WINDPOWER (Chicago).ppt

America (And The World)

Faces Genuine

Energy/Electricity Challenges

America (And The World)

Faces Genuine

Energy/Electricity Challenges

Global WINDPOWER 2004

Chicago, Illinois

March 31, 2004

Presented By:

Matthew R. Simmons

Global WINDPOWER 2004

Chicago, Illinois

March 31, 2004

Presented By:

Matthew R. Simmons

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Renewable Energy Soon To

Be Urgently Needed

Renewable Energy Soon To

Be Urgently Needed

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

Fossil fuels are now running
into limits to growth.

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

The future for wind must be bright.

The challenges might also be awesome.

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The Nub Of The Problem:

We Face An Energy Crisis

The Nub Of The Problem:

We Face An Energy Crisis

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

Shift to oil does not work.

Coal and nuclear capacity now
approximately 100%.

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

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

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

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Energy Is The Heart And

Soul Of Our Economy

Energy Is The Heart And

Soul Of Our Economy

Petroleum creates our transportation.

Natural gas creates our “heat”.

Electricity is used in industrial, residential and
commercial.

For economy to prosper, electricity must grow.

All future growth was supposed to happen
through natural gas.

This assumption was wrong.

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America’s Electricity Is “Mother’s

Milk” To Our Prosperity

America’s Electricity Is “Mother’s

Milk” To Our Prosperity

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

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

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

Blackouts were what Third World
countries suffered.

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

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

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America’s Electricity Model Was Flawed

People assumed demand growth was waning.

Electricity deregulation would make industry
“efficient”.

Electricity could be wheeled from “coast to coast”.

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

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

All assumptions were wrong!

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Electricity Demand Is Still Growing

Historical demand facts:

–

1973 - 2002: 2.7% per annum growth

–

1998 - 2002: 1.6% per annum growth

Slowdown was primarily mild weather driven.

–

Average monthly use (1998) = 291,000 MMKW

–

Peak use (Summer 2002) = 381,500 MMKW

Electricity growth parallels GDP growth in normal
weather.

If electricity growth stopped, so would GDP.

+31% or

7% per annum

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Electricity Deregulation Was Flawed

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

As wheeling grows in distance,
yield losses soar.

Deregulation used up
“reserve margins”.

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

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

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“1,000 KW Creates Power For 1,000

Homes” Was Wrong

“1,000 KW Creates Power For 1,000

Homes” Was Wrong

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

–

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

–

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

This standard was probably true 40 years ago.

Today, it understates generation needs by
two-thirds.

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

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In 1999, America Began A

Power-Adding Binge

In 1999, America Began A

Power-Adding Binge

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

Summer of 1999: 29 different blackouts /
brownouts.

America then went on a “Power Buying Spree”.

220,000 MW added by end of 2003.

98% was gas-fired power plants.

America bets its future onto natural gas.

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Some Think America Created

A Power Glut

Some Think America Created

A Power Glut

Many energy experts now assume
America created massive power glut.

August 2003 blackout happened on
only extremely muggy day.

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

Simulated photo. Not true representation of the

August 2003 blackout.

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

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

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America’s Bet On Natural Gas Was

Sound (If Supply Had Worked)

America’s Bet On Natural Gas Was

Sound (If Supply Had Worked)

Natural gas was a safe
economic bet.

–

Most efficient way to create
kilowatts.

–

Cheapest cost to build
generating capacity.

–

Cleanest form of fossil fuel.

–

Only form that turns on instantly.

The bet was essential.

–

All other forms operate at
effective 100% capacity.

–

Nuclear and coal take days to turn on.

Image courtesy of World Energy.

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Supply Constraints Made The Bet Bad

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

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

Conventional natural gas peaked in 1973.

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

2000/2001 drilling boom shattered this dream.

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Natural Gas Prices Have Become

A “One-Way” Street

Natural Gas Prices Have Become

A “One-Way” Street

Commodity core assumptions:

–

High prices create surge in supply.

–

High prices also depress demand.

–

Low prices depress supply.

–

Low prices encourage greater demand.

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

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

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

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“Quo Vadis” Natural Gas Supply?

Conventional gas supplies are in steep decline.

–

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

–

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

Oilfield technology revolution accelerated ability
to drain proved reserves.

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

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

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Creating Net Growth By

Non-Conventional Supply Is Tough

Creating Net Growth By

Non-Conventional Supply Is Tough

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

Arctic gas has hurdles to overcome.

–

Proved North Slope gas is now injected.

–

McKenzie Delta gas “found” is not great.

–

Exploration in Arctic has been tough.

CBM/Tight Sands gas is small/wellhead.

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LNG’s Future Is Bright

(But Tough To Grow Fast)

LNG’s Future Is Bright

(But Tough To Grow Fast)

Global LNG markets are experiencing “Renaissance”.

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

Why U.S. landed LNG has to grow.

2010 To

2015

(Bcf/day)

Implicit Demand

Probably U.S. Supply

Canadian/Arctic/Current LNG

Shortfall

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

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

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Adequacy Of Global Natural Gas

Supply Is “Hazy”

Adequacy Of Global Natural Gas

Supply Is “Hazy”

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

Everyone assumes global gas supply is fabulous,
though stranded.

–

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

–

Undrilled structures are not proved reserves.

65% of current global gas supply is in decline.

–

U.S./Canadian gas

–

Most of Russia’s gas

–

U.K. gas

–

Indonesian gas

–

Netherlands gas

If 2/3 of supply in decline, hard

for total growth to be high.

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How Did We Get Into This Energy Mess?

Energy prices were “too low for too long”.

Low prices created illusion about energy security.

Low prices encouraged growth in demand.

Low prices inhibited growth of supply.

Supply growth might have ended
anyway.

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

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What Will Future Energy Prices Be?

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

Low prices inhibited any
supply growth and
stimulated energy demand.

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

Current prices are still too low.

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Global Energy Issues Are

Extremely Complex

Global Energy Issues Are

Extremely Complex

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

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

World oil supplies are peaking.

Natural gas supplies could also peak.

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

It does mean supply growth ends.

These are complex and serious issues.

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