The Quest: Energy, Security and the Future of Economic Growth

Perspectives from CERAWeek 2012

SPECiAl REPoRt
Reprinted from The Wall Street Journal the Quest: Energy, Security and the Future of Economic Growth: CERAWeek 2012 special sections, March 68, 2012, these articles feature iHS CERA and iHS Global insight experts on irans Ambitions and World oil the Great Revival: the Western Hemispheres oil Renaissance Energy, Jobs and Economic Growth the New Frontier: New oil from old Fields Nuclear Power: taking a long View Getting to Scale: Renewable Energy in an Era of Austerity the Rise of Unconventional Natural Gas in China: Wild Card for World Markets? Brazil: the Rising oil Power Jobs and income: the impact of Shale Gas on the US Economy

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Experience CERAWeek 2012 on the Web. For more information go to www.ceraweekondemand.com or contact the iHS CERA Client Services Center at info@ihscera.com.

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ThE QUEST: EnErGy, SEcUriTy And ThE FUTUrE oF Economic GrowTh PErSPEcTivES From cErAwEEk 2012
kEy imPlicATionS
the articles in this iHS CERA Special Report, published in The Wall Street Journal during CERAWeek 2012, examine how the world energy system is evolving amidst economic and political uncertainties and rapid technological change. Some of the key insights are irans nuclear program is causing disquiet not only in the United States and Europe but also among the countries of the Persian Gulf. Rising tensions triggered by irans nuclear ambitions are having a major effect on the global oil market. The western hemisphere is emerging as the surprising new locus of world oil. Growing production from Canadas oil sands, tight oil in the United States, and the Brazilian offshore will increase the northward and southward movement of oil within the hemisphere and cause more oil from the Persian Gulf to flow to East Asia. with the world economy still recovering from the financial crisis, governments in many countries are looking to the energy sector as a source of growth and jobs. innovative technologies are allowing more oil to be extracted from existing fields. through the application of these techniques, existing fields have become a crucial resource for meeting the worlds growing oil demand. nuclear plants currently provide nearly 20% of the electricity used in the United States. if construction of a new generation of nuclear plants does not start soon, this source of low-carbon power generation may be lost. Although progress was slowed by the financial crisis, the renewable sector achieved remarkable gains over the past decade. But even with rapid continued growth, renewables are likely to generate only 15% of the worlds electricity in 2030. in recent years, china has greatly increased its imports of natural gas. As a result, gas producers around the world look to china as a promising market. But a wild cardChinas own supplies of unconventional gascould change the future supply picture. After discovering vast new offshore oil deposits, Brazil envisions becoming a major global oil producer and a leader in offshore technology. Achieving both of these objectives simultaneously may prove challenging. The shale gas industry has already created nearly 600,000 jobs in the United States, and this figure is projected to grow to nearly 900,000 by 2015. in addition, lower energy prices enabled by the shale gas boom have added $1,000 in extra spending power to the budget of the average American household. May 2012

2012, All rights reserved, iHS CERA inc. 55 Cambridge Parkway, Cambridge, Massachusetts 02142. No portion of this report may be reproduced, reused, or otherwise distributed in any form without prior written consent.

irAnS AmBiTionS And world oil ............................................................................................... 2

By dAniEl yErGin

ThE GrEAT rEvivAl: ThE wESTErn hEmiSPhErES oil rEnAiSSAncE ................................ 5

By dAniEl yErGin And JAmES BUrkhArd

EnErGy, JoBS And Economic GrowTh ..................................................................................... 9

By roBErTo BoccA And SAmAnThA GroSS

ThE nEw FronTiEr: nEw oil From old FiEldS ..................................................................... 11

By PAUl mArkwEll, PETE STArk, lETA SmiTh, And SUryA rAJAn

nUclEAr PowEr: TAkinG A lonG viEw .................................................................................... 13

By lAwrEncE mAkovich And JonE-lin wAnG

GETTinG To ScAlE: rEnEwABlE EnErGy in An ErA oF AUSTEriTy................................... 16

By AlEx klEin And ATUl AryA

ThE riSE oF UnconvEnTionAl nATUrAl GAS in chinA: wild cArd For world mArkETS? ............................................................................................ 18
By xizhoU zhoU And ShAnkAri SrinivASAn

BrAzil: ThE riSinG oil PowEr ................................................................................................... 21

By EnriQUE SirA

JoBS And incomE: ThE imPAcT oF ShAlE GAS on ThE US Economy................................................................... 23

By mAry lAShlEy BArcEllA And John w. lArSon

IHS CERA Special Report

ThE QUEST: EnErGy, SEcUriTy And ThE FUTUrE oF Economic GrowTh PErSPEcTivES From cErAwEEk 2012
ovErviEw The energy industry is facing new challenges in the prolonged Great Economic Contraction and resulting uncertainty over markets and demandand indeed the very stability of the international system. At the same time, a wave of innovationlargely focused on unconventional oil and gas, transportation, the environment, and clean electric power generationis giving rise to game-changing new technologies and solutions. Other keys issues facing the industry include rising geopolitical tensions and shifting regulatory and political agendas in a US and European election year. This IHS CERA Special Report, The Quest: Energy, Security and the Future of Economic Growth, focuses on how the energy world is changing amidst all of this. In this report, we address a series of issues: recent developments in Iran, the great revival in Western Hemisphere oil production, how the energy industry can be a source of economic growth and jobs, the emergence of mature oil fields as a key resource, prospects for nuclear power and renewables, the growing importance of natural gas in China, Brazils oil boom, and the economic impact of shale gas in the United States. We are pleased to provide the following articles that explore these important topics, produced in partnership with The Wall Street Journal. They were originally published in special sections of the Journal during our 31st CERAWEEk conference in Houston, Texas. CERAWEEk is recognized as the most prestigious annual meeting for the global energy industry. This years conference, held March 59, featured presentations and interactive sessions by more than 200 senior executives, government officials, thought leaders, and IHS CERA experts. Altogether over 2,000 participants, representing more than 50 countries, were in attendance. The conference culminated with a special Thursday evening and Friday program on Energy: The Next 30 Years. CERAWEEk On Demand brought the conference to a wider network of virtual participants. For more information, see http://ceraweekondemand.com. As we mark our 31st CERAWEEk conference, we invite you to join in a dialogue about the energy future through our experts insights in these pages.

