LNG market grows, uncertainties persist

Discussion at London liquefied natural gas conference driven by US shale gas production, Japanese tsunami’s affect on nuclear power

By Bill White

Researcher/writer for the Office of the Federal Coordinator
Driving much of the discussion at a liquefied natural gas conference in London were two relatively recent events that have rattled how the global LNG industry views its short-term future.
The events help explain the unusual LNG pricing trends of late, underscore some of the volatile dynamics of supply and demand, and amplify the uncertainty forecasters have of their own predictions.

The first event was the rise of U.S. shale-gas production over the past five years, sweeping aside the world’s biggest gas market — North America — as an LNG customer. Companies mistakenly targeted billions of dollars for construction of new gas liquefaction capacity and U.S. import terminals. The lack of U.S. customers cast adrift that new LNG production, which needed to find a new destination and did so in Europe, helping soften short-term and spot LNG prices there. The continued rise of Lower 48 shale-gas production also has engrossed the LNG industry in a guessing game: Will the United States export some of its new-found gas bounty as LNG?
Event two: A tsunami stifling nuclear power production at Japan’s Fukushima plant last March. This boosted short-term LNG demand in Japan, raising prices there and diverting to Asia spot shipments that had been aimed at Europe.

Two currents at congress

Shale gas and Japan were two currents flowing through presentations at the LNG Global Congress held in London during the last week of September. I was invited to present on Alaska natural gas and to learn the latest developments in an industry undergoing rapid change.
A key message from the conference is that the spectacular expansion of LNG supply and demand worldwide should continue over the next decade, although LNG traders, analysts and consultants offered no consensus on the exact timing and details of that growth.

The LNG conference covered a breadth of other topics, from the rise of Qatar and Australia as gas liquefiers, to China’s energy appetite, the prospect of U.S. LNG exports, whether North America’s shale-gas revolution will be replicated elsewhere, and how a wider Panama Canal and a new technology called floating LNG might be game changers for the industry.

Optimism about LNG

Conference attendees gushed optimism about the LNG industry, while mumbling uncertainty about how exactly the future will unfold.
Alaska helped pioneer the world of LNG exports when the Nikiski liquefaction plant opened in 1969 to supply Japanese utilities with natural gas from the new Cook Inlet discoveries. Alaska since has been eclipsed as an exporter by Indonesia, Malaysia, Egypt, Trinidad & Tobago and, more recently, by such countries as Qatar, Yemen, Russia and Norway.
People attending the conference were generally aware that Alaska is about to exit the game, with the last LNG shipment expected to leave the Nikiski plant this fall.

Why Alaska would drop out just as Japanese demand is spiking did puzzle them, however. They didn’t understand that the historic Cook Inlet fields are petering out. I explained that some Alaskans hope the state can re-enter the fray within a decade by exporting North Slope gas from a resuscitated Nikiski plant or a new mega-plant at Valdez, if a proposed pipeline from the Slope gets built.
Here’s a snapshot of themes discussed at the conference.
Supply and demand

The LNG market has been defined for decades by long-term contracts between LNG makers and buyers of the gas. LNG makers needed these 20-year-plus deals to underwrite the huge upfront cost of building plants to liquefy gas — superchilling it to minus 260 degrees Fahrenheit transforms methane into a liquid that is more compact and economical to transport via special tankers.

But thanks to their rapid expansion in recent years, the world’s LNG exporters now have far more capacity to liquefy natural gas than is needed to fulfill current demand. This imbalance has given rise to short-term contracts and spot sales, which last year comprised about 20 percent of the LNG volume traded. That’s roughly akin to the percentage of oil under short-term and spot deals, said Kasper Walet, principal with Amsterdam-based energy consultant Maycroft. But he noted that these spot and short-term deals, while 20 percent of the LNG trade, comprised just 2 percent of all natural gas movement. Most speakers said they expect long-term deals to continue to characterize the industry.

