Transcript: National Petroleum Council Report: Facing the Hard Truths About Energy

CNA CORPORATION


Energy: A Conversation About
Our National Addiction


Facing the Hard Truths About Energy...ECONOMIC, ENVIRONMENTAL
AND POLITICAL CHALLENGES OF MOVING FORWARD



Speakers:

Frank Verrastro,
CSIS Energy Director

Sarah Ladislaw,
CSIS Energy Fellow




5:45 – 8:30 P.M.
Tuesday, October 9, 2007



Transcript by:
Federal News Service
Washington, D.C.




STEVE WEHRENBERG:  Ladies and gentlemen, if you’ll find your seats.  I always love to say that.   Well, good evening, ladies and gentlemen.  My name is Steve Wehrenberg.  I’m with the Coast Guard, also a director of the Energy Consensus, a nonprofit aimed at educating decision-makers and those who influence them in issues surrounding energy and the environment.  I’ll be your moderator this evening. 

A couple of quick announcements before I introduce our stellar speakers this evening, if I can.  Our next event will be November 19th, the topic will be transportation.  On the 10th of December we will have a DOD R&D panel to talk about some of the interesting – more interesting things that are going on in DOD.  We are, as you are all probably aware or most of you are probably aware by now in the process of a collaborative overhaul of the energy conversation website – is that me buzzing, or – (laughter.)  I’ll do what I can.  I used to be a technician back in the old days.

But any rate the – where was I – oh, our website is undergoing a major overhaul and we’re doing that through a very collaborative set of activities.  As a matter of fact, it’s collaborative to the point where it seems to have taken on a life of its own, and I’m very pleased to see that.  It’s sort of what we’re here for anyway.  I will mention in passing that the Solar Decathlon is in the process of being constructed and put together on the national – (inaudible) – as we speak, or here as we speak, it would be open to the public on this coming Friday – is that right, I think, this Friday – and then through 20th. So if you want to see innovation and energy, that’s a real good place to take a look.  Lots of exciting next generation people who are trying to solve this problem.

Our topic this evening is – has to do with, I understand, it’s not a direct word for word recounting, but it has to do with the National Petroleum Council’s report of this July, and our speakers are going to sort of take the next step and explain the economic and political consequences that are associated with that report.  Our speakers this evening are Frank Verrastro, who is the director and senior fellow at CSIS Energy Program, tons of energy experience in both the public and private sectors and the government.  He has served in staff positions in the White House in energy policy and planning and the Departments of Interior and Energy.  So he brings a lot of good perspectives to bear on these kinds of issues. 

Sarah Ladislaw is a fellow in the CSIS Energy Program.  She’s been concentrating on issues related to the geopolitical implication such as energy production and use, energy security, energy technology, and sustainable development.  These are all topics that we have been deeply interested in throughout this series.  So it is a great honor for me to ask our two speakers to come forward, and on that note, I will give you the floor. 

Thank you very much.  (Applause.)

I will ask, by the way, if you have questions for the sake of clarification, please ask them, but it would probably be better if you withheld your general questions till the end.  You see we’ve got three mike stands.  There’ll be plenty of time for questions and answers.  With the three mike stands, you can sort of meter yourself and help out each other out of the way, and that sort of thing, so I thank you for that.

FRANK VERRASTRO:  Thank you.  Thank you very much.  A lot of familiar faces out here.  What we were asked to do at least initially was to talk about the NPC study, the National Petroleum Council study, and it’s actually about two years since we’ve got the Bodman letter that kicked this off, and at the time the focus was on peak oil, and we’ve moved way beyond peak oil, although I suspect we’ll have some questions about peak oil – (inaudible).  We’ve divided this up into two segments.  There were four co-chairs of the study.  Chevron did supply, Schlumberger did technologies, Sarah and Dan Juergen (sp) did demand, and we were charged with the responsibility for policy and geopolitics, the frontline. 

So I co-chaired policy and geopolitics taskforce.  Sarah worked both on the policy and geopolitics work.  The way we’ve divided up the presentations tonight: she’s going to walk you through the beginning of the study, and then we’re going to focus a little bit more on the geopolitical issues and what we call the “above ground,” because we see that the research endowment looks huge in the study.  When you go round the world there’s literally trillions of barrels, but if you can’t produce it, you can’t transport it, you can’t convert it into products that you need, it doesn’t make a wits bit of difference. 

So with that, I’ll turn it over to Sarah to get started.

SARAH LADISLAW:  Hi, I’m Sarah Ladislaw again.  Thanks very much for having us here tonight.  We know a lot about this forum, and are very pleased that you’re taking the time to focus on what we think was a really interesting study done by the National Petroleum Council.  As Frank said it was about two years – October, 2005, – that Secretary Bodman presented the National Petroleum Council with a series of questions.  For those of you who don’t know, I think most of you do, the National Petroleum Council is the federal advisory board made up of oil and gas companies, and their sole sort of purpose is for answering questions that are potential interest to the secretary of energy. 

And given all of the discussion, one of the reasons why this very group exists about sort of the security, reliability, affordability and environmental impact of energy production and use., the secretary wanted the National Petroleum Council to look out over the future of oil and gas supply, and put their best minds together to decide whether incremental oil and gas supplies can be brought online on time and at reasonable prices to meet future energy demand without jeopardizing economic growth.  He also asked for them to look at sort of a demand-side strategy and supply-side strategy that might be implemented to help pursue greater economic stability and prosperity. 

So the NPC took on these questions and decided, one, how to best answer them, two, how to make the study a little bit different from other studies, and to (come ?) with them what are now known as the five or six – depending on how you divide them – hard truths about the future of oil and gas supplies.  So as Frank said, I’m going to go through sort of the first five or six hard truths – first five hard truth, and Frank is going to take more the geopolitics and “above ground” issues.

The first thing I want to go over was how this study is different from other studies, and it basically differs in three main ways.  It focuses on integrated in depth analysis.  It’s not one of those studies that goes through and tries to make its own forecast or projections – (inaudible) – on me.  I know I tune it all off too, so –

MR.    :  (Off mike.)  If anybody’s got a Blackberry on – (inaudible).  (Laughter.)

(Background chatter.)

MR.    :  There you go.

MS. LADISLAW:  All right.  Let’s see if this works.  Hold it like that.  (Laughter.)  Okay.  I think we’re okay.  Okay.  Can you hear me okay? 

MR.    :  No.

MS. LADISLAW:  No.  Is it on? 

MR.     :  Yeah, we can hear you.

MR. VERRASTRO:  He was just kidding.

MS. LADISLAW:  All right.  All right.  (Laughter.) 

MR. VERRASTRO:  Okay, sense of humor.

MS. LADISLAW:  So anyway – (laughter) – basically, the study instead of recreating their own supply and demand outlook, they took the best and the widest breadth of studies that they could find out, they’re both proprietary and non-proprietary, over 100 studies, and incorporated them into what is sort of a wide-ranging view of what the various – what the perspectives are out there.  Because one of the secretary’s comments in the letter was that perspectives vary widely, and he wants to know why that was the case.  So this study, we had Adam Skaminsky (ph) and George Wenk (ph) put together a parallel studies review and it looked at how many groups actually did studies that were based on aggregate data and had recommendations, and there weren’t very many of them that did studies the way that we did them.  So that’s one way that the study is different. 

The diversity of experience.  There’s over 350 participants with backgrounds in energy, in energy efficiency outside the oil and gas industry and with specialization in economics, geopolitics and environment.  And the technology assessment was also a particularly unique portion of the study.  It identified achievable opportunities and likely deployment in timing and then looked across the energy spectrum, including both supply and demand.  So one of the things that the studies were noted for is that it not only looks at oil and gas, but it looks at also the other fuel sources and the entire process for getting oil and gas to market and supplying energy needs.

The dimensions of the study.  One of the things that was noted at the outset was sort of the complexity of energy issues.  Not only are they very technically specific where you get down into certain areas, but as a whole, it’s very complex.  And so one of the things we did was focused very hard on: what’s the best way of dividing up the work in the study to make sure that we cover all angles.  And as Frank had said, there were different task groups in charge of supply, demand, technology and geopolitics.  We also spent a lot of time focusing on alternative energies, bringing in outside experts to focus on areas where the National Petroleum Council doesn’t traditionally have experience to make sure that we tackled those issues with a degree of expertise.

And through the whole process, we really focused on what we kind of named the triangles – you can see triangle there – on economics, environment and energy security, because we really saw these as sort of the three policy angles – of the three angles of priority that through which folks are looking at the energy challenges today.  So these were also different, I mentioned, that some of the participants that were involved.  As you’ll see, we had folks from government, NGOs, the academic and professional societies, consulting groups, other industries.  Over 65 percent of the industry or the study participants came from outside the oil and gas industry.  So this really was a wide-ranging group of folks that came together to bring the study to bear.  It’s over – input from 1,000 folks as well.  So the NPC did go – I can say they’re sort of not being part of the NPC, but out of its way to contact as many folks as possible to have input on the study.

So what we learned.  I’m going to go through a few of the hard truths relatively quickly so we can get to the geopolitics portion and the “above ground” issues, which we worked more closely on.  But the first hard truth is – comes about demands, and the hard truth is that most forecast project global energy demand growth increase by 50-60 percent, mainly as a result of population and it improves living standards.  Also, that cool oil and natural gas will remain indispensable to meeting total projected energy demands. 

So here you’ll see forecast from the energy information administration, part of the U.S. Department of Energy, and the International Energy Agency.  It’s a range of forecast and we just wanted to show through the range of projections going forward, and even in the low-end of these projections, global energy demand will grow about 35 percent between now and 2030.  And this shows that, yes, there is indeed a growing wedge of the energy mix that will come from renewable sources of energy such as biomass, nuclear, hydro, and wind, solar, and geothