a position 

to substantially ramp up production volumes and consequently seek higher OPEC 

export quotas. If global demand is insufficient to accommodate those incremental 

volumes without disturbing other member quotas, how will OPEC as an institution 

react? 

EIA forecasts global oil supply in 2025 to exceed current production by some 46 

percent or over 38 mmb/d. To achieve this level, production increases are required 

from both OPEC and non-OPEC sources. In the near to mid-term, increases in nonOPEC volumes will likely come from Canada, Mexico, Angola, Azerbaijan and 

Kazakhstan. Meeting this target will also require OPEC volumes to substantially 

increase. While there is a high level of confidence that the region contains reserves 

adequate to meet these targets, the strain on resources, supporting infrastructure 

and political governance should not be underestimated. 

In forecasting future OPEC output, considerable attention must be paid to the 

pace and success of expansion efforts in Iraq, Iran, and Libya three countries in 

which the oil sector has largely been neglected for decades as a consequence of political upheaval, war, nationalization, and sanctions. In 1979, combined OPEC production capacity exceeded 38 mmb/d. Twenty-five years later capacity had declined to 

around 31 mmb/d (Figure 7). Two-thirds of that capacity loss can be traced directly 

to declines in those three countries. At the same time, Saudi capacity is roughly the 

same today as it was 25 years ago. 

The growth in oil production from non-OPEC sources has significantly contributed 

to the marked erosion in OPEC market share since the late 1970s, as have gains 

in energy efficiency. That trend may be changing. Despite the emergence of a wider 

variety of producer nations, including new production from Latin America, the Caspian, Australia, West Africa, and nonconventional oil from Venezuela and Canada, 

plus the sharp rebound in Russian oil production, future growth, especially by 2020 

and beyond, is likely to be overshadowed by production gains from the resource-rich 

Middle East. 

38

6Monthly Oil Market Report, December 2003, OPEC. 7 Extracted data from IEA and EIA reference and low economic/high price cases. 

It is here that the question of sustained demand looms particularly large. In 2003, 

both OPEC6 and the IEA projected that the average growth in global demand for 

oil over the next several years would approximate 1.6 percent per year. If true, 

worldwide incremental demand for oil would increase by almost 10 mmb/d by 2010. 

At that pace, virtually all new production from both OPEC and non-OPEC sources 

would be needed to keep pace with demand. 

Assuming, however, that sustained higher prices may reduce that growth to 1.1-

1.2 percent annually over the same period, additional worldwide production of only 

about half that much would be required.7

Under those conditions, non-OPEC oil production, including output from Russia, 

the Caspian, West Africa, and others, coupled with renewed efforts in Iraq and 

Libya, for example, would undoubtedly produce downward price pressure on other 

OPEC members and OPEC as an institution (in terms of quota enforcement). This 

could result in a particularly difficult time for Saudi Arabia during a period in 

which the Kingdom is expected to face substantial challenges in terms of population 

growth, governance, and political succession issues—a time during which sustained 

high revenues generated by oil exports will likely be needed. 

MAJOR GLOBAL OIL PLAYERS

We can identify six key players in today’s world oil market: Saudi Arabia, Russia 

and Iraq as ‘‘Givers’’ to the market, and the U.S., China and India as major consumers or ‘‘Takers.’’

Saudi Arabia 

Saudi Arabia is likely to continue as world’s largest oil exporter for at least the 

next few years, though Russia could pose a challenge in terms of gross production. 

Saudi Arabia is one of the few countries which possesses additional spare production 

capacity and is capable of expanding that capacity (at least on a temporary ‘‘surge’’ 

basis) in the near term. 

Notwithstanding this enviable position, or possibly because of it, concerns surrounding Saudi output continue to abound. Terrorist threats to Saudi production 

and export facilities have increased upward pressure on crude oil prices and the 

Kingdom’s aging leadership with no clear succession beyond the current Crown 

Prince, who is 80 years old, remain cause for concern. 

In addition, the Kingdom’s growing and youthful population, the tension between 

religious conservatives and more reform minded factions, high unemployment, and 

the increasing need for ever higher earnings to pay for health care, education, and 

infrastructure will require all the skills of the royal family to maintain social order. 

Even with its then substantial oil export revenues, the Kingdom ran budget deficits until as recently as 2002. Notwithstanding current high production and prices, 

Saudi officials remain concerned that with the rise of Russian and Iraqi oil production and the re-emergence of Libya, in the absence of continued robust oil demand, 

OPEC producers and Saudi Arabia in particular could face reduced output and/or 

lower prices in the next several years. 

Terrorism is the most public and immediate threat to the Kingdom and the royal 

family, not to mention the world oil market. Asset and personal security have improved over the year, in part due to collaboration and assistance from the government’s foreign partners. While public support for terrorism is low and improved security may have reduced the chances of a successful attack, the threat has not been 

removed. 

Political reform, despite its seemingly glacial pace, is also underway. The government is pursuing an announced process with specific markers, although it is not 

prepared to offer the ultimate democratic objectives sought by some in the West. In 

many ways, the U.S. declaration of bringing a wave of democracy to the Middle East 

may have exactly the opposite effect in terms of the pace and direction of reform 

in the Kingdom. 

Russia 

The Soviet Union entered the world market as a small net exporter in the late 

1950s. During the next decade as production and export volumes grew, application 

was made for membership in OPEC. That gesture, however, was rebuffed although 

at OPEC’s invitation, Russia now attends the cartel’s official meetings with observer 

status. 

Over 30 years, Soviet oil production increased from 2.3 in 1958 to more than 12 

mmb/d in 1988, but export volumes remained relatively low, partly as a result of 

39

8 ‘‘Russia Country Analysis Brief,’’ EIA, May 2004, www.eia.doe.gov/emeu/cabs/russia.html. 9Tables D5: World Oil Production Capacity by Region and Country, High Oil Price Case, 

1990-2025,’’ International Energy Outlook 2004, EIA, p. 217. 

low domestic prices that encouraged wasteful consumption, and partly due to system loss. With the collapse of the oil sector in the late 1980’s-early 1990’s, Russian 

oil production declined rapidly from its 1988 peak to a low of some 6 mmb/d in 

1996.8 This decline was unprecedented in world oil history, in that it was brought 

about not by developments in the market place, but rather by oilfield mismanagement and the lack of investment capital. 

Following a decade of difficulty and turmoil, new investment has produced a 

marked increase in Russian oil output to about 9.2 mmb/d in 2004, allowing Russia 

to challenge Saudi Arabia as the world’s leading oil producer. Internal consumption 

of approximately 2.4 mmb/d limits current exports to 6.7 mmb/d. 

More importantly, until the recent crackdown on Russian producers, especially the 

embattled company Yukos, and the reassertion of Kremlin control over energy policy, output and exports (via infrastructure), estimates for future Russian production 

indicated continued and substantial growth possibly reaching as high as 12 mmb/

d in 20259—assuming continued high prices and successful exploration and oilfield 

development in the intervening years. 

Russia’s ability to continue to increase production rests on several considerations. 

Existing oil production, in part, reflects Soviet technology and practices. Production 

practices are suspect and the ability of the existing fields to sustain increased output is an open question. 

The Putin government’s strategy of restoring state control if not ownership of the 

oil and gas producing and infrastructure sectors, including its effort to insert favored companies into existing joint ventures, reflects a restoration of greater centralized direction. Overall, there is a widespread perception in the industry that 

large Russian producers desire foreign partners for financial reasons but are unwilling to relinquish control or ownership. Smaller Russian companies, on the other 

hand, hope to attract foreign partners as they provide the only available option for 

growth and new capital. 

These developments raise the prospect that Russian production from existing 

fields may be nearing a temporary peak. Without additional incentives or early development of additional prospects, the recent history of rapid increases may not be 

sustainable. Future increases in the export of oil and gas in large part will depend 

on the timely discovery and development of new deposits in Eastern Siberia and offshore, on the availability of supporting infrastructure, and on IOC involvement contributing funding, technical and managerial know-how. Moreover, and of equal importance, the investment climate must be attractive and the rule of law must be 

in place, and honored. Risk-averse management may look elsewhere, while other 

corporations may value access over what is normally viewed as acceptable risk. 

Iraq 

The timing and success in stabilizing Iraq may well be one of the largest wild card 

issues with respect to global oil supply and prices. Iraq currently holds the world’s 

second largest proven reserves of oil (at 115 billion barrels) and most industry observers speculate that with renewed investment directed to oilfield exploration and 

development, plus access to advanced technology and infrastructure improvements, 

the country could become a major oil producer/exporter. Realizing that future, however, will require substantial improvements in infrastructure and security, rule of 

law, and a thorough examination of the state of the major producing reservoirs in 

both the north and south (soon to be undertaken as a result of recently awarded 

contracts to Shell and BP). In addition, while the country is saddled with significant 

external debt, including billions in compensation claims resulting from the invasion 

of Kuwait, these financial obstacles are not expected to prevent investment from 

going forward. 

Infrastructure security is especially important. Pipelines in Iraq have been blown 

up over 170 times since the President Bush’s declaration of the cessation of major 

hostilities in May 2003. These incidents disrupt oil production and export schedules 

and bring about considerable financial loss to the country. This week’s elections, 

while a significant step forward in the march toward democracy and nation 

(re)building are not expected to bring an end to the violence and sabotage. 

Other Suppliers 

There are also other groups of emerging producers. Over the last ten years substantial new exploration has taken place in the Caspian region, where significant 

production and exports are about to become a reality. Kazakhstan and Azerbaijan 

40

10See official statement by Uzakbai Karabalin, President of Kazmunaigaz National Oil Company, October 2003, www.kazakhembus.com/100203.html, and Kazakhstan Country Analysis 

Brief, EIA, November 2004, www.eia.doe.gov/emeu/cabs/kazak.html. 11 ‘‘Natural Gas,’’ IEO 2004, EIA. pp. 47-74. 

possess substantial resources, but as domestic consumption is quite limited, the 

timely development of these resources has depended on the availability of export 

pipelines to move oil and natural gas to hard currency markets. 

A pipeline to carry Kazakh oil to an export site on the Black Sea has been available for several years now and is key to production reaching the stated goal of 3.5 

mmb/d by 2015.10 Later this year, the Baku-Tblisi-Ceyhan (BTC) export pipeline 

will become operational, allowing expansion of fields offshore Baku. 

Libya has recently proposed terms for production sharing agreements (PSAs). 

While expansion plans out to 2010 are comparatively modest, the removal of sanctions in a tight global oil market has made the country more attractive to investors. 

Even facing difficult contract terms, companies are still anxious to re-enter Libya. 

West African oil provinces, at first glance, seem well-positioned to respond to U.S. 

oil import needs. The relatively short, direct route across the Atlantic Ocean to East 

Coast ports combined with superior crude quality lead many to suggest that West 

African exports can help the United States reduce its dependence on Middle East 

oil. Investment in heavy oil processing globally, however, may change the dynamics 

of West African marketing. Wide spread corruption, a personalized political system, 

lack of reform, and the failure to equitably redistribute the financial benefits of oil 

export revenues have created conditions conducive to civil unrest that often interferes with oil production and export schedules. 

NONCONVENTIONAL SUPPLIES

Nonconventional energy supplies (heavy oil and tar sands) in Canada and Venezuela hold considerable promise, but also face substantial obstacles. Development 

of the Canadian oil sands requires tremendous amounts of water and natural gas 

and is very labor intensive. Extraction is largely a mining operation and two tons 

of oil sands are needed to produce one barrel of oil. At present, these oil sands yield 

roughly 1 mmb/d. 

The heavy oils of Venezuela face their own challenges. Yet given the enormity of 

the resource base, even in the face of the recent announcement of hefty royalty increases, investors still look favorably (albeit cautiously) on prospects for development. 

GLOBAL GAS & LNG

Global gas reserves are abundant and given recognition of natural gas as an environmentally friendly fuel and the desire of resource holders to monetize their resource, it is not surprising that forecasts for gas supply and demand over the next 

decade are frequently described as robust. 

Unfortunately, much of this gas is considered stranded as it is located in areas 

geographically distant from major consuming areas. In some cases, overland piping 

of gas is economic, but for transiting great distances, including across ocean expanses, liquefying the gas and shipping it in sea-borne tankers is becoming an increasingly attractive option. IEA projections for gas demand growth indicate that 

natural gas will overtake coal as the second leading energy fuel source sometime 

in the next decade. By 2030, more than 50 percent of all inter-regional gas trade 

will be comprised of LNG shipments. 

In 2002, twelve countries (Algeria, Libya, Qatar, Nigeria, United Arab Emirates, 

Oman, Australia, Brunei, Indonesia, Malaysia, the United States, and Trinidad and 

Tobago) shipped some 5.4 trillion cubic feet (tcf) of gas to about the same number 

of countries worldwide. Supplying markets in just three countries Japan, South 

Korea, and Taiwan accounted for two-thirds of the total LNG demand. Three additional exporters (Russia, Norway, and Egypt) are constructing liquefaction facilities 

and at least seven additional producer/exporters (Iran, Yemen, Equatorial Guinea, 

Angola, Venezuela, Bolivia, and Peru) are waiting in the wings.11

Unlike oil investments, however, LNG financing and project success ultimately 

are tied to consumer markets. Siting and permitting approvals, especially in the 

United States, are not guaranteed. Environmental, safety, and security concerns remain largely unanswered and policy issues surrounding the prudence of exposing 

the domestic electric grid to the same or similar price and supply volatility recently 

experienced in the oil-based transportation sector may dampen enthusiasm for needed natural gas imports, possibly to the benefit of domestic coal. 

41

12 Anthony Cordesman, Saudi Petroleum Security: Challenges & Responses, CSIS draft, Washington, DC, November 2004, p. 7. 

CONSUMER WILD CARDS

The United States 

The role of the United States as an energy producer, consumer, and importer has 

already been noted in some detail. The energy future of the country seems at once 

very clear but very worrisome: declining domestic production and rising domestic demand, with the gap to be covered by imports from suppliers whose national interests may not and historically have not coincided with U.S. interests. 

This almost inevitable growth in reliance on foreign supplies would, to the casual 

observer, seem to be a call to action, to define and implement policies that would 

concomitantly expand domestic supplies while setting demand management efforts 

in motion. To do so, however, requires a certain political will on the part of both 

the U.S. consumer and the government. And, to date, despite higher energy prices, 

threats of shortage, environmental damage and blackouts, that critical ingredient 

remains lacking. 

All energy producer/exporters and consumer/importers are bound together by a 

mutual interdependency. All are vulnerable to any event, anywhere, at any time, 

that impacts on supply or demand. This means that the U.S. energy future likely 

will be shaped, at least in part, by events outside of its control and beyond its influence. Calls for energy independence, absent major technological breakthroughs and 

a national commitment, ring hollow and in the near term are both unrealistic and 

unachievable. In the absence of decisive political will to undertake those steps necessary to improve efficiency, promote conservation, the increased use of domestic energy resources and renewable energy forms, learning to manage the risks accompanying import dependency may be the only reasonable course of action. 

Further, it should be noted that while the United States currently imports roughly 23 percent of its crude oil needs from the Persian Gulf, if total reliance also took 

into account the indirect imports of manufactured goods from other nations that also 

purchase Middle East oil, the resulting figure might be 30-40 percent higher.12

China 

The analytical community is in almost universal agreement regarding the size 

and nature of Chinese energy demand growth over the next three decades. It will 

lead the world with growth rates substantially above the world average. All sectors 

of the energy producing economy are predicted to grow between 2.3 and 9 percent 

while generally maintaining the current share of each within the total fuel mix. 

Coal would retain its dominant position in this scenario. 

Growth rates of this magnitude would drive world oil and, to a lesser extent, natural gas markets as imports of both are projected to increase substantially. Foreign 

investors and suppliers are eager to exploit this potential and Chinese officials are 

taking advantage of this interest. 

As demonstrated by almost 30 years of economic reform and growth, Chinese decisionmakers are likely to proceed incrementally in further reforming the energy sector. The result is an existing energy sector containing a mix of market signals and 

government direction. For example, power stations pay close to market prices for 

coal but are unable to pass on the full cost to consumers. 

China’s mixed economic system complicates introducing new market related policies for a variety of reasons. Any decision may worsen existing distortions. Equally 

important, any decision is guaranteed to diminish the authority of those directing 

the system as well as those who benefit from the status quo. This latter problem 

may prove particularly intractable if both producers and consumers benefit from the 

status quo. 

China’s current five-year plan ends in 2005. A group of senior advisors, comprised 

of academics, senior statesmen, and business leaders is considering a revised energy 

strategy to cover the period to 2020. There are undoubtedly differences within the 

group over how to meet the announced goals of energy supply security, environmental protection, economic efficiency, and rural development, not to mention the 

implied need to maintain domestic tranquility. 

Energy investors have a vested interest in any decisions made. There is for example a need to rationalize and modernize the refining sector while ensuring the delivery of product to rural or underserved areas. Similarly, there is a need to rationalize 

the domestic energy pricing system not just for consumers but also to effect market 

competition for competing energy sources. 

42

India 

India contains 16 percent of the world’s population, a growing thirst for energy 

in support of its expanding economic growth, but only a very limited resource base 

to call upon. Oil use rose by a bit more than 1 million b/d during the 10-year period 

1993 to 2003, but domestic oil production was able to cover just one-third of that 

increment. The gap could only be filled by expanding the importation of foreign oil, 

which now accounts for some 70 percent of the country’s current oil needs. There 

is little reason to believe that any import relief can be secured, and the IEA places 

India’s oil import dependence at 80 percent as early as 2010. 

This high degree of dependence on foreign oil troubles the Indian government. As 

a consequence, the country is seeking to diversify its energy base while undertaking 

a broad-ranging and aggressive search for equity oil around the world. Interestingly, 

this search has on several occasions put India in direct competition with China. 

Limited opportunities worldwide confirm that this competition likely will continue. 

Competition for access to oil supplies typically occurs between private companies. 

When governments, through national oil companies, increase their involvement in 

competition, both the nature of the issues and transparency regarding the terms 

may be sacrificed. 

The natural gas resource base of India is equally limited, and for both oil and natural gas, the ever-increasing gap between domestic supply and demand will have 

to be covered by imports. India must look abroad for incremental supplies production currently determines how much natural gas can be made available, and these 

volumes fall well short of the country’s realistic needs. In this effort to search out 

and find acceptable sources of natural gas outside India, pollution abatement is just 

as much a driver as is diversity among fuels consumed. 

GEOPOLITICAL CONCERNS

Does this new oil ‘‘map,’’ the emergence of China as a major competitor (the number 2 importer and consumer, behind the United States), and threat of realignment 

and bilateral arrangements threaten traditional global supply network? Should the 

U.S. government be concerned if China and Russia or China and the Middle East 

form diplomatic alliances and bilateral relationships? How would such action affect 

U.S. foreign policy options, especially regarding Sudan and Iranian sanctions? How 

plausible? Is the recent Saudi decision to supply China and reduce exports to the 

United States purely economic (given demand, crude quality and price differentials) 

or something more political in nature? Can a change in U.S. policy toward the Middle East peace process improve the U.S. Saudi relationship? How will the upcoming 

elections in Iraq affect the region? 

More importantly, under all forecasts, energy import dependence in Japan and 

China will increase. Part of this supply will come from Russia and part from Africa, 

but the bulk will come from the Middle East. Seeking security of supply through 

diversity of suppliers, in the past several months, the Chinese government has discussed commercial or diplomatic arrangements with Russia, Kazakhstan, Saudi Arabia, Iran, Venezuela, Canada and Argentina. Should this be a wake up call and 

cause for concern? 

PRICE VOLATILITY AND THE CURRENT OIL MARKET

Crude oil prices have increased by over 60 percent since the beginning of 2004. 

As a consequence, the past few months have also seen near record prices for refined 

petroleum products (gasoline and distillates) in the United States. While oil price 

volatility is seen often as a recent phenomenon, evidence over the past thirty years 

(Figure 8) suggests that price volatility has been the rule rather than the exception. 

Most of the upward price movements have been tied to oil supply disruptions and 

political upheaval. The 1973 spike was the result of a targeted embargo against the 

United States. 

Conversely, when prices drop precipitously, it is usually the result of intentional 

or unintended oversupply. At times this has been caused by deliberate Saudi efforts 

to regain control of the market. Other price collapses were caused by demand reductions resulting from high prices (early 1980s) or economic recessions (Asian recession of the mid-1990s). 

The current oil market, however, has been driven by a number of specific factors, 

including:

• Unexpected high demand growth in the United States and Asia, particularly in 

China; 

• The marked absence of adequate commercial inventories (supplemental sources 

of supply); 

43

• Limited spare production capacity on the part of the major producing nations; 

• Uncertainty in the ability of producers to continue to deliver needed oil volumes 

to the market—a situation exacerbated by actual disruption in supply from Venezuela, Norway, Nigeria, the U.S. Gulf Coast, Iraq, and the concern over further 

losses from Venezuela as well as a potential loss of supply from Saudi Arabia 

and Russia; and 

• The role of speculators.

A decided mismatch between the types of crude available for sale and those needed by refiners and buyers to produce consumer products has complicated the supply 

picture. This crude quality issue was most evident in the price spread between light 

sweet crudes and heavier, sour oil and in the request for light oil swaps or loans 

from the SPR that followed the loss of domestic production from the Gulf of Mexico 

as a result of Hurricane Ivan in September 2004. 

Looking ahead into 2005, market fundamentals are likely to change very little. 

Sizable new (incremental) production is not expected until the latter half of this 

year at the earliest. Owing largely to the lag time between investment and output, 

additional production growth is not expected until 2007 and beyond. Consequently, 

if global demand continues to grow, albeit a bit more slowly than in 2004, partly 

as a result of weakened economic activity reflecting higher prices, supply/demand 

balances can be expected to remain tight but manageable for at least the near term. 

In this scenario, barring any significant and protracted loss of oil output, oil prices 

are likely to recede from current high levels but remain in the $35-45/barrel range, 

while exhibiting continued volatility in reaction to specific events. 

Alternatively, should sustained high prices result in a regional or global economic 

slowdown, demand reductions will have to be countered by OPEC production cuts 

to maintain price levels. Conversely, if prices moderate, we expect a corresponding 

increase in demand, continued tightness in supply availability and the prospects for 

substantial price increases if supply shortfalls become evident. 

Increasingly, economic forecasters are projecting a reduction in U.S. and global 

GDP growth for 2005-06 as a result of sustained high oil prices. Regional economic 

impacts vary depending on the level of oil dependence of particular countries, their 

ability to substitute or reduce their oil consumption, and calculations based on 

achieved energy efficiency. At the very least, higher oil prices will have the effect 

of dampening the cyclical upturn in global economic activity. 

OIL IN THE FINANCIAL MARKET, INTER-REGIONAL TRADE AND CHOKE POINTS

There may be no clearer indicator of energy’s role as a strategic commodity and 

the interdependency of participants in energy markets than an examination of oil’s 

role in global trade and finances. In today’s global oil market, after netting out volumes produced and consumed in the same country, somewhere on the order of 35-

37 million barrels are actually transferred internationally on a daily basis. At an 

average price of $45 per barrel, that adds up to slightly more than a billion and 

a half dollars a day. Daily U.S. crude oil imports cost more than $450 million or 

over $160 billion annually. 

The transfer of wealth from the industrialized world to oil producer/exporters is 

without precedent. During the past 30 years OPEC’s (net) export revenues have increased tenfold from under $30 billion to almost $340 billion (estimate for 2004). In 

the last ten years, oil export revenues have doubled for every OPEC member, and 

tripled in the case of Qatar. 

More importantly, given rising global oil demand, the IEA’s World Energy Outlook 

2004 projects that inter-regional trade in oil shipments will increase sharply by 

2030, reaching 65 mmb/d, accounting for more than half of global oil production and 

roughly double current shipments. As a result of growing concentration in production and exports from the Middle East, increased tanker traffic to major consumption centers around the world will necessarily increase routing through recognized 

‘‘choke points,’’ major transport channels through which much of the world’s oil (and 

LNG) currently flows. As these routes are highly trafficked and pose navigational 

challenges, they are also areas susceptible to piracy, terrorist attacks, or accidents. 

EIA and IEA sources have identified six such strategic maritime choke points and 

several major pipeline systems. Those that affect oil and LNG tanker traffic are:

• The Straits of Hormuz, located at the mouth of the Persian Gulf, currently the 

world’s most critical maritime oil-shipping route; 

• The Straits of Malacca, located between Indonesia, Malaysia and Singapore, 

and the principal route for oil shipments to Asia; 

• The Suez Canal, which connects the Red and Mediterranean Seas; 

• The Bab el-Mandab passage, connecting the Red Sea and the Gulf of Aden; 

44

• The Bosporus and Turkish Straits, connecting the Mediterranean and Black 

Seas and a major waterborne shipping route for Caspian and Russian oil; and • The Panama Canal.

Collectively, over 34 mmb/d of oil is shipped through these channels every day. 

Disruptions at any of these choke points would undoubtedly have a dramatic impact 

on crude deliverability and prices. More importantly, as global oil trade expands, 

these major arteries will become even more critical and heavily utilized. In fact, IEA 

projections forecast that tanker traffic through the Straits of Hormuz and Malacca 

and the Suez Canal alone will more than double by 2030. 

CHALLENGES FOR INTERNATIONAL OIL COMPANIES (IOCS)

When confronted with the prospects of continued near-term tightness in conventional oil markets and corresponding high prices, instability in major oil producing 

areas, heightened sensitivity to national security concerns, the need to improve environmental conditions while continuing to offer reliable energy choices to developed 

and developing economies alike, IOCs are now faced with a spectrum of strategic 

investment choices. These include pursuing access to conventional energy resources 

and/or moving to develop nonconventional fuel forms, including LNG, GTL, renewables, and biofuels, in concert with traditional and emerging energy suppliers. 

Since the majority of today’s proven oil reserves are located in a handful of countries with access controlled by national ministries or national oil companies, the 

ability of the IOCs to successfully pursue access opportunities is currently severely 

limited. This situation is exacerbated by current high prices as these translate to 

high export revenues for major producer countries and undermine the need for outside assistance. Flush with the income from higher oil prices, host country producers 

are less likely to require or desire the assistance of foreign oil firms, except in the 

instance of acquiring technology-specific aid enhanced oil recovery efforts, for example. Higher prices and profits generally also translate into tougher commercial 

terms for entrants as host governments look to extract additional concessions from 

bidders. 

Assuming that companies are denied access to conventional oil reserves in OPEC 

nations, IOCs are left to choose among investment options in non-OPEC countries 

and frontier areas (e.g., ultra-deep water and the Arctic), pursue nonconventional 

fuel choices, focus on research related projects to develop renewable sources and/or 

pursue technology and demand reduction initiatives that preserve the continuity or 

expansion of their product line. This alternative strategy is not without risk, however, and even large IOCs are expected to experience difficulty in replacing reserves 

in the coming years. 

POLITICAL AND OTHER TRENDS

International politics and the political environment within which companies operate are also undergoing fundamental change. For companies looking to invest or 

trade, an issue of paramount concern is the country’s governing structure and the 

locus of political authority. And the predominant, emerging political ideology of this 

century has become autonomy, with its increasing emphasis on unique identities 

around shared ethnic, cultural, or religious values. This new ideology poses a challenge to the old system of nationalism and the traditional nation-state. As a consequence, investors are witnessing the growing power of non-state actors and the 

increasing likelihood of precipitating events leading to the overthrow/overhaul of 

ruling regimes. In energy producing countries, the importance of the energy sector 

invariably means that it is almost always in play politically. 

Governments facing political threat or transformation respond in varying degrees 

with a combination of coercion, co-option and cooperation. Some resist claims for autonomy by reasserting central control and direction often at the expense of market 

efficiency. States in which political authority and economic control is shared among 

a small group of individuals and interests resist threats to their control most vigorously. Consequences for investors are most severe in instances where the domestic 

confrontation results in an abrupt and violent political transition as occurred in the 

past in Iran, Iraq, Libya, and Venezuela. Under those circumstances, oil production 

declines dramatically, usually failing to regain its pre-crisis levels for a decade or 

more. Further, in most cases, private assets are taken by the state. 

On the economic front, market capitalism appears to be losing ground to economic 

ideology. The appeal of economic efficiency and reliance on the market, which resulted in the rapid spread of domestic market reforms and global financial, trade 

and investment integration in the 1980s and 1990s, has stalled. For the oil sector, 

domestic economic reforms were welcomed as they permitted foreign investment and 

even some limited privatization. 

45

Citing justifications of security, jobs, environmental concerns, economic competition and the narrow need for securing energy supplies, certain nations have slowed 

reforms and are beginning to pursue more centralized ideologically-justified, interventionist economic policies, often with widespread domestic public support. 

The confluence of these political and economic changes holds several major implications for energy investors. First, to the extent that IOCs continue to be denied 

access to those few select resource-rich nations under competitive terms comparable 

to those offered elsewhere, their E&P investment opportunities are likely to become 

more complicated, causing investors to continually rebalance their portfolio risk, including the addition of less attractive opportunities, with potentially longer payout 

periods. Portfolios of the future will likely include fewer commercially attractive exploration opportunities in frontier areas, workover acreage offered by nations attempting to forestall production declines by offering more attractive terms to new 

entrants, and possibly a few lower return but highly prospective areas. 

Coupled with the difficulty in obtaining access to proprietary reserves is the emergence of significant competitors pursuing investments in the most attractive exploration and production markets. As previously discussed, the most aggressive of 

these new competitors is China, and to a lesser extent, India. And this raises a third 

challenge, namely dealing with the reemergence of security inspired, politically driven foreign investment. 

Over the past few years, Chinese state companies, in particular, have aggressively 

gained access to prime production opportunities using their lower cost of capital and 

the financial and political support of the Chinese financial institutions and government. These companies tend to make uneconomic bids, use Chinese state bilateral 

loans and financing, and spend wildly. Chinese investors pursue market and strategic objectives, rather than commercial ones. 

In strategic terms, the Chinese government has artfully exploited the reduced 

U.S. political standing among oil producers (and its overuse of economic sanctions) 

to assert its strategic interest in the Middle East. Since China is unable to project 

significant military forces in the Gulf, it employs economic, commercial and political 

means instead. It is also seeking access to higher quality crudes that better match 

the configuration of its refining sector. 

China also offers the attractiveness of its rapidly expanding energy consuming 

sector to leverage suppliers and investors to accept lower returns and to provide desired technology as the price for entry to both the downstream and LNG markets. 

In this way, China is redefining market competition. 

The consequences of the Chinese strategy are to reduce investment opportunities 

for commercial entities and ultimately reduce the flexibility of the global crude trading market. While the implications of this strategy have not gone unnoticed, the 

United States has been slow to recognize the dynamics of this potentially changing 

market. 

IMPLICATIONS FOR U.S. POLICY

Over the past 50 years, U.S. energy policy has been faithfully diverse, often internally inconsistent, amazingly flexible in adjusting to public, market and commercial 

pressures, and incomprehensible to most observers. It is likely to retain many of 

these unique elements. 

The 1970s provided the last clear articulation of an attempted national energy 

strategy and this was largely in response to global energy events. The 1973 Arab 

Oil Embargo prompted the development of the SPR, the adoption of CAFE ́ (Corporate Average Fuel Efficiency) standards, and the formation of the IEA. Domestic 

natural gas shortages and the prospects for declining oil supplies produced the 

Carter Administration’s decision to lift oil price regulation and pursue energy sector 

transformation, ushering in a new era in U.S. policy driven by the market. The combined effect of these actions has produced the following results:

• Consumers pay market prices for oil and gas and market responses are favored 

to adjust to price distortions and to distribute oil; 

• With some narrow exceptions, economic regulation is a policy of the past; 

• The United States remains the largest and most attractive import market for 

suppliers of all types of oil and gas, ensuring oil supply diversity and relatively 

robust levels of natural gas imports. A policy inclination for regional or Western 

hemisphere oil supplies has been largely discredited, but nonetheless remains 

alive; and that policy may be revived in the face of global security threats; 

• Refiners have successfully responded to environmental legislation by closing inefficient refineries and investing in increased capacity to produce new products, 

using lower quality crude oil; 

46

• The SPR is nearing capacity and a heating oil reserve in New England now exists; 

• All administrations have been committed to the multilateral political arrangements contained in the IEA. International cooperation in oil is enshrined, if not 

always practiced, in the face of world market shortages; and 

• On a bipartisan basis, successive administrations have supported U.S. investors 

negotiating contracts, particularly in non-OPEC countries and with natural gas 

producers.

In short, economics has prevailed over the past 25 years. Oil prices have remained 

relatively low and U.S. energy efficiency has increased. However, changing market 

and political conditions may complicate America’s policy agenda going forward, and 

these include:

• Energy security, broadly defined in terms of attacks on infrastructure, and 

greater vulnerability to imported oil supply threats, either physical or financial, 

due to growing production concentration; 

• Market developments, particularly in alternative fuels and with respect to climate change. In the future, markets may drive policy more than policy drives 

markets; 

• Less multilateral cooperation in the international oil trading and investment 

market places as governments pursue specific narrow interests; 

• Increased vulnerability to supply disruptions due to growing natural gas import 

dependence in the power sector; and 

• Political hostility to U.S. policy in specific regions as allies and friends abandon 

the United States to ensure their own political survival.

It is against this backdrop that future U.S. energy and security policies must be 

fashioned. But that is likely the topic for another day. 

Thank you.

The CHAIRMAN. Thank you very, very much. 

First, let me say how pleased I am that so many Senators have 

attended. I cannot think of any hearing that could be taking place 

here in the Senate where more important and vital information 

would be available to Senators than what we have heard here 

today. I know you all are going to have a lot of questions and 

thoughts, and I am going to yield after a story. I just want to tell 

you what these four people remind me of. You will understand this 

very well, Mel. 

When I was growing up, my father, who did not speak English 

very well, used to look out the window of his little office, and usually about once a week, a little bicycle would come up the sidewalk 

with a little driver. On the front of the bike, he had a little knapsack. In that knapsack, were whatever that fellow was bringing 

back to his business from the banks. He had sent something to the 

bank. They were sending something back. What they were sending 

back were the bad checks, the checks they had taken and deposited 

that were no good. And he nicknamed that little bike. He called it 

the pa ́jaro de mala suerte. He laughed. You understood what it 

was. He called that little fellow the bird of bad luck, or bad luck 

bird. It sort of reminds me of these witnesses. 

[Laughter.] 

The CHAIRMAN. They are bad luck birds. If we pay attention to 

what they have said, anybody that does not think that they are at 

least that or more was not listening. 

I have just two questions. Since LNG is so much in the wind 

here, would somebody tell me where is most of the basic resource 

for LNG? Where is it in the world, and how much is there? 

Mr. CARUSO. Well, the main LNG suppliers today are Algeria, 

Trinidad and Tobago, and Nigeria, as well as the Asian suppliers, 

Malaysia and Indonesia. But there will be substantial increases, as 

47

you can imagine, from the demand numbers you have just heard, 

and they will come from Russia, Norway, Qatar, and Australia, and 

there could be others such as Iran, for example. So they are similar, but not identical to the oil sources. 

The CHAIRMAN. What is the effect going to be of the competition 

for LNG among large consumers like the United States, China, on 

the ultimate cost of natural gas? And could you describe some of 

the progress that we are making in developing LNG regasification 

terminals in other countries? 

Mr. CARUSO. Well, the United States, of course, would be a major 

player. As you pointed out in your opening remarks, net imports 

of LNG in 2003 of .4 tcf to potentially 6.4. So we will clearly be 

a dominant player as you look out over the next 2 decades. Right 

now there is a regional market for gas. 

The CHAIRMAN. My question is what effect will that have on the 

price of natural gas? 

Mr. CARUSO. Yes. We think that with the kind of LNG exports 

that are projected in our outlook, as well as the IEA’s outlook, that 

the price pressures on natural gas will be downward. We do think 

that by 2010, when a large component of new LNG comes into the 

United States, that the average wellhead price of gas in this country will go below $4 a 1,000 cubic feet. It is about $5.50 today. So 

we do think increased LNG supplies will provide some increased 

competitiveness in the United States, as well as on a global basis. 

The CHAIRMAN. My last question has to do with nuclear power. 

Whoever talked about nuclear as part of the mix, I notice it did not 

account for very much by 2025. Is it possible that it could play a 

bigger role if the process for the development and licensing of nuclear power plants was substantially different than history has revealed? 

Mr. CARUSO. Yes. Our outlook is for there to be no new nuclear 

plants in our 2025 outlook, and that is mainly because the economics are unfavorable relative to combined-cycle natural gas or pulverized coal. It certainly is possible that that could change, but it 

would require both improvement in the economics, as well as some 

of the structural issues that you have mentioned. Clearly the potential is there. Some of the suppliers of nuclear plants do believe 

they can bring the cost down substantially, and our scenario that 

we will release next week shows that if they bring the capital cost 

of a nuclear plant down to about $1,450 a kilowatt, that nuclear 

would be quite competitive particularly in the decade after 2015 to 

2025. 

The CHAIRMAN. Thank you very much. 

Senator Bingaman. 

Senator BINGAMAN. Thank you very much. Thank you to all the 

witnesses. 

I would like to try to sort of disaggregate some of the information 

we have heard here. First, just to talk about oil. The growth in demand for oil, as I understand it, at least in this country is primarily a result of increased demand in the transportation sector. 

Is that accurate? 

Mr. CARUSO. That is absolutely correct, sir. 

48

Senator BINGAMAN. And is that true worldwide? Is that what is 

driving the growth in demand for oil that we are seeing in China 

and these other developing countries? Is that a fair statement? 

Mr. CARUSO. Well, in our outlook it is a bit different outside of 

the United States in that it is more shared across sectors. So the 

industrial sectors in, particularly, China and other parts of Asia 

also show substantial growth, in addition to transportation. So it 

is more spread across the commercial and industrial sectors, as 

well as transportation. 

Senator BINGAMAN. But is it fair to say in your opinion that any 

serious effort to reduce the demand for new oil, the increased demand for oil over the next decade or two will have to have as a 

central component reducing the demand in the transportation sector? Is that fair? 

Mr. CARUSO. Yes, sir. It is our view. 

Senator BINGAMAN. Now, the growth in the demand for natural 

gas, as far as I can understand it, here in the United States at 

least, is a result of the demand for gas to generate more electricity. 

So that is where that growth is coming from? 

Mr. CARUSO. Yes, sir. 

Senator BINGAMAN. Is that true worldwide also? Is the primary 

increased demand for natural gas worldwide coming from more and 

more plants being constructed to produce electricity with that gas? 

Mr. LOGAN. It is partially true in China, but there are a whole 

number of emerging industrial and residential sectors that are, for 

the first time, using natural gas. So in China, and in India I think 

to some extent, it is more of a new playing field that is emerging. 

Senator BINGAMAN. So I guess policies that would encourage or 

facilitate generation of electricity from sources other than natural 

gas would be helpful in reducing the future demand for natural 

gas. Is that a fair conclusion? 

Mr. CARUSO. It is definitely true in this country, as well as in 

Asia. 

Senator BINGAMAN. I think Senator Alexander was asking about 

the various proposals that are floating around and that we heard 

at this conference that we had a week or so ago about coal gasification and carbon sequestration as a way to facilitate the use of 

more coal in power generation. I guess just to try to understand the 

size of that problem, my impression is that given current plans, 

there are going to be a tremendous number of additional coal-fired 

power plants constructed over the next 10 or 20 years. China is 

planning another 500-and-some-odd, as I understand it. India has 

got several hundred. I do not know exactly how many, but the figure that I saw was that there were over 800 known, planned coalfired power plants on the books somewhere, on the drawing board 

somewhere for construction. 

It would strike me that on the global warming issue, which I 

think just about each of you has mentioned in passing, there is no 

way to deal with that issue in any meaningful way without trying 

to change the technology that is used in those new coal-fired power 

plants. Is there? 

Mr. VERRASTRO. Senator, if I might. Just to put your comments 

in context, globally 40 percent of total energy consumed goes to 

power generation. It is the single biggest factor. About 20 percent 

49

goes for transportation and half the world’s oil. So if we have an 

82 million barrel a day world, about 40 million barrels a day goes 

to transportation. If you do not attack transportation and power 

generation, you cannot even expect to make a dent in reducing demand or controlling it. 

Having said that, on the power generation side in the United 

States, half of the power is generated from coal, 50 percent. About 

20 percent comes from nuclear. 13 or 14 percent comes from natural gas. It is unbelievably inefficient. It takes three units of primary energy to produce one unit of electricity out the back end. If 

you could conserve or find alternatives to reduce the amount of 

total electricity consumption by improving efficiency, you obviate 

the need for three primary units at the front end, and that is a significant piece. 

Your point on coal I think is extremely important. The United 

States is frequently identified as the Saudi Arabia of coal in terms 

of resources. There are many things you can do with coal, gasify 

it, liquefy it. Our transportation sector right now, the gasoline combustion engine runs on a liquid fuel. It is very hard to do and replace gasoline unless you have another liquid. If you can liquefy 

coal or gasify it with a clean coal technology and scrubbers, you can 

appreciably improve the environment and also change your energy 

mix. 

Mr. SLAUGHTER. I would just like to comment on coal gasification, if I may, very briefly. At Shell, we believe in opening up options for the future use of energy by maturing technology, and I 

think coal gasification is certainly one we need to look at not only 

for the United States but for major coal-consuming countries like 

China which has both the resource and a need. We are actually developing technology in one of our units, Shell Global Solutions, 

which we are looking to license to utilities and electric power producers as it matures. 

I think basically this fits into the whole concept that energy markets and energy market structures take a very long time to shift, 

and you have to take action early to mature new technologies to 

get them into the portfolio of choices. I think it is an ongoing process and we need to work on it. 

Senator THOMAS [presiding]. Thank you. 

Senator Martinez. 

Senator MARTINEZ. I have concerns—and I would like for Mr. 

Logan perhaps to address this—in the area of the geopolitical 

world in which we live and the concerns that you expressed with 

the instability in some parts of the world. I know that there have 

some concerns that Venezuela could decide to sell their oil elsewhere. I do not know that that is necessarily practical in the short 

term, but I do know that there is an increasing interest in Venezuela and China in doing business with one another. 

What would be the impact? How do we prepare for the possibility 

of a disruption of supply from Venezuela? 

Mr. LOGAN. Well, I think that is a difficult question when you 

ask about one particular country. Our forecasts call for, in the future, more of a surplus, I guess, in the supply demand balance 

than has existed over the last year or so. So hopefully there would 

50

* See Appendix I. 

not be an immediate global catastrophe if, for example, Venezuela 

happened to shut off its output. 

But in a larger economic sense, Venezuela is very closely tied 

into the global market, and it would not really serve their interests 

to stop selling oil at the market price. So in a sense, they are tied 

into the system as it exists right now. 

Senator MARTINEZ. So the likelihood of that occurring you do not 

think is a realistic possibility. 

Mr. LOGAN. Well, it is very difficult to say. It is something we 

have to be prepared for certainly, but the likelihood I do not think 

is very high. 

Senator MARTINEZ. That is all I have. 

The CHAIRMAN [presiding]. Thank you, Senator. 

Senator Wyden. 

Senator WYDEN. Thank you, Mr. Chairman. 

Mr. Caruso, in the last analysis that you all did, you indicated 

that the United States is exporting 1 million barrels per day of petroleum in 2003. Does that not make us something like 10 percent 

less secure every single day because we are, according to your figures, 9.6 million barrels per day dependent on foreign oil? And if 

we are exporting 1 million barrels out of the country, are we not 

10 percent less secure every single day because of the conduct of 

the oil companies? 

Mr. CARUSO. You are absolutely correct, we are exporting about 

1 million barrels a day, according to our latest numbers, which go 

through 11 months of 2004. That is because, of course, we have 

free trade and we do not have restrictions other than some on 

crude. But about 950,000 barrels a day or more is in the form of 

refined products. 

A large portion is petroleum coke, which is residue from refineries. I think last year we exported close to 400,000 barrels a day 

of petroleum coke which was excess. It was not really a critical 

component of our consumption mix. Most of that went to Asia. 

The other big part of that million is about 150,000 barrels a day 

for cross-border trade with Canada. There are some markets that 

are on the border that would be more efficiently served by movement across the border. 

So of the 1 million, maybe a little over 500,000 is explained by 

those two phenomena. The rest of it, of course, is just the market 

determining where those products could best be utilized. But, indeed, we calculate our import dependency on a net basis, and the 

figure I mentioned, 56 percent net import dependency, includes 

that million barrels per day. 

Senator WYDEN. I would like you to supply for the record a list 

of the companies that are exporting these products outside the 

United States and the amounts they are exporting. Obviously, you 

have got it because you calculated it. Can you make that available 

to us? 

Mr. CARUSO. Yes, sir.* 

Mr. VERRASTRO. Senator, if I might. 

Senator WYDEN. Let me just ask one question of Mr. Slaughter, 

and then I am happy to take yours, sir. 

51

My question to you, Mr. Slaughter, is why is industry tying up 

scarce refining capacity in this kind of way? Because you all have 

made the case that we do not have adequate refining capacity. It 

is something I happen to be fairly sympathetic to. But why are we 

using refining capacity now in a fashion that is apparently being 

used to export all these products rather than figuring out a way to 

make sure that the products stay in our country, gas and diesel? 

Why is this going on? 

Mr. LOGAN. First, I am not a refining expert or do not represent 

the refining part of our company. But when you refine a barrel of 

crude oil in any particular refinery, you get a particular yield of 

products which come out of it, and that has to be balanced among 

all the available markets in accordance with the demand in those 

local markets by the refinery. And there is never a perfect correlation between end-use demand and the refinery output. So balancing trade actually makes the market work more efficiently. 

Senator WYDEN. Well, it might make sense in some fanciful trade 

theory, but to me, anyway you look at it, we are 10 percent less 

secure. Mr. Caruso has told us that we are looking at 9.6 million 

barrels per day in terms of our dependence on foreign oil and we 

are shipping 10 percent of it out of the country because of some 

fanciful notions about trade. 

I want to get into one other area, but I want to give you, sir, a 

chance to make your comment. 

Mr. VERRASTRO. Thank you, Senator. Just to follow up on Andrew’s point, I think there are two things when you talk about refining capacity and exports. One is that companies typically work 

our swap arrangements. They will supply a certain area that is 

geographically proximate to where they have refineries in terms of 

refined products and take product elsewhere. So some of that is 

netted out. It might just be a market switch where you move product and you get product back in return in some other market. 

The second piece of that is when refineries produce a slate of 

products, some are usable in the market that they serve, some are 

not and they are excess to that market. And in the case of resid, 

for example, there are a lot of shipments in bunker fuels and asphalt. 

Senator WYDEN. Do I have time for one additional question, Mr. 

Chairman? 

The CHAIRMAN. Yes. 

Senator WYDEN. Thank you for your thoughtfulness, Mr. Chairman. 

Mr. Caruso, you can hear in my opening statement—I also serve 

on the Finance Committee—I am interested in changing the tax incentives for oil production. The Congressional Research Service 

considers the existing tax credit for enhanced oil recovery to be, in 

their words, a relatively inexpensive way to add additional oil reserves. Now, they estimate that nearly 400 billion barrels of oil remain in abandoned reservoirs, and that 10 percent of that oil consists of known recoverable reserves that could be produced with 

EOR techniques if the incentives were there. So we would be talking then about 40 billion barrels of oil that is in the ground that 

is not being recovered today that could be produced in the United 

States if there were the right incentives. 

52

Would it be your view that an additional 40 billion barrels of oil 

would make a significant difference in reducing our dependence on 

foreign oil? 

Mr. CARUSO. Certainly it would make a big difference. We have 

used enhanced oil recovery very effectively in this country, but 

even with that latest technology, we only recover about 30 percent 

of the oil in place. 

Senator WYDEN. Thank you, Mr. Chairman. 

The CHAIRMAN. Senator Smith. 

Senator SMITH. Mr. Caruso, did I understand your testimony correctly that you project significantly lower prices in the future in 

constant dollars than we are paying today? Is that what you said? 

Mr. CARUSO. That is correct, Senator. 

Senator SMITH. And is that true even in light of the rapid growth 

in China and other emerging nations? 

Mr. CARUSO. That is our reference case and we have, as I mentioned, looked at several other cases which will be released next 

week in which we say, well, given the uncertainties that some of 

the other witnesses have referred to this morning, what if we are 

living in a higher oil price world, what difference would that make? 

Clearly it does make a substantial difference in things like coal 

gasification, for example, and coal liquification. So, yes, we have 

done that. 

Senator SMITH. Your testimony indicates that about 70 percent 

of U.S. petroleum demand in 2025 will be for transportation uses. 

What assumptions did you make about CAFE ́ standards, fuel cell 

vehicles, and hybrids that are emerging as very high demand vehicles among consumers? 

Mr. CARUSO. The assumptions were the existing rules and regulations. So, therefore, any standards would be those that are in 

place as of November 2004 when we finished our analysis. 

Senator SMITH. But the ones that are in the energy bill we almost passed, that are likely to pass in this Congress, those would 

improve the situation quite dramatically or would they be marginal? 

Mr. CARUSO. The ones that were in the bill—there were no substantial changes, as I recall, in the vehicle efficiency standards. 

Senator SMITH. No, I think actually there were. They were left 

to the Government agency to figure out what those need to be. 

Mr. CARUSO. Okay. 

Senator SMITH. But did you calculate what those——

Mr. CARUSO. We did not include that because——

Senator SMITH. That picture actually might brighten in terms of 

conservation. 

Mr. CARUSO. That is correct. We did not include that in our analysis because it was left to be determined and therefore we could 

not put the specific changes in our model. 

Senator SMITH. Can you tell me how many LNG terminals are 

going through the permitting process right now on the west coast? 

Mr. CARUSO. On the west coast, there are several. I do not know 

the exact number. There are about 20 on a nationwide basis, and 

my recollection is there are several on the west coast. 

Senator SMITH. Are they proceeding? Are they having permitting 

difficulties, or do you know that kind of detail? 

53

Mr. CARUSO. I know that there are five on a national basis that 

have received either Coast Guard or FERC approval, but none of 

them are on the west coast. 

Senator SMITH. How rapidly do you think Canada’s exports to us 

of natural gas will decline? Quite significantly or? 

Mr. CARUSO. We have them gradually declining over the next 2 

decades. 

Senator SMITH. Mr. Logan, will China turn to nuclear power for 

its electricity needs? Do you factor that in at all? 

Mr. LOGAN. We do anticipate that new nuclear power plants will 

be built in China, but we also note that Chinese policy has gone 

through up and down stages of predicting heavier reliance on nuclear power. And then as the market either becomes over-supplied 

or then under-supplied, the forecasts will dramatically change, and 

it will depend on who in the back room is making the decisions at 

the time. 

Senator SMITH. Is the Three Gorges dam just about fully operational? And what does that portend for China’s energy? 

Mr. LOGAN. The Three Gorges dam, when fully completed, will 

have about 18 gigawatts of generating capacity. Of that, roughly 60 

percent is now complete. In 2009, the scheduled completion date, 

when it is fully operating, that 18 gigawatts will only account for 

about maybe 2 or 3 percent of the country’s total installed capacity. 

Senator SMITH. And will it be sufficient to get rid of all of their 

backup petroleum generators? 

Mr. LOGAN. No. 

Senator SMITH. Mr. Slaughter, U.S. refineries are operating at 

full capacity. Will oil companies be forced to import refined petroleum products in the U.S. future, and are ports prepared to accept 

these refined products? 

Mr. SLAUGHTER. If U.S. demand continues to grow along the projections we have seen and new refinery capacity is not added, then 

the market has to be balanced with imports. What you do see, 

though, on a year-on-year basis is more efficient operations in existing refineries as maintenance schedules are carried out, which 

actually give some small percentage of incremental capacity each 

year, maybe a half a percent of incremental capacity, without 

building new facilities. But if market demand increases at a higher 

rate than that, then we are exposed to international trade in products. Yes. 

Senator SMITH. Thank you all for you testimony. It has been very 

informative and I am glad I was here this morning, Mr. Chairman. 

Thank you. 

The CHAIRMAN. Senator Bunning. 