dAniEl yErGin iHS CERA Chairman and Chairman of CERAWeek

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IHS CERA Special Report

irAnS AmBiTionS And world oil

by Daniel Yergin For 33 years, Irans relations with its neighbors and the wider international community have been marked by tension, conflict, and suspicion. But in the last few months they have entered a new stage. There were two periods, in the early 1990s and then again a few years later, when some improvement in relations seemed possible. In the late 1990s, the reformist President Mohammed khatami proposed a Dialogue of Civilizations with the United States, and President Bill Clinton responded with a call to end the estrangement of our two nations. But that was not to be. khatamis hardline opponents sought to undermine his outreach. In 2005, the election of Mahmoud Ahmadinejad as president brought any possibility of dialogue to an end. Instead Iran accelerated its nuclear program. riSinG TEnSion Today that program appears to be bringing Iran toward the brink of a crisis with the international community. Last November, the United Nations reported that Irans nuclear program indicated the development of a nuclear weapons capability. Europe has followed up with an embargo on Iranian oil, and the United States is putting in place sanctions on Irans central bank. Iran has, at the same time, threatened to close the Strait of Hormuz and conducted large-scale naval exercises. The rising tension is sparking an increase in oil and gasoline prices and generating worries about disruption in oil supplies. An Iran with nuclear weapons would change the balance of power in the Persian Gulf. Iran would be in a position, to borrow a phrase that Franklin Roosevelt used prior to World War II, to overawe its neighbors. Other countries in the region fear that Iran would assert itself as the dominant regional power, capturing a role it has sought for decades. Iran could directly threaten to use the weapons in the regionor actually use themalthough the latter would likely trigger a very large response. But such weapons could also provide it with a license to project its power and influence with what it might regard as impunity throughout the regionboth directly and through its proxies. On top of all of that, Iran, as a regional hegemonic nuclear power, would, in the view of the other countries, be positioned to assert dominance more directly over the flow and price of oil out of the Gulf. In short, Iranian possession of such weapons would, at the very least, create insecurity for the region and for world oil supplies. Many governments also fear that some elements in the Iranian government would, if they have not already done so, go into the proliferation business and provide fissile material to other governments, to its proxies such as Hezbollah in Lebanon, or to terrorist groups.

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IHS CERA Special Report

ASSESSinG inTEnTionS In general, the assessment of the impact of a nations acquiring nuclear weapons depends not only on the possession of the weapons themselves but also on the intentions of those who hold them. And that is why the rhetoric from Tehran would take on new significance were Iran to have those weapons. Ahmadinejad has said that the ultimate mission of the Islamic Republic is to prepare the way for the return of the Hidden Imam, who disappeared in the ninth century but whose reappearance will be necessarily preceded by a period of violent chaos and fiery war. When the Mahdi returns, Ahmadinejad has added, he will destroy the unjust who are not connected to the heavensby which he means the United States, the rest of the West, and Israeland lead survivors to the most perfect world. how mUch wE donT know Adding to the danger is the lack of communication with Tehran, which could increase the likelihood of an accident setting off a nuclear confrontation. Even during the tensest Cold War times, the United States and the Soviet Union had communication channels, including, after the Cuban Missile Crisis in 1962, the hotline between the White House and the kremlin to assure immediate contact during this is indeed a new phase, and a more a crisis. No such channels exist with Iran. critical one, in the contention over irans nuclear program. one way or another, it will have great impact on the global oil market. Indeed, in both Washington and Europe, the frustration is frequently expressed that there is very little understanding of how the regime functions, who makes decisions, and how the factions compete for power. All this adds to the risk. The lack of understanding also extends to the Gulf Arab states. The great worry, observed a leader of one of the Gulf nations, is not how much we know about Iran, but how much we dont. The alarm among the other Gulf countries, as well as in Israel, about Irans objectives has been rising in direct proportion to Irans progress toward nuclear weapons capability. They fear that Iran will become more aggressive in seeking regional hegemony and trying to destabilize other regimes. As one Saudi put it, They want to dominate the region, and they express it strongly and clearly. Many of the Arabs believe that intermittent negotiations is a standard Iranian tacticwhat one official described as their usual strategy of leading you on with false promises, designed to buy more time. Some Gulf Arabs are convinced that Iran is pursuing a strategy of encirclement, from its presence in Iraq and subversion among the Shia populations in Bahrain and eastern Saudi Arabia and in Yemen to promoting insurgency on Saudi Arabias southern border to financing and supplying weapons to Hezbollah in Lebanon and Hamas in Gaza. This encirclement would pressure the Arab Gulf states and, at the same time, put assets in position that Iran could activate during some future time of tension or crisis. The outcome of the current conflict in Syria, Irans one reliable ally in the Arab world, will be another key element in the regional balance of power.
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For years, the Israelis have spoken of a nuclear Iran as an existential threat to the very survival of their nation and people. Now some Arabs also describe Iran as an existential threat. As a leader of one of the emirates put it, his country is only 46 seconds from Iran as measured by the flight time of a ballistic missile. This is indeed a new phase, and a more critical one, in the contention over Irans nuclear program. One way or another, it will have great impact on the global oil market. This article is adapted from Daniel Yergins new book, The Quest: Energy, Security, and the Remaking of the Modern World. He received the Pulitzer Prize for his history of world oil, The Prize: The Epic Quest for Oil, Money and Power.