Japan needed 110 billion cubic feet of additional LNG this year after Fukushima, and it got about 48 billion of it on the spot market, buying from Algeria, Egypt, Yemen and Nigeria, said Frederic Deybach, an LNG executive with European energy conglomerate GDF Suez.
The imbalance will end soon, as demand catches up with the capacity to supply LNG. When? The presenters’ estimates ranged from 2012 to 2015.
Key unknowns

Here are key unknowns that make this future so hard to predict:
Will low coal prices tilt China and other emerging Asian economies away from natural gas for future fuel supplies?
Will Japan and Germany phase out nuclear power and need more natural gas (as well as coal and oil) to make electricity, and if so, how quickly will the phase-outs occur? Will the world economy double-dip into another recession, or even triple-dip?
Will geopolitical events disrupt LNG supply, as they did this year in Libya, a gas exporter, and could do in unstable Yemen, another LNG exporter?
After 2015, start-up of new liquefaction plants — particularly in Australia but also in Papua New Guinea, possibly Canada and other locations — probably will ease any worries about LNG supply shortages for several years.
But timing is everything. If capacity comes on slow and demand rises fast, expect to see LNG prices rise, several speakers said. Prices could fall if liquefaction capacity gets built faster than demand rises.

Andre Mernier of Belgium sees a bright future in Asia for LNG because of its geology and geography. Geology — not enough of its own gas reserves and generally too distant for gas deliveries through pipelines. Geography — lots of need for electrical generation fuels in coastal population centers, where deliveries can be made easily. Mernier is secretary general of the Energy Charter Secretariat, a group with 53 member countries that upholds international laws to ensure the smooth flow of energy between exporters and importers.
Deybach of GDF Suez, said much of the expected new demand for LNG imports to 2020 will come from nations “where demand uncertainty is greatest.” These importers include developing nations in Asia, the Middle East and Latin America.
Ship charter rates soar

The LNG fleet has expanded rapidly in recent years, from 195 ships at the end of 2005to 360 ships at the end of last year, according to the International Gas Union.
That expansion hasn’t been fast enough, said Walet of consultancy Maycroft. Most tankers are sailing under entrenched contracts. The few available for short-term hire are demanding premium rates.
The rate for chartering an LNG tanker last year averaged $41,000 a day. That price jumped to $80,000 in the first half of this year, particularly after Japan’s Fukushima disaster boosted that nation’s short-term need for gas, Walet said. Claire Wright, principal gas analyst with Lloyd’s List Intelligence, said some spot-shipment rates have reached $100,000 a day.
Chris Meyer, a European LNG consultant with Poten & Partners, said shipyards are busy building tankers, and that day rates will fall within 18 to 24 months, after the new boats get launched. About 60 new ships have been ordered, Wright said.

Hot commodity

Worldwide demand for natural gas last year rebounded from the drop in demand caused by the 2008-2009 global recession. Overall demand leaped 7.4 percent, with LNG demand up 21 percent, said Hideomi Ito, natural gas analyst for the International Energy Agency. (LNG tends to be a niche product desired by places like Japan, South Korea and Taiwan that lack the option of pipeline deliveries. As was mentioned, less than 10 percent of the world’s gas consumption involved LNG last year.)
Growth in gas demand should slow over the next five years to perhaps 2.4 percent a year, Ito said, with LNG demand growing faster than that because it would help fuel hotter economies such as China and India.
Christof Ruehl, chief economist for BP, said European demand for LNG might even fall next year although he expects it to grow over time.

China’s big appetite

Natural gas comprises 4 percent of China’s energy needs now, Ruehl said. Coal provides 70 percent. China consumes less than one-tenth the amount of gas that Europe uses.
But China is just getting going as a natural gas consumer, Ruehl said. By 2030, China will consume far more energy than today, and natural gas will supply 9 percent of it. Within 20 years, China will consume as much natural gas as all of Europe consumes now, he predicted.

China will get about half of its gas in 2030 from domestic production, particularly tapping shale and other unconventional reservoirs, and it will import the other half via pipelines and LNG tankers, Ruehl said.
Ito noted that China has been investing furiously to secure new supplies. These investments include developing conventional, shale and coal-bed methane resources within China; securing long-term LNG-supply contracts with Australia, Qatar and Papua New Guinea; opening of an almost 4 billion cubic feet a day pipeline from Turkmenistan in late 2009 (expected to reach full capacity next year); and building a 1.1 bcf a day pipeline from Myanmar that should start in 2013.
Ito said China’s total gas demand could rise from about 10 bcf a day on average last year to 25 bcf a day in 2015, with LNG sating some of that growth.