Senator BUNNING. Thank you, Mr. Chairman. 

Mr. Caruso, EIA forecasts that by the year 2025, two-thirds of 

all coal production will originate from the Western States. Why do 

you believe this is the case? Why cannot the Eastern coal companies and Eastern States—what do they have to do stay competitive? 

Mr. CARUSO. Well, I think that is exactly the answer; your statement is accurate. The main reason is the west coast is less costly. 

Senator BUNNING. Even with the shipping costs? 

54

* See Appendix I. 

Mr. CARUSO. Yes, sir. It is more competitive to the point of its 

consumption even with the transportation costs and, of course, it 

has a lower sulfur content. Those are the two main factors. So we 

see east of the Mississippi coal production staying relatively flat 

over the next 2 decades with most of the growth, which will be considerable given the outlook for electricity generation, to come from 

the West. 

Senator BUNNING. Even with the clean coal burning technologies 

that were in the energy bill that almost got through the Senate last 

time? It did not quite make it but it almost did. Even with those 

incentives for cleanup of Eastern coal, do you still see that same 

project? 

Mr. CARUSO. The forecast does not include the bill provision, 

since it was not enacted. But my recollection is that even analyzing 

that component of the bill, it did not make a large change in that, 

but I would certainly be able to supply you that for the record. 

Senator BUNNING. There was about $4.5 billion worth of incentives to clean up with new technology coal that would burn cleaner 

and more efficiently, and that included coal from east of the Mississippi, as well as coal from west of the Mississippi. So you do not 

think that that would make a difference. 

Mr. CARUSO. I would prefer to provide that for the record because 

my recollection of our analysis—we did an analysis of those components of the conference energy bill that we could model that had 

enough specificity and funding requirements outlined that could be 

analyzed in our model. So I would be happy to supply that for the 

record, Senator Bunning.* 

Senator BUNNING. In light of recent developments in Russia and 

the virtual nationalization of the Yukos Oil Company facilities and 

assets, what actions should we take in the Congress to ensure that 

our companies can be competitive with foreign companies in developing oil and natural gas infrastructure and resources? Anybody. 

Mr. VERRASTRO. Senator, I think in the case of Russia and 

Yukos, it would probably be helpful if at every opportunity, using 

diplomatic as well as commercial pressure, that we talk about 

incentivizing and market reform and proceeding with market reform. 

Senator BUNNING. For them? 

Mr. VERRASTRO. For Russia, for Venezuela, for a lot of other 

places. If national oil companies control the vast majority of the resources, increasingly international companies are going to have a 

difficult time with access. To the extent that state players decide 

now that you are going to use energy as a strategic commodity and 

things that you cannot do economically you will do in a bilateral 

fashion, a diplomatic fashion, to put pressure on other countries 

and form new alliances—one of the concerns we have with China, 

for example, is that get 5 percent of their supply from Sudan and 

15 percent from Iran. 

Senator BUNNING. I understand that but the problem is OPEC 

and their ability to ignore or deal with nationally held oil resources. 

55

Mr. VERRASTRO. I think it is because they view those oil resources and energy commodities now as so strategic that it is part 

of the patrimony of the country. This map is changing. 

Senator BUNNING. Would it make more sense to the United 

States of America to develop their own natural resources that are 

available and not being used now? 

Mr. VERRASTRO. I think the two most important things the 

United States can do in terms of policy is to develop our natural 

resources that we have, as well as do something on demand management, and reduce our reliance that way. That is actually the 

more effective response in the short term because the lead time to 

develop new resources takes time. 

Senator BUNNING. Are we going to have a second round, Mr. 

Chairman? 

The CHAIRMAN. Indeed, we will if you are here. 

Senator BUNNING. Thank you. My time is up. 

The CHAIRMAN. I am going to go to Senator Dorgan on this side. 

Senator DORGAN. Mr. Chairman, thank you very much. I will be 

brief. 

I was testifying before a commission this morning and missed the 

testimony of this panel, but I have read much of it and think that 

you have added a great deal to the discussion. 

I want to ask just a question about hydrogen fuel cells. The 

chairman and I and President Bush and many others feel that a 

hydrogen fuel cell future is something that we ought to aspire to 

create. About every quarter century or so, based on my reading, 

people with blue suits come and sit at this committee table and 

people with blue suits come and testify, and we essentially talk 

about how important it is for us to continue to dig and drill. And 

while I think we have to dig and drill, I think that is a yesterdayforever policy. I really believe that the only way we are going to 

find a way out of this is to move toward a different future. Now, 

that is complicated and not easy to do. 

But, Mr. Slaughter, your company with some fanfare opened a 

hydrogen service station or a service station distribution of hydrogen in this town. I thought it was a nice thing for you to do. I am 

sure part of it was publicity, but part of it was also a practical first 

baby step in a direction that I am fully supportive of. Tell us about 

your experience there. 

Mr. SLAUGHTER. Well, it is not quite a first step. We are already 

quite a long way down the road of thinking about a hydrogen future. We instituted a hydrogen business, Shell Hydrogen, several 

years ago because we believe in developing technologies for the 

long term, as I mentioned in respect to coal gasification, increasing 

the options available for markets to develop. So we see hydrogen 

as very much a viable energy source for the long term. When we 

think about the energy systems futures, we are thinking about a 

50-60 year time horizon. It will be many years before it matures 

into something which has a very important role in an energy system. 

But to get there, to get hydrogen into a significant place in the 

market in 30 years, we need to be thinking about these initiatives 

now, maturing the technology, thinking about the most efficient 

way of distribution, thinking about the most efficient way of 

56

sourcing the hydrogen. And we are actually spending quite a lot of 

money on that and developing it. 

It is not just important for the United States It is important also 

for these developing economies, China, India. Open up the options 

and they will become less dependent on one particular energy 

source. 

Senator DORGAN. Well, I think the marketplace, including participants like Shell, are moving and doing things. I also agree that 

there needs to be some public policy initiatives because the kind of 

movement to this is so expansive and requires so many different 

issues, production of hydrogen, distribution, storage, and so on. 

Would you agree that there needs to be public policy initiatives in 

order to aspire to get to a certain point? 

Mr. SLAUGHTER. I believe the public sector and the private sector 

can very effectively work together in creating a level playing field 

for these new technologies. Part of it is not so much legislative policy but purely educating the public and the consuming market that 

the more choice there is, the better it is for consumers. I think that 

part of the process needs to be emphasized. 

Senator DORGAN. You know, there is the old saying: wherever 

you find yourself, there you are. If we do not set some way-points 

out there and some objectives to say, by 2050, here is what we 

would like to see, we are not going to get there. 

It is interesting to me that, for example, last night the President 

talked about Social Security, and we gnash our teeth about what 

is going to happen in 2042 or 2052, depending on the actuaries or 

CBO. You know, I asked the Energy Department, I guess, about 4 

years ago. I said, what kind of plans do you have for energy, particularly production in 50 years? The answer, we really have not 

thought out that far. Well, we really should. If we are talking about 

Social Security in 50 years, let us think about what kind of an energy mix, what kind of an energy future do we want as a country 

in 50 years because that is a critically important issue. 

Let me make one final point to you. We have the Nation’s only 

coal gasification plant on the prairies of North Dakota. It was built, 

thanks to Federal support, and then changed hands a couple times. 

It is a technological marvel. It is extraordinary. It is producing beyond anyone’s expectation. We now have a relationship with the 

Federal Government in which we share profits with the owner, the 

regional cooperative that owns this plant, but we produce synthetic 

natural gas from lignite coal. Interestingly enough, from the Nation’s only coal gasification plant, as we produce synthetic natural 

gas, we are also piping CO2 to Canada to put into tertiary wells 

in oil wells in Canada, which is sequestration. I mean, what a wonderful thing. 

The reason I mention that is you talked about coal gasification. 

We all ought to take a look at the only plant that exists and what 

a marvel it is and how we are producing this synthetic gas from 

lignite coal. 

Mr. SLAUGHTER. I think that is a great example. The difficulty 

right now you have in generalizing using the CO2 for injection for 

recovery is that often the markets in which you want to put the 

power plant are not the geographical places where you can use the 

57

CO2 for exploration and production activities. That limits that option. But we should be looking at others. 

The other point I would make about coal gasification is that right 

now it needs some momentum. Right now, until you have sufficient 

scale in the pilot plants, the demonstrations at a commercial level, 

you cannot get commercial financing for them. So it is risk capital 

for the investors. 

Senator DORGAN. The chairman made the point that that came 

from a public policy initiative, the synthetic fuels initiative, and I 

think the result was only one plant was built. And frankly, in the 

early stages, we had some problems with it because the cost of the 

investment was higher than the market clearing price for natural 

gas. But that has all changed at the moment. 

Well, Mr. Chairman, thank you for recognizing me and thank 

you all very much for your participation today. It was very helpful. 

The CHAIRMAN. I was just going to say the Synthetic Fuels Corporation built that and spent a lot of money. It was the tar baby 

for those who did not think the Government ought to get involved 

in advanced projects. We are coming around to wondering how we 

are going to get some of those kind of way-out technologies, and 

that ought to be a question that comes along soon here. 

Senator Alexander. 

Senator ALEXANDER. Thank you, Mr. Chairman. 

First, I think Senator Dorgan’s comments suggest to me that 

there is a great deal of consensus in our committee on major objectives toward long-term energy needs. One is the hydrogen fuel cell, 

and we are going to work on that. It seems to me that the private 

sector may be moving a good deal faster than a 30-year horizon. 

I was at a fuel cell filling station in Yokohama where nine major 

automobile companies each have their own vehicle, and I put hydrogen in the Nissan prototype. And Carlos Ghosn, the CEO of Nissan, drives it around Tokyo every weekend. Nissan is putting $700 

million a year of its own money into hydrogen fuel cells. The Toyota chief executive told me they have a horizon a good deal shorter 

than 30 or even 20 years for having cars on the road. So that is 

a promising technology. 

But that leads me to the second area of growing consensus here, 

which is about what can we in the Government most appropriately 

do about coal. The staff has pointed out to me that the China state 

environmental protection administration recently ordered 26 coalfired power plants halted, an estimated 120 megawatts, because 

developers did not complete the required environmental impact assessments. Now, when we think about the fact that China might 

be generating 650 gigawatts of coal-based energy in the next 25 

years, that is 650,000 1,000-megawatt plants, roughly. We mentioned earlier—Senator Bingaman brought it up—maybe India is 

another 800. It is obvious it will not matter much what we do in 

the United States about capturing carbon or global warming if that 

level of coal production is going on around the world without appropriate environmental restrictions. 

So it seems to me that one thing we can do in the United States 

for ourselves and the rest of the world is accelerate any way we can 

think of to explore whether it is commercially viable to gasify coal 

and sequester carbon. 

58

Now, we may get to a hydrogen fuel cell economy, but we are 

going to have to make the hydrogen somehow. That means it is either natural gas, coal, or oil to make the hydrogen. 

The CHAIRMAN. Or nuclear. 

Senator ALEXANDER. Or nuclear, yes. Excuse me. That is exactly 

right. 

So what can you suggest to us that we could appropriately do 

here with making minimum interference in the marketplace, which 

we do not want to do, that would accelerate our understanding and 

the market’s movement toward coal gasification and carbon sequestration as a way of energy independence and as a way of solving 

the problem of too much carbon in the air? 

Mr. Slaughter, help us out here, and any of the rest of you who 

can comment on that. What would you do if you were in our shoes? 

Mr. SLAUGHTER. Well, I think one of the most important things 

you can do immediately is create a long-term energy vision for the 

country, which includes these new options and say as a Nation we 

need to have a wider mix. We need to develop new technologies. 

We need to develop cleaner burning fuels. Coal gasification is one 

of those options. And we need to think beyond the 20- or 30-

year——

Senator ALEXANDER. But now we have gotten that far. But in 

terms of those options, do we just sit back and wait for it to happen, or are there ways that we can encourage that? 

Mr. SLAUGHTER. I think having that public debate will be a 

strong stimulus for the private sector to look at it very seriously 

perhaps on a bigger scale than it is doing right now. 

Senator ALEXANDER. Well you mentioned, or someone did, that 

the market itself was slow to react to such big changes. It needed 

to be receptive. Even if the cost of coal gasification was at a competitive rate and carbon sequestration were reliably invented at 

this point, we still have got a great, big market out there that is 

slow to react. Specifically what can we do to encourage the market 

to be open to this specific set of ideas about coal? 

Mr. VERRASTRO. Senator, I think there are two things initially 

that we ought to be looking at. One is to engage in this public debate because if we are actually looking at energy transformation, 

it takes public policy to set that in place. And then the second piece 

is to stimulate through incentives for technology development and 

also for demonstration projects to show that these new technologies 

actually work. 

Senator ALEXANDER. May I ask one more question, Mr. Chairman? 

The CHAIRMAN. Sure, absolutely. 

Senator ALEXANDER. Do I understand that a demonstration 

project, a pilot plant is an appropriate next step? And if so, how 

big a plant? And if so, how many? And what sort of support would 

it require for major companies to make the investment they would 

need to make in a coal gasification plant or in technology that 

would lead us toward effective carbon sequestration? 

Mr. SLAUGHTER. It is difficult for me to respond on behalf of 

Shell because we are not very big in the power generation business. 

I think—it is very difficult for me to respond to that. We can get 

back to you on that. 

59

Senator ALEXANDER. I would be grateful for any written suggestions that any of the four of you would have to us on that subject. 

There are a number of Senators on this committee who are very 

interested in the subject and we are looking for an innovative, prudent way to understand what we should do. 

The CHAIRMAN. Senator, let me say you are absolutely correct in 

everything you said about the enthusiasm and interest. While they 

have some knowledge, we are going to go beyond that, as you 

know, and we are going to have a forum on coal, and it will include 

this issue. Hopefully we will be prudent enough to invite some people who are in the business of generating who will talk about will 

the private sector do this if we just sit back and talk about it, or 

could we do something to push it. We certainly are going to do 

that. 

Senator ALEXANDER. Thank you. 

The CHAIRMAN. Senator Murkowski. Thank you for coming, Senator. I know you have a lot of other commitments, and we are glad 

to have you. 

Senator MURKOWSKI. Thank you, Mr. Chairman. I was presiding 

this morning and I was unable to get out of that. I would rather 

have been here. 

It was interesting, though, because we were talking about Social 

Security on the floor, but I come in here and, again, it is the energy 

security that I am convinced we need to be talking about just as 

much as we are talking about Social Security. So I appreciate, Mr. 

Chairman, your leadership on this. 

I wish that I had had an opportunity to listen to you, gentlemen. 

I have quickly gone through some of your written testimony, and 

so if my questions are a bit haphazard, I apologize. If I do not ask 

the right person, please do not hesitate to jump in. 

I guess this would be initially directed to you, Mr. Caruso. In the 

natural gas assumptions where you referenced the growth in U.S. 

natural gas supplies dependent on specific items and you also mention production from natural gas in Alaska and anticipate gas coming on line by 2016, how do your figures change? How does your 

analysis change for the need for imported LNG if our time line on 

that slips? And I do not want to send out any negative signals 

here, but we recognize that this is a massive project. We are working very earnestly up in the State right now to get this thing moving, but the reality is it is a very complex project. What happens 

if that date slips? 

Mr. CARUSO. Well, as things stand right now in our modeling efforts, any slippage in domestic supply—and that would, of course, 

be the case of Alaska natural gas—virtually all of that would need 

to be supplied by new LNG. And that is why we have LNG going 

from .4 tcf in 2003 to 6.4. So if, indeed, there was slippage, I am 

sure that would mean more LNG requirement. 

Senator MURKOWSKI. When you looked at the Alaska natural gas 

picture, was there any taking into account the opportunity for the 

gas hydrates? We had a presentation just last week before the committee and we had the director of the Oil and Gas Division from 

the State of Alaska come and give some pretty remarkable statistics about the vast potential for gas hydrates in the State, some 

520 tcf on land directly underneath where we are already drilling 

60

and we could just tap right in, and then the incredible potential offshore. Do you look at those unconventional natural gas estimates 

in your calculations? 

Mr. CARUSO. Yes. We share the optimism that ultimately gas hydrates can be a large supplier of natural gas. Our view is that 

given the technology development and the current knowledge, it is 

beyond the 2025 time horizon of our outlook. So I would share we 

share the resource optimism but we are still, I guess you could call 

it, technology pessimists with respect to deliverability of those gas 

hydrates. 

Senator MURKOWSKI. So you do not assume those reserves in 

your calculations for available domestic supply. 

Mr. CARUSO. There are no gas hydrates in the 2025 outlook. 

Senator MURKOWSKI. We want to talk to you next year and see 

that in there. We want to move forward on it. 

Looking at the U.S. energy prices and where you see the price 

of oil in 2010 and then down the road, obviously a better scenario 

for a State like mine that derives revenue from oil, tough on the 

economy. But in terms of making folks like Shell and other producers more interested in exploration, does this up the amount of 

what we would consider economically recoverable oil, and does that 

then factor into your calculations for the availability of domestic reserves? 

Mr. CARUSO. Yes. There is clearly a relationship between the 

price assumptions and the reserve development. We do have in our 

reference case prices coming down, as you pointed out, by 2010, but 

we have also looked at about four other cases, including prices 

staying about where they are now in real terms, which would be 

a substantial change. And we feel that at those higher prices, there 

would be substantially more incentive to drill not only in this country but in other countries as well. So it does make a big difference. 

And there are also changes. The technology for what we call unconventional liquids would bring on a lot more unconventional liquids 

as well. And those scenarios will be available next week. 

Senator MURKOWSKI. I cannot let you go without mentioning 

ANWR. If ANWR and the potential for oil reserves, discoverable, 

economically recoverable, which under your scenario we feel really 

ups the ante in terms of what will be available coming out of 

ANWR, is that included anywhere in your calculations? 

Mr. CARUSO. No, because the outlook is based on current rules, 

regulations, and policies. ANWR is not included, but we have done 

a number of cases or service reports for, among others, Senator 

Frank Murkowski, and last year for Congressman Pombo, which 

indicate that if the ANWR were to be opened for development, 

within a 7-to-12-year timeframe, the median USGS resource estimate is that it could be producing at its peak rate of about 800,000 

to 900,000 barrels a day. At the high end, the USGS resource assessment could be as much as 1.6 million barrels a day. 

The CHAIRMAN. What percent is that? 

Mr. CARUSO. Well, right now crude oil production in this country 

is about 5.5 million barrels a day. So as a share of U.S. production, 

it would be substantial. And as you know, Alaskan production right 

now is about 1 million barrels a day. 

61

* See Appendix I. 

Senator MURKOWSKI. Now, you have indicated that you ran those 

numbers last year or a couple years ago. How do those numbers 

change as we are looking at higher prices of oil and recognizing 

what is now economically recoverable is increased? 

Mr. CARUSO. As you stated, those numbers were based on prices 

that existed 2 years ago in the analysis done for Senator Frank 

Murkowski and last year for Congressman Pombo. So I think they 

would be roughly the same because they were already economic. 

The biggest issue is the pace of development, and that includes permitting as well as other planning. 

So the price itself probably would not change those numbers 

much, but it is possible that you would get slightly increased 

recoverability at a higher price and that would extend the production profile. But I think the peak numbers—and I am just going 

from memory now—would be about the same, but I would certainly 

be willing to look into that and report back to you. 

Senator MURKOWSKI. I would appreciate an update as to where 

we are now based on the numbers, based on the anticipated price 

per barrel. If you could supply that to us, I would appreciate it. 

Mr. CARUSO. I would be happy to do that.* 

Senator MURKOWSKI. Thank you, Mr. Chairman. 

The CHAIRMAN. Mr. Caruso, just as a factoid, would you once 

again, if you have it in your head—if not, put it in the record—at 

its peak what percent of American production would ANWR be if 

all the laws were passed and it was at the peak that you just described? What percent might that be of American production? 

Mr. CARUSO. I would be happy to supply that for the record, sir.*

The CHAIRMAN. It is a rather substantial portion. 

Mr. CARUSO. Yes, because we anticipate American production to 

be relatively flat on average over the next 20 years, so that clearly 

an additional 800,000 to 1 million barrels a day would make a substantial difference. 

The CHAIRMAN. So for those who say it is not very much, we 

might ask what percent does Texas produce? Do you know? 

Mr. CARUSO. Well, I think Texas now is under 1 million barrels 

a day. 

The CHAIRMAN. So if it is not very much, we could say, well, we 

do not need Texas production either. Right? 

[Laughter.] 

The CHAIRMAN. Anyway, I look at it that way. 

With reference to renewables, there is an enormous desire to 

produce energy that is clean and does not affect global warming, 

and so we are constantly asked let us maximize renewables so we 

can solve our problem. Could I make sure we understand? 

Renewables in the United States already has a big component 

which some choose not to call that, but it is hydro. And I do not 

think anybody assumes we are going to add any significant hydro 

generation on that renewable side. So when you say renewables 

over the next 25 years will be 2 percent—that is what you said—

because 2 and 7 is 9, and 7 is hydro; the total is 9—does that assume we have put in the incentives for renewables that exist now, 

or do you assume they are not going to be there? 

62

* See Appendix I. 

Mr. CARUSO. We include all the incentives that are in place now. 

Of course, the production tax credit does expire on December 31st 

of this year. 

The CHAIRMAN. So your current assumptions would include that 

it expires. 

Mr. CARUSO. Yes, sir. 

The CHAIRMAN. Could you quickly for the record tell us what it 

would be if we continue it indefinitely? So we would answer the 

question for everybody, okay, we have continued that, now here is 

what our experts tell us. It would be 2.4 percent or whatever it is. 

Mr. CARUSO. It would increase, certainly, and I do not have that 

number off the top of my head. I would be happy provide it for the 

record.* 

The CHAIRMAN. Can you do that? I think that would be good to 

have. Would you specifically tell us what is renewables under that 

definition? Because whatever we say, somebody is going to say you 

did not put everything in. So if you do not put everything in, we 

are going to ask you to put everything in. 

Mr. CARUSO. I will and I can tell you just off the top of my head 

that the largest components are biomass, wind, and geothermal. 

The CHAIRMAN. With reference to China, we now know that 

China plans to add two new nuclear power plants a year—that is 

their indication—for the next 16 years. So current plans would be 

32. I assume they are 1,000 megawatts. Is that what you all would 

think? 

Mr. LOGAN. Yes. 

The CHAIRMAN. Now, that is not a big part of China’s needs is 

it? 

Mr. LOGAN. If indeed China added 2 gigawatts of new nuclear capacity each year for 16 years, it would be approximately, at that 

time, 4 percent of their generating capacity. 

The CHAIRMAN. Is that big? Is that a big component, something 

important? 

Mr. LOGAN. Currently it is about 1.6 percent in China. It is not 

very big, no. 

The CHAIRMAN. So the point is that we all go back to the fact 

that it is either going to be oil, natural gas, or the big one, or some 

form of coal that is going to be used for generation, even for China. 

Mr. LOGAN. Well, China also has ambitious plans to develop 

their remaining hydropower resources that are there, but yes, you 

are right. 

The CHAIRMAN. Well, you told us about it and I just assumed 

that even with that giant one they are adding, it is much like nuclear. It is not going to be that big even when finished. 

Mr. LOGAN. There are many others also under development that 

are smaller than the Three Gorges dam but are substantially large. 

So it will pay a role, but it will not——

The CHAIRMAN. For the record, would you tell us about those? 

Even though they are just planned, would you put it in a statement 

for the record, what they are and what their capacity might be? 

Mr. LOGAN. Sure. 

63

The CHAIRMAN. I wanted to ask a question with reference to 

OPEC. This is for Mr. Slaughter and Mr. Verrastro. You discussed 

a reluctance or inability of OPEC to expand its oil production capacity. Do you think OPEC purposely created inventory tightness 

in 2001 and 2002 and is now working to deprive the market of the 

ability to build inventory? 

Mr. SLAUGHTER. I think OPEC relies on a team of analysts and 

forecasters like many organizations to predict what is happening in 

oil markets. I think pretty much across the board most organizations under-estimated global demand growth, not just in 2001 and 

2002 but right through until last year. So I think there was a certain element of surprise in the strength of global demand over the 

last few years for OPEC and for the consuming countries. So I do 

not agree that it was a conspiracy to drive inventory levels down. 

OPEC has a dilemma in terms of the pace and the extent to 

which it adds production capacity because many of the producing 

countries do not have very diversified economies. So investment 

capital they put into oil-productive capacity is investment capital 

that does not go into diversifying the economy to reduce their dependence on oil. So it is a real dilemma. They also have pressing 

social needs in terms of their growing and youthful populations. So 

I believe that balancing all that is very difficult and perfect knowledge is not available to OPEC as it as not available to us. 

Mr. VERRASTRO. I think I would echo Andrew’s sentiments on 

that. If you go back and look at the second quarter of last year, the 

IEA projected total demand to be about 77.5 million barrels a day. 

They made eight revisions in 8 months, and it turned out to be 

over 81 million. 

OPEC, like everyone else, looks back at their history in deciding 

future policy, and coming out of the late 1990’s, they had excessive 

spare capacity, so much so that they had to cut production in certain areas. 

If you look at the price—and this is the other piece of it—what 

these revenue needs are for these individual countries over the last 

25 years, their total export revenues have gone from about $30 billion to $300 billion. So for planning purposes, it has been a very 

difficult planning period. 

I was with a minister last February after the OPEC meeting and 

his sense was exactly what Andrew said, that coming out of the 

OPEC meeting, they were looking at second quarter demand crashing. No one knew what China was going to do. They were concerned about Iraq coming on, the prospect of Libya coming on in 

the future, and Russian production being healthy, and the call on 

OPEC looked to be a lot less. And those forecasts were obviously 

wrong. 

The CHAIRMAN. My last observation, and then if Senator Alexander would not mind, if he has time, if he could finish the hearing 

with the last two Senators, I would appreciate that very much. 

I want to say for the record and to the four of you—and if you 

have an observation, that would be fine—I think we understand 

how the diversification ought to occur over the next 10 or 15 years 

to create a bit more security for us. Obviously, we have got to find 

a way to use coal and still not have a terrific impact on global 

64

warming. Others may not care about the latter, but we are going 

to have to. 