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ThE GrEAT rEvivAl: ThE wESTErn hEmiSPhErES oil rEnAiSSAncE

by Daniel Yergin and James Burkhard The oil industry was born in the United States a century and a half ago in the hills of Western Pennsylvania. And for the industrys first hundred years, the Western Hemisphere was the leading petroleum-producing region in the world. But after World War II oil production from the Middle East began to grow spectacularly, a development that only accelerated in the 1950s and 1960s. Over time, the Middle East supplanted the Western Hemisphere as the center of world oil production. This has shaped US energy policy and geopolitical strategy ever since. A nEw EnErGy AxiS Now a new energy axis is emerging, running from western Canada, through North Dakota and Texas, to Brazil. It is leading to a revival in hemispheric oil production, one with major implications not only for the energy industry, but also for the world economy and geopolitics. This shift was not due to a policy push to achieve energy independence; rather, it has happened almost accidentally, a product of market signals and quite separate initiatives and technological advances. But together, these developments are leading to a major upgrade of the hemispheres oil profile. The recent boom in hemispheric oil production has come from supply sources that were marginal or even nonfactors until recently: the oil sands in Canada, tight oil in the United States, and presalt deposits in Brazil (see Figure 1). ThE SUrGE in cAnAdA Oil sands, also known as tar sands, are made up of very heavy oil mixed with clay and sand. The oil is so thick that it must be separated from the sand and clay, and then treated, to flow. To do this on a large, commercially viable scale has required major engineering advances. The 1990s was the decade when the technical groundwork was laid. Oil sands production in Canada has grown from 400,000 per day (bd) in the mid-1990s to 1.7 million barrels per day (mbd) todaymore than Libyan production before its civil war. And IHS CERA projects that output could exceed 3 mbd by 2020. Such an increase would make Canada the worlds fifth-largest oil producer, behind Russia, Saudi Arabia, the United States, and China. The oil sands have become controversial. Environmental groups in the United States have opposed the keystone pipeline, which would carry oil from Alberta and North Dakota to the Gulf of Mexico. One reason given for this opposition is the carbon dioxide (CO2) emissions associated with oil sands production. But research has found that a barrel of oil produced from the oil sands results in only 5 to 15% more CO2 emissions than the average barrel of oil used in the United States.

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IHS CERA Special Report

Figure 1 Liquid Hydrocarbon Production in Canada, United States, and Brazil, 200020
20

Brazil

15
US Tight Oil

Million Barrels 10 per Day

US Other

5
Canada Oil Sands Canada Other

0 2000

2005

2010

2015

2020

Source: IHS CERA. 20308-3

While the environmental debate goes on, oil sands have proved to be a major contributor to energy security. Though many people assume that most US oil imports come from the Middle East, in fact, the largest sharenearly a quarter of the totalnow comes from Canada. And the oil sands account for more than half of Canadas oil exports to the United States, a share projected to rise steeply in the coming years. TiGhT oil EmErGES The second source of increased production is tight oilsometimes called shale oilin the United States. Tight oil is petroleum trapped in shale or other fine-grained rocks, such as sandstone or carbonates. The technologies used to extract natural gas from shalehorizontal drilling and hydraulic fracturingare now being applied to release tight oil from dense rock. In North Dakota, a formation known as the Bakken was producing a mere 10,000 bd of oil less than a decade ago. Its production level is now over 500,000 bd. The Bakken has turned North Dakota into the third-largest oil-producing state in the country, as well as the state with the lowest unemployment rate. Similar development of tight oil is taking place in other areas, including in the Eagle Ford Formation in South Texas and in West Texas. Total US production of tight oil was around 150,000 bd in 2000. But it reached nearly 1 mbd last year, and by 2020, IHS CERA projects that it could approach 3 mbdone third of overall US oil production. And this estimate is conservative; some forecasts project even higher levels of US tight oil production by the

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IHS CERA Special Report

end of the decade. Tight oil has been the key engine of higher US production of all liquids fuels, which increased by 1.3 mbd between 2008 and 2011. This made the United States the number one source of global supply growth over that periodby far. The economic impact of tight oil could be substantial. By 2020, the net US oil import requirement could be around 5 mbd less than it was as recently as 2005. At an illustrative oil price of $100 per barrel, this represents an annual reduction in the oil import bill of $182 billionan amount equal to about one-third of the entire US trade deficit last year. BrAzil SEES ThroUGh ThE SAlT Brazil comprises the southern end of the new hemispheric oil axis. When Brazil began to develop its sugar-based ethanol industry in the 1970s, it did so on the assumption that the country had no oil. But it turned out that the waters off the coast of Brazil had a very great deal of oil. Offshore development has meant that just the increase in Brazilian oil production since 2000 is more than one and a half times the countrys entire ethanol output. But even more striking production increases are on the horizon. In the middle of the last decade, technological breakthroughs made it possible to identify large new oil fields off the coast of southern Brazil that until then had been hidden below a belt of salt a mile or more thick. Developing these presalt resources, as theyve come the shift in the locus of production means to be known, is an immense technical and logistical challenge and will require more oil will flow north to south and south huge investments. But if development to north within the Western Hemisphere, goes at a reasonable pace, Brazil could rather than from the Eastern Hemisphere in total be producing 4.5 mbd of oil by 2020, nearly twice Venezuelas present westward. output and almost half the current production of Saudi Arabia. Venezuela has traditionally been the powerhouse of Latin American oil. But Brazil is now poised to assume that role and, in the process, to become a major exporter to the global market. rEdrAwinG ThE oil mAP Together, these three developments will significantly alter the global oil map. The Western Hemisphere will still import oil from the rest of the world, but not nearly to the same degreeand certainly not in the amounts forecasted just a few years ago. This will mean significant reductions in shipments from the Middle East and West Africa. Oil that would have been shipped west from those regions will instead move eastward in growing volumes to the emerging economies of Asia. China, which today uses half as much oil as the United States, could become the worlds largest oil consumer around 2020. All of this points to a big geopolitical shift, with Asian economies having a growing stake in the stability of Middle East oil supplies. This raises a question: How will the great powers share responsibility for the stability of the Persian Gulf in the decade ahead?

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For the United States, new sources of supply from the Western Hemisphere will contribute to energy security. Since the oil market is global, the United States, like all consuming countries, will still be vulnerable to supply disruptions. And because of the sheer size of the Persian Gulfs oil reserves, the Middle East will remain strategically important. But new sources of supply closer to home will make Americas supply system more resilient. The shift in the locus of production means more oil will flow north to south and south to north within the Western Hemisphere, rather than from the Eastern Hemisphere westward. This shift strikingly demonstrates how technological innovation is redrawing the map of world oil and reshaping the energy future. Daniel Yergin is Chairman of IHS Cambridge Energy Research Associates and the author of the new book The Quest: Energy, Security, and the Remaking of the Modern World. James Burkhard is Managing Director of IHS CERAs World Oil Group.

