Presentation to Economics for Energy Madrid January 19, 2015

Amy Myers Jaffe Executive Director

Energy and Sustainability

Energy  Security    

OPEC in Disarray : Repeating Boom and Bust Cycles Characterize Oil.

•  High oil prices usher in demand destruction through conservation, efficiency gains, and substitution

•  High oil prices stimulate drilling innovations, which over time can lead to supply bubbles.

Source: Medlock, K.B., Amy Jaffe, “The price of crude oil: deja vu all over again?” (2013), EIA

Research Finding: Wavelet analysis reveals key variables that create prolonged oil price discontinuities and interrupt cycle: 1. War 2. Drilling Technology breakthrough 3. Demand destruction 4. Saudi price war

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Insurgencies Target Oil Facilities

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World Demand and SupplyOther Supply Responses

Secular Business Cycle and DemandSupply Responses to High & Low Prices

Technology-Driven Supply Response to Rising Prices: UK

1970 1980 1990 2000 2010

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1500

2000

2500

Mahmoud A. El-Gamal – Medium Term Price Talk – June 12, 2013 Oil Demand, Supply, and Medium Term Price Prospects — 13/30

War’s impact can be extended as countries struggle to repair facilities damaged during prolonged conflicts.

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US Stimulus Hits the Energy Jackpot Twice at Once

The United States has the opportunity to become a net oil exporting country. Future US climate, vehicle and energy policy and the industrial internet will accelerate this trend.

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5

10

15

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25

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040

U.S.  liquid  fuel  supply  million  barrels  per  day  

Source:    EIA,  Annual  Energy  Outlook  2014  Reference  case  and  High  Resource  

Consump8on  

Domes8c  supply  

Net  imports  

40%   32%  

Projec8ons  History  2012  

2005  

60%  

25%  

2016   2040  

High  Resource    

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Russia Cannot Currently Shift Europe’s Natural Gas Supply to China

•  About 50% of Russia’s natural gas exports still transit Ukraine (142 bcm/yr capacity)

•  Nordstream design is 55 bcm/yr but currently constrained to 35 bcm/yr by ontake limits

•  TANAP (Azerbaijan) only adds 10 bcm/yr

•  Europe currently has a large surplus in storage, but…

•  If Europe’s weather were normal and supply remains robust, Europe will have too much gas; If Europe’s winter is mild and only half of Russian supply to Europe is disrupted (via Ukraine), inventories will be sufficient; If Europe’s winter were cold and there is a Russian supply cutoff, a serious energy shortage would ensue in Europe.

•  Residential/commercial sector is 40% of total European natural gas use market.

•  Long term prospects for Arctic and other upstream deals may sour over time

Liberalization Scenarios:

Produces Lower Global Prices and

Encourages US LNG Exports

Source: Baker Institute RWGTM February 2014 10  

 $-‐          $1,00      $2,00      $3,00      $4,00      $5,00      $6,00      $7,00      $8,00      $9,00      $10,00      $11,00      $12,00      $13,00      $14,00      $15,00      $16,00    

2011  

2013  

2015  

2017  

2019  

2021  

2023  

2025  

2027  

2029  

2031  

2033  

2035  

2037  

2039  

Henry  Hub   NBP   Asia  (JKM)  

$/mcf  

Europe Would Become Less Reliant on Russian Exports Over Time, But Hard to Do Quickly

•  Under a liberalization scenario, Russian export volumes are negatively impacted, with European market share falling. Under Russia/EU “cutoff” scenarios, additional LNG receiving capacity added in Germany, Italy. More North Sea supplies come on line.

Source: Baker Institute RWGTM February 2014 11  

Shale gas production will eventually proliferate globally, bringing down international LNG prices.

•  North America accounts for the majority of shale gas. Qatar will have to discount prices to keep market share in geopolitically important countries, especially if Chinese shale can be developed.

Source: Baker Institute RWGTM February 2014 12  

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Breakevens for US shale oil and gas are lower than many other regions. developments

Source:  Ci8  Research  

Unconven=onals  are  not  at  the  top  of  the  scale  for  breakeven  costs.  Arc=c  and  Mega-‐LNG  projects  could  be  most  under  pressure  as  global  gas  prices  ease.    