The dilemma we have is that we believe in a free market and 

capitalism, and yet, when it comes to projects that are way out that 

involve a lot of capital, it is not very easy for the private sector to 

do that. First of all, it is not very good business for the bottom line 

so as to speak, and stockholders are not very interested in it. If you 

say we are going to issue some bonds and put out $1.5 billion to 

do two pilot projects in coal gasification, including reduction of carbon, how are they going to do that? 

One of the problems is do we have any business, any reason as 

a Congress to do something about that or do we sit by and wait 

and say at some point in time, it really will come on when we are 

really hurting. To me it seems like that is way too late because it 

seems we will be in an international crisis, the likes of which we 

do not even understand, at that time. 

Could you just talk about this? Particularly you, Mr. Slaughter, 

you would know from the business standpoint. You all are very big 

and the rest of you have some feeling. Is my assessment sort of 

right, or will those things just happen even if we do not do anything about it? 

Mr. SLAUGHTER. Well, there is capacity in the private sector to 

invest for the very long term, in the major companies, the international oil companies like Shell. I had mentioned several of the 

things we are doing for the very long term in terms of hydrogen 

and renewables and technology on coal gasification. So there is the 

capacity to invest. 

Basically it involves putting in seed capital at a fairly low level 

and then maturing the technology over a number of years until the 

market is ready, but we do need a stable market environment and 

a receptive consuming public. That involves making the country 

very conscious of the energy choices and the energy futures that 

are available and open to it. So I believe a public education process 

in this is very important. 

The second point I would make is that energy markets, by their 

very nature, are global. Not only are they global in terms of traded 

goods, but they are global in terms of technology development. So 

we are going to go ahead in maturing these technologies. And 

maybe it will not happen in the United States. Maybe it will happen in other markets. But when a technology is developed, it is 

available for all markets typically and will migrate to where it has 

the most value. So it is not something the U.S. has to take on on 

a unilateral basis. 

The CHAIRMAN. Does anybody else have a thought? 

Mr. VERRASTRO. Again, I would echo Andrew’s comments. I think 

there are two things that you pointed out, Senator, that are extremely relevant. One is the difference between public policy and 

private sector investment cycles. I was a senior vice president at 

Pennzoil for about 17 years, and when you look at things as they 

come across the board in the management committee, you look at 

the cost to shareholders and you look at your rate of return and 

you look at expending capital versus other prospects that you have. 

So it is extremely difficult for companies. Even in the current enviVerDate 0ct 09 2002 11:48 Apr 04, 2005 Jkt 000000 PO 00000 Frm 00068 Fmt 6633 Sfmt 6602 P:\DOCS\20004.TXT SENE3 PsN: SCAN
65

ronment, there is the expectation that with high prices a lot more 

drilling, a lot more exploration will go on. 

But, in fact, what you would probably look to do is if you cannot 

find a good commercial deal around the world because a lot of these 

host countries you cannot have access, or you are in the situation 

where you cannot negotiate good commercial terms because the 

commodity is so attractive to these countries, that you tend to 

stand back a little bit and watch and wait what happens. As a result, in terms of quarter-to-quarter projections, your expenditures 

go down. Your income rises just as a result of current production 

with higher prices, and you look good on Wall Street. Your shareholders are very pleased. But you have to take a longer-term perspective. 

I was also fortunate enough, I think, to be part of the Carter administration in the first energy plan and we developed the Syn 

Fuels Corporation. And it did get lambasted and prices dropped in 

1981 and people walked away from it because at $10 or $15 a barrel, it made no sense to develop 15 years out a backstop technology 

that was $40 or $50. But I do think it takes both the private and 

the public sector in combination to push this thing forward. 

The CHAIRMAN. Thank you very much. 

Senator Alexander, you are in charge. 

Senator ALEXANDER [presiding]. Senator Bunning. 

Senator BUNNING. Thank you. 

I want to get a handle on additives and how much we can rely 

on their ability to help our supply. We have the ability in the 

United States on ethanol, biodiesel, and other things to add what 

percentage to the overall supply of what we are using now mainly 

for our gasoline and other things and to drive our trucks and to 

drive our cars? How much of that can be added or increased to 

keep the price of those and the purity or the better conditions for 

the United States into the immediate future? 

Mr. CARUSO. We did look at, when the bill was being debated 

last year, the ethanol requirement of 5 billion gallons by, I think, 

2012 or so and looked at what that would imply, as well as we also 

have done some work in terms of biodiesel. It is still relatively 

small. It is a big number, but when we are talking about a gasoline 

consumption that is headed toward well over 10 million barrels a 

day in our outlook——

Senator BUNNING. In other words, the capacity to produce is the 

problem? 

Mr. CARUSO. It is the capacity to produce, plus it is the economics under existing laws and regulations. It is both. 

Senator BUNNING. So if, in fact, we change the existing laws and 

regulations—that is something that we can do—it might assist in 

the production of more ethanol, more biodiesel fuel, which in my 

opinion is a viable alternative to what we have if we are not going 

to use our natural resources that we have available in ANWR and 

other places. 

Mr. CARUSO. That is correct. 

Senator BUNNING. So we can look forward in our energy bill, 

Senators, to incentivize those things a little better than we did the 

last time so that there is a larger production. 

66

I want to thank you all because our energy policy in the United 

States of America has been on hold for so long that we are ground 

to a halt in trying to make it better. Now, when you get within two 

votes of a major energy bill and incentives to make it better, 

whether it be liquified coal or hydrogen or new sources of energy, 

and incentivizing the use of coal for different purposes other than 

just the production of electricity and those things, we need help, 

and we need to be able to sell this to the American people as something that is absolutely necessary if we are going to survive as a 

Nation. No matter how hard we try to move that number from 55 

to 58 to 60 to 65, dependency on foreign resources is unacceptable. 

It is totally and completely unacceptable for our national defense, 

for our national security. So please help us. We need your help. 

Thank you. 

Senator ALEXANDER. Senator Murkowski. 

Senator MURKOWSKI. Thank you, Mr. Chairman. 

I want to talk just real quickly about two of Alaska’s neighbors, 

Canada and Russia. A very quick question on Canada, and this is 

probably to you again, Mr. Caruso. I came in at the end where you 

were talking about Canadian exports of natural gas and your assumption that there would really not be much coming to the 

United States from Canada because of their consumption. I am assuming you factor in the gas coming down from Mackenzie and 

that line. 

Mr. CARUSO. Yes. 

Senator MURKOWSKI. But it is your assessment that the Canadians will use what they currently have in addition to the new 

source coming out of Mackenzie. 

Mr. CARUSO. That is correct. We made our latest forecast taking 

into account the National Energy Board of Canada’s forecast for 

Canadian production as well as consumption and, of course, bringing on stream the Mackenzie Delta valley gas toward the latter 

part of this decade, I think 2009, 2010. We have it in our outlook. 

But even with that, we have less gas coming from Canada over this 

outlook period over the next 20 years. 

Senator MURKOWSKI. So you do not view the two projects, the 

Mackenzie line and the Alaska natural gas line, as competing 

projects. 

Mr. CARUSO. Definitely not. They will both be needed. 

Senator MURKOWSKI. Absolutely. Thank you. 

And then a question about Russia. Just reading through the 

background, recognizing that Russia is currently the second largest 

exporter, how much do we import from Russia? 

Mr. CARUSO. Not very much. 

Senator MURKOWSKI. So it is negligible. 

Mr. CARUSO. 100,000 barrels a day or so out of our more than 

about 11 million. 

Senator MURKOWSKI. I was reading, Mr. Verrastro, your comments about the future for Russia and a very tentative assessment 

of where you think they are going. You state that the developments 

raise the prospect that they may be nearing a temporary peak because of a multitude of reasons that you cite. You also indicate that 

the inability to continue to increase production rests on several 

67

considerations. Production practices are suspect. What do you 

mean by that statement? 

Mr. VERRASTRO. I think two things. The resource base. Most people believe that Russia has substantial resources. The question is 

whether they have been producing for rate or actually exploring 

new territories that they can produce for over the long term. There 

is concern that Yukos, in particular, over the last several years, 

while they were very successful in moving oil to market and increasing production, that it was what we call step-out drilling. It 

was the easy oil to get to, least expensive, and you are actually depleting the reservoirs faster. There has not been new exploration. 

And the infrastructure, quite honestly, is also suspect in terms of 

pipelines and delivery systems. 

Senator MURKOWSKI. It is old or when you say it is suspect? 

Mr. CARUSO. Yes. When we were in the Caspian, the rated capacity of some of the Russian lines that were at 200,000 barrels a day, 

if you put 200,000 barrels a day through them, they would burst 

at the seams. So part of the reason that they were running at 

about 50 percent capacity was just because they were concerned 

about infrastructure breakdown. 

Senator MURKOWSKI. Where do you see them going then? You 

recognize they have got the resources. They are somewhat like 

Alaska. We have definitely got the resources. With us it is absolutely access, and to a certain extent, the Russians are in the same 

situation. But how do you see them moving forward? 

Mr. CARUSO. I think the three restrictions are in terms of infrastructure, policy, and investment, and also the introduction of new 

technologies. Where they go from here, some people are projecting 

10 million to 12 million barrels a day, in terms of increased production. Others are looking at a plateau and then a decline if new investment is not brought in soon. I think the Yukos episode kind of 

froze people in place, at least for a time, just to see what policies 

would be emanating from the Kremlin. Prior to that, Russia looked 

like a great place to go explore and invest, but increasingly—and 

you saw it with Conoco-Phillips that the way to do business in Russia, at least at this particular time, is to go to the Kremlin first, 

get the approval from the president, and then go do your side deals 

to do investment or equity participation in projects or with other 

companies in Russia. Right now it is probably not the way to go. 

Senator MURKOWSKI. You used the term ‘‘it needs to happen 

soon,’’ and I am assuming because of all the reasons that you have 

cited, whether it is the infrastructure or the policies. But we recognize that when you build a pipeline of any size, it is going to take 

some time to bring on. It seems that there is a lot of expectation 

or hope coming out of Russia that they are going to be able to keep 

the levels of production that they have, that they will continue to 

be the second largest oil exporter. But your assessment is, as I say, 

somewhat hesitant here. Do you think that they can maintain that 

status? 

Mr. VERRASTRO. I think a lot depends on where the policies go 

forward. I think President Putin recognizes that oil and gas are the 

engine that is going to fuel economic growth in Russia. The point 

is that I think he is looking to centralize control, whether it is in 

state-owned companies or government mandates. Gazprom and 

68

Transneft control the distribution networks. So even if you produce, 

you have to find a way to export. The oil is there. It is just a question of how you get it out and move it to market. 

Senator MURKOWSKI. I struggle with what we are able to do on 

the North Slope of Alaska. As I say, we have got the resources up 

there, but we have got some issues in terms of getting them out. 

And some of those that would look at extraction up north and production opportunities instead go to our neighbors right across the 

water. I would like to think that we offer them a little more stability, a little more security in terms of policies and in terms of opportunities. So I am curious to hear your perspective on Russia. 

Mr. Slaughter, I would love your comments. 

Mr. SLAUGHTER. May I jump in on a couple of things there? I 

think it is not a question of Russian resources getting developed in 

competition with Alaskan or Canadian resources. I think over the 

next 20 or 30 years, the world will need additions from both and 

be very capable of absorbing all the production that both regions 

can give. 

Russian production will fluctuate year to year as policy changes, 

as capacity gets built or gets delayed, but over the long term, we 

are very optimistic the resource base will be developed. We have 

got some very big investments in Russia. Some of our competing 

companies do as well, and we have to work with them on a company-to-country basis and on a country-to-country basis to ensure 

a stable and fair fiscal and regulatory environment over the long 

term. I think it has to become clear to all the big players in world 

energy markets that we need that stable environment to develop 

resources. 

Senator MURKOWSKI. Are things getting better as you engage in 

the dialog with the Russians as it relates to your business investments? 

Mr. SLAUGHTER. I am sorry. I did not quite——

Senator MURKOWSKI. Well, is it getting easier to deal with them 

or is it still complicated? 

Mr. SLAUGHTER. We deal with them on a project-by-project basis, 

based on our particular investment profile. I think it has been challenging at times, but we get things done and it is moving on and 

we would like to have more of the opportunities. 

In terms of the Mackenzie Delta and Alaska gas, I would like to 

say that the assumptions on those are largely based on current outlooks for production in both areas, both in Alaska and MacKenzie. 

There are step-out opportunities offshore, for example, which are 

very interesting, which could actually supplement the Canadian 

supplies and it could also supplement the Alaskan supplies long 

term. I think we need to look at those as well as focusing on the 

existing proved resource. 

Senator MURKOWSKI. Absolutely. 

I want to thank you all for your time here this morning. I certainly learned a lot and appreciate the information. 

Thank you, Mr. Chairman. 

Senator ALEXANDER. Thank you, Senator Murkowski. 

A lot of the talk this morning has been about new technologies 

and the solutions to the challenges of energy independence. And 

the environmental challenges of producing so much new energy deVerDate 0ct 09 2002 11:48 Apr 04, 2005 Jkt 000000 PO 00000 Frm 00072 Fmt 6633 Sfmt 6602 P:\DOCS\20004.TXT SENE3 PsN: SCAN
69

pend, to a great deal, on new technologies. There are a number of 

forecasts that suggest that many of the new technologies might 

come from somewhere other than the United States, other parts of 

the world, China, India, Brazil, Korea, Thailand. We see a concern 

in this country long term about the smaller number of scientists 

and engineers who are homegrown who are going to our colleges 

and universities. 

So I am wondering if we are looking over the next 10-20 years 

at the twin challenges of energy independence and a clean environment, should we be cooperating internationally on technologies, or 

are we already doing that? 

I think of the example of fusion, which is an advanced technology 

far down the road, but we are now cooperating with two or three 

other countries, Japan and France I believe, in that. 

So my question is, are we now cooperating in terms of technology 

with other countries when it is a matter not so much of us protecting our own intellectual property rights but getting access to 

others’? Can we combine efforts with China, for example, on clean 

coal technology or with India or with any other country? What is 

being done now, and would you suggest any policy changes that we 

ought to consider that would accelerate technological development 

that would permit more energy independence and a cleaner environment? 

Mr. SLAUGHTER. In terms of private sector research and development and technology, yes. That certainly happens internationally 

and it is done across units in different countries and different markets. I cannot comment so much on the public sector cooperation 

because I am not so familiar with it, but I think it is positive. Markets are interconnected and it spreads the risk and opens up opportunity if you can cooperate on technology development. 

Senator ALEXANDER. Does anyone else have a comment on that? 

Mr. LOGAN. From the IEA’s perspective, the 26 members of the 

International Energy Agency do have a number of technology exchange agreements amongst our members, but also with participation from countries like China and India. My general feeling is that 

it is useful but that much more could be done in venues such as 

the IEA. 

But I also believe that at the bilateral level, the United States 

could play a much larger role in international cooperation to develop technologies and that it would be extremely useful for our interests, not only commercial interests but also national security 

and environmental interests as well. For example, if you look at 

the amount of spending that the U.S. Government contributes to 

countries like China, for example, on cooperative technology research, it is, I think, much smaller than, for example, what Japan, 

at least until the recent past, had been spending in China. 

Mr. VERRASTRO. Senator, one other point. When we talk about 

energy independence, I like to think of the world as more energy 

interdependent. As you travel and you try to deal with issues of reliable energy supply going forward in the future and environmental 

benign-ness, it would be good for not only technological exchange 

and technology transfer—and I think the Department of Energy 

and the IEA are doing some of that, as well as the private sector. 

70

But I do think intellectual property rights is a hurdle that companies have to get over as well. 

Senator ALEXANDER. Well, would you agree that in this case that 

it may be a matter of us getting access to other countries’ intellectual property rights than ours, or is still almost all the new technology coming out of the United States? 

Mr. VERRASTRO. No. I think that is true. I think in the case of 

nuclear, for example, we have not built a new nuclear facility in 

this country for a long, long time, but other parts of the world 

have. So we may be falling behind because we have not been able 

to develop certain technologies and apply them. 

Senator ALEXANDER. Might we learn something from the France 

about the storage of spent fuel rods? 

Well, there are a variety of other questions that we could ask, 

but this has been a very interesting subject. I think you and the 

audience can tell by the attendance of a large number of Senators 

on a day when there were a lot of other important events going on 

in the U.S. Senate. 

Senator Domenici has several questions for the record that ask 

for additional information. Please be assured that if you will take 

the time to provide that to us, we will pay attention to it. 

We thank you very much for your time. The hearing is adjourned. 

[Whereupon, at 12:18 p.m., the hearing was adjourned.] 

(71)

APPENDIXES 

APPENDIX I 

Responses to Additional Questions 

RESPONSES BY GUY CARUSO TO QUESTIONS FROM THE COMMITTEE

Question 1. Provide the Committee with a list of companies exporting crude oil 

and refined products outside the U.S. and the amounts. 

Answer. The Energy Information Administration (EIA) does not collect petroleum 

export data. EIA’s petroleum export statistics are based on aggregate export data 

obtained from the U.S. Bureau of the Census on a monthly basis. Those data are 

sufficient to meet the analytical and dissemination needs of EIA. We have been advised by officials at the Census Bureau that, while we could obtain its companylevel information under an inter-agency Memorandum of Understanding (MOU), we 

would not be authorized to release it to a third party. Senator Wyden’s office has 

been apprised of this situation, and we understand that his office has contacted the 

Census Bureau directly. 

Question 2. Analysis of Conference Energy Bill’s Clean Coal Incentives. What are 

impacts of the clean coal incentives in the energy bill. 

Answer. In response to a request received from Senator John Sununu on February 

2, 2004, EIA performed an assessment of the Conference Energy Bill (CEB) of 2003. 

The full analysis is available at the following link:

http://www.eia.doe.qov/oiaf/servicerpt/pceb/pdf/sroiaf(2004)02.pdf

This report summarizes the CEB provisions that can be modeled using the National Energy Modeling System (NEMS) and have the potential to affect energy consumption, supply, and prices. The impacts are estimated by comparing the projections based on CEB provisions with the Annual Energy Outlook 2004 (AE02004) reference case. 

There were several provisions in the CEB that provide incentives to develop clean 

coal technologies. Section 1351 of the CEB provides a 17.5-percent investment tax 

credit (ITC) for new coal-fired generating units employing advanced clean coal technologies, such as advanced pulverized coal, fluidized bed, or coal integrated gasification combined cycle (IGCC). The tax credit applies to facilities placed in service 

before January 1, 2017, and is limited to 6 gigawatts. The 6-gigawatt cap is to be 

divided evenly between advanced IGCC plants and advanced pulverized coal plants. 

To qualify as an advanced clean coal technology, a plant must meet a minimum 

technology-specific energy conversion efficiency and carbon dioxide emission rate. 

The ITC for advanced IGCC units is expected to increase this capacity by about 

22 gigawatts above the Reference Case level. While the ITC is only available to the 

first 3 gigawatts of IGCC capacity, it causes plants to be built earlier than otherwise 

expected, making the technology more competitive in later years of the projections. 

An ITC is also specified for 3 gigawatts of advanced pulverized coal capacity, but 

more than 3 gigawatts are expected without the ITC, so the CEB does not cause 

more advanced pulverized coal capacity to be built. Overall, EIA found that the total 

pulverized coal capacity is actually lower in the CEB case because other provisions 

in the CEB package affecting natural gas supply, and nuclear and renewable energy, result in lower natural gas prices that make natural gas capacity more economical and also bring on more nuclear and renewable capacity that dampens the 

additions of new pulverized coal capacity. 

Question 3. Peak Alaska crude oil production contribution. What percentage of 

total U.S. crude oil production does Alaska represent today and would represent in 

the future with ANWR? 

72

Answer. According to the Monthly Energy Review, Alaska represented 16.7 percent of total U.S. crude oil production in 2004. That is projected to decline to 11.0 

percent by 2025 without production from the Arctic National Wildlife Refuge 

(ANWR). Based on a March 2004 service report for Congressman Pombo incorporating ANWR production at the earliest possible date and assuming the mean 

USGS resource estimate is realized, it was found that Alaska crude oil production 

would peak in 2019 at 1.524 million barrels per day and represent 25.8 percent of 

total U.S. production. 

Question 4. Peak ANWR crude oil production contribution. What percentage of 

total U.S. crude oil production would ANWR represent at the peak year? 

Answer. Based on a March 2004 service report for Congressman Pombo incorporating ANWR production at the earliest possible date, it was found that, under 

the assumption that the mean USGS resource estimate is realized, peak incremental Alaska crude oil production would occur in 2024 at 876,000 barrels per day 

and represent 15.6 percent of total U.S. production. On a percentage basis, peak incremental production occurs in 2025 at 15.9 percent, due to falling lower-48 production. 

Question 5. Impact of extending renewable production tax credit. What would be 

the impact if the renewable production tax credit (PTC) were extended beyond its 

current expiration date? 

Answer. Consistent with current laws and regulations the reference case in the 

Annual Energy Outlook 2005 (AEO2005) assumes that the production tax credit 

(PTC) for renewables will expire in December 2005. However, an additional case is 

included in the AEO2005, which assumes that the PTC is extended for 10 years, 

through 2015. In both these cases, the PTC is assumed available to wind, biomass, 

geothermal, and solar facilities. 

In the reference case, electric power sector non-hydroelectric renewable capacity 

is projected to grow from 14 gigawatts in 2003 to 25 gigawatts in 2025. The increase 

is expected to come from wind, biomass and geothermal, with wind accounting for 

about half. Approximately 2.4 percent of total electric sector generation is projected 

to come from non-hydroelectric renewable sources in 2025 in the reference case. 

In the PTC extension case, electric power sector non-hydroelectric renewable capacity is projected to grow from 14 gigawatts in 2003 to 78 gigawatts in 2025. New 

wind plants are projected to benefit most from the PTC extension. Between 2003 

and 2025, electric power sector wind generating capacity is projected to grow from 

7 gigawatts to 63 gigawatts. In 2025, electric power sector non-hydroelectric renewable sources are projected to account for 5.7 percent of total electric power sector 

generation, more than double the level expected in the reference case. 

A complete discussion of the reference and PTC extension cases is provided in the 

Issues In Focus section of the AEO2005 at:

http://www.eia.doe.gov/oiaf/aeo/index.html

(73)

APPENDIX II 

Additional Material Submitted for the Record 

STATEMENT OF CHEVRONTEXACO CORPORATION

THE NEW ENERGY EQUATION: WISE ENERGY USE AT HOME AND GLOBAL ACCESS, 

DIVERSIFICATION AND SECURITY

ChevronTexaco thanks the Committee for holding this hearing on global energy 

trends and their impact on U.S. energy security and policy. We are pleased to share 

our recommendations for U.S. energy policy in light of these global trends. 

ChevronTexaco brings significant experience on global energy issues—we are the 

fifth largest integrated energy company in the world and second largest in the U.S. 

We have global oil and gas exploration, production, refining, marketing and transportation activities. Our worldwide crude oil and natural gas production is 2.5 million oil-equivalent barrels per day. 

THE NEW ENERGY EQUATION DEMANDS A STRATEGIC, GLOBAL ENERGY POLICY

Energy is quite literally the lifeblood of the U.S. and global economy and a critical 

determinant of human progress at home and abroad. Today, America and the world 

face a new equation on the stability of the supply and price of energy. This new 

equation results from increased and sustained demand particularly from China and 

India, declining sources of supply from traditional energy sources, and increased 

geopolitical risk in areas where energy is produced. The result of this new equation 

so far is tighter and more vulnerable energy supplies, and sustained higher energy 

prices. 

The Federal Reserve recently concluded that higher energy costs are constraining 

consumer and business spending in the United States. The International Energy 

Agency has also acknowledged that higher oil prices are dampening global economic 

growth. America’s energy policy can no longer stop at the water’s edge. We need to 

develop a strategic, global energy policy based on two fundamental precepts:

• Aggressive policies at home to reduce consumption, increase energy efficiency 

and develop alternative supply sources, and 

• International engagement to ensure continued access to diverse international 

energy supplies, particularly as competition for these supplies intensifies.

Trade and investment issues, tax policy, foreign policy, bilateral, regional and 

multilateral relationships, and U.S. Government international advocacy efforts must 

be more effectively and strategically integrated with our traditional domestic energy 

agenda. 

CHEVRONTEXACO RECOMMENDATIONS FOR AN ENERGY-INTERDEPENDENT WORLD

There has already been much debate in Congress on the domestic energy policy 

agenda, and on the domestic front we respectfully ask Congress to enact the energy 

bill debated in the past two Congresses. However, there needs to be more discussion 

on international engagement, and will be the focus of the rest of our testimony. We 

need to recognize that the United States and the world are energy interdependent.

The U.S. consumes more oil and gas than we produce, and the Energy Information 

Agency’s forecast is that we will continue to do so. ChevronTexaco’s energy policy 

recommendations have specific ideas on how the U.S. government can improve our 

energy security through constructive international engagement. Included are recommendations for developing a strong investment framework for energy investments around the globe by:

• Opening markets and reducing trade barriers to foster market-driven investment climates for increased energy supplies, 

74

• Protecting energy investments by assisting transitioning economies to develop 

institutions and systems of good governance and support for the rule of law, 

• Improving the business climate for U.S. energy investments overseas through 

improved international trade rules, and 

• Working through multilateral organizations such as the IMF and WTO to help 

liberalize trade, and develop good policy mixes to sustain responsible economic 

growth. 

(See Global Energy Security Paper and Global Business Climate Paper for additional 

details).

It is time for U.S. business to work with the U.S. government and recognize energy as a strategic—and global—issue. Corporate America can no longer treat energy as merely an expense item, and government can not afford to focus on energy 

as simply a domestic issue. U.S. energy policy in the 21St century must reflect our 

interdependence with producing countries, and encourage bilateral relationships 

that recognize the importance of energy development and promote the flow of investment in energy resources. The end of easy energy may mean the end of easy choices, 

but recognizing the new energy equation is a strong first step towards working on 

constructive ways to meet the new challenge. 