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EnErGy, JoBS And Economic GrowTh

by Roberto Bocca and Samantha Gross Energy is the lifeblood of the global economy, a crucial input to nearly all of the goods and services of the modern world. Stable, reasonably priced energy supplies are central to maintaining and improving the living standards of billions of people. But as the world struggles to emerge from a global recession and financial crisis, countries are looking to improve economic performance and put people back to work. Policymakers, especially in countries with energy-producing potential, now increasingly see another role the energy sector can play: job creator and engine of economic growth. In most countries, energys direct contribution to the economy is relatively small, whereas in resource-rich countries, energys share of GDP can be much higher. Regardless of the industrys position in the overall economy, if domestic energy production can be Policymakers, especially in countries increased at a competitive price, such with energy-producing potential, now growth can be a powerful economic driver. increasingly see another role the energy Energy production typically requires sector can play: job creator and engine of a skilled and well-paid workforce and economic growth. massive capital expenditures. As a result, the industry can have a substantial multiplier effect on the larger economy. Employment and investment in the energy industry flow through to other sectors, creating additional jobs and spurring growth in seemingly unrelated realms. BriGhT SPoT in ThE UniTEd STATES For these reasons, energy production can make a significant contribution to recovery from the global downturn. To take just one example, oil and gas production in the United States has been a bright spot in an economy still struggling to find its footing. The US upstream oil and gas sector grew 4.5% in 2011, more than twice as fast as overall GDP, which rose only 1.7%. The US energy industry also supports a substantial number of jobs, owing in part to its long supply chain. Incremental growth in energy production can be a boon for countries where energy is a relatively small part of the overall economy, such as the United States. Countries where energy production accounts for a large share of GDP face the challenge of translating resource wealth into broad prosperity. Nations that have done this successfully have typically expanded from energy production into related downstream activities such as refining and petrochemicals; upstream activities such as oil and gas services; or complementary sectors such as renewables and energy efficiency, information technology, engineering and construction, and transportation and logistics. Norway and Brazil have been especially successful at building robust oil and gas services clusters; other resource-rich nations often look to them as models. Good governance and economic diversification are also critical in enabling nations to make the most of their resource endowments.
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innovATion in rEnEwABlES Technological advances have revolutionized oil and gas extraction over the past decade, and this transformation has been a key to the remarkable recent growth in upstream oil and gas in the United States. Innovations in renewable electricity generation have also contributed to job creation and economic growth. Areas with fewer natural resources have relied more on the renewables sector to spur economic activity. In the wind industry, the scale of the turbines promotes substantial local or regional supply chains, which create many additional jobs. South korea, China, and India are fostering entrepreneurship and technological innovation in renewables by providing incentives for wind and solar production, encouraging joint ventures and technology transfer, and funding research and development. Many developed economies hope to expand their renewables footprint as well, both to be at the forefront of this growing sector and as a means of reaching their sustainability goals. The energy industry itself can undoubtedly be a driver of economic growth. But what policies can governments enact to encourage growth? Energy policy typically tries to achieve relatively stable prices, security of supply, and environmental protection. Adding job creation to the list of goals for a countrys energy policy can prove challenging. Seeking to maximize direct employment in the energy industry may not be the best thing to do if it promotes unproductive activity and leads to increases in energy prices. Such a step could restrain other economic activity. The net result could be that direct gains from the energy industry are canceled out by losses from other sectors. A better approach is to focus not just on the industrys direct economic contribution, but instead on how energy contributes to the economy overall. Although policymakers may look to energy as a driver of job creation and growth, its primary role remains as a key input for activity across the entire economy. The energy industry certainly contributes to economic growth and job creation, and in some countries to a very great extent. But in most settings, its basic role as the economys lifeblood will remain most important. Roberto Bocca is Senior Director and Head of Energy Industries at the World Economic Forum. Samantha Gross, Director of Integrated Research at IHS CERA, is an expert on the intersections among environment, stakeholders, and energy companies. This article is drawn from the new joint World Economic Forum and IHS CERA study Energy for Economic Growth: Energy Vision Update 2012. The full report can be found at www.weforum.org/ issues/energy.

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ThE nEw FronTiEr: nEw oil From old FiEldS

by Paul Markwell, Pete Stark, Leta Smith, and Surya Rajan A perennial question in the oil and gas industry is, Where is the next frontier from which future supplies will come? Today, one answer is, so to speak, right under our feet. Putting it another way, old oil fields are becoming the big new thing in the energy business. Continuing technological advances are making this possible. A striking example comes from the Granite Wash, a sandstone formation stretching from North Texas into western Oklahoma. The first discovery wells were drilled there in 1956. By the late 1950s, the Granite Wash was producing nearly 100,000 barrels per day (bd) of oil and condensates, another form of liquid hydrocarbons. Production at the Granite Wash declined over time, falling below 50,000 bd by the late 1960s. Natural gas production also began around then, and as oil output fell, the Granite Wash became known primarily as a gas play. Production of oil and condensates dropped all the way to 13,000 bd in 2003. It looked like the Granite Wash was just about washed up as a source of petroleum. rEvivinG GrAniTE wASh But then technologies used successfully over the past decade to extract natural gas trapped in shalehorizontal drilling and the fracturing of rock through the injection of liquids and particles under high pressurerevived the Granite Wash as an oil play. Over the past eight years, combined oil and condensate production has nearly tripled, to more than 36,000 bd. And IHS CERA projects that by the early 2020s, production could exceed 100,000, surpassing the previous peak. This is not the first time such techniques have been used. As far back as 1951, a Time magazine reporter described hydraulic fracturing operations in West Texas: Because of the hard-packed nature of the formation, ordinary drilling methods will not release the oil; instead, a gelatinous compound followed by coarse sand, must be pumped into the hole under tremendous pressure. This loosens the fractures and the oil begins to flow freely. Though the techniques used at the Granite Wash are not new, their much greater sophistication and far more widespread application is novel. EnhAncinG rEcovEry Horizontal drilling and fracturing are not the only ways to expand production from mature fields. Other enhanced oil recovery (EOR) techniques include injecting carbon dioxide (CO2) or other gases; heating the rock by injecting steam or hot water or even burning some of the hydrocarbons underground; and injecting chemicals such as polymers, surfactants (similar to soap), gels, or specially prepared salt water. Among the creative new methods being researched is the use of microbes, in which biological organisms ferment the oil and produce a by-product that assists recovery. The use of CO2 is widespread in the Permian Basin of West Texas, which in its heyday was the largest onshore oil producing region ever in the lower-48 states. Such an approach works
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IHS CERA Special Report

there because abundant, naturally occurring supplies of CO2 are nearby. Some speculate that to reduce greenhouse gas emissions, CO2 from coal- and gas-fired electric power plants could be used to increase oil production in locations that lack naturally occurring CO2. GloBAl imPAcT The revival of mature fields has been a quiet, global revolution that has occurred without great fanfare. But it is generating a major prize. In recent years, estimated additions to reserves from existing fields have averaged 18 billion barrels annually, owing to revised assumptions about how much oil can be recovered. This amount was equal to nearly three-fifths of the oil consumed during these years. By contrast, growth in reserves from new discoveries has averaged only about 14 billion barrels annually over the past 20 years. The giant Duri field in Indonesia, which has been producing since 1941, shows how EOR can lead to an increase in reserves from a mature field. In 1982, Duris estimated reserves were 500 million barrels. EOR techniques were begun in the early 1990s and resulted over time in a massive increase in estimated reserves. In 2009, they stood at 2.8 billion barrels. the revival of mature fields has been a quiet, global revolution that has occurred without great fanfare. Advanced techniques certainly have their challenges. Field operators and governments must cooperate to facilitate the investments that can optimize production from mature fields. Several key ingredients are needed: recognition early in a fields life that upside potential exists; a shift in the operational mindset to allow for application of innovative technologies and operating practices; and host governments willing to alter contract terms to take into account the additional costs presented by mature fields. Discoveries of large new oil fields now come along far less frequently than in the past. Getting more oil out of old fields is a major new frontier for the industry. Today, it represents one of the most critically important ways to meet future demand. Paul Markwell, IHS CERA Senior Director, is an expert in upstream oil and gas and oversees IHS CERAs upstream research agenda. Pete Stark, Vice President of Industry Relations at IHS, is an expert on unconventional oil and gas and industry trends. Leta Smith, IHS CERA Director, focuses on trends in exploration and production and their implications for the future supply outlook. Surya Rajan, IHS CERA Director, is an expert on upstream research and North American natural gas production and supply.

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nUclEAr PowEr: TAkinG A lonG viEw

by Lawrence Makovich and Jone-Lin Wang Sometimes you dont know what youve got until its gone. Today most people take the benefit of nuclear power in the United States power generation portfolio for granted. But this cornerstone of power generation diversity is something that may slip away in the not too distant future if we fail to take a long view about nuclear power development. The United States is fortunate to have a well-diversified mix of fuels and technologies for power generation (see Figure 2). But this is not an accident. Maintaining a diverse mix of power generation fuels and technologies requires making adjustments based on a long view. The shale gas revolution has dramatically expanded reserves, lowered prices, and changed expectations regarding the availability and cost of natural gas. As a result, it makes sense to adjust the generation mix toward a greater share for natural gasfired power supply. But it would be shortsighted to expand natural gasfired power supply alone and end up relying too much on a single fuel in the years ahead. Current natural gas prices lead some to jump to the conclusion that developing new nuclear power plants simply does not make economic sense. However, current natural gas prices are at a cyclical low owing in part to a warm winter. These current low prices are well below the level most people expected just one year ago and are also well below the price level that most analysts expect will keep natural gas demand and supply in balance over the long run. The implication is clear: the current downward price swings indicate that the shale gas revolution has not made predicting natural gas prices any easier, nor has it ended their multiyear cycles and volatility.

Figure 2 US Net Electric Power Generation by Energy Source, 2010

Hydro and Renewables 10%

Other 2%

Nuclear 19% Coal 45% Natural Gas 24%

Source: IHS CERA. 20308-2

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ThE vAlUE oF divErSiTy Uncertainty regarding future fuel prices is why it is so important to take a long view and remember the value of fuel diversity. How long a view? Power technology and fuel choices are something we have to live with for 40 to 60 years into the future. Looking back over a few decades provides some valuable perspective. Natural gas prices rode a roller coaster across the past two decadesranging from as low as $1.40 to as high as $13.36 per million Btu at the Henry Hub in Louisiana, which is where the benchmark price is established. It is not hard to imagine what monthly consumer power bills would have looked like if the United States did not have fuel diversity and instead had relied solely on natural gas for power generation. In just the last six years, the average monthly cost of fuel for power generation would have doubled. Since fuel makes up roughly one-third of a monthly power bill, the ups and downs in natural gas prices would have made the variation in monthly power bills three times greater. The vast majority of electricity consumers reveal a strong preference for power bills that are more stable and predictable than the cost of natural gasfired power supply. And the most cost-effective and proven way to dampen power price volatility is a diversified generation mix. But here is the rub: the United States is approaching a critical juncture regarding a key element of the diversified generating portfolionuclear power. PErFormAncE Between 30 and 50 years ago, the United States built the worlds largest fleet of nuclear power plants and increased the generation share of nuclear power to around 20%. But the accident at Three Mile Island in 1979 abruptly decelerated the growth of US nuclear generating capacity. Although additions of nuclear capacity have not been keeping pace with increases in power use, the share of nuclear generation has been relatively steady because the performance of nuclear power plants has steadily increasedso much so the decisions made in the next decade will that today US nuclear performance determine whether or not nuclear power represents the benchmark for world-class operations. remains a key element of the US power generation mix. The gradual improvements in US nuclear performance did not generate many headlines and these gains in carbon-free power generation are something most people simply took for granted. However, the current nuclear power plant fleet is aging and is scheduled to cease operations between 2025 and 2050. That may still seem a long way off, but the lead time to build a new nuclear power plant is about a decade. Taking a long view indicates that the nuclear power decisions made in the next decade will determine whether or not nuclear power remains a key element of the US power generation mix. Thats why the nuclear power plants starting construction in the United States this year are so important. Although these plants alone cannot maintain a viable generation share for nuclear power in the long run, they are going to be the proof statement for the next generation of nuclear power development. And that is important because the next generation

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IHS CERA Special Report

needs to add about one nuclear power plant per year in the post-2020 time frame simply to maintain a viable nuclear generation share. If this does not happen, then a meaningful nuclear power generation share may be something we all come to regret when its gone. Lawrence Makovich is a Vice President and Senior Advisor at IHS CERA. He is author of the IHS CERA report Recalibrating Power Supply Cost Assessments: Accounting for Integration. Jone-Lin Wang is an IHS CERA Managing Director and head of the Global Power Group. She is author of The Unfolding Crisis in Japan and What It Means to Energy.

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IHS CERA Special Report

GETTinG To ScAlE: rEnEwABlE EnErGy in An ErA oF AUSTEriTy

by Alex Klein and Atul Arya Starting in the mid-1990s, renewable energy experienced a remarkable boom. This growth accelerated in 2004 in the face of burgeoning energy demand, volatile and high oil prices, and seeming progress toward a global agreement to slow the growth of carbon emissions. These factors drove sizeable investment in wind, solar, and biofuels technology, as well as rapid development of renewable power projects. The boom started from a tiny base: wind and solar energy combined accounted for less than 0.5% of global power generation in 2000. But many observers felt this boom might be a launching pad that would spur renewables to become a substantial part of the worlds energy picture over the next decade. The financial crisis of 2008 and its aftermath brought the renewables sector down to earth. Share prices of renewables companies are now well off their peaks, some early leaders have gone under, and government fiscal constraints jeopardize the subsidies and tax breaks that were crucial in fueling the earlier boom. What are the prospects for renewables in the new era of austerity and fiscal discipline? AchiEvEmEnTS oF ThE Boom yEArS The starting point is to review what occurred during the boom years. Global investment in renewable electricity capacity grew from a mere $5 billion in 2000 to nearly $100 billion in 2008. The worlds major energy equipment manufacturers jumped into Renewables will remain an important renewables, standardizing technology and part of the world energy agenda. But bringing operational scale. Research and even if renewable energy technologies development (R&D) spending and growth were to double their share of new power in the manufacturing base drove costs generation investment over the next two down significantly. In some locations, wind has become competitive with electricity decades, they would still barely account from fossil fuelfired or nuclear power for 15% of power supply on a global basis plants. The cost of solar photovoltaic (PV) panels has plummeted by 75% over the by 2030. past decade. In most parts of the world, however, the cost of power from PV remains significantly higher than power from the grid. Large-scale solar thermal power has become a new frontier, as has offshore wind, especially in Europe. A new breed of global renewables developers emerged during the boom years, initially coming from the ranks of Europes utilities. Wind power was the major driver, and these companies were able to extend their renewables footprint into new markets. Renewables also increasingly became an important consideration in the strategies of the worlds major utilities and energy companies.

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SincE ThE criSiS In the years since the financial crisis, growth of the renewables industry has continued. Tax incentives and stimulus funding in the United States, taxpayer and electricity ratepayer subsidies in Europe, and the Chinese governments support for manufacturing and R&D investment have all provided support for renewables, even in the face of a sluggish global economy. In each of the past three years, the global renewables industry set new records for installed capacity and investment. Notably, renewables now capture over a third of all global investment for power generation. Yet, despite all this, wind and solar energy combined still account for only 2% of global power generation. One of the major challenges is that electric power infrastructure turns over very slowly. The equipment has an average life span of 40 years, so over the course of a decade, only 25% of installed capacity becomes obsolete and needs replacement. For renewables to get to scale more quickly, their cost needs not only to be lower than other options for adding new capacity and replacing obsolete equipment, but also to become low enough to justify supplanting existing power generation equipment that is operating perfectly well. With Europes economies in turmoil, continued support there for aggressive renewables subsidies is in doubt. And with the US stimulus money now spent, and concern over deficits widespread in Washington, there is little prospect of major new funding for renewables in America. Nor is there much likelihood for a global agreement to control greenhouse gas emission. The renewables industry currently has far too much manufacturing capacity, so a swift and painful consolidation has actually already started. The market is also likely to become more diversified globally. The United States, Europe, and China accounted for 75% of world renewables purchases in 2011. Yet more than 60 countries have adopted policies designed to increase the share of wind and solar in their energy mix. Latin Americas renewables market is surging, and the Fukushima nuclear accident has led to increased demand for solar, wind, and biomass in Asia. Markets in emerging economies will be able to offset some of the demand lost from the United States and Europe. lonG-TErm ProSPEcTS In spite of a slowdown, renewables will remain an important part of the world energy agenda. But even if renewable energy technologies were to double their share of new power generation investment over the next two decades, they would still barely account for 15% of power supply on a global basis by 2030. Over the long term, the world is going to need all optionsfossil fuels, renewables, and efficiency gainsto meet its future demand for energy. There will be multiple pathways forward and unexpected turns and surprises. Renewables will over time become a larger part of the worlds energy mix. But the change wont happen overnight. Alex Klein is Research Director for Clean and Renewable Power Generation at IHS Emerging Energy Research. Atul Arya is Senior Vice President, Research & Analysis, at IHS.

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ThE riSE oF UnconvEnTionAl nATUrAl GAS in chinA: wild cArd For world mArkETS?
by Xizhou Zhou and Shankari Srinivasan Chinas consumption of natural gas has doubled over the past five years, and IHS CERA projects that demand will quintuple over the next two decades. This trend seems to bode well for international gas producers. As a result, many gas-producing countries look to the Middle kingdom as a promised land. But a wild card could disrupt their vision of robust Chinese gas imports: Chinas own unconventional gas, a resource that over the long term could put the squeeze on imports. Natural gas has historically been a niche fuel in China. Even after recent rapid growth, it accounts for less than 4% of primary energy supply, compared with 25% in the United States. Last year, China consumed 130 billion cubic meters (Bcm) of gas, roughly one fifth of US consumption, despite Chinas having a population four times larger. An expanding urban grid and rising incomes mean that Chinas consumers can now access and afford natural gas, and industrial users are happy to switch to gas from more expensive oil. Gas-fired power generation allows utilities to meet both rising electricity demand and more stringent environmental regulations. Yet a dearth of supply previously kept gas as a marginal part of Chinas energy mix. The supply picture is now changing. Chinas domestic gas production has tripled over the past decade. And imports have increased from a negligible factor to one-quarter of consumption in 2011 (see Figure 3). Imports

Figure 3 Imports Increasing in Chinas Natural Gas Supply

160 140 120 100 Billion Cubic Meters 80 60 40 20 0 1996
Source: IHS CERA. 20308-1 LNG Imports Pipeline Imports Domestic Production

2000

2005

2010

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come to China in two ways: on tankers in the form of liquefied natural gas (LNG) and by pipeline. LNG currently arrives in China through long-term contracts with Australia, Indonesia, Malaysia, and Qatar; short-term cargoes have also come in from Oman, Nigeria, and, very recently, Alaska. The completion of the Central Asia Pipeline in 2009 gave China access to gas from its western neighbors. Last year, shipments from Turkmenistan reached 13 Bcm, roughly 40% of total gas imports. Long-term pipeline contracts are also planned with Uzbekistan and kazakhstan, and other pipelines are in the works: a China-Myanmar link is currently under construction, and negotiations with Russia are ongoing, with four potential projects on the drawing board. Yet a surprise may be in the making. Domestic supplies of unconventional gasshale gas and coalbed methanecould become a big factor, and soon. A new study by IHS CERA has come to a striking conclusion: the geological potential for unconventional gas in China is greaterpotentially much greaterthan in North America, where shale gas has turned the United States from a gas importer to a prospective exporter in less than a decade.* Because of the time required to develop this new resource and projected demand growth, over the next decade unconventional gas will chiefly fill Chinas supply gap rather than replace other sources. As a result, China is still expected to depend heavily on With unconventional gas looming on conventional gas, LNG, and pipeline the horizon, China may not have the imports up to 2020. insatiable appetite for imports many have After 2020, however, unconventional anticipated. gas could begin to compete with other supply sources and even with oil and coal. Large volumes of cheap unconventional gas may not only provide the market with abundant supply but also spur further gas demand. Unconventional gas in China could then do what it has done in North America in recent yearsdrive an energy revolution. With unconventional gas looming on the horizon, China may not have the insatiable appetite for imports many have anticipated. Instead, the country could become gas self-sufficient in two decades. Existing LNG contracts would come under pressure, and new contracts could face stiff competition. Pipeline negotiations may be delayed or even stopped altogether, with potentially large geostrategic implications. Other fuels could face rising pressure from gas across all sectors: power generation, industry, and even transportation. This is a year for assessment. Chinas Ministry of Mineral and Land Resources is working with key stakeholders to evaluate the potential of unconventional gas. The Ministry aims to complete this assessment and select priority areas for exploration in 2013. The decisions from this effort could trigger fundamental changes in the global gas balance and in Chinas energy mix.

*The Unconventional Frontier: Prospects for Global Unconventional Gas is a Multiclient Study that combines IHS proprietary data with IHS CERAs market experience and knowledge of above- and belowground drivers. The study develops detailed analysis of unconventional natural gas supply in seven key regions: China, India, Indonesia, Australia, Europe, Eastern Europe, and South America. For more information, contact Roberto.Futuro@ihs.com.

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Xizhou Zhou is Director of China Energy at IHS CERA. Shankari Srinivasan is Managing Director for Gas, Power, and Renewables for Europe, Middle East, and Asia at IHS CERA.

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BrAzil: ThE riSinG oil PowEr

by Enrique Sira The largest oil discovery in recent decades has been the undersea deposits off the coast of Brazil. These create the potential for Brazil to move into the ranks of leading oil powers, with major implications for the global market. The Brazilian government is fully aware of the tax revenue, job creation, and influence that oil production on this scale could provide. But it also sees this new discovery as an opportunity to turn the countrys oil services industry into a global leader in offshore technology. To achieve that objective, the government has raised the bar by imposing more stringent local content requirements on new offshore production. But becoming a top-tier oil supplier and global leader in oil services at the same time will not be easy. The genesis of the recent Brazilian offshore discoveries can be traced back almost four decades, to the oil price spikes of the 1970s. These left Brazil vulnerable, and the government resolved to make the country fully energy self-sufficient. One result was the discovery of offshore oil deposits in the Campos Basin, which had sizeable potential. The other was development of Brazils ethanol industry, which grew over time to become one of the worlds two largest. BElow ThE SAlT Production from the Campos Basin and elsewhere has allowed Brazilian oil output to grow more than tenfold over three decades, from less than 0.2 million barrels per day (mbd) in 1980 to 2.3 mbd in 2011. Along the way, Brazil became self-sufficient in oil. The skills developed in exploiting the Campos fields gave Brazil world-class offshore capabilities and proved to be a key factor behind the latest discoveries. Petrobras, the Brazilian national oil company, has recently made several important technical advances in offshore exploration and development, including new methods for analyzing seismic data that make it possible to see oil deposits under mile-thick salt domes. These have led to approximately 90 new offshore discoveries, which contain an estimated 40 billion barrels of oil. This resource can be exploited with only half the wells needed for a similar field in West Africa and 5 to 10 times fewer wells than are needed for a comparable field in the Gulf of Mexico. This means that Brazils production costs for its new offshore oil will be much lower than for other sources of offshore oil. After these new fields come online, Brazil could increase its output to 4.5 mbd or more by 2020, pushing it into the top tier of oil-producing countries, behind only such titans as Russia, Saudi Arabia, and the United States, and at almost the same level as Canada. This would place Brazil well ahead of its continental rival, Venezuela, and make it by far the largest oil producer in Latin America. ThE chAllEnGE AhEAd But exploiting this new resource will involve a herculean effort, one in which Petrobras will have to operate at, and push beyond, the current technological frontier. The oil is almost
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IHS CERA Special Report

200 miles offshore, under a mile of salt that is itself under more than a mile of ocean water. The oil also contains large amounts of natural gas; handling this mix will require complex and expensive transportation infrastructure that has to be built. Getting the hydrocarbons out from under the ocean will require major technological innovation and many first-of-akind solutions. The scale of what is ahead is enormous; and the investment required will be massive, amounting to several hundred billion dollars. Equipment constraints could pose another challenge. To cite just one example, when the Brazilian project reaches scale, it will require half of the worlds stock of deepwater drilling equipment. By imposing strict local content regulations, Brazil hopes to increase the scale and Brazil may face tough choices. its goal of technical sophistication of its oil services sector. The idea is that this industry could maximizing tax revenues and influence in eventually generate sizeable exports. But it global markets may be at odds, at least will be very challenging for the domestic in the short term, with its aspirations of industry to develop the capabilities needed becoming a leader in offshore oil services. to meet the new content requirements, given the scale of the undertaking. Brazil may face tough choices. Its goal of maximizing tax revenues and influence in global markets may be at odds, at least in the short term, with its aspirations of becoming a leader in offshore oil services. Managing potentially conflicting goals will require dexterity on the part of Petrobras and other key stakeholders in the new Brazilian discoveries. Whatever the eventual balance in the years ahead, the Brazilian offshore has become a new hot spot in global oil. Enrique Sira leads IHS CERAs Latin America Energy Advisory Services.

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JoBS And incomE: ThE imPAcT oF ShAlE GAS on ThE US Economy

by Mary Lashley Barcella and John W. Larson The US shale gas revolution is the most significant energy development of the past quarter century. A decade ago, shale gas represented a tiny share of domestic gas production; today, it accounts for more than one third. As it has grown so rapidly, it has also become the subject of a highly visible environmental debate. But shale gas is also a major, yet surprisingly little recognized, economic story. The shale gale, as it is sometimes called, is providing a big boost to the US economy at a time of sluggish job and income growth. The rapid growth of shale gas has already created 600,000 jobs. By 2015 that number could grow to 870,000 jobs and add nearly $1,000 per year in extra spending power to the budget of the average American household. In addition, it will generate nearly $30 billion annually in tax revenues. These are some of the key conclusions from the new study, The Economic and Employment Contributions of Shale Gas in the United States, prepared by IHS Global Insight. These shale gas jobs come in three categories. The first category is direct jobs: people employed by the industry itself. In the case of shale gas, this includes workers involved with exploration and drilling as well as activities that support drilling, such as cementing wells. The second category is indirect jobs: people employed by companies the rapid growth of shale gas has already active in the shale gas supply chain. created 600,000 jobs. By 2015 that Examples include surveyors, cement number could grow to 870,000 jobs and truck drivers, iron and steel workers, heavy equipment operators, rig spare add nearly $1,000 per year to the budgets parts installers, and IT specialists. The of the average American household in third category is induced jobs: people terms of extra spending power. employed as a result of spending by holders of direct and indirect jobs. Examples include waitresses at restaurants near drilling sites, carpenters and electricians who build apartments for gas field workers, real estate brokers, attorneys who draw up mortgages, and auto dealers. The current 600,000 jobsand projected 870,000 by 2015are sizable contributions in a country with sluggish economic growth and which, in total, employs 140 million. Each direct job created in the shale gas industry leads to the creation of more than three indirect and induced jobs, a rate higher than for many other sectors. The United States is the global leader in all aspects of shale gas, which means that most suppliers are domestically based. As a result, a higher proportion of industry spending supports jobs at home. This is in sharp contrast to an industry such as electronics, where much of the supply chain is based overseas.

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In addition to creating jobs, the shale gas industry has also contributed to the US economy by lowering the cost of natural gas. A decade ago, it was generally expected that the country would soon have to rely on imported, and expensive, liquefied natural gas. The shale gale has turned that expectation on its head and provided an abundant source of domestic gas. This has led to lower prices for the gas used in home heating and cooking, as well as lower electricity prices. We estimate that the average American household will have an additional $926 in disposable income every year between 2012 and 2015 as a result of lower natural gas prices. Moreover, these gains are projected to increase to more than $2,000 per year over the long term. This provides truly welcome relief to family budgets in lean economic times. Finally, shale gas helps government budgets. Over the next 25 years, we estimate that the industry will generate nearly $1 trillion in tax revenues for local, state, and federal entities. And our assessment may actually underestimate the industrys economic impact. To ensure that the study was rigorous, we used conservative assumptions. The study included only shale gas fields already under development in 2010 and excluded states such as New York, where there has been regulatory uncertainty. It also excluded economic activity by US companies that may support the Canadian shale gas industry. Finally, our numbers do not include jobs created in industries that rely on natural gas as a raw material, such as petrochemical or fertilizer production, which may move plants to the United States in response to low gas prices. Because of the shale gale, billions of dollars of investment are now planned for new chemical facilities in the United States. These investments would never have been considered half a decade ago, and they will generate many additional new jobs. In a strained economic and political environment, the jobs created by the shale gas industry have been a major boon. And with both households and governments facing tight budget constraints, shale gas provides sorely needed income and tax revenues. So far, the shale gas revolution has been a big story in the energy industry. Its broad economic benefits, as it sweeps throughout the US economy, are just beginning to be appreciated across the country. Mary Lashley Barcella is Director, North American Gas Analysis, at IHS CERA. She coauthored the IHS CERA study Fueling North Americas Energy Future: The Unconventional Natural Gas Revolution. John W. Larson is Vice President and global industry leader for Public Sector Consulting at IHS. He is a coauthor of IHS Global Insights study of the economic impact of shale gas. The study is available at http://www.ihs.com/info/ecc/a/shale-gas-jobsreport.aspx

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