beyond the science and economics: the politics of …limited access national companies 22% national...

Bureau of Economic Geology, The University of Texas at Austin

Beyond the Science AND Economics:The Politics of Global Energy

Dr. Michelle Michot Foss, AAPG 2007

©CEE-UT, 2

Dr. Michelle Michot Foss, CEE-UT

Does Economics Matter?• People are “profit maximizers”

– Our calculus is complex, group outcomes may deviate• People respond to price signals

– We change the amount and kinds of things we demand• Competition makes a difference

– As do private transactions costs, frameworks, property rights• Perception of risk – emotion trumps reason

– Loss aversion (“losses loom larger than gains”)• Negative information has big impact• Youngest, oldest more susceptible to new information

©CEE-UT, 3


Persistent Energy Dilemmas• Access (resources, infrastructure)• Energy supply and delivery (pricing and price

signals)• Reliability at what cost? (capacity, storage)• Risk mitigation (safety, security, acceptance)• Entry of new technology (timing)• Environmental protection (future generations)• Economic, social benefits (“all politics is

local”)

©CEE-UT, 4


Access, Competition

Concessions21%

Production Sharing

12%

Limited access

national companies

22%

National companies only (Saudi

Arabia, Kuwait, Mexico)

35%

Iraq10%

Source: IEA Global Investment Survey 2003

©CEE-UT, 5


Competition and Performance

13.9628.2820.6234.05

Total SectorContribution, $/BOEProduction

22,88644,55914,41855,156Total SectorContribution, $MM

92%55%96%99%NOC Production as %of Total

1,6391,5756991,620Country Prod. MMBOE

ChinaNorwayBrazilMexicoCountry

Source: CEE, 2007

©CEE-UT, 6


Pricing

Source: DB Global Markets Research, 2006

0

5

10

15

20

1980-82 1983-85 1986-88 1989-91 1992-94 1995-97 1998-00 2001-03 2004-06E

US

dolla

rs (2

004)

per

boe

3 x finding cost [$12] = $36/bbl4 x higher finding cost [$15, higher gov’t take] = $60/bl

Long Run Avg. Finding Cost

Finding cost withhigher gov’t take

©CEE-UT, 7


Price Signals and Demand

00.5

11.5

22.5

33.5

44.5

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2Q05

4Q05

2Q06

4Q06

2Q07

Oil

Dem

and,

Inde

xed US

ChinaWorldPrice

Source: U.S. EIA

©CEE-UT, 8


Changing the Quantity Demanded

5

7

9

11

13

15

17

19

21

1949

1952

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

200

220

240

260

280

300

320

340

360

380

U.S. Energy (MBtu)/$GDP (2000),left scaleU.S. Energy per Capita (MMBtu),right scale

Sources: U.S. EIA

How is the consumer market basket changing?

©CEE-UT, 9


Changing What We Demand, Introducing Competition

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Sources: U.S. EIA, Renewable Fuels Assoc.

©CEE-UT, 10


Reliability

0200400600800

1,0001,2001,4001,6001,800

1/14/2

006

2/14/2

006

3/14/2

006

4/14/2

006

5/14/2

006

6/14/2

006

7/14/2

006

8/14/2

006

9/14/2

006

10/14

/2006

11/14

/2006

12/14

/2006

MW

Los

s

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

Affe

cted

Cus

tom

ers

Source: U.S. EIA

Electric power system disruptions, 2006

©CEE-UT, 11


Reliability, Capacity, Implied Storage

Natural Gas61%

Petroleum2%

Coal30%

Hydroelectric Conventional

0%

Other Renewables

7%Planned nameplate additions, 2006-2010, 94 GW (shares do not add to 100% because of omitted categories)

Source: U.S. EIA

©CEE-UT, 12


Local, hostcommunity

Mitigating Risk, Finding Local Benefits So That We Can Build

Costs are perceived to be concentrated at the local site andlocal host community

Benefits of the project arespread across a larger area; local host community may not perceive sufficient benefits to support project

Result: Perception of imbalance; “environmental justice” issue

Sources: CEE-UT

©CEE-UT, 13

Dr. Michelle Michot Foss, CEE-UT18

50

1900

1930

1940

1950

1960

1970

1980

1990

2000

•Oil discovered in Titusville, Pennsylvania, 1859; natural gas replaces town gas, 1870s

•Advances in drilling, early seismic, shallow offshore E&P•Long-line pipeline transmission

•Directional drilling, offshore below 250ft water depth

•Pipeline trenching and welding, compression,pressure control, metering; national grid develops

•3-d seismic, horizontal drilling, measurementwhile drilling, offshore below 1,000ft

IT Pathway Mainframes Minis Micros Work Stations ?

•Offshore below10,000ft

•Oil discovered at Spindletop (Texas), 1901

050

100150200250300350400450

Impact of Technology –Deferring Declines

Cumulative U.S. Oil & GasProduction, 1936-2006BBOE (IncludesAlaska)

Not to scale

•Hydrates? GTL?

•4-d seismic, offshore below 5,000ft

Sources: U.S. EIA, various industry and trade publications

©CEE-UT, 14


Timing of Technology

$-

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00

$10.00

- 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000 1,600,000 1,800,000

Bcf of Economic Recovery at Indicated Wellhead Price

Wel

lhea

d Pr

ice,

200

2$/M

cf

2003 Total Production, US and Canada



Sources: NPC, 2003

Natural Gas Supply Curves

©CEE-UT, 15


Climate, Future Generations, Uncertainty,

and Value from Waiting

Sources: The Economist, 2005

Each wedge reduction represents a more rigorous deployment of capital and technology to achieve additional reductions

©CEE-UT, 16


What Does This Mean for You?

• Supply, demand, price, risk, uncertainty, timing are business variables

• Strategic economic thinking provides clues to underlying trends, ripple effects in the political realm (“policy”)– Demand, “market basket” restructuring– Oil market “contestability” from biofuels– Natural gas for electricity reliability– Socio-environment and the status quo

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