Australia — boom towns, boom nation

Australia is the Wild West of LNG — a brawny frontier toward which the industry’s future is migrating.
Alan Copeland of the Australia Bureau of Resources and Energy Economics said his nation exported about 19 million metric tons (2.5 bcf a day on average) of LNG last year from two plants. That’s about the same LNG volume Alaska would export from Valdez if that idea ever catches on.

But that volume is dwarfed by what’s planned for Australia: Seven projects totaling 57.1 million metric tons (7.5 bcf a day) at some stage of development (a combined price tag of $144 billion), plus another six totaling 44.4 million metric tons (5.8 bcf a day) proposed but not under way.
The seven projects are supposed to be done by 2016. Can Australia really pull that off? Copeland called it “a huge challenge, an enormous task,” but noted the companies involved are sticking to their start dates. Others at the conference said start-up delays are all but certain.
Still, nearly everyone expects Australia will become the world’s No. 1 LNG exporter by 2020. Last year it was No. 4, behind Qatar, Indonesia and Malaysia. Qatar exported 56 million metric tons of LNG, the equivalent of 7.4 bcf a day on average.

Australia is developing gas fields relatively close to its East Coast population center. These include coal-bed methane fields that some local farmers oppose, Copeland said. But the giant plays are in remote areas, including in deep water far off the nation’s northwest coast. Australia, through a Shell project called Prelude, is pioneering the emerging technology called “floating LNG,” where liquefaction occurs at sea rather than piping the offshore gas to an onshore LNG plant.
The rapid build-out of Australian LNG is straining the country. An LNG development called Wheatstone plans to bring 3,500 workers to a town of 800 people — raising issues of where to house them, how to feed them and what they will do for fun. Some projects have adopted a work schedule familiar to those who labor at Alaska’s North Slope oil fields: one or two weeks of 12-hour days followed by extended time off.
With coal and iron ore developments occurring as well in Australia, engineers and equipment are in short supply, Copeland said. A big winner is the average laborer, who is pulling in wages of $225,000 to $300,000 a year on remote LNG projects, Copeland said. The audience gasped when Copeland mentioned this.

U.S. LNG exports

Several speakers said U.S. exports of LNG are inevitable. The United States will have the supply, due to fast expanding shale-gas production. And if the big gap between gas prices in North America and those in Asia linger, liquefying U.S. gas production could be very profitable.
Deybach of GDG Suez noted that a race is afoot within the Lower 48 by companies positioning themselves to make and export LNG. One or two of them will win. Possibly three.
Simon Bonini, a consultant and former LNG director for Centrica, a British utility, said that of course the United States will export LNG. “I’m a firm believer that if you can have a stampede into Queensland (one of Australia’s gas hotbeds), you can have anything.”

Leslie Palti-Guzman, a New York-based analyst with political-risk consultant Eurasia Group, said at least six serious LNG export proposals are in play in the United States and Canada. If they all came together they could export 70 million metric tons of LNG, or 9 bcf a day. That’s twice the volume TransCanada and ExxonMobil hope to flow into the Lower 48 from Alaska’s North Slope. Asian utilities or governments are involved directly or indirectly in the push for North American LNG, Palti-Guzman said.
“In practice only half of that amount at best will be expected to be exported but that is still a significant volume,” she said.
U.S. projects that are finished by 2016 could “hit a window of opportunity” if Australian projects fall behind schedule and LNG demand grows as some expect, Palti-Guzman said.
She noted the opposition to exports from the U.S. petrochemical industry, which uses natural gas as a feedstock and wants a supply glut to hold down prices. But, she added, “U.S. LNG export is definitely going to happen.” The exports would reduce the nation’s trade deficit, providing political reason to allow gas to leave the country, she said.

The current price gap between North American gas and Asian LNG is about $12 per million Btu. U.S. gas can be liquefied and shipped from the Gulf Coast to Asia for about half that price, Palti-Guzman said. The economics are even better for LNG from British Columbia — as long as the price gap holds, a risky assumption, she said.
Lower 48 natural gas prices could rise by $2 to $2.50 per mmBtu if the nation starts exporting significant volume, she predicted.
Some analysts believe U.S. LNG exports, and the resulting price rise, would heighten the Lower 48’s need for North Slope gas from Alaska.

Panama Canal

Palti-Guzman said expansion of the Panama Canal will help U.S. LNG exports to Asia.
LNG tankers traversing the Panama Canal can sail from the U.S. Gulf Coast to Asia in 22 days, shorter than a trip around South America or Africa, she said. Proposed LNG projects in British Columbia would hold a travel advantage, however: an eight-and-a-half-day trip to East Asia, she said.
Right now, only 6 percent of the LNG fleet of under 400 ships can squeeze through the canal, and none of them try, said energy consultant Walet.

But when the Panama Canal expansion is done, scheduled for 2014, 80 percent of the fleet will fit through the canal.
“It should be a real game changer,” Walet said.
The canal will transform how LNG flows around the world. In particular, diverting a cargo load in the Atlantic over to Asia will become more cost effective.
Shale gas globally?

Can the U.S. shale-gas revolution be duplicated elsewhere in the world?
Not easily, several speakers noted.
The United States is the perfect setting for shale gas. The country has lots of independent producers and service companies. A skilled labor force exists. Regulators generally understand gas production. Technology such as hydraulic fracturing and horizontal drilling are easily disseminated and improved on. The pipeline network to move production to market is vast.

China is estimated to have even greater shale-gas resources than the United States, but it falls short of the U.S. on know-how, competitiveness and market structures, said Madjid Kubler, owner of energy analyst Team Consult. Germany falls far short of China, he said, particularly on competitiveness and the regulatory/social environment for accepting unconventional gas development.
Will floating LNG sink or swim?
A new idea that many are watching to see how fast and how well it catches on is called floating LNG.

Shell is the first mover with this technology, approving a FLNG vessel to be built in South Korea and deployed to the company’s $10 billion Prelude development far offshore Northwest Australia. Shell estimates the field will start up in 2016, with 3.6 million metric tons of annual output (processing about 500 million cubic feet a day of natural gas).
A company called Flex LNG is involved in a smaller proposal off Papua New Guinea — an onshore field with offshore liquefaction, unlike Prelude where the entire operation will be offshore. Other projects are envisioned, including a couple more off Australia’s coast.
The attractions: FLNG fields could be developed more quickly for less cost, with no long-distance pipelines, fewer environmental challenges and less bureaucratic red tape ... if the concept proves itself.

The actual cost of building and operating FLNG units is unproven. This is causing some in the financial industry to wait and see, some speakers said.
But Wouter Pastoor, business development vice president with Flex LNG, said the technology is custom-made for small and medium-scale LNG production — 2 million metric tons a year (260 million cubic feet a day) in production or less, a bit more than the peak output from the ConocoPhillips/Marathon plant at Nikiski that is closing. This will let smaller countries and smaller fields get into the LNG business, and smaller volumes are easier to market, he said.
However, he noted that FLNG is “a novel idea whose risk profile is being defined.”