Johan SverdrupRumailaJubilee Area

Bina BawiZubair

China Domestic GasCampos ExpWest Qurna 1Tempa RossaPNG LNG T3

Gbaran Ubie Ph2Cepu Exp

NgamiaPerlaGoM Tiebacks Majnoon

NE Tupi

ItaipuFrancoWhales Park

CariocaLulaSapinhoa

SkrugardIara

PNG LNG T1-2Hadrian

Yamal Gas

JupiterBig Foot

Trebs TitovSandridge JVADMA

Mozambique LNG Uganda Bl.1,2,3Clair Ph 2 AbsheronVankorBl. 15/06 East

North Alexandria Hub TiberWest Qurna 2 KaskidaCLOVGhana Gas

Laggan/Tormore ZaedyusBlock 32

STL Bakken

Colombia OilChina Domestic Oil

Tanzania LNGWheatstone LNGYamal LNG

OXY Bakken APLNGPSVM

Ichthys LNGChina Domestic Oil Junin 5Prelude LNG

Bl. 31 SE Gorgon LNGJack-St Malo

DominoSTL Eagle Ford Browse LNGTengiz Exp

Bolia-ChotaKearlOPL245

Aparo-NsikoSunrise Ph 1 Usan

West Canada LNGRDS Unc Gas STL MarcellusFilanovsky

Block 61 OmanBG Haynesville QCLNGSurmont Ph 2

Fort HillsMacKay RiverDover

Abadi FLNGTerre de Grace Kashagan Ph 1

Arrow LNGCarmon Creek JoslynGLNG

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0 5 10 15 20 25 30 35 402020e Production, Mboe/d

Bre

ak

ev

en

, $

/bb

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LNG cost pressures

Pricing-discounts pushing

unconventionals higher up the curve

(2Q writedowns)

Low-cost conventional giants (Brazil & Norway)

remain robust.

Heavy oil expectations being scaled

back

Disappointing pace in Iraq sees industry accept

political risk of Kurdistan

Field     Breakeven     OPEX  

Marcellus  (gas)  

$2.50   $1.30  

BarneP  (gas)  

$3.80   $1.60  

Haynesville  (gas)  

$3.60   $1.30  

Eagle  Ford  (oil)  

$37   $7-‐$8  

Permian  (oil)  

$49   $10-‐$12  

Bakken  (oil)  

$37   $7-‐$8  

Mississippian    

$43   $7-‐$8  

Costs and Oil Prices Move Together •  Chicken egg effect: As prices rise, more drillers expand activity, increasing

demand for equipment and rigs and raising costs. Equal and opposite effect seen when prices fall.

•  It is not correct that cost increases will be permanently rising based on complexity. Cost management-technology improvement, accelerated development cycle times, and improved well productivity can all reduce costs. (source for graphic: Kenneth Medlock, The Oil Price Cycle Presentation, Baker Institute)

•  Chick

Generational shift in Attitudes Towards Automobiles and Climate Change

Younger Americans More Urban, Less Interested in Car Culture

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US will follow different models towards low carbon energy. Local policy is driver.  

   

§  Smart homes and net zero energy communities fit US interest in resilience and response to extreme weather events

§  Debate beginning on new utility models, distributed energy and net metering. Resistance to “death spiral” of falling electricity demand, maintenance cost of transmission.

§  Sharing economy and millennial purchasing patterns changing the way transportation “services” (eg ride sharing), urban planning, and consumer facing household technologies will develop.

§  Expect more disruptive technologies to come out of the US

The US Strategy for COP21    

§  US negotiator Todd Stern expresses support for New Zealand proposal in October 2014, country by country “legally binding” pledges with mandatory accounting, but not an int’l binding treaty, removing distinction between developed and developing world considered desirable.

§  US-China meetings in early November focus on possible areas of agreement on climate change. US expecting to lead, not follow in global dialogue.

§  Little appetite in US Congress, Obama administration focused on policies that can be implemented by executive order.

§  US-China energy and climate dialogue focusing on clean tech collaboration and investment strategies

§  China-California collaboration on air pollution, EV strategy