Attachments: 

1. ChevronTexaco’s Energy Policy Recommendations 

2. Opinion Editorial: The New Energy Equation by Dave O’Reilly, CEO of 

ChevronTexaco 

ENERGY POLICY RECOMMENDATIONS FROM CHEVRONTEXACO

DOMESTIC ENERGY STRATEGY:

‘‘IMPROVING U.S. ENERGY CONSERVATION, SUPPLY AND USE’’

Energy is the lifeblood of the American economy, affecting the competitiveness of 

virtually every sector and touching nearly every aspect of American life. Over the 

past several years, domestic production of energy resources has matured and declined while, at the same time, U.S. and world demand have continued to increase. 

With these changes has come recognition that energy is a key strategic issue important to U.S. consumers and businesses alike. Providing diverse, reliable and affordable sources of energy is paramount to a national energy policy that will stand the 

test of time. 

ChevronTexaco stands ready to work with the Administration, Congress, policy 

makers, and other stakeholders to develop a comprehensive U.S. energy strategy for 

the 21st century. One important aspect is how the U.S. manages energy domestically. ChevronTexaco believes our energy strategy should:

• Ensure sufficient and diverse energy supplies

• Encourage responsible use of energy

• Enhance regulatory certainty to improve the investment climate for energy

• Support basic and applied scientific research to improve energy availability and 

use

ChevronTexaco strongly supported the energy bill (H.R. 6 conference report) in 

the 108th Congress, and is committed to work towards a comprehensive domestic 

energy strategy consistent with the above principles. 

Ensuring Increasing and Diverse Energy Supplies—With energy demand continuing to rise, the United States will need a diversity of supplies to meet our future 

energy needs. Specific steps the U.S. government (USG) can take to ensure such diversity include:

• Promote Increased U.S. Exploration, Production and Refining—The USG should 

encourage the responsible development of oil and natural gas resources in the 

Gulf of Mexico, the Rocky Mountains and elsewhere in the United States. Further, the USG needs to work with local communities to overcome opposition to 

energy projects and help streamline permitting efforts in order to allow for new 

and expanded refining capability to meet growing U.S. needs. 

• Diverse Fuel Supplies—The USG should promote performance standards and 

not mandate or subsidize specific types of fuels or energy. This will allow all 

energy sources to compete on a level playing field. ChevronTexaco is ready to 

work with the USG to reduce ‘‘balkanization’’ resulting from boutique fuels 

while protecting the environment. 

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• Natural Gas—USG should support construction of a pipeline (without subsidies) 

to bring additional supplies of gas from Alaska and Canada. It should also help 

facilitate the efficient growth of liquefied natural gas (LNG) to meet the increased natural gas demand. ChevronTexaco is poised to provide new supplies 

of LNG to help meet growing energy needs on the U.S. Gulf and West coasts. 

• Electric Power—The USG should set standards to improve the reliability of electric power, facilitate the development of open and transparent markets, and 

support the use of efficient electric power generation—e.g. cogeneration.

Responsible Use of Energy—The U.S. government should support continuous improvement in the responsible use of energy to further goals of energy security, environmental performance, conservation, and energy efficiency. Specific steps the USG 

should take include:

• Conservation and Energy Efficiency—In the near-term, conservation is the easiest, most reliable ‘‘new’’ source of energy. The USG, as a large consumer of energy, should lead the way in becoming more energy efficient. The USG should 

continue to support its Performance Management Contracting program. 

ChevronTexaco has also reduced its energy use by 22 percent in the past 12 

years through conservation and improved energy efficiency. ChevronTexaco has 

a subsidiary called Chevron Energy Solutions business whose sole function is 

to help both private and public sector customers save energy in their operations. 

• Gasoline and Diesel Fuel Reformulation—As federal, state and local governments have adopted new fuel standards to improve environmental performance 

and reduce emissions, ChevronTexaco has worked with regulators, the auto and 

oil industry, researchers, and others to reduce sulfur content of fuels, and to 

help reformulate gasoline and diesel to reduce tailpipe emissions from vehicles. 

ChevronTexaco will continue working constructively with the USG to see that 

new fuel requirements are fully implemented.

Enhance Regulatory Certainty—The United States government can improve the 

investment climate for energy projects by decreasing regulatory uncertainty. Specific 

steps the USG should take include:

• Permit Streamlining for Energy Infrastructure—The USG needs to assist in assuring timely permitting, and working with local communities to overcome obstacles so that necessary LNG re-gasification and distribution facilities can be 

constructed in a timely fashion. Additionally, with U.S. refineries running at/

near capacity, the USG needs to help streamline permitting processes for refinery expansions. More specific recommendations on how to streamline the permitting of energy infrastructure are included in the paper on ‘‘Environmental 

Protection: Responsible Stewardship of the Environment and Energy Resources.’’

• Avoid Rule Changes—Once federal or state governments establish new requirements (e.g., new fuel standards), those governments should avoid making lastminute changes that create market uncertainty. It can take 3 to 4 years for a 

refinery to plan and complete plant modifications to meet new requirements. 

Last-minute waivers that allow noncomplying refiners/marketers to avoid or 

defer compliance penalize companies that have made good-faith investments to 

comply with the rules on the books. The EPA needs to develop a variance process, with per-gallon penalties for noncomplying fuels, to maintain a level playing field with those companies who play by the rules and make the necessary 

investments in a timely manner.

Support for Basic and Applied Research—The USG, in conjunction with other governments and the private sector, has a fundamental role in advancing basic scientific research related to energy. The private sector thrives on partnerships between companies, national laboratories, universities and public agencies to strengthen the nation’s technical capabilities. ChevronTexaco has developed specific recommendations for the USG role in research and development in its paper on 

‘‘Leveraging Technology—Ensuring Sustainable Energy Supply and Use.’’

ENVIRONMENTAL PROTECTION:

‘‘RESPONSIBLE STEWARDSHIP OF THE ENVIRONMENT AND ENERGY RESOURCES’’

Protecting the environment is a key value in the ChevronTexaco Way—which describes ChevronTexaco, what we believe, and what we plan to accomplish. We are 

proud of our reputation and work everyday to improve it. We must. Standards for 

environmental protection are growing tougher. Society, including our customers, 

shareholders and the communities in which we do business, expect us to continuously improve. 

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At the same time, the ChevronTexaco Way encourages us to constructively engage 

in public policy debates, including those around the environment, in ways that are 

solutions-oriented and lead to environmental stewardship improvements. We are 

eager to work with the Administration to develop effective, creative, approaches to 

progress environmental performance and care. 

We believe environmental public policy should:

• Lead to improvement in environmental quality and minimize unintended consequences 

• Prioritize environmental problems in order of risk, and solutions in order of 

cost-effectiveness 

• Apply sound science to all phases of decision-making 

• Develop requirements in a manner that considers economic growth, allows flexibility for the regulated community to respond to market conditions, and provides regulatory certainty to encourage investments

Climate Change—We recognize and share the concerns that governments and the 

public have about climate change. In addressing climate change, we support flexible, 

market-driven and economically sound policies and mechanisms that protect the environment. Our recommendations to the USG are:

• One national program for voluntary greenhouse gas (GHG) reporting—the DOE 

program 1605(b) currently under revision. 

• Increased government support for R&D of advanced technologies to separate, 

capture and geologically store CO2. Also, the government needs to continue its 

international dialogue on carbon sequestration, particularly the Carbon Sequestration Leadership Forum program. 

• Encouraging the use of near-term cost-effective voluntary actions to reduce 

GHG intensity in the U.S. The government should recognize and publicize voluntary industry actions to reduce GHG. In addition, the government should increase its efforts to encourage energy efficiency by consumers and others.

The Kyoto Protocol, the international treaty to reduce greenhouse gases, is expected to shortly be approved by Russia and enter into force. We will work constructively with governments to implement treaty provisions wherever we have operations in countries that are signatories. ChevronTexaco will continue to manage our 

greenhouse gas emissions by taking 4 types of actions: 1) reducing emissions of 

greenhouse gases and increasing energy efficiency; 2) investing in research, development and improved technology; 3) pursuing business opportunities for promising 

technologies; and 4) supporting flexible and economically sound policies and mechanisms to protect the environment. 

Permit Streamlining for Energy Projects—Permit streamlining will encourage energy infrastructure, such as refineries, to implement projects that build capacity 

and/or increase efficiency and reliability. The permitting process should be clear, 

and simple, with agency roles and responsibilities well defined. One lead agency 

should be designated with the responsibility for meeting overall permitting deadlines and coordinating with other agencies to eliminate bottlenecks. The process 

should allow for public input and applicant appeals and ensure date-certain resolutions. 

Air 

• New Source Review (NSR)—Uncertainties surrounding NSR permit requirements can stall important energy projects and environmentally beneficial 

projects such as cleaner-burning fuels. Refining and producing operations within the oil industry are interrelated, continuous and very complex. A permitting 

delay or loss of operational flexibility due to NSR could impact our ability to 

supply our markets. We strongly support streamlining and clarifying these 

rules to provide regulatory predictability and de-bottlenecking. Issues of most 

importance include interpretations of ‘‘routine repair and maintenance’’ and 

other permitting triggers. 

• National Ambient Air Quality Standards (NAAQS)—The EPA recently announced areas in the U.S. which are in non-attainment for ozone and particulates. We urge EPA, particularly for ozone attainment plans, to recognize that 

the timeline for benefits of control measures already on the books (e.g. low sulfur gasoline and diesel) will not be fully realized until well after the attainment 

deadlines for state implementation plans. The administration needs to consider 

ways to recognize the benefits from full implementation of these new control 

measures to avoid unintended consequences—such as another generation of 

boutique fuels that can lead to supply disruptions. 

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Remediation and Water 

• Natural Resource Damages—We support NRD reforms that focus on remediation of ecological services using generally accepted scientific and economic 

methods. Unfortunately, some trustees view natural resources damages as a 

means to generate funds to offset budget shortfalls and generate private attorney fees. Program reforms should focus priorities on natural resources by limiting the potential for highly inflated damage claims, reducing incentives to use 

these claims to offset budget shortfalls and speeding remediation of resources 

for the public. 

• Cleanup Program Reform—We support ways to safely return contaminated 

properties into productive use and make them an asset to the surrounding community. In fact, ChevronTexaco won an award from EPA in 2002 for being one 

of the first companies to pledge expedited cleanups of our remediation sites. We 

believe successful approaches from one regulatory program should be allowed 

in all EPA cleanup programs. For example, isolating a source of contamination 

is acceptable in Superfund and should be used, when appropriate, in RCRA as 

well. Regardless of the statutory authority on which the programs are based, 

clean-up decisions should be risk-based, use sound science and consider the intended end use of the property. 

• MTBE Remediation Success—ChevronTexaco strongly believes that those responsible for releases of gasoline containing MTBE should be held accountable 

for clean-up efforts, and that existing laws are sufficient to compel those responsible. MTBE remediation efforts are best handled under the clean-up authorities of the respective state regulatory agencies. Current litigation against manufacturers only serves to distract parties from necessary remediation efforts and, 

if required, delay the return of those resources to beneficial reuse. 

ChevronTexaco supports a national MTBE phase-out and limited liability protection for manufacturers. 

• Water—We support development of a consistent, scientifically-based policy to 

identify and remediate ‘‘impaired’’ water bodies. Responsibility for remediation 

should be assigned to dischargers in an amount that is in proportion to their 

contribution to the problem. Stormwater controls should rely on ‘‘best management practices’’ rather than strict end-of-pipe limits since stormwater is variable, unpredictable, and impossible to treat reliably. 

GLOBAL ENERGY SECURITY:

‘‘FUELING THE GLOBAL ECONOMY’’

Globalization is making the world’s economies increasingly energy interdependent. 

Rising world demand for all forms of energy means that our nation will face increased competition for secure sources of energy. U.S. energy policy needs to reflect 

a new reality where global oil consumption is forecast to rise nearly 2% annually 

over the next two decades. ChevronTexaco looks forward to working with the Administration to reinforce partnerships that sustain our country’s energy interdependence and to codify strong investment frameworks around the globe that are built 

upon three foundations:

• Open markets 

• Sanctity of contracts 

• Transparent Application of Rule of Law

Energy Interdependence—USG foreign policy must reflect the critical role of energy interdependence in sustaining healthy economies.

• USG should seek bilateral policies that allow commercial stability and security 

of energy supply. Active dialogue with key suppliers and users, such as Russia 

and China, will need to be ongoing to help ensure stable markets. 

• USG relationships with key energy suppliers, such as Canada, Mexico, Saudi 

Arabia, and Venezuela are essential to maintain reliable energy supplies. Foreign investment through collaborative partnerships will be necessary if these 

supplier countries are to make the requisite investment in energy infrastructure 

to maintain and expand production, while at the same time adequately provide 

for their local social expenditures, e.g. in education and health care. 

• The USG should seek to expand its natural gas collaborations with suppliers 

such as Australia and Canada. With global natural gas demand projected to 

grow by 2.2% annually through 2025, Australia is ideally positioned to become 

a major global energy supplier. 

• The USG should explore how to create a mutuality of interests with key energy 

producers where foreign investment is currently limited, e.g. Mexico.

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Open Markets—Reduced trade barriers, price deregulation, and market-driven 

public investing are all prerequisites of a transparent business environment.

• The USG needs to support active participation in rules-based international institutions like the World Trade Organization (WTO), and should work actively 

with major energy suppliers such as Russia, Kazakhstan, and Saudi Arabia to 

ensure that they recognize the benefits of WTO membership and can take the 

necessary steps for accession requirements. • Our public/private sector coalitions should support strong investment protection 

provisions that are modeled in the Central American Free Trade Agreement. • Open markets provide level playing fields for U.S. companies and our competitors. Engagement with countries is more effective as a way promote acceptance 

into the global community than unilateral sanctions. The stepwise U.S.-Libya 

rapprochement that is exposing Libya to international best business practices 

(by re-engaging with U.S. companies and the U.S. educational system to develop 

its next generation of leaders) can serve as a model for other sanctioned countries. • Liquefied Natural Gas (LNG) is growing in importance as a fuel. The U.S. 

should seek ways to facilitate efficient growth of LNG utilization by: a) 

encouraging/ streamlining approval processes for import/regasification terminals, b) seeking leadership opportunities in regional organizations (e.g. APEC) 

to facilitate policy development in permitting, transport, customs, and other 

areas that impact LNG production and shipping and c) engaging in a public 

education campaign on LNG.

Sanctity of Contracts—Contracts are the keystones for investments, and all contractual parties must be confident of agreed-upon commitments.

• A coordinated interagency process that leverages the strengths of individual 

USG agencies to partner with U.S. companies can provide maximum support for 

U.S. commercial projects. • As new opportunities arise, the USG should encourage countries to develop contracts that provide fair rates of return for all parties, commensurate with risk. • U.S. companies are looking to develop broad partnerships to ensure reliable energy supply to U.S. markets. Some specific ChevronTexaco opportunities to support future demand include:

• award of the Kuwait Northern Fields • contract extension for the Saudi Partitioned Neutral Zone • timely expansion of Kazakhstan’s Tengiz and the Caspian Pipeline Consortium (CPC) to facilitate moving new crude supplies to market.

• We note that failure to honor contractual terms, as has occurred in Ecuador 

(with unfair legal claims against our company), will discourage new investment 

or re-investment in energy resources by any company.

Transparent Application of Rule of Law—The USG should assist transitioning 

economies to develop the institutions and systems of good governance and support 

for the Rule of Law. This assistance provides an appropriate environment for ensuring the protection of investments, provisions for worker safety and security, and the 

environmentally sound development of energy resources.

• Public/private sector cooperation can be an effective method of delivering such 

assistance. For example, we participate with our host-government partners in 

the voluntary U.S.-U.K. Extractive Industries Transparency Initiative (EITI) 

and the G-8 Transparency Initiatives. These initiatives are making demonstrable progress to ensure that oil revenues are invested wisely and utilized for 

the benefit of a country. 

• Good governance should extend to physical as well as fiscal security in the 

transparent development of energy resources. USG technical assistance to the 

Nigerian government to improve the way it provides security in areas such as 

the Niger Delta is critical not only for regional development, but to help calm 

jittery energy markets through secure production capacity. 

• Critical signposts for new investment opportunities in high risk areas will be 

progress in judicial reform and recognition of property/shareholder rights. USG 

technical assistance is an important component to this progress. 

THE GLOBAL BUSINESS CLIMATE:

‘‘KEEPING THE BAR HIGH AND THE PLAYING FIELD LEVEL’’

The globalization of commercial ties provides an important vehicle to enhance economic growth, promote understanding, reinforce alliances and, where necessary, 

help build political bridges. To be effective and mutually beneficial, global enterprise 

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needs a level playing field where the same rules apply to all participants, and the 

standards of behaviors are maintained at the highest levels. We urge the Administration to foster a favorable global investment climate. With the U.S. as one of the 

world’s leading economies, the USG needs to develop innovative and collaborative 

approaches to promote sustainable economic growth, and it has a responsibility to 

ensure high standards and a level playing field. These approaches will need to focus 

on the rules of engagement for businesses around the world:

• International Trade Rules • Corporate Governance • Multilateral Organizations • Tax policy

International Trade Rules: We urge the Administration to continue to ensure high 

standards of protection for U.S. investments and property rights overseas. The USG 

should demand non-discriminatory treatment, free transfers of profits and capital, 

protection from expropriation, and international arbitration in dispute resolution.

• We urge the USG to push forward on Bilateral Investment Treaties (BIT) that 

offer strong investment protection and serve as models for host country governments to design favorable investment environments. Where BITs have been negotiated, but are still pending ratification, (e.g. Russia), we encourage the USG 

to continue to work to bring these agreements into force. 

• Free Trade Agreements (FTAs), both bilateral and regional, are excellent tools 

to encourage rules-based behavior and USTR is to be commended on its efforts 

to extend these agreements to governments who recognize the value of rulesbased trade regimes. 

• We urge the USG to ensure that Article 35 of the draft UN Convention Against 

Corruption is defined to prevent the use of U.S. courts as major forums for frivolous, private anti-corruption lawsuits. 

• Judicial expansion of the scope of the Alien Tort Claim Act encouraging U.S. 

adjudication of foreign grievances creates a non-level playing field and undermines U.S. relations with transitioning nations.

Corporate Governance: The USG should identify and expand programs that encourage good governance. It should work to promote fiscal responsibility and transparency—through voluntary programs such as the U.S.-U.K. Extractive Industry 

Transparency Initiative and the G-8 Transparency Compact. These and related efforts are discussed in more detail under the Issue Paper: ‘‘Corporate Responsibility: 

Developing Innovative Partnerships to Promote Corporate Responsibility.’’

In addition the USG should do the following:

• Promote the links between transparency, investment flows and economic performance by publishing the results of international surveys (e.g. 

GovernanceMetrics). 

• Continue the State Department’s Corporate Excellence awards and invite other 

countries to establish similar programs. 

• Award, and encourage others to award, contracts on an evaluation of the total 

value proposition and competency of bidders and the transparency of their bid 

to provide a requested service (as opposed to simply awarding contracts to low 

bidders)

Multilateral Organizations: Multilateral organizations such as the World Bank, 

the International Monetary Fund and the World Trade Organization (WTO) should 

help governments establish good policy mixes. The WTO must push for trade liberalization particularly in the agricultural sector. Debt relief must also be tackled in 

a systematic way.

• We ask the USG to actively participate in the multilateral organizations to ensure that policies actually support responsible growth through regular monitoring and feedback to the multilateral organizations. The USG should participate in new policy initiatives to bolster governance frameworks, insisting that 

the private sector be included as a critical stakeholder and client. 

• Nongovernmental organizations (NGOs) and community groups should help 

local populations make lasting, sustainable improvements in their own economies. They, like all stakeholders, should be held accountable for their actions, 

and participate constructively in working with stakeholders, including corporations, to identify collaborative approaches to sustainable development. 

• ChevronTexaco’s Angola Partnership Initiative, working with USAID and the 

UN Development Program, is focusing on a relief-to-development strategy that 

will allow this war-torn country to move beyond humanitarian relief efforts and 

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gola rebuild itself. We are pleased to share our learnings with other potential 

partnerships.

Tax Policy: U.S.-based businesses compete throughout the world with non-U.S. 

based businesses for market access, and exploration and production opportunities. 

The USG should promote tax policy which enables U.S.-based businesses to compete 

with its non-U.S. peers. This requires:

• Foreign tax credit rules which prevent double taxation. 

• Tax treaties which reduce withholding taxes and other investment barriers. 

• Avoiding unnecessarily complex tax rules and tax reporting.

These activities create U.S.-based jobs and ensure availability of energy resources 

to the U.S. If U.S.-based businesses are subject to a higher tax burden than their 

competitors these benefits can be lost. 

LEVERAGING TECHNOLOGY:

ENSURING SUSTAINABLE ENERGY SUPPLY AND USE

The energy industry is technology intensive. Applied research and development 

(R&D) and complex engineering have always been essential to finding, developing, 

and using energy resources. While energy companies have historically met the technical challenge, industry consolidation has narrowed the R&D base. At the same 

time, industrial R&D has become globalized. These trends threaten to challenge 

U.S. technology leadership, unless we create new options for supporting research 

and development. The private sector needs increased partnerships between companies, national laboratories, universities, and public agencies to broaden its technical 

capabilities. The USG should encourage public-private partnerships to maintain 

U.S. leadership in energy technology and promote competitively bid partnerships between government and industry to advance and demonstrate technology. 

Sustaining U.S. Technology Leadership—The technologies that will secure America’s energy future require a strong scientific and engineering base. In the face of 

growing challenges, the USG should build America’s intellectual capital by vigorously participating in energy-related R&D and by bearing a reasonable share of 

costs for energy programs that serve the national interest but are not yet commercially viable. The USG should continue to support science and engineering education 

to keep American business, universities and government laboratories technologically 

competitive as other countries increase their own technological capability. 

Energy companies apply technology to provide diverse, secure energy supplies 

that are economically and environmentally sustainable. Technology is generally leveraged in three key areas: accessing hydrocarbon resources, providing clean fuel 

and power, and managing emissions and waste products. 

Accessing Hydrocarbon Resources—The challenge for our industry is maximizing 

oil and gas recovery from existing production areas while extending the frontiers for 

exploration and development. Enhanced recovery technologies allow more oil and 

gas to be recovered from existing fields, while precision techniques such as horizontal drilling allow production with smaller environmental footprints. 

The USG should:

• Encourage responsible development of resources both offshore and continental 

U.S., and work to inform the media and local communities about new technical 

capabilities that enhances production while minimizing environmental impact. 

• Partner with the private sector to develop precision technologies for finding and 

producing hydrocarbon resources.

ChevronTexaco’s joint projects with National Laboratories in areas such as advanced computing and seismic imaging demonstrate the public-private collaboration 

needed to advance exploration and development technology. Technologies for arctic 

development, deepwater production, heavy oil commercialization, and oil sands development will diversify hydrocarbon resources while adding significant new reserves. 

Providing Clean Fuel and Power—The energy industry is actively developing technologies for cleaner burning fuels, high performance fuels, and alternative fuels. 

While some technology is proprietary, the work is highly collaborative between regulators, the auto industry, energy companies and others. In addition to vehicle fuels, 

technology is advancing for cleaner power generation, particularly from natural gas 

or gasification of other hydrocarbons. The USG should:

• Avoid mandating or subsidizing consumer use of specific fuels. 

• Cooperate with local communities and authorities to ensure timely construction 

and operation of re-gasification and distribution facilities such as LNG plants. 

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• Continue public-private research partnerships for clean energy systems such as 

hydrogen fuel cells and other advanced alternative fuels.

Looking further to the future, numerous public-private research projects are testing the feasibility of hydrogen and other alternative fuels. ChevronTexaco participates in these projects, including leadership of a DOE-industry consortium to demonstrate hydrogen infrastructure and fuel cells. 

Managing Air and Water Emissions and Waste Products—Both greenhouse gas 

and water issues transcend company and industry boundaries. Acting domestically 

and internationally, the USG should:

• Continue its research activities with other organizations to establish the scientific basis for policy decisions and mitigation requirements 

• Partner with the energy industry to develop economically and environmentally 

sustainable policies regarding carbon capture and storage.

Energy companies have vigorous engineering programs to reduce our own emissions and waste streams and the emissions from our products. On the global issue 

of greenhouse gases, for example, we pursue technology to reduce emissions at the 

source (e.g., more efficient use of fuel) as well as remove them from the environment 

once produced (e.g., CO2 sequestration in oil and gas fields). For example, oil field 

injection of CO2 is a key feature of ChevronTexaco’s activities in Western Australia 

and in other projects for enhanced oil recovery. ChevronTexaco also participates in 

the Department of Energy’s Carbon Capture Project, which is now entering Phase 

2 of a multi-year program. 

Water remediation and re-use is a major, parallel area of technical focus in production operations and refining. Since technology for water issues is in its early 

stages, government and industry have an opportunity to collaborate in mapping 

technology pathways and developing policies. In addition to its own technology programs, ChevronTexaco is in exploratory discussions with the National Laboratories 

about joint programs for water treatment and use. 

CORPORATE RESPONSIBILITY:

‘‘DEVELOPING INNOVATIVE PARTNERSHIPS TO PROMOTE CORPORATE RESPONSIBILITY’’

Over the past decade, corporations have addressed a range of corporate responsibility issues, ranging from corporate governance and transparency to environment 

and human rights. Corporations, either through their own initiatives or through 

public-private partnerships, have focused their attention on how they can be a positive force for society and contribute to economic growth, social stability and sustainable development. 

ChevronTexaco is an acknowledged leader in corporate responsibility. Indeed, we 

see corporate responsibility and business success as mutually reinforcing—the success of our business is directly linked to the economic, social and environmental 

health of the communities where we operate. ChevronTexaco stands ready to work 

with the Administration, policymakers and other stakeholders to develop effective 

and innovative approaches to promote corporate responsibility. ChevronTexaco believes that a sound USG approach to corporate responsibility should:

• Encourage voluntary efforts that offer creative solutions and allow for flexibility 

in implementation given the complex operating environments facing companies 

in different sectors around the globe. 

• Contribute to sustainable solutions to enable communities and stakeholders, including civil society, to build their capacity and contribute to economic growth. 

• Support efforts for voluntary partnerships to increase revenue transparency (e.g. 

Extractive Industry Transparency Initiative).

Encourage Voluntary Efforts. The USG should support voluntary public-private efforts rather than pursue regulatory mandates. Unlike regulatory mandates which 

impose one-size-fits-all approaches, voluntary efforts permit the flexibility necessary 

to adapt to local, often complex and diverse, operating conditions. They also provide 

corporations and their employees with ownership over implementation. Voluntary 

approaches can also stimulate creative discussions and innovative solutions that leverage individual organizational capabilities and commitment. Incentives and recognition for performance, such as the State Department’s Award for Corporate Excellence, should be used to encourage corporate efforts.

• Human Rights. The USG should continue its leadership role in supporting 

human rights around the globe through bilateral and multilateral diplomatic 

channels. Continued USG funding of programs that build the capacity of civil 

society, the media, and the judiciary are key to supporting human rights. Our 

commitment to this issue is demonstrated in our conduct, through our participaVerDate 0ct 09 2002 11:48 Apr 04, 2005 Jkt 000000 PO 00000 Frm 00085 Fmt 6601 Sfmt 6621 P:\DOCS\20004.TXT SENE3 PsN: SCAN
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tion in the Voluntary Principles for Security and Human Rights dialogue process, and support for the Global Sullivan Principles. ChevronTexaco pledges to 

work collaboratively with the USG, host governments, and local communities to 

support universal human rights. 

• HIV-AIDS. The USG should support public-private partnerships to combat HIVAIDS. With programs in nearly 100 countries totaling over $3.2 billion since 

1986, the U.S. government is at the forefront of responding to the global pandemic of AIDS. USG support for public-private partnerships could offer an additional opportunity to leverage resources and expertise. ChevronTexaco, with our 

strong presence in Africa, currently works with host governments, NGOs, multilateral agencies and international initiatives on HIV-AIDS and stands ready to 

explore partnership opportunities with the USG.

Contribute to Sustainable Solutions. The 2000 World Summit for Sustainable Development was a watershed event that highlighted the need to build both publicprivate partnerships and local capacity to enable sustainable development. The USG 

should support public-private partnerships that promote economic growth, social development and environmental stewardship. ChevronTexaco stands ready to work 

with the USG on innovative and progressive approaches to sustainable development.

• Community Engagement. The USG should support public-private efforts to 

stimulate economic growth through education, focused health programs and the 

development of small and medium sized businesses through training, business 

development services and micro-credit programs. USAID’s Global Development 

Alliance should receive continued support. Combining public resources with 

those of business to leverage complementary skills and resources can lead to 

sustainable results. ChevronTexaco stands ready to work with the USG to partner on programs, such as our Angola Partnership Initiative with USAID which 

is helping people improve their lives by building the human and institutional 

capacity necessary to support economic growth. 

• Stakeholder Engagement. The USG should use its convening power and diplomatic resources to lead multi-stakeholder dialogues on corporate responsibility 

issues. The USG can provide a neutral forum to address tough issues and exchange best practices. Its convening role on the Voluntary Principles on Security and Human Rights is a good example. The USG should also work with existing mechanisms, such as the OECD, to encourage greater dialogue on corporate responsibility.

Support Transparency Efforts. The USG should continue its support for voluntary 

partnerships to increase revenue transparency. The U.S.-U.K. Extractive Industry 

Transparency Initiative (EITI) and the G-8 Transparency Compacts are two good examples of these efforts. The USG should also use its diplomatic leverage to encourage governments to participate in these efforts. ChevronTexaco was proud to have 

participated in the constructive discussions that launched the EITI and remains 

supportive of the process. 

OPINION EDITORIAL: THE NEW ENERGY EQUATION

BY DAVE O’REILLY, CEO OF CHEVRONTEXACO

THE NEW ENERGY EQUATION:

WISE ENERGY USE AT HOME AND GLOBAL ACCESS, DIVERSIFICATION AND SECURITY

Energy is essential to economic health and the quality of life everywhere in the 

world. Energy is, quite literally, the lifeblood of the U.S. and the global economy. 

Today, America and the world face a new equation in terms of both the stability 

of the supply and the price of energy. This new equation results from increased and 

sustained demand particularly from China and India, declining sources of supply 

from traditional energy sources, and increased geopolitical risk in areas where energy is produced. America’s energy policy must recognize the new reality and acknowledge that while our nation strives to become more energy self-sufficient, our 

policies must recognize that America will continue to rely on international energy 

supplies to meet domestic needs. 

America’s energy policy can no longer stop at the water’s edge. We need a global, 

strategic approach to ensure continued access to diverse international energy supplies, particularly as competition for these supplies intensifies. At the same time we 

need to implement more aggressive policies at home to reduce consumption, increase 

energy efficiency and develop alternative supply sources. Trade and investment 

issues, tax policy, foreign policy, bilateral, regional and multilateral relationships, 

83

and U.S. Government international advocacy efforts must be more effectively and 

strategically integrated with our traditional domestic energy agenda. 

The Federal Reserve recently concluded that higher energy costs are constraining 

consumer and business spending in the United States. The International Energy 

Agency has also acknowledged that higher oil prices are dampening global economic 

growth. Given the changed circumstances we face today, it is critical to begin to explore new ways of approaching the energy debate, to develop a more robust and coordinated set of policy options and to organize strategically the U.S. Government’s 

energy policymaking apparatus to ensure that America has stable, predictable and 

affordable energy to fuel sustained economic expansion. 

WE MUST RECOGNIZE THAT THE UNITED STATES AND THE WORLD

ARE ENERGY INTERDEPENDENT

Today, America relies on energy from countries around the globe, and will continue to do so in the future. Almost two-thirds of the total U.S. energy consumed 

comes from oil and natural gas. And with U.S. energy consumption expected to increase by 27% over the next 15 years, the nation will continue to rely heavily on 

oil and natural gas to meet that growing demand (Chart 1)—with much of the oil 

and natural gas imported. 

The United States consumes much more oil than it produces (26 percent of the 

world’s consumption verses 10 percent of world oil production), and consumption is 

high relative to proven reserves (Chart 2). While U.S. natural gas production is 

much closer to consumption, there will be an increasing need for supplies of imported natural gas. The U.S. consumes 25 percent of the world’s natural gas, but 

has only 3 percent of the world’s reserves (Chart 3). This means that over time the 

United States will be more dependent on natural gas in the form of Liquefied Natural Gas (LNG), the form of natural gas that can be transported around the globe. 

As U.S. domestic oil production has declined, the United States has relied more 

and more on imported crude oil and products (Chart 4). While the United States 

needs to conserve oil and increase its domestic supply, it is apparent that the 

United States will continue to significantly rely on imports. Thus, for both natural 

gas and oil, the United States needs to recognize it is interdependent with the rest 

of the world for supply of these two important fuels. We need a comprehensive policy that reflects this reality. 

A NEW GLOBAL, STRATEGIC APPROACH TO AMERICA’S ENERGY SECURITY IS REQUIRED

ChevronTexaco hopes to be part of the solution to the energy challenges America 

faces. Our ability to do so depends upon working with the Administration and Congress to build support for and consensus around a shared national goal of American 

businesses and consumers having stable, predictable and affordable energy supplies. 

To advance this goal, requires us to look at three critical sets of issues.

• Wise management of energy resources within the United States, including ensuring sufficient and diverse supplies, the responsible use of energy (conservation) and the responsible stewardship of the environment. 

• To meet America’s energy security needs, we need to diversify and improve access to international energy supplies through constructive international engagement. 

• Finally, we need to support those enablers that promote the wise use of energy 

and ways to responsibly manage energy resources around the globe through 

leveraging technology to ensure sustained energy supply and use and developing effective and innovative public-private partnerships to promote corporate 

responsibility. 

ORGANIZING FOR SUCCESS TO MEET THE CHALLENGE OF THE NEW ENERGY EQUATION

How America organizes to address the energy challenge we face is critical going 

forward. For the United States to be able to develop and implement a global and 

truly strategic energy policy requires consideration of new organizational models. 

Today, U.S. energy policy is managed through a number of federal agencies including the Department of Energy, Department of the Interior, Department of Commerce, Department of State, and Department of the Treasury, as well as agencies 

and groups such as EPA, OMB, USTR, NSC, and the NEC. There are not institutional mechanisms to ensure that these important components of the broader policy—our environmental policy, our foreign policy, our trade policy, our security policy and our domestic energy production, access and use policy—are brought together 

to advance the common goal of reliable and affordable energy supplies. The global 

nature of the challenge and the domestic and international components of the soluVerDate 0ct 09 2002 11:48 Apr 04, 2005 Jkt 000000 PO 00000 Frm 00087 Fmt 6601 Sfmt 6621 P:\DOCS\20004.TXT SENE3 PsN: SCAN
84

tion require us to develop organizational models that will ensure a strategic, seamless approach. 

The enclosed papers provide concrete and practical recommendations that we believe, if taken together, will help safeguard America’s energy security for year’s to 

come. All of us at ChevronTexaco stand ready to work with the Administration and 

Congress on this critical challenge. 

STATEMENT OF DR. R. NEAL ELLIOTT,

AMERICAN COUNCIL FOR AN ENERGY-EFFICIENT ECONOMY

The American Council for an Energy-Efficient Economy (ACEEE) appreciates the 

opportunity to provide comments regarding global energy trends and their potential 

impact on U.S. energy needs, security and policy. ACEEE is a non-profit organization dedicated to increasing energy efficiency as a means for both promoting economic prosperity and environmental protection. We were founded in 1980 and have 

developed a national reputation for leadership in energy efficiency policy analysis, 

research and education. We have contributed in many ways to congressional energy 

legislation adopted during the past 20 years, including the current energy bills, the 

Energy Policy Act of 1992, the National Appliance Energy Conservation Act of 1987, 

and the Energy Title of the 2002 Farm Bill. We are also an important source of information for the press and the public on energy efficient technology, policies, and 

programs. 

ACEEE remains concerned about the continuing imbalance between energy supplies of natural gas, oil and electricity, and rapidly growing domestic and foreign 

demands for these energy resources. ACEEE research has shown that energy efficiency is the most viable near-term strategy for rebalancing energy markets. Energy 

efficiency is the only near-term option for moderating energy prices, and is also vital 

to stabilizing longer-term energy markets. Additional energy supplies, either domestic or imported require at least three years to bring to the market, with many resources, such as additional Alaska gas and oil, taking on the order of a decade to 

bring to market. 

Recent ACEEE analysis of the impact of energy efficiency on natural gas markets 

shows that if we can reduce gas demand by as little as 4% over the next five years, 

we can reduce wholesale natural gas prices more than 20%. These savings would 

put over $100 billion back into the U.S. economy, at a cost of $30 billion in new 

investment, of which less than one-quarter would be public funds at a combination 

of the federal and state levels. 

Moreover, this investment would help bring back U.S. manufacturing jobs that 

have been lost to high gas prices, and would help relieve the crushing burden of 

natural gas costs experienced by many lower-income households. Importantly, much 

of the gas savings in our analysis come from electricity efficiency measures, because 

so much electricity is generated by natural gas, often inefficiently. 

It is important that assessments of energy resource options fairly treat energy efficiency in national energy forecasts. Efficiency resources are more flexible and in 

most cases less costly than are new supply resources. In the past, the National Energy Modeling System (NEMS) used by the Energy Information Administration 

(EIA) has not adequately characterized the potential for energy efficiency. While significant improvements have been made in recent years, such as the more robust 

characterization of combined heat and power (CHP) and electric motors in the Industrial Demand Module, ACEEE feels additional work needs to be done to bring 

energy efficiency resources into parity with supply resources across all the modules. 

Also, major structural changes are taking place in U.S. energy markets. EIA needs 

updated modeling capability to reflect adequately these new market realities. 

However, for EIA to better characterize energy efficiency, it is important that they 

have adequately detailed consumption data available and sufficient staff resources 

to modify the NEMS model to capture these market effects. Unfortunately, budget 

cuts in recent years have reduced the sample size of the three important consumption energy surveys—Manufacturing, Residential and Commercial Buildings. In addition, as a result of limited resources, the questions asked in these surveys are now 

less detailed and the reports are taking longer to issue. It is important that funding 

be restored to the real dollar levels from the mid-1990s if not increased. 

It is not just quality consumption data that is needed for supporting sound energy 

policies. The supply data collected by EIA is also critical to functioning energy commodity markets. In particular the frequency and reliability of natural gas market 

data has become a problem for smoothly functioning natural gas markets. The natural gas storage and consumption data collected and reported by EIA on a weekly 

basis is neither frequent nor reliable enough to allow natural gas markets to funcVerDate 0ct 09 2002 11:48 Apr 04, 2005 Jkt 000000 PO 00000 Frm 00088 Fmt 6601 Sfmt 6621 P:\DOCS\20004.TXT SENE3 PsN: SCAN
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1The Nuclear Energy Institute (NEI) is the organization responsible for establishing nuclear 

industry policy on matters affecting the nuclear energy industry. NEI’s members include all 

companies licensed to operate commercial nuclear power plants in the United States, nuclear 

plant designers, major architect-engineering firms, fuel fabrication facilities, materials licensees, 

and other organizations and individuals involved in the nuclear energy industry. 

tion smoothly, and has contributed to price volatility. ACEEE supports providing 

EIA additional resources so that they can collect and report natural gas data more 

frequently and in greater detail. 

Finely, policy makers in Washington need new capabilities to do policy analysis 

to explore the various options presented to them. Unfortunately, NEMS is a forecasting, not a policy assessment tool. The program is ill suited to exploring various 

policy scenarios. Congress should support EIA in developing a robust suite of policy 

analysis tools to complement their forecasting ability. Failing that, consideration 

should be given creating this policy analysis capability somewhere else within the 

federal government, either at another agency or within the National Laboratory system. 

Thank you for the opportunity to provide these comments. We would welcome the 

opportunity to explore them in greater detail at the committee’s convenience. 

STATEMENT OF MARVIN S. FERTEL, SENIOR VICE PRESIDENT, NUCLEAR GENERATION, AND CHIEF NUCLEAR OFFICER, NUCLEAR ENERGY INSTITUTE

SUMMARY

The Energy Information Administration (EIA) will release the Annual Energy 

Outlook 2005 (AEO 2005) next week, and the Senate Energy and Natural Resources 

has requested testimony about EIA’s forecasting through 2025. Although EIA’s forecasting of nuclear power’s contribution to U.S. electricity supply has improved in recent years, the Nuclear Energy Institute (NEI) 1 believes that EIA’s outlook, particularly with respect to new nuclear plant construction, is based on erroneous assumptions. 

NEED FOR ACCURATE ANALYSIS AND FORECASTING

There is increasing evidence that the United States faces serious energy supply 

and delivery problems. Even assuming successful conservation and efficiency programs, U.S. dependence on imported oil is at a historic high. Natural gas prices 

across the country have increased dramatically. The transportation infrastructure 

for delivery and natural gas requires significant expansion. The transmission infrastructure necessary to move electricity within and between states and regions is seriously overloaded, placing reliability at risk. 

The imminent threat to reliable supplies of energy at stable, predictable prices is 

generating interest in new national energy policy legislation. The appropriate authorizing committees in both the Senate and House are holding hearings. At times 

like these, policymakers in the Administration and the Congress must have access 

to the most accurate analysis and forecasting possible. In the case of nuclear energy, 

the EIA’s forecasts are not accurate, appear based on hypothetical speculation, and 

do not reflect realistic analysis of the current status of nuclear energy in the United 

States. 

EIA’S FORECAST FOR NUCLEAR ENERGY

Each year, EIA’s Office of Integrated Analysis and Forecasting publishes an annual forecast of U.S. energy supply and demand called the Annual Energy Outlook 

(AEO). AEO 2005 provides projections of energy supply and demand in all consuming sectors and for all fuels through 2025. This year’s Outlook projects that total 

nuclear generation will grow from 764 billion kilowatt-hours in 2003 to 830 billion 

kilowatt-hours in 2025. 

This EIA projection contrasts sharply with EIA’s forecasts several years ago. AEO 

1999 predicted that 50,800 megawatts of nuclear capacity would be retired by 2020. 

The following year, the publication predicted that 42,700 megawatts would be retired. AEO 2001 forecast shutdown of 28,100 megawatts, and AEO 2002 forecast 

shutdown of 9,700 megawatts of nuclear generating capacity. These wildly divergent 

results were produced through a combination of analytical errors, including use of 

out-of-date data, imposition of arbitrary additional costs, and ‘‘double-counting’’ of 

additional costs. 

EIA’s assessment of the outlook for the existing U.S. nuclear power plants nonetheless has improved dramatically. AEO 2005 predicts nuclear generating capacity 

86

will increase from 99.2 gigawatts in 2003 to 102.7 gigawatts in 2025 as a result of 

uprates of existing plants. It projects that all existing nuclear plants will continue 

to operate. 

The Nuclear Energy Institute commends EIA for recognizing that the 103 nuclear 

operating reactors that supply 20 percent of U.S. electricity will continue to operate 

to the end of their initial 40-year license terms and, in virtually all cases, will renew 

their licenses and continue to operate for an additional 20-year period. However, 

NEI believes there is substantial room for improvement in EIA’s outlook for new 

nuclear plants in the United States. 

THE OUTLOOK FOR NEW NUCLEAR UNITS

The Annual Energy Outlook 2005 assumes no new nuclear power plants will be 

built before 2025 in the United States. The NEMS (National Energy Modeling System) model reaches this conclusion because EIA analysts have assigned an unrealistically high, and inflated, capital cost to new nuclear generating capacity. The EIA 

assumes new nuclear plants would have an overnight capital cost of $1,928 per kilowatt of capacity. 

NEI commends EIA for its initiative, during 2003, to conduct a series of workshops on the issue of new nuclear plant capital cost. AEO 2004 included a summary 

of those workshops, which reflected industry’s view that new nuclear plants in the 

United States could be built for $1,400 to $1,500 per kilowatt (including first-of-akind costs for the initial reactors of a series) and $1,100 to $1,200 per kilowatt (for 

the nth of a kind). Unfortunately, these cost estimates, which have a strong factual 

basis, were not reflected in either AEO 2004 or AEO 2005. 

The summary of the 2003 workshops in AEO 2004 acknowledged that ‘‘there is 

reason to believe that new reactors will be less costly to build than those currently 

in operation in the United States. Over the past 30 years, there have been technological advances in construction techniques that would reduce costs. In addition, the 

simplified, standardized, and pre-approved designs clearly result in cost savings.’’

EIA then ignored this finding and assumed that new nuclear plants would experience the same delays, lengthy construction periods and high costs experienced by 

some of the plants built in the 1980s and 1990s. Consequently, it estimated that 

a new plant would face overnight capital costs in the range of $1,928 per kilowatt. 

The industry believes there is ample evidence to demonstrate that EIA’s approach 

is flawed, and that there is a reasonably solid basis for industry’s capital cost estimate. Two examples are cited here: the AP1000 design developed by Westinghouse, 

and the Advanced Boiling Water Reactor (ABWR) developed by GE Nuclear Energy. 

THE WESTINGHOUSE AP1000

Westinghouse is currently pursuing Nuclear Regulatory Commission design certification of its AP1000 nuclear power plant. The AP1000 is a 1,117-megawatt advanced light water reactor. It is essentially a higher power version of Westinghouse’s 600-megawatt design, the AP600, which the NRC certified in 1999. Over 

$400 million was invested in developing and licensing the AP600 design, including 

an extremely detailed cost database comprising more than 1,900 commodity categories and 25,000 specific items. The cost estimate was verified by Westinghouse, 

several international architect-engineers, the Electric Power Research Institute, and 

several utilities. A comparably detailed cost estimate was prepared for the AP1000 

by modifying the AP600 estimate to reflect the design changes. 

In 2002, an industry team—comprised of Westinghouse, seven major U.S. power 

companies and architect-engineer Bechtel—completed a $1-million re-evaluation of 

the AP1000 reactor design. As part of that re-evaluation, Bechtel performed a thorough review of the modifications made to the original cost estimate and, after making some minor adjustments, endorsed the AP1000 cost estimate. 

Although the specific numbers are proprietary information, the overnight capital 

cost for building the first two AP1000 reactors at one site is less than $1,400 per 

kilowatt. This includes all of the first-time costs for completing design, engineering 

and licensing of the first project. After the first few projects have been completed, 

the capital cost for later plants will be approximately $1,000 per kilowatt, which is 

competitive with other sources of baseload electricity. Once those first reactors are 

built and capital costs reach the $1,000-per-kilowatt range, all future plants would 

be financed and built without federal government financial assistance. 

The Westinghouse-Bechtel estimate of less than $1,400 per kilowatt has a solid 

analytical basis, has been peer-reviewed, and reflects a rigorous design, engineering 

and constructability assessment. 

87

THE GE NUCLEAR ENERGY ABWR

GE Nuclear Energy and its partners have built several ABWRs in Japan, and are 

building two reactors in Taiwan (the Lungmen project). In 2002, GE and Black & 

Veatch (B&V) completed an independent cost estimate of the ABWR. This study resulted in volumes of data, including quantities, vendor costs and construction labor 

rates. The source of information for every piece of data is referenced. Most references for quantities of materials are to the Lungmen project database, and thus 

accurately reflect what would be required to build a plant. 

This cost estimate was reviewed and re-reviewed by GE, B&V and a U.S. utility. 

As the estimate was based on actual experience from current and previous ABWR 

projects, it is considered to be solid. 

The bottom line: a single unit ABWR could be built in the U.S. for $1,445 per 

kilowatt on an overnight basis. Two units on the same site roughly one year apart 

would have an average cost of $1,300 per kilowatt. These estimates are for a 1,450-

megawatt reactor and include owner’s costs, supplier profit and contingency. These 

costs are slightly higher than the estimates for the AP1000 because the Westinghouse reactor incorporates a number of so-called passive safety features that reduce 

the total capital cost. GE Nuclear Energy also is developing a boiling water reactor 

design that incorporates similar advanced passive safety features.

FINLAND: COMPARISON OF GENERATING OPTIONS 

[With Emissions Trading] 

[in Euro/MWh] 

Fuel O&M Capital Emissions 

Allowances Total 

Nuclear .................. 2.7 7.2 13.8 23.7 

Gas ........................ 23.4 3.5 5.3 7.0 39.2 

Coal ....................... 13.1 7.4 7.6 16.2 44.3 

Peat ....................... 17.9 6.5 10.2 19.6 54.2 

Wood ...................... 23.1 8.2 13.0 45.3 

Wind ...................... 10.0 40.1 50.1 

Note: All generating technologies at 8,000 hours per year; wind at 2,200 hours per year. 

Source: TVO 

The company expects that overnight capital cost for this design will be approximately 20 percent lower than the ABWR. 

In addition, EIA ignores real experience from overseas, which demonstrates clearly that new nuclear power plants are the most economic option for new generating 

capacity and not, as EIA suggests, the least economic. The chart above shows the 

results of the economic assessment conducted by TVO, the Finnish electric power 

company, which led to its decision in 2004 to order and build a fifth nuclear power 

plant. This analysis shows that a new nuclear power plant is markedly more economic than the other alternatives and lends credence to the capital cost estimates 

developed by the U.S. nuclear industry. 

The Nuclear Energy Institute believes EIA would better serve the policy community by using real-life analysis and cost information rather than its own hypothetical assumptions, which prejudice its forecasts against nuclear power. 

The continuing prejudice against new nuclear plant construction reflected in EIA’s 

Annual Energy Outlook has serious negative consequences. Once such example of 

erroneous EIA data used in the energy policy debate occurred in 2003 when the 

Senate evaluated whether a federal production tax of $18 per megawatt-hour for the 

first eight years of operation for the first 6,000 megawatts of new nuclear capacity 

built would stimulate new nuclear generating capacity in the United States. 

The EIA report (SR/OIAF/2004-02) concluded that the production tax credit 

would, in fact, stimulate construction of 6,000 megawatts of new nuclear power capacity, but that further expansion beyond 6,000 megawatts would not occur because 

new nuclear plants still would not be economic. The EIA analysis was incorrect because EIA again used inflated assumptions about the capital cost of new nuclear 

power plants and rejected the logic that, as more plants are built, capital costs 

would decline making the next units less expensive. 

It is not difficult to predict what the EIA’s NEMS model would forecast if EIA 

staff used more reasonable and realistic cost estimates for new nuclear plants. In 

2002, the Electric Power Research Institute used the NEMS model to forecast the 

amount of new nuclear capacity that would be built using more reasonable capital 

88

1 Import spending estimates based on 2004 petroleum supply and price data provided by

Energy Information Administration, January 2005 Short Term Energy Outlook,

http://www.eia.doe.gov/emeu/steo/pub/steo.html. 2 Import spending calculated based on EIA 2004 data on U.S. monthly crude oil imports (excluding SPR), crude oil WTI spot price, and percent U.S. imports from the Persian Gulf,

http://www.eia.doe.gov/emeu/international/petroleu.html#IntlTrade and http://www.eia.doe. 

gov/oillgas/petroleum/infolglance/importexport.html. 3Federal Reserve Chairman Alan Greenspan, October 15, 2004 and statement before the National Italian American Foundation in Washington, DC, on Oct. 15, 2004. 4 Energy Information Administration, Short Term Energy Outlook, January 2005. EIA projects 

2005-06 crude oil prices of $42 to $43 per barrel. 5Mouawad, Jad, ‘‘Saudis Shift Toward Letting OPEC Aim Higher,’’ New York Times, January 

28, 2005. 

* Carbon Dioxide Information and Analysis, Oak Ridge National Laboratory, http://

cdiac.esd.ornl.gov/trends/emis/top98.tot accessed on January 31, 2004. 

cost assumptions than EIA. The result: At $1,250 per kilowatt, 23,000 megawatts 

of new nuclear capacity would be built by 2020. At $1,125 per kilowatt, 62,000 

megawatts of new nuclear capacity would be built by 2020. 

CONCLUSION

Given the potential importance attached to the Energy Information Administration’s forecasts, NEI believes it is important that these forecasts have a sound factual and analytical basis. At a minimum, NEI urges that EIA’s forecasting function 

would benefit from rigorous peer review of all EIA’s nuclear-related assumptions 

and methodologies, and peer-reviewed development of new economic models better 

able to simulate the dynamics of competitive electricity markets, the performance 

of existing nuclear power plants and the timing for construction of new nuclear 

units. 

STATEMENT OF DERON LOVAAS, VEHICLES CAMPAIGN DIRECTOR, NATURAL RESOURCES DEFENSE COUNCIL (NRDC) AND ANN BORDETSKY, POLICY ANALYST

(NRDC) 

On behalf of the Natural Resources Defense Council (NRDC), a conservation organization with more than 700,000 members, thank you for the opportunity to submit 

testimony to the Senate Energy and Natural Resources Committee for the February 

3rd hearing on the 2005 Global Energy Outlook. 

The bottom line is simple and alarming—America’s dependence on oil is a threat 

to our national security, our economy as well as our environment. Growing demand 

and shrinking domestic production means America is importing more and more oil 

each year—much of it from the world’s most unfriendly or unstable regions. In 2004 

the United States spent more than $18 million per hour on foreign oil1 and more 

than $36 billion on Persian Gulf imports alone.2 Last year Federal Reserve Chairman Alan Greenspan called the higher cost of imported oil a tax on U.S. residents 

that has cut into our national GDP, warning that geopolitical tension is a serious 

concern and that adverse economic impacts for the U.S. will intensify if current 

trends in oil demand and prices continue.3

And there is increasing evidence that the era of cheap oil is over, with $20-to $25-

per-barrel oil becoming a thing of the past. Global consumption is quickly outpacing 

spare production capacity and investment in future capacity is struggling to keep 

up with rising demand. The United States must face the prospect of oil prices remaining at $40 per barrel.4 This is especially likely as OPEC, whose oil export revenues grew by 42 percent to $338 billion in 2004, shifts its supply policy to lock in 

the higher prices.5

Our oil dependence also exacts a heavy toll on the environment. It helps make 

the United States the world’s largest emitter of carbon dioxide, responsible for onefourth of the world’s total global warming pollution.* It causes serious air and water 

pollution, and it is the source of constant pressure to exploit our last precious wild 

lands. As our petroleum demand intensifies, Americans will remain exposed to the 

environmental costs and the harmful public health impacts associated with our dependence on oil. 

Recent attacks on global oil infrastructure and subsequent spikes in domestic oil 

and gasoline prices provide clear evidence of the vulnerability that comes with extreme dependence on petroleum. Furthermore, terrorist organizations now recognize 

that oil is a lifeline of the United States and are well aware that one successful 

strike could take a million barrels per day or more of Saudi oil off the global market 

for months. That is just one possible event that could send oil prices soaring to $80 

89

6 Ending the Energy Stalemate: A Bipartisan Strategy to Meet America’s Energy Challenges, December 2004. 

* All graphs have been retained in committee files. 

7 International Energy Agency cited by Interfax, ‘‘Foreign Investment to Play Key Role in Development of China’s Oil and Gas,’’ China Weekly Energy Report, May 22-28, 2004. 8Manjeet Kripalani, Dexter Roberts, Jason Bushm, India And China: Oil-Patch Partners?, 

Businessweek, February 7, 2005. 9Luft, Gal, ‘‘In Search of Crude: China Goes to the Americas,’’ Institute for the Analysis of 

Global Security, http://www.iags.org/n0118041.htm) 10 Romero, Simon, ‘‘China Emerging as U.S. Rival for Canada’s Oil,’’ New York Times, December 21, 2004. 11 Bradsher, Keith, ‘‘China Sets its First Fuel Economy Rules,’’ New York Times, September 

29, 2004. 

per barrel in today’s dollars, as the U.S. experienced at the height of the second oil 

crisis. Today, oil price spikes easily send jitters through the U.S. market, while our 

military expenditures in oil supplying regions continue to grow and our dependence 

is quickly becoming a key target for those who wish us harm. 

That is why Congress must act immediately by making a national commitment to 

save at least 2.5 million barrels per day by 2015—an achievable and important first 

step toward a more secure energy future. There is burgeoning, bi-partisan support 

for taking such a step. For example, the National Commission on Energy Policy 

(NCEP)—composed of industry, government, conservation and academic officials—

just completed an important report which identifies some opportunities for possible 

consensus on challenging energy policy questions.6 And NRDC recently joined an 

energy freedom initiative with security hawk groups, including the Institute for the 

Analysis of Global Security (TAGS), the Center for Security Policy and the National 

Defense Council Foundation (NDCF), focused on relieving the United States of our 

intense dependence on oil. 

CURRENT DEMAND TRENDS

Here at home, while domestic production peaked in the 1970s, our consumption 

continues to grow at break-neck speed. According to last year’s Annual Energy Outlook (AEO 2004), in 2025 the United States is projected to consume 44 percent more 

oil than we do today or 28.3 million barrels of oil per day; domestic production will 

meet a mere 30 percent of the total need (see graph below).* 

Other growing nations will increasingly compete with the U.S. for the oil on the 

global market. Oil consumption by industrializing nations is expected to double over 

the next 25 years, from 15 to 32 million barrels a day. To meet projected world demand of 118 million barrels a day in 2025, global oil output would have to expand 

by 40 million barrels per day or 51% between 2002 and 2025. 

Oil demand in China is especially likely to heat up. While per capita petroleum 

consumption is just six percent of the U.S. figure, rapid industrialization and a 

growing consumer culture mean China’s demand for imported oil is projected to 

grow from less than 2 million barrels per day in 2004 to nearly 8 million barrels 

per day by 2020 (see graph below).7 While U.S. import dependence will rise to nearly 70 percent by 2025, India already imports 70 percent of its oil and the import 

share in China is expected to grow from 40 to 75 percent over the same time period.8 Business as usual keeps the United States on a path fraught with increasingly tight competition with other oil-needy nations. 

This challenge is not lost on the Chinese government. In recent years China has 

been scouring the globe for oil supplies, including the Western Hemisphere (most 

notably in Canada and Venezuela).9 With its oil demand growing 18 percent in 

2004, China is moving quickly to secure exclusive access to future oil supplies by 

financing strategically located pipelines, expanding its oil companies, and contracting with the key oil producing regions across the globe.10 Fortunately, China 

recognizes that its energy needs must also be met through efficiency, and in 2004 

it took an important step towards reducing booming demand by setting vehicle fuel 

economy standards that are more stringent than those in the United States.11

So business as usual means rapidly growing global consumption and intensifying 

competition for oil that will boost prices and increase the potential for conflict between nations addicted to this resource. 

THE GRIM SUPPLY PICTURE

Even in the context of higher prices, it is clear that drilling for oil in the United 

States will not address the challenges of petroleum dependence, as the graph below 

shows. For example, while some argue that there are 16 billion barrels of ‘‘technically recoverable’’ oil under the Arctic National Wildlife Refuge’s coastal plain, the 

90

12PFC Energy, Global Crude Oil and Natural Gas Liquids Supply Forecast, September 2004. 13 Id. 2 14Mouawad, Jad, ‘‘Irrelevant? OPEC Is Sitting Pretty’’, New York Times, October 3, 2004. 15 Energy Information Administration, Annual Energy Outlook 2004. 16 Energy Information Administration, Annual Energy Outlook 2004, p.2-3. 17 International Energy Agency, World Energy Investment Outlook 2003, Paris: IEA, 2003, Executive Summary, p. 29. 18Federal Reserve. 19 British Petroleum, Statistical Review of World Energy 2004, http://www.bp.com/

genericarticle.do?categoryId=111&contentId=2004175. 20Klare, Michael T., Blood and Oil: The Dangers and Consequences of America’s Growing Dependence on Imported Petroleum, Metropolitan Books, New York, New York, 2004. 

U.S. Geological Survey’s estimate of the amount that could be recovered economically—that is, the amount likely to be profitably extracted and sold—is much smaller and represents less than a year’s oil supply. Moreover, it would take 10 years 

for any Arctic Refuge oil to reach the market, and even when production peaks—

in the distant year of 2027—the refuge would produce less than 3 percent of Americans’ daily oil demand. Whatever oil the refuge might produce is simply irrelevant 

to the larger issue of meeting America’s future energy needs. 

Furthermore, today’s global oil use outpaces new oil discoveries, with the world 

using about 12 billion more barrels per year than it finds.12 OPEC is quickly exhausting excess production capacity, allowing for little relief of demand, and despite 

Saudi Arabia’s efforts to cushion the market, global capacity utilization remains at 

99 percent in 2005.13

Given booming demand projections and high prices that already pinch the economy, what are the prospects for increasing oil supply? The reality is that the United 

States is inexorably headed towards greater dependence on hostile regions of the 

world to slake our thirst for oil. The Middle East has two-thirds of the world’s proven oil reserves.14 Persian Gulf OPEC states already supply the United States with 

2.5 million barrels per day—25 percent of our daily imports. 

The future looks to bring more of the same: Last year’s AEO projects that the 

Middle East will produce 36 percent of the world’s oil in 2025 and together with 

other OPEC nations would control 46 percent of the global oil market.15 To meet 

demand, OPEC production is expected to grow by 80 percent to 54 million barrels 

per day in 2025, while non-OPEC production must rise 43 percent to 63.9 million 

barrels per day in 2025.16 However, this is easier said than done—the International 

Energy Agency estimates the expected expansion of production will require enormous investments in global oil infrastructure of $3 trillion.17

UNREALISTIC, RISKY ALTERNATIVES TO THE MIDDLE EAST

Looking beyond OPEC to fill our needs offers no comfort—investment in new production wells continues to lag in non-OPEC countries, limiting any near-term 

growth in production.18 In short, the system has reached its limit. In May 2001 the 

Administration recognized the need for a new direction when it released its National 

Energy Policy but proposed a strategy that would only exacerbate the existing 

threats of petroleum dependence. The Administration proposes to avoid the Scylla 

of Middle East dependence by targeting the Charybdis of alternative oil-supplying 

nations for government investment and closer alliances, including Angola, Azerbaijan, Colombia, Kazakhstan, Mexico, Nigeria, Russia and Venezuela (see graph 

below). Yet the total proven reserves of these alternative oil suppliers, 198 billion 

barrels, is 70 percent lower than Persian Gulf reserves, and at current production 

levels offer only 30 more years of capacity.19 In comparison, the Persian Gulf has 

almost 100 years of proven reserves at 2003 production levels. Furthermore, all of 

the nations on the Administration’s list face significant political and social instability and remain porous to global terrorism, making it difficult to attract the foreign investments necessary to finance future production.20 Most importantly, increasing U.S. reliance on these states—many of which are unstable and undemocratic—would do little to address the security and economic threats of petroleum dependence. 

While global market trends necessitate a new a direction for U.S. energy choices, 

shifting our imports to non-OPEC states is a risky, short-term solution at best. The 

Middle East holds most of the supply cards and looking elsewhere may well intensify the threats of dependence by continuing to expose the U.S. to the unpredictable 

political future and domestic tensions of oil supplying states. 

91

21Stone, Amey, ‘‘$50 Oil: A Spreading Slick of Pain,’’ Business Week 9/29/04. 22Odessey, Bruce. ‘‘U.S. Trade Deficit Surges as Exports Fall, Oil Imports Rise’’, January 12, 

2005. U.S. Consulate trade statistics, http://www.hongkong.usconsulate.gov/usinfo/statis/ft/

2004/11.htm. Estimate calculated based on 2004 trade deficit data and EIA petroleum spending 

data in Id. 4. 23 As quoted in Roberts, Paul, The End of Oil: On the Edge of a Perilous New World, Houghton 

Mifflin, New York, NY, 2004. 24 National Defense Council Foundation. ‘‘The Hidden Cost of Imported Oil’’, September 2003, 

as cited by the Institute for the Analysis of Global Security, Energy Security Bi-Weekly, October 

30, 2003. 25 Jaffe, Amy Myers. United States and the Middle East: Policies and Dilemmas. Analysis 

commissioned by the National Commission on Energy Policy, www.energycommission.org. 26 International Energy Agency. World Energy Outlook 2004, (119-121). Organization for Economic Cooperation and Development, 2004. 27 Ibid (29) 28 Ibid (32) 

DEPENDENCE ON OIL UNDERMINES U.S. ECONOMIC AND NATIONAL SECURITY

The high costs of oil have already been passed on to consumers through higher 

prices at the pump, more expensive goods and services, and a weaker job market 

and lower stock prices.21 In 2004 alone Americans spent roughly $270 billion to feed 

our oil appetite, nearly half of last year’s trade deficit.22 Sadly, this is just the latest 

chapter in the saga of oil dependence sapping our economy. Economist Philip 

Verleger finds that oil price spikes have cumulatively sapped 15 percent of our 

economy’s growth, resulting in $1.2 trillion in direct losses.23 The total economic 

penalty of our oil dependence, including loss of jobs, output, and tax revenue is estimated to be $297 to $305 billion annually.24 The most recent estimates suggest that 

during peacetime the U.S. spends an additional $20 to $40 billion per year in military costs to secure access to Middle East oil supplies (estimates predate current 

military operations in Iraq). At $20 billion a year the American taxpayer is paying 

an additional $4 to $5 a barrel for crude oil beyond its market price.25 And despite 

the already elevated oil prices, over the next 25 years the U.S. will also have to 

shoulder a substantial portion of the $105 billion a year global investment necessary 

to finance additional oil production capacity.26

Looking into the next few decades, the security costs and the risks of petroleum 

dependence will only increase as the global oil market tightens and geopolitical tensions play out in the arena of international trade. The International Energy Agency 

recently emphasized in its annual World Energy Outlook that current market 

trends suggest serious concerns for energy security and that the short-term risks 

to energy security will continue to grow as the flexibility of oil supply and demand 

diminishes, oil use becomes concentrated in the transportation sector in the absence 

of petroleum alternatives, and the growing oil demand is met by a small group of 

countries.27 For example, today 26 million barrels of oil flow every day through just 

two critical choke points, the Straits of Hormuz in the Persian Gulf and the Straits 

of Malacca in Asia. By 2030 net inter-regional oil trade is expected to grow to 65 

million barrels per day—over half of total oil production.28 Traffic through these 

channels is expected to more than double over the next few decades—one of the 

many trends that will increase the vulnerability and security costs to oil-dependent 

nations. 

In short, petroleum dependence imposes an incalculable price tag on American 

consumers and the U.S. economy, and is quickly becoming the Achilles heel of our 

national security. 

TRUMPING INSECURITY WITH AMERICA’S STRONG SUIT: EFFICIENCY, INNOVATION

The real solution that Americans can count on for a healthy economy and greater 

national security is a lifeline of technology and efficient energy choices supplied by 

industries and workers here at home, not a lifeline of oil. The U.S. must begin immediately to ease our intense oil addiction, first by making a national commitment 

to save 2.5 million barrels of oil per day by 2015.

A key component of such a plan would increase the efficiency of cars and trucks, 

since the transportation sector will be responsible for 80% of the growth in oil demand through 2020. We did it before: Passenger car and light truck fuel efficiency 

increased 70 percent between 1975, when the fuel economy law was originally enacted, and its peak in 1987. Since then we’ve been moving backward. Overall mileage of our new cars and trucks has steadily dropped. Today it’s at its lowest level 

in 20 years. 

The reason is simple: While automotive engineering has advanced over the last 

decade to offer a wide variety of fuel-saving innovations, stagnant policies have fosVerDate 0ct 09 2002 11:48 Apr 04, 2005 Jkt 000000 PO 00000 Frm 00095 Fmt 6601 Sfmt 6621 P:\DOCS\20004.TXT SENE3 PsN: SCAN
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tered sluggish fuel economy and failed to harness technological potential to curb our 

massive oil demand. To re-energize policies, Congress must:

• provide automakers and their suppliers with incentives to retool factories to 

produce more efficient vehicles and create new jobs; • raise fuel efficiency standards; • expand the market for gasoline-electric hybrid vehicles through tax incentives; • invest in alternative fuels, such as biofuels or hydrogen; • encourage the adoption of fuel-efficient tires and motor oil in passenger vehicles; • increase the efficiency of heavy-duty trucks and reduce idling; and • provide transportation choices, such as public transit, that use significantly less 

oil per passenger.

However, this important national commitment requires contributions from sectors 

besides transportation. Specifically, the measures above can and should be complemented by:

• industrial efficiency techniques; • fuel-savings steps in aviation management; • reduced heating oil use in homes across America (for example, through weatherization).

NRDC believes that a healthy environment goes hand in hand with a healthy 

economy. We believe this country can continue to have strong economic growth and 

a high standard of living, while reducing our oil dependence and cutting global 

warming pollution. This can be achieved by investing in America, as called for by 

the bipartisan NCEP. Some of their recommendations mirror ours: $3 billion in tax 

credits to manufacturers that build and to consumers who buy efficient vehicles, an 

increase in fuel-efficiency standards, and a national oil savings of at least 3 to 5 

million barrels per day by 2025. 

As a nation we must blaze a new path, one that will set the United States apart 

as an innovator and leader in efficiency, rather than a weak competitor and needy 

consumer of the world’s energy. But steps won’t be taken without leadership from 

Congress, and NRDC looks forward to working with Senators and staff to reduce 

dependence on oil and make our nation more secure through efficiency and innovation. 

ROCKY MOUNTAIN INSTITUTE, 

Snowmass, CO, February 2, 2005. 

Hon. PETER DOMENICI, 

Chairman, Committee on Energy and Natural Resources, U.S. Senate, Washington, 

DC.

Hon. JEFF BINGAMAN, 

Ranking Member, Committee on Energy and Natural Resources, U.S. Senate, Washington, DC. 

DEAR SENATORS DOMENICI AND BINGAMAN: As testimony to the record of the 10:00 

a.m., 3 February 2005 Hearing on ‘‘Global energy trends and their potential impact 

on U.S. energy needs, security and policy,’’ Rocky Mountain Institute hereby submits for the consideration of the U.S. Senate Committee on Energy and Natural Resources the Executive Summary and the Forewords (by George P. Shultz and Sir 

Mark Moody-Stuart) of our independent, peer-reviewed, Pentagon-cosponsored analysis entitled Winning the Oil Endgame, published 20 September 2004. Our study 

details how to eliminate U.S. oil dependence over the next few decades, and revitalize the economy, led by business, for profit. Please permit us to highlight four 

key implications:

• The most important energy choices before the U.S. are not about which energy

forecast or policy to adopt, but rather about industrial and technological strategy. Will America import efficient cars to displace foreign oil, or make efficient 

cars to displace both foreign oil and foreign cars? China’s energy policy focuses 

on major efficiency improvements and leapfrog technologies, linked with her industrial policy to become a major exporter of [efficient] cars, so America’s lack 

of such strategies puts the Big Three at risk. In contrast, we believe Boeing’s 

bet on efficiency with the 787 Dreamliner will prove a winning strategy in its 

rivalry with Airbus. 

• EIA’s 2004 forecast implies that the U.S. will use approximately 100% more oil 

in the long run than we found is cost-effective for providing the assumed services. That is, compared with EIA’s January 2004 Reference Case, our analysis 

93

showed how to save half of the United States’ forecast 2025 oil use at an average cost of $12 per barrel of crude oil (2000 $), and how to displace the other 

half with robustly competitive supply-side substitutions, while delivering the 

same services that underlie the EIA forecast. This would save the U.S. $70 billion per year net from avoided fuel costs (at EIA’s 2025 forecast price of $26/

bbl in 2000 $). Biofuels production in the Midwest would boost rural incomes 

by $40 billion per year. A million net new jobs would be created and a million 

more retained. • Why can’t EIA’s forecasting methodology—conventional, capably applied, and 

useful for reference—reveal such fundamental opportunities? Why can’t EIA’s 

forecast come close to defining the limits of profitable choice? EIA’s slate of 

technologies for both end-use efficiency and supply-side substitutions doesn’t reflect the current state of the shelf in cost or performance. EIA forecasts only 

5% of new light vehicles are hybrids by 2025, and they’re far less efficient than 

today’s market offerings. Yet we found that under a slightly different policy scenario, 77% could be far more efficient than today’s hybrids, and cost no more. 

This matters a lot. If, for illustration, all new light vehicles in 2025 were only 

as efficient as today’s best-on-the-market hybrids, total U.S. oil consumption 

would be one-sixth lower than in EIA’s 2004 Reference Case—equivalent to saving twice today’s net oil imports from the Persian Gulf. • EIA’s Annual Energy Outlook models business-as-usual with minor variations. 

It only shows what might happen if policies and business strategies didn’t 

change. Thus AEO is not fate; it is not a mandate that one must fulfill; and 

it absolutely does not illuminate the true range of national choice. Rather than 

striving to meet current EIA forecasts, policymakers need to choose national 

goals and ask EIA to model the full range of ways to achieve them. This requires a different modeling methodology. Changes in EIA’s current model are 

driven only by shifts in relative prices or in enacted public-policy mandates. Yet, 

as our study showed, the biggest shifts in energy patterns can come from private-sector innovation driven by competitive strategy—by the kinds of business 

models we analyzed for the car, truck, plane, and oil industries. EIA should be 

permitted and encouraged to model these business drivers to develop meaningful policy paths and outcomes. Policymakers should appreciate that those drivers may be more important than prices or public policies, so lighthanded policies 

tailored to support these business drivers may be more attractive and effective 

than fuel taxes, subsidies, and mandates. Our study proposed just such an innovative approach, and EIA’s modeling mandate should be extended to illuminate 

those kinds of drivers and outcomes.

Our full analysis and its technical backup, including all models, spreadsheets, documentation, reviews, and commentaries, are posted for free download at 

www.oilendgame.com. We hope they will inform the Committee’s deliberations.

Sincerely, 

AMORY B. LOVINS, 

CEO. 

[Enclosures.] 

WINNING THE OIL ENDGAME

INNOVATION FOR PROFITS, JOBS, AND SECURITY

EXECUTIVE SUMMARY

Winning the Oil Endgame offers a coherent strategy for ending oil dependence, 

starting with the United States but applicable worldwide. There are many analyses 

of the oil problem. This synthesis is the first roadmap of the oil solution—one led 

by business for profit, not dictated by government for reasons of ideology. This roadmap is independent, peer-reviewed, written for business and military leaders, and 

co-funded by the Pentagon. It combines innovative technologies and new business 

models with uncommon public policies: market-oriented without taxes, innovationdriven without mandates, not dependent on major (if any) national legislation, and 

designed to support, not distort, business logic. 

Two centuries ago, the first industrial revolution made people a hundred times 

more productive, harnessed fossil energy for transport and production, and nurtured 

the young U.S. economy. Then, over the past 145 years, the Age of Oil brought unprecedented mobility, globe-spanning military power, and amazing synthetic products. 

But at what cost? Oil, which created the sinews of our strength, is now becoming 

an even greater source of weakness: its volatile price erodes prosperity; its 

vulnerabilities undermine security; its emissions destabilize climate. Moreover the 

94

quest to attain oil creates dangerous new rivalries and tarnishes America’s moral 

standing. All these costs are rising. And their root causes—most of all, inefficient 

light trucks and cars—also threaten the competitiveness of U.S. automaking and 

other key industrial sectors. 

The cornerstone of the next industrial revolution is therefore winning the Oil 

Endgame. And surprisingly, it will cost less to displace all of the oil that the United 

States now uses than it will cost to buy that oil. Oil’s current market price leaves 

out its true costs to the economy, national security, and the environment. But even 

without including these now ‘‘externalized’’ costs, it would still be profitable to displace oil completely over the next few decades. In fact, by 2025, the annual economic 

benefit of that displacement would be $130 billion gross (or $70 billion net of the 

displacement’s costs). To achieve this does not require a revolution, but merely consolidating and accelerating trends already in place: the amount of oil the economy 

uses for each dollar of GDP produced, and the fuel efficiency of light vehicles, would 

need only to improve about three-fifths as quickly as they did in response to previous oil shocks. 

Saving half the oil America uses, and substituting cheaper alternatives for the 

other half, requires four integrated steps:

• Double the efficiency of using oil. The U.S. today wrings twice as much work 

from each barrel of oil as it did in 1975; with the latest proven efficiency technologies, it can double oil efficiency all over again. The investments needed to 

save each barrel of oil will cost only $12 (in 2000 $), less than half the officially 

forecast $26 price of that barrel in the world oil market. The most important 

enabling technology is ultralight vehicle design. Advanced composite or lightweight-steel materials can nearly double the efficiency of today’s popular hybrid-electric cars and light trucks while improving safety and performance. The 

vehicle’s total extra cost is repaid from fuel savings in about three years; the 

ultralighting is approximately free. Through emerging manufacturing techniques, such vehicles are becoming practical and profitable; the factories to 

produce them will also be cheaper and smaller. 

• Apply creative business models and public policies to speed the profitable adoption of superefficient light vehicles, heavy trucks, and airplanes. Combined with 

more efficient buildings and factories, these efficient vehicles can cut the official 

forecast of oil use by 29% in 2025 and another 23% soon thereafter—52% in all. 

Enabled by a new industrial cluster focusing on lightweight materials, such as 

carbon-fiber composites, such advanced-technology vehicles can revitalize these 

three strategic sectors and create important new industries. 

• Provide another one-fourth of U.S. oil needs by a major domestic biofuels industry. Recent advances in biotechnology and cellulose-to-ethanol conversion can 

double previous techniques’ yield, yet cost less in both capital and energy. Replacing fossil-fuel hydrocarbons with plant-derived carbohydrates will strengthen rural America, boost net farm income by tens of billions of dollars a year, 

and create more than 750,000 new jobs. Convergence between the energy, chemical, and agricultural value chains will also let versatile new classes of biomaterials replace petrochemicals. 

• Use well established, highly profitable efficiency techniques to save half the projected 2025 use of natural gas, making it again abundant and affordable, then 

substitute part of the saved gas for oil. If desired, the leftover saved natural 

gas could be used even more profitably and effectively by converting it to hydrogen, displacing most of the remaining oil use—and all of the oil use if modestly 

augmented by competitive renewable energy.

These four shifts are fundamentally disruptive to current business models. They 

are what economist Joseph Schumpeter called ‘‘creative destruction,’’ where innovations destroy obsolete technologies, only to be overthrown in turn by ever newer, 

more efficient rivals. In The Innovator’s Dilemma, Harvard Business School professor Clayton Christensen explained why industry leaders often get blindsided by 

disruptive innovations—technological gamechangers—because they focus too much 

on today’s most profitable customers and businesses, ignoring the needs of the future. Firms that are quick to adopt innovative technologies and business models will 

be the winners of the 21st century; those that deny and resist change will join the 

dead from the last millennium. In the 108-year history of the Dow Jones Industrial 

Average, only one of 12 original companies remains a corporate entity today—General Electric. The others perished or became fodder for their competitors. 

What policies are needed? American companies can be among the quick leaders 

in the 21st century, but it will take a cohesive strategy-based transformation, bold 

business and military leadership, and supportive government policies at a federal 

95

or at least a state level. Winning the Oil Endgame charts these practical steppingstones to an oil-free America:

• Most importantly, revenue-and size-neutral ‘‘feebates’’ can shift customer choice 

by combining fees on inefficient vehicles with rebates to efficient vehicles. The 

feebates apply separately within each vehicle-size class, so freedom of choice is 

unaffected. Indeed, choice is enhanced as customers start to count fuel savings 

over the vehicle’s life, not just the first few years, and this new pattern of demand pulls superefficient but uncompromised vehicles from the drawing-board 

into the showroom. • A scrap-and-replace program can lease or sell super-efficient cars to low-income 

Americans—on terms and with fuel bills they can afford—while scrapping 

clunkers. This makes personal mobility affordable to all, creates a new millioncar-a-year market for the new efficiency technologies, and helps clean our cities’ 

air. • Military needs for agility, rapid deployment, and streamlined logistics can drive 

Pentagon leadership in developing key technologies. • Implementing smart government procurement and targeted technology acquisition (the ‘‘Golden Carrot’’) for aggregated buyers will accelerate manufacturers’ 

conversion, while a government-sponsored $1-billion prize for success in the 

marketplace, the ‘‘Platinum Carrot,’’ will speed development of even more advanced vehicles. 

• To support U.S. automakers’ and suppliers’ need to invest about $70 billion to 

make advanced technology vehicles, federal loan guarantees can help finance 

initial retooling where needed; the investments should earn a handsome return, 

with big spin-off benefits. 

• Similar but simpler policies—loan guarantees for buying efficient new airplanes 

(while scrapping inefficient parked ones), and better information for heavy truck 

buyers to spur market demand for doubled-efficiency trucks—can speed these 

oil-saving innovations from concept to market. 

• Other policies can hasten competitive evolution of next-generation biofuels and 

biomaterials industries, substituting durable revenues for dwindling agricultural subsidies, and encouraging practices that protect both topsoil and climate.

What happens to the oil industry? The transition beyond oil is already starting to 

transform oil companies like Shell and BP into energy companies. Done right, this 

shift can profitably redeploy their skills and assets rather than lose market share. 

Biofuels are already becoming a new product line that leverages existing retail and 

distribution infrastructure and can attract another $90 billion in biofuels and biorefining investments. By following this roadmap, the U.S. would set the stage by 

2025 for the checkmate move in the Oil Endgame—the optional but advantageous 

transition to a hydrogen economy and the complete and permanent displacement of 

oil as a direct fuel. Oil may, however, retain or even gain value as one of the competing sources of hydrogen. 

How big is the prize? Investing $180 billion over the next decade to eliminate oil 

dependence and revitalize strategic industries can save $130 billion gross, or $70 

billion net, every year by 2025. This saving, equivalent to a large tax cut, can replace 

today’s $10-billion-a-month oil imports with reinvestments in ourselves: $40 billion 

would pay farmers for biofuels, while the rest could return to our communities, businesses, and children. Several million automotive and other transportation-equipment jobs now at risk can be saved, and one million net new jobs can be added 

across all sectors. U.S. automotive, trucking, and aircraft production can again lead 

the world, underpinned by 21st century advanced-materials and fuel-cell industries. 

A more efficient and deployable military could refocus on its core mission—protecting American citizens rather than foreign supply lines—while supporting and 

deploying the innovations that eliminate oil as a cause of conflict. Carbon dioxide 

emissions will shrink by one-fourth with no additional cost or effort. The rich-poor 

divide can be drastically narrowed at home by increased access to affordable personal mobility, shrinking the welfare rolls, and abroad by leapfrogging over oil-dependent development patterns. The U.S. could treat oil-rich countries the same as 

countries with no oil. Being no longer suspected of seeking oil in all that it does 

in the world would help to restore U.S. moral leadership and clarity of purpose. 

While the $180-billion investment needed is significant, the United States’ economy already pays that much, with zero return, every time the oil price spikes up 

as it has done in 2004. (And that money goes into OPEC’s coffers instead of building 

infrastructure at home.) Just by 2015, the early steps in this proposed transition 

will have saved as much oil as the U.S. gets from the Persian Gulf. By 2040, oil 

imports could be gone. By 2050, the U.S. economy should be flourishing with no oil 

at all. 

96

How do we get started? Every sector of society can contribute to this national 

project. Astute business leaders will align their corporate strategies and reorganize 

their firms and processes to turn innovation from a threat to a friend. Military leaders will speed military transformation by promptly laying its foundation in superefficient platforms and lean logistics. Political leaders will craft policies that stimulate demand for efficient vehicles, reduce R&D and manufacturing investment risks, 

support the creation of secure domestic fuel supplies, and eliminate perverse subsidies and regulatory obstacles. Lastly, we, the people, must play a role—a big 

role—because our individual choices guide the markets, enforce accountability, and 

create social innovation. 

Our energy future is choice, not fate. Oil dependence is a problem we need no 

longer have—and it’s cheaper not to. U.S. oil dependence can be eliminated by proven and attractive technologies that create wealth, enhance choice, and strengthen 

common security. This could be achieved only about as far in the future as the 1973 

Arab oil embargo is in the past. When the U.S. last paid attention to oil, in 1977-

85, it cut its oil use 17% while GDP grew 27%. Oil imports fell 50%, and imports 

from the Persian Gulf by 87%, in just eight years. That exercise of dominant market 

power—from the demand side—broke OPEC’s ability to set world oil prices for a 

decade. Today we can rerun that play, only better. The obstacles are less important 

than the opportunities if we replace ignorance with insight, inattention with foresight, and inaction with mobilization. American business can lead the nation and 

the world into the post-petroleum era, a vibrant economy, and lasting security—if 

we just realize that we are the people we have been waiting for. 

Together we can end oil dependence forever. 

QUOTATIONS ABOUT WINNING THE OIL ENDGAME

‘‘This exciting synthesis of how to eliminate America’s oil dependence could be the 

most important step in many years toward secure and affordable energy. Its novel 

but persuasive ideas, which hold promise of revitalizing American industry and agriculture, should appeal to conservatives and liberals alike.’’

President Jimmy Carter

‘‘We can, as Amory Lovins and his colleagues show vividly, win the oil 

endgame.... [A]n intriguing case that is important enough to merit careful attention by all of us, private citizens and business and political leaders alike.’’

George P. Shultz, Distinguished Fellow at the Hoover Institution, Stanford 

University; former Secretary of State, the Treasury, and Labor

‘‘[T]his compelling synthesis... demonstrates that innovative technologies can 

achieve spectacular [oil] savings... with no loss of utility, convenience and function. It makes the business case for how a profitable transition for the automotive, 

truck, aviation, and oil sectors can be achieved.... The refreshingly creative government policies suggested... merit serious attention,... and I suspect they 

could win support across the political spectrum.... This report will help to 

launch, inspire, and inform a new and necessary conversation about energy and security, economy and environment. Its outcome is vital for us all.’’

Sir Mark Moody-Stuart, Chairman, Anglo American plc;

former Chairman, Royal Dutch/Shell Group

‘‘Amory Lovins has had more impact on our energy use than any single person 

in the world. Now his team has produced one of the most important energy studies 

in decades. It merits careful examination as a profitable strategy for achieving energy security, economic prosperity, and environmental quality through smart business strategies accelerated by efficient government policy.’’

William Martin, Chairman, Council on Foreign Relations,

Energy Security Group

‘‘One of the best analyses of energy policy yet produced.’’

Time magazine

For the full report and more information, please visit www.oilendgame.com. 

FOREWORD TO WINNING THE OIL ENDGAME BY GEORGE P. SCHULTZ

Crude prices are rising, uncertainty about developments in the Middle East roils 

markets and, well, as Ronald Reagan might say, ‘‘Here we go again.’’ Once more we 

face the vulnerability of our oil supply to political disturbances. Three times in the 

past thirty years (1973, 1978, and 1990) oil price spikes caused by Middle East crises helped throw the U.S. economy into recession. Coincident disruption in Venezuela and Russia adds to unease, let alone prices, in 2004. And the surging economies of China and India are contributing significantly to demand. But the problem 

97

far transcends economics and involves our national security. How many more times 

must we be hit on the head by a two-by-four before we do something decisive about 

this acute problem? 

In 1969, when I was Secretary of Labor, President Nixon made me the chairman 

of a cabinet task force to examine the oil import quota system, in place since 1954. 

Back then, President Eisenhower considered too much dependence on imported oil 

to be a threat to national security. He thought anything over 20 percent was a real 

problem. No doubt he was nudged by his friends in the Texas and Louisiana oil 

patches, but Ike was no stranger to issues of national security and foreign policy. 

The task force was not prescient or unanimous but, smelling trouble, the majority 

could see that imports would rise and they recommended a new monitoring system 

to keep track of the many uncertainties we could see ahead, and a new system for 

regulating imports. Advocates for even greater restrictions on imports argued that 

low-cost oil from the Middle East would flood our market if not restricted. 

By now, the quota argument has been stood on its head as imports make up an 

increasing majority, now almost 60 percent and heading higher, of the oil we consume. And we worry not about issues of letting imports in but that they might be 

cut off. Nevertheless, the point about the importance of relative cost is as pertinent 

today as back then and applies to the competitive pressures on any alternative to 

oil. And the low-cost producers of oil are almost all in the Middle East. 

That is an area where the population is exploding out of control, where youth is 

by far the largest group, and where these young people have little or nothing to do. 

The reason is that governance in these areas has failed them. In many countries, 

oil has produced wealth without the effort that connects people to reality, a problem 

reinforced in some of them by the fact that the hard physical work is often done 

by imported labor. The submissive role forced on women has led to this population 

explosion. A disproportionate share of the world’s many violent conflicts is in this 

area. So the Middle East remains one of the most unstable parts of the world. Only 

a dedicated optimist could believe that this assessment will change sharply in the 

near future. What would be the impact on the world economy of terrorist sabotage 

of key elements of the Saudi pipeline infrastructure? 

I believe that, three decades after the Nixon task force effort, it is long past time 

to take serious steps to alter this picture dramatically. Yes, important progress has 

been made, with each administration announcing initiatives to move us away from 

oil. Advances in technology and switches from oil to natural gas and coal have 

caused our oil use per dollar of GDP to fall in half since 1973. That helps reduce 

the potential damage from supply problems. But potential damage is increased by 

the rise of imports from 28 percent to almost 60 percent of all the oil we use. The 

big growth sector is transportation, up by 50 percent. Present trends are unfavorable; if continued, they mean that we are likely to consume—and import—several 

million barrels a day more by 2010. 

Beyond U.S. consumption, supply and demand in the world’s oil market has become tight again, leading to many new possibilities of soaring oil prices and massive 

macroeconomic losses from oil disruptions. We also have environmental problems to 

concern us. And, most significantly, our national security and its supporting diplomacy are left vulnerable to fears of major disruptions in the market for oil, let alone 

the reality of sharp price spikes. These costs are not reflected in the market price 

of oil, but they are substantial. 

What more can we do? Lots, if we are ready for a real effort. I remember when, 

as Secretary of the Treasury, I reviewed proposals for alternatives to oil from the 

time of the first big oil crisis in 1973. Pie in the sky, I thought. But now the situation is different. We can, as Amory Lovins and his colleagues show vividly, win the 

oil endgame. How do we go about this? 

A baseball analogy may be applicable. Fans often have the image in their minds 

of a big hitter coming up with the bases loaded, two outs, and the home team three 

runs behind. The big hitter wins the game with a home run. We are addicted to 

home runs, but the outcome of a baseball game is usually determined by a combination of walks, stolen bases, errors, hit batsmen, and, yes, some doubles, triples, and 

home runs. There’s also good pitching and solid fielding, so ball games are won by 

a wide array of events, each contributing to the result. Lovins and his coauthors 

show us that the same approach can work in winning the oil endgame. There are 

some potential big hits here, but the big point is that there are a great variety of 

measures that can be taken that each will contribute to the end result. The point 

is to muster the will power and drive to pursue these possibilities. 

How do we bring that about? Let’s not wait for a catastrophe to do the job. Competitive information is key. Our marketplace is finely tuned to the desire of the consumer to have real choices. We live in a real information age, so producers have 

to be ready for the competition that can come out of nowhere. Lovins and his colVerDate 0ct 09 2002 11:48 Apr 04, 2005 Jkt 000000 PO 00000 Frm 00101 Fmt 6601 Sfmt 6621 P:\DOCS\20004.TXT SENE3 PsN: SCAN
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leagues provide a huge amount of information about potential competitive approaches. There are home run balls here, the ultimate one being the hydrogen economy. But we don’t have to wait for the arrival of that day. There are many things 

that can be done now, and this book is full of them. Hybrid technology is on the 

road and currently increases gas mileage by 50 percent or more. The technology is 

scaleable. This report suggests many ways to reduce weight and drag, thereby improving performance. A big point in this report is evidence that new, ultralight-butsafe materials can nearly redouble fuel economy at little or no extra cost. 

Sequestration of effluent from use of coal may be possible on an economic and 

comfortable basis, making coal a potentially benign source of hydrogen. Maybe hydrogen could be economically split out of water by electrolysis, perhaps using renewables such as windpower; or it could certainly be made, as nearly all of it is now, 

by natural gas saved from currently wasteful practices, an intriguingly lucrative option often overlooked in discussions of today’s gas shortages. An economy with a 

major hydrogen component would do wonders for both our security and our environment. With evident improvements in fuel cells, that combination could amount to 

a very big deal. Applications include stationary as well as mobile possibilities, and 

other ideas are in the air. Real progress has been made in the use of solar systems 

for heat and electricity. Scientists, technologists, and commercial organizations in 

many countries are hard at work on these issues. 

Sometimes the best way to get points across is to be provocative, to be a bull in 

a china closet. Amory Lovins loves to be a bull in a china closet—anybody’s china 

closet. With this book, the china closet he’s bursting into is ours and we should welcome him because he is showing us how to put the closet back together again in 

far more satisfactory form. In fact, Lovins and his team make an intriguing case 

that is important enough to merit careful attention by all of us, private citizens and 

business and political leaders alike. 

FOREWORD TO WINNING THE OIL ENDGAME BY SIR MARK MOODY-STUART

In this compelling synthesis, Amory Lovins and his colleagues at Rocky Mountain 

Institute provide a clear and penetrating view of one of the critical challenges facing 

the world today: the use of energy, especially oil, in transportation, industry, buildings, and the military. This report demonstrates that innovative technologies can 

achieve spectacular savings in all of these areas with no loss of utility, convenience 

and function. It makes the business case for how a profitable transition for the automotive, truck, aviation, and oil sectors can be achieved, and why they should embrace technological innovation rather than be destroyed by it. We are not short of 

energy in this world of ours; we have large resources of the convenient hydrocarbons 

on which our economies are based, and even greater resources of the coal on which 

our economies were originally built. But there are two serious issues relating to its 

supply and use. 

First, some three fourths of the reserves sit in a few countries of the Middle East, 

subject to actual and potential political turmoil. Second, there are the long-term climatic effects of the burning of increasing amounts of fossil fuels. While the normal 

rate of change of technology is likely to mean that we will be on one of the lower 

impact scenarios of climate change and not at the apocalyptic end favoured by doom 

mongers, it is reasonably certain that our world will have to adapt to significant 

climate change over the next century. These two factors mean that, unless there is 

a change of approach, the United States will inexorably become increasingly dependent on imported energy—be it oil or natural gas. At the same time, on the international scene, the United States will be criticised by the rest of the world for profligate use of energy, albeit to fuel an economy on whose dynamism and success the 

rest of the world is also manifestly dependent. Furthermore, thoughtful people wonder what we will do if the booming economies and creative people of China and 

India have energy demands which are on the same development curve as the United 

States. 

The RMI team has approached this economic and strategic dilemma with technical rigour, good humour, and common sense, while addressing two key requirements often overlooked by energy policy advocates. 

First, we have to deliver the utility, reliability and convenience that the consumer 

has come to expect. As business people we recognise this. It is no good expecting 

people in the United States to suddenly drive smaller, less convenient or less safe 

vehicles. We have to supply the same comfort and utility at radically increased levels of energy efficiency. Most consumers, who are also voters, have only a limited 

philosophical interest in energy efficiency, security of supply, and climate change. 

Most of us have a very intense interest in personal convenience and safety—we expect governments and business to handle those other issues on our behalf. There 

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is a very small market in this world for hair shirts. Similarly, we cannot expect the 

citizens of China and India to continue to ride bicycles in the interests of the global 

environment. They have exactly the same aspirations to comfort and convenience as 

we do. This book demonstrates how by applying existing technologies to lightweight 

vehicles with the use of composites, by the use of hybrid powertrains already in production, and with the rapid evolution to new technologies, we can deliver the high 

levels of convenience and reliability we are used to at radically increased levels of 

energy efficiency, while also maintaining cost efficiency. 

The second critical requirement is that the process of transition should be fundamentally economic. We know in business that while one may be prepared to make 

limited pathfinding investments at nil or low return in order to develop new products and markets, this can not be done at a larger scale, nor indefinitely. What we 

can do, and have seen done repeatedly, is to transform markets by delivering greater utility at the same cost or the same utility at a lower cost, often by combining 

more advanced technologies with better business models. When this happens, the 

rate of change of markets normally exceeds our wildest forecasts and within a space 

of a few years a whole new technology has evolved. 

A good example of the rapid development and waning of technology is the fax machine. With astonishing rapidity, because of its functional advantages over surface 

mail, the fax machine became globally ubiquitous. The smallest businesses around 

the world had one and so did numerous homes. The fax has now become almost obsolete because of e-mail, the email attachment and finally the scanned e-mail attachment. The connectivity of the Internet, of which e-mail is an example, has 

transformed the way we do business. What this book shows is that the delivery of 

radically more energy-efficient technologies has dramatic cost implications and 

therefore has the potential for a similarly economically driven transition. 

The refreshingly creative government policies suggested here to smooth and speed 

that transition are a welcome departure from traditional approaches that often overlook or even reject the scope of enterprise to be an important part of the solution. 

These innovative policies, too, merit serious attention, especially as an integrated 

package, and I suspect they could win support across the political spectrum. 

The technological, let alone policy, revolution has not been quick in coming to the 

United States. Yet as has happened before in the automobile industry, others are 

aware of the potential of the technology. Perhaps because of Japan’s obsession with 

energy security, Toyota and Honda began some years ago to hone the electric-hybrid 

technology that is likely to be an important part of the energy efficiency revolution. 

As a result, U.S. automobile manufacturers who now see the market opportunities 

of these technologies are turning to the proven Japanese technology to deliver it 

rapidly. 

I believe that we may see a similar leapfrogging of technology from China. China 

is fully aware of the consequences on energy demand, energy imports, and security 

of supply of its impressive economic growth. Already China is using regulation to 

channel development into more energy-efficient forms. The burgeoning Chinese 

automobile industry is likely to be guided down this route—delivering the function 

and convenience, but at greatly increased levels of efficiency. And it is not just in 

the automobile industry—by clearly stated national policy it applies to all areas of 

industrial activity. This has great implications both for the participation by U.S. 

firms in investment in China, and also in the impact of future Chinese manufactures on a global market that is likely to be paying much greater attention to energy 

efficiency. 

As a businessman, I am attracted by the commercial logic and keen insight that 

this report brings to the marketplace struggle between oil and its formidable competitors on both the demand and the supply sides. Indeed, during my time in both 

Shell and Anglo American, RMI’s engineers have helped ours to confirm unexpectedly rich deposits of mineable ‘‘negawatts’’ and ‘‘negabarrels’’ in our own operations—an exploration effort we’re keen to intensify to the benefit of both our shareholders and the environment. 

As a lifelong oil man and exploration geologist, I am especially excited to learn 

about the Saudi Arabia-size riches that Amory Lovins and RMI’s explorers have discovered in what they term the Detroit Formation—through breakthrough vehicle design that can save vast amounts of oil more cheaply than it can be supplied. And 

as a citizen and grandparent, I am pleased that RMI proposes new business models 

to span the mobility divide that separates rich and poor, not just in the United 

States, but in many places in the world. Concern about such opportunity divides is 

increasingly at the core not just of international morality but also of stability and 

peace. 

This book points the way to an economically driven energy transformation. And 

its subtitle ‘‘Innovation for Profit, Jobs, and Security’’ is both a prospectus for posiVerDate 0ct 09 2002 11:48 Apr 04, 2005 Jkt 000000 PO 00000 Frm 00103 Fmt 6601 Sfmt 6621 P:\DOCS\20004.TXT SENE3 PsN: SCAN
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tive change and a reminder that both the United States and other countries can be 

rapid adapters of innovative technologies, with equally transformative economic consequences. As someone who has spent a lifetime involved in energy and changes in 

energy patterns, I find the choice an easy one to make. The global economy is very 

much dependent on the health of the U.S. economy, so I hope that the U.S. indeed 

makes the right choice. 

This report will help to launch, inspire, and inform a new and necessary conversation about energy and security, economy and environment. 

Its outcome is vital for us all. 

STATEMENT OF DAVID J. O’REILLY, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 

CHEVRONTEXACO CORP. 

PUBLISHED NOVEMBER 28, 2004, IN THE WASHINGTON TIMES

The late economist Herbert Stein once said, if something cannot go on forever, it 

will stop. The time when we could count on cheap, abundant oil is clearly approaching that point. Prices are not likely to stay in the $50 range as they have in recent 

months. But it is even more unlikely they will retreat to late 20th-century levels 

as low as $10 a barrel. 

The reasons are complex, but it is critical we understand them so we can move 

to drive volatility out of the energy markets and replace it with predictability and 

stability, two prerequisites for sustained economic growth. 

A basic reason for price volatility is surging demand. China alone accounted for 

roughly 30 percent of this year’s total growth in world oil demand. Global energy 

demand is expected to jump 40 percent over the next two decades. It took the world 

125 years to consume the first trillion barrels of oil. We’ll consume the next trillion 

within 35 years. 

But demand is not the only factor. Supply is also an issue. 

Simply put, the age of easy oil and gas is over, partly because we are seeing the 

convergence of geological difficulty with geopolitical instability and hard-to-reach 

supply with rising demand. In essence, we face a new energy equation. 

Many of the world’s large oil fields outside the Organization of Petroleum Exporting Countries are maturing just as demand is growing. Increasingly, future supplies 

must be found in areas more difficult to access and develop, such as ultra-deep 

water and oil sands. Developing these new frontiers will require trillions of dollars 

of investment in new infrastructure and innovative technology. And the world oil 

increasingly comes from areas with stability concerns, such as the Middle East. 

As the Bush administration heads into its second term, we need to recognize this 

new equation’s realities and align our policies and actions to address them. Here 

are four pragmatic steps we can take in the short-term to do that. 

(1) We should maximize the value of the resources we have now, on both the supply and the demand side. Simply put, over the next 20 years we will need all the 

energy we can develop. We should allow access for responsible development of promising resource regions in the Arctic, the Rocky Mountains and offshore. In resourcerich countries in the developing world, we should promote enhanced contract sanctity and transparency, which will encourage more investment and access, while 

helping expand the economic and social benefits of oil production for local communities. At the same time, we need to moderate demand by pushing for more energy 

efficiency in everything from consumer appliances to automobiles and aircraft. In 

the near-term, conservation is our easiest, cheapest and most reliable ‘‘new’’ energy 

source. 

(2) We need to create a regulatory climate that encourages energy production. In 

the U.S., some key operating rules should be revised for refineries, now operating 

at virtually full capacity. If the government streamlines the permit process, industry 

can proceed to add capacity or improve efficiency without increasing emissions. We 

should rationalize state and regional gasoline standards that have effectively ‘‘balkanized’’ gasoline supplies. We now have 18 different gasoline blends in the U.S. 

to comply with these standards, making it difficult to move supplies around the 

country to even out supply disruptions and moderate pump prices. Natural gas, 

clean-burning and plentiful globally but in tight supply in the United States, needs 

to be commercialized sensibly but aggressively. The United States has only four terminals capable of receiving liquefied natural gas, while most forecasts estimate a 

need for 10 to 14 new import terminals by 2015 to meet projected demand. 

(3) We should increase investments in viable alternative energy sources for the 

future. Renewable sources like solar, wind and water will continue playing a greater 

role, growing to about 7 percent of our total energy needs by the year 2020. We need 

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to continue investing in renewables and, at the same time, invest in understanding 

the potential of new alternative sources such as hydrogen. Although hydrogen’ viability as a widely used fuel is years away, investment today will help assess its 

practicality and potentially accelerate its commercial viability. 

(4) The U.S. business community must recognize energy as a strategic—and global—business issue. Corporate American can no longer treat energy as an expense 

item or solely as a domestic issue. It is time for business to act on the knowledge 

that access to sufficient, predictable energy supplies is a strategic issue for every 

company in every sector of the U.S. economy. The business community should educate the public about the indelible link between reliable energy and economic 

growth, while helping policymakers draft a comprehensive national energy policy to 

let us balance volatility with stability and increasing consumption with greater efficiency. 

Moreover, U.S. energy policy in the 21st century cannot stop at the water’s edge. 

It must reflect our interdependence with producing countries and encourage bilateral relationships that recognize the importance of energy development and promote 

the flow of capital and investment. 

Sensible, pragmatic development of new energy supplies is not just a business 

issue. Energy development is ultimately a fundamental element of human progress, 

particularly in the developing world whose population is expected to grow more than 

1.5 billion in the next 15 to 20 years. Access to energy, like employment and education, is a building block of stable and prosperous societies. It is our collective responsibility to provide that access. 

The end of easy energy may mean the end of easy choices. But recognizing the 

new energy equation is a strong first step toward resolving it in our favor.

Æ