10 Things That Must Change

10 Things That Must Change
By Doug Kass

This blog post originally appeared on RealMoney Silver on Aug. 3 at 8:25 a.m. EDT.
It is said that confidence is contagious and so is the lack of confidence. And these days, this statement applies directly to our Representatives' rancor and overall behavior over the past month in Washington, D.C.
A domestic economic recovery on a slow trajectory path is exposed to policy mistakes and external shocks (e.g., geopolitical, oil spike, etc.). It is now clear that confidence has been sufficiently eroded, in part, by the Washington circus -- and this has, in part, served to undermine growth and has jeopardized our equity markets.
I have written extensively about investors' consternation toward our country's politicians. Over the past few weeks, in "My 'Fast Money Halftime Report' Recap" and "Partisanship Trumps Progress," I have described the potential headwinds to economic growth and stock market appreciation instilled by the lack of confidence (on the part of businesses and consumers) caused by the ineptitude and bitterness in the latest debate over the debt ceiling and budget issues.
Indeed, back in late 2010, my surprise list for 2011 included two surprises on the manner in which partisan politics would inhibit economic growth and limit the upside to equities.
Surprise No. 2:
Partisan politics cuts into business and consumer confidence and economic growth in the last half of 2011.
Increased hostilities between the Republicans and Democrats become a challenge to the market and to the economic recovery next year....
The resulting bickering yields little progress on deficit reduction. Nor does the rancor allow for an advancement of much-needed and focused legislation geared toward reversing the continued weak jobs market.
Surprise No. 9:
A new political party emerges. Screwflation becomes a theme that has broadening economic social and political implications. Similar to its first cousin stagflation, screwflation is an expression of a period of slow and uneven economic growth, but, in addition, it holds the existence of inflationary consequences that have an outsized impact on a specific group. The emergence of screwflation hurts just the group that authorities want to protect -- namely, the middle class, a segment of the population that has already spent a decade experiencing an erosion in disposable income and a painful period (at least over the past several years) of lower stock and home prices.
Importantly, quantitative easing is designed to lower real interest rates and, at the same time, raise inflation. A lower interest rate policy hurts the savings classes -- both the middle class and the elderly. And inflation in the costs of food, energy and everything else consumed (without a concomitant increase in salaries) will screw the average American who doesn't benefit from QE2.
Stagnating wages and ever higher food and other costs energize Middle America, the chief victim of screwflation, and a new party, the American Party, emerges chiefly through a viral campaign begun on Facebook. This centrist initiative initially is endorsed by several independent Republican and Democratic Congressmen, but a ratification by Senator Joe Lieberman (Connecticut) leads to several Senatorial endorsements as it becomes clear that the American Party's ranks are growing rapidly. (Both the Tea Party and Sarah Palin abruptly disappear from the public dialogue.)
By the end of 2011, between 5% and 10% of all U.S. voters are believed to be members of the American Party. With its newfound popularity, the American Party asks New York City Mayor Bloomberg to become its leader. By year-end 2011, he has not yet made a decision.
This morning I want to change my stripes; instead of focusing on and being critical of the disruptive impact of the deliberations in Washington, D.C. last week, I want to propose some solutions (a hat tip to Omega's Lee Cooperman who helped me on some of these suggestions).
So, if I were king of the forest, here are 10 changes I would immediately enact:
1. Establish term limits for all our representatives.
2. Limit government spending. Set a specific limitation on the annual gains in spending to be less than the increase in consumer price index.
3. Develop a comprehensive jobs plan.
4. Fix housing. Over 15 million homeowners are underwater with their mortgages, the shadow inventory of unsold homes is a drag on a housing recovery, and we must find a way to find a way to reemploy over 2 million former housing-related workers. We need a Marshall Plan for housing. I would suggest that the Obama administration reach out to the two most knowledgeable and smartest guys in the residential real estate markets, Eli Broad and Bob Toll. I would have them all meet in a locked room with Fed Chairman Ben Bernanke, Treasury Secretary Geithner and President Obama (and his economic team).
5. Raise taxes on the rich. Put a three-year income tax surcharge (of 10% to 15%) on incomes above $500,000.
6. Create a health care czar and tackle our health care industry's delivery and costs.
7. Mean test entitlements, freeze entitlement payouts and gradually increase the social security retirement age to 70 years old.
8. Exit Afghanistan and Iraq immediately. More effectively rationalize the defense budget and provide returning soldiers full tuition to vocational schools and colleges as they have sacrificed much.
9. Build infrastructure. Set up an infrastructure bank, and place the money saved on defense into a massive build-out and improvement of the U.S. infrastructure base.
10. Create energy self-sufficiency. Develop a comprehensive plan designed to rapidly develop all of our energy resources.

The Green Thing

In the line at the store, the cashier told the older woman that she should bring her own grocery bag because plastic bags weren't good for the environment. The woman apologized to him and explained, "We didn't have the 'green thing' back in my day."

The clerk responded, "That's our problem today. The former generation did not care enough to save our environment."

He was right, that generation didn't have the green thing in its day.

Back then, they returned their milk bottles, soda bottles and beer bottles to the store. The store sent them back to the plant to be washed and sterilized and refilled, so it could use the same bottles over and over. So they really were recycled.

But they didn't have the green thing back in that customer's day.

In her day, they walked up stairs, because they didn't have an escalator in every store and office building. They walked to the grocery store and didn't climb into a 300-horsepower machine every time they had to go two blocks.

But she was right. They didn't have the green thing in her day.

Back then, they washed the baby's diapers because they didn't have the throw-away kind. They dried clothes on a line, not in an energy gobbling machine burning up 220 volts - wind and solar power really did dry the clothes. Kids got hand-me-down clothes from their brothers or sisters, not always brand-new clothing.

But that old lady is right, they didn't have the green thing back in her day.

Back then, they had one TV, or radio, in the house - not a TV in every room. And the TV had a small screen the size of a handkerchief, not a screen the size of the state of Montana. In the kitchen, they blended and stirred by hand because they didn't have electric machines to do everything for you. When they packaged a fragile item to send in the mail, they used a wadded up old newspaper to cushion it, not styrofoam or plastic bubble wrap.

Back then, they didn't fire up an engine and burn gasoline just to cut the lawn. They used a push mower that ran on human power. They exercised by working so they didn't need to go to a health club to run on treadmills that operate on electricity.

But she's right, they didn't have the green thing back then.

They drank from a fountain when they were thirsty instead of using a cup or a plastic bottle every time they had a drink of water. They refilled their writing pens with ink instead of buying a new pen, and they replaced the razor blades or bought a blade sharpener for a razor instead of throwing away the whole razor just because the blade got dull.

But they didn't have the green thing back then.

Back then, people took the streetcar or a bus and kids rode their bikes to school or rode the school bus instead of turning their moms into a 24-hour taxi service. They had one electrical outlet in a room, not an entire bank of sockets to power a dozen appliances. And they didn't need a computerized gadget to receive a signal beamed from satellites 2,000 miles out in space in order to find the nearest pizza joint.

But isn't it sad the current generation laments how wasteful the old folks were just because they didn't have the green thing back then?

http://www.freedomsledder.com/forums/index.php?showtopic=45567

Cap-and-trade will not pass this Congress

Ben Nelson: Cap-and-trade will not pass this Congress
By Michael O'Brien - 10/30/09 10:35 AM ET

A cap-and-trade bill to address climate change cannot pass the Congress this session, Sen. Ben Nelson (D-Neb.) claimed Friday.

Nelson, a centrist Democrat whose vote is key to leaders wielding its 60-vote majority in the Senate, said he and his constituents had not been sold on the cap-and-trade system proposed in House and Senate bills to address global warming.

"No," Nelson simply responded when asked if those cap-and-trade bills can pass through this Congress during an interview on CNBC.

"I haven't been able to sell that argument to my farmers, and I don't think they're going to buy it from anybody else," Nelson said. "I think at the end of the day, the people who turn the switch on at home will be disadvantaged."

The pessimistic assessment makes Nelson a thorn in the side of his party's leaders on climate change legislation, one of their top priorities, as they assiduously court his vote on another key proposal, healthcare reform.

On that issue, Nelson was reluctant to fully stand behind the Senate health bill as has currently been proposed, but said he is working to find a way to support the legislation.

"I don't know that we should conclude that some form of healthcare reform won't pass. I believe that some form will pass," he said. "I'm looking to find a way to vote for healthcare reform because we need it."



Source:
http://thehill.com/blogs/blog-briefing-room/news/65615-ben-nelson-cap-and-trade-will-not-pass-this-congress

Twelve Principles to Guide U.S. Energy Policy

Americans are growing increasingly concerned about energy. Their demand for energy is increasing faster than secure supplies. Much of the world's sup­ply of oil is delivered in a restrictive market dominated by unstable or hostile nations, some of which are using energy as a tool to frustrate U.S. national secu­rity and foreign policy objectives.
Meanwhile, many Americans harbor misunder­standings and myths about energy and market forces. They want low energy prices and plentiful supply but resist the steps that energy companies must take to achieve these goals. This confusion leads their repre­sentatives in Congress to enact conflicting policies that harm America's ability to meet its energy needs. This has to change.
Sound national energy policies must enable Amer­ica to obtain energy supplies from a wide range of sources in a way that is best for the economy and at the same time addresses homeland and national secu­rity considerations. An abundant, diverse energy sup­ply is central to America's freedom and prosperity.
The guiding principles for an energy strategy that advances freedom and prosperity should emphasize three themes:
Unleashing free enterprise,
Protecting America's energy interests, and
Advancing free global energy markets.
Unleashing Free EnterpriseU.S. energy policy should recognize that the cre­ativity of free enterprise is best suited to building the infrastructure that is needed for exploration and distribution, producing domestic supplies safely, and developing viable new energy sources.
To unleash American entrepreneurship, Congress and the Administration should let the free market do its job. Central planning frustrates the functioning of markets and undermines security by limiting oppor­tunities to adapt and innovate. Washington must clear away the red tape that obstructs energy pro­duction and innovation while also assuring safety and appropriate environmental protection.
Specifically, Congress and the Administration should:
1. Avoid costly environmental regulatory man­dates that will achieve little environmental gain. Numerous costly regulations have been proposed or implemented to address various environmental goals, from water quality to glo­bal warming. However, past experience—such as with the morass of gasoline regulations that push up the price at the pump and the require­ments that have stopped construction of any new coal-fired power plants for the past 15 years—shows that mandates can be expensive and economically harmful while making only marginal progress toward environmental goals. The full cost of current and proposed regula­tions and mandates, including the economic and security impact, should be evaluated and compared with the likely environmental gain.
2. Rely on the private sector's research and development capabilities. The competitive pri­vate sector is best able to improve fuel efficiency and develop the next generation of fuels. There are many guesses as to what the “new oil” might be, but no one knows for certain—least of all the federal government. We do know, however, that finding and commercializing these new fuels is crucially important to our economic future. The best way to secure abundant energy sources in the future is to encourage entrepreneurs to dis­cover them, not for agencies and congressional committees to try to pick winners with directed research, regulations, mandates, and subsidies. Entrepreneurs need a regulatory, trade, and tax system that creates the best climate for private-sector innovation.3. Urge government agencies to learn from the private sector. The U.S. government is one of the world's largest consumers of energy. In par­ticular, the Department of Defense is one of the world's biggest customers for petroleum prod­ucts, but it does a poor job of thinking about long-term energy costs. It relies heavily on leg­acy equipment that is very energy inefficient, assumes that it will always have plentiful sup­plies of petroleum products to support opera­tions at reasonable prices, and does not adequately consider the life-cycle energy costs associated with developing, procuring, and maintaining new military capabilities. The mil­itary and the rest of government should adopt the best practices of the private sector to enable them to make smart buying decisions.
Protecting America's Energy InterestsIn today's dangerous world, policymakers must take steps to secure America's energy sources and protect the nation's energy infrastructure. However, they also need to keep down the economic cost of achieving security by enabling the energy produc­tion and distribution market to operate as efficiently as possible. Markets function most efficiently when they are transparent and predictable and when busi­nesses can respond to market incentives.
Therefore, while pursuing the goal of security, government should:
4. Make all sources of energy within U.S. bor­ders accessible.The federal government has placed too many restrictions on domestic oil and natural gas production. Failure to make full use of these domestic energy resources exacer­bates the security and cost problems caused by geopolitical events and makes America more vulnerable to supply disruptions and price increases. All U.S. lands and waters should be made accessible for appropriate exploration and production, which could be done using technologies that are far safer and more efficient than those that were available in the past.
5. Remove artificial constraints on the domes­tic energy infrastructure, including unneces­sarily severe environmental regulations.Red tape has restrained the expansion of refineries, construction of new pipelines and electricity transmission lines, and construction of new power plants. Several key domestic energy sources, particularly coal and nuclear power, can fulfill their potential and thus help to achieve energy security only if costly regula­tions and procedural requirements are revised or eliminated. Thus, new legislative initiatives such as streamlining requirements under the Clean Air Act and rethinking requirements for reprocessing nuclear fuel and the storage of nuclear waste should be considered.
6. Ensure that any effort to reduce reliance on foreign oil is grounded in policies that are best for the economy. Reducing oil imports from unstable or unfriendly regimes should be done in a way that minimizes the economic cost to Americans. Policies such as raising taxes on gasoline while mandating or subsidizing expensive or unproven alternative fuels and vehicles lead to large costs with marginal—or even negative—results. The first steps in reduc­ing reliance on foreign oil are to make full use of domestic petroleum reserves and to remove disincentives to investment in oil production from friendly nations. These should be coupled with efforts to encourage diversification away from petroleum, which will be best achieved not by government fiat, but by the private sec­tor–led development of alternatives that can compete in their own right. Domestically, the federal role should be limited to conducting basic research and removing regulatory and tax barriers that impede private-sector innovation. In addition, restrictions on international growth in alternatives, such as the tariffs that limit ethanol imports into the United States, should be eliminated.
7. Manage risks to critical energy infrastruc­ture as a responsibility shared jointly by the government and the private sector. Assessing the risks to critical infrastructure is a task that should be shared jointly by government, which best represents the national interest, and the private sector, which best understands how to deliver goods and services efficiently and effec­tively. Government can best understand threats and take steps to reduce them, while businesses can best assess their own vulnerabilities and address them effectively. Government should establish reasonable due-diligence standards for safety, security, and environmental con­cerns. This will require a high degree of trans­parency and effective information-sharing between government and industry, a mecha­nism to assess compliance and performance, and a non-bureaucratic way to enforce regula­tions. Optimal requirements would be perfor­mance-based (i.e., setting clear standards and allowing the private sector to determine how best to achieve them).
8. Establish effective risk communications for energy issues.Educating Americans on the facts is essential. In particular, Americans should be better educated about energy policy and the changes likely in the pattern of energy supply and prices before disruptions or crises occur. In the event of a crisis, information that is credible, understandable, and actionable should be provided to Americans so that they can make the best-informed decisions.
9. Develop foreign policies that thwart the capacity of coercive regimes to employ energy supplies as an economic weapon. America should be concerned not only about the dependability of its own energy, but also about that of its friends and allies. Regimes that withhold or restrict energy supplies as an instrument of national policy threaten not only regional stability and prosperity, but also the economy and national interests of the United States. The United States should develop strong bilateral measures to deal with efforts by coer­cive regimes to wage economic warfare. These might include joint contingency planning, public–private initiatives, and research and development initiatives.
Advancing Free Global Energy MarketsAmerica cannot ensure freedom solely from within its own borders. It must be willing to engage internationally to create the conditions for free enterprise to prosper.
This means that the government must act to:
10. Sustain access to the global marketplace.Remaining an integral part of the global econ­omyis vital to long-term U.S. national security and the country's continuing economic com­petitiveness. Rather than attempting to defend, protect, or secure any means of domestic or global production, the greatest degree of secu­rity comes from having access to the global marketplace and obtaining goods, resources, and services based on market decisions from friendly suppliers. It is in the vital interest of the United States to uphold the principle of free­dom of the seas and to promote and protect the ways and means of free trade among nations acting in accordance with the rule of law.To accomplish this, the United States should retain the capability to use all of the instruments of national power—including military, diplomatic, law enforcement, intelligence, economic, and informational power—in any theater where U.S. interests could be at risk.
11. Discourage restrictive international regimes.OPEC and non-OPEC countries with restrictive foreign investment laws, state monopolies, and excessive government intervention undermine the U.S. effort to promote free markets. U.S. economic and foreign policy should seek to discourage these practices.
12. Recognize that not all trading partners are equal.Free people have the right to decide with whom to conduct business, but trade in critical but vulnerable goods and services is best conducted with other free peoples. Amer­ica's closest friends and allies should be viewed as the most reliable trading partners for supply­ing oil and other energy supplies. Geostrategic military and economic alliances will change, of course, and the U.S. should be prepared to adapt, but Americans should seek to conduct energy business with countries that respect the rule of law, combat corruption and terrorism, and foster economic opportunity, democracy, and justice.
ConclusionAmericans clearly understand that freedom, opportunity, and their very quality of life suffer when abundant, affordable energy supplies are threatened. They expect Washington to enact poli­cies that protect their interests. Congress and the Administration would do this best by following these 12 principles to unleash the power of free enterprise, protect America's energy interests, and advance freedom in energy markets not just at home, but worldwide.
Stuart M. Butler, Ph.D., is Vice President for Domestic and Economic Policy Studies, and Kim R. Holmes, Ph.D., is Vice President for Foreign and Defense Policy Studies and Director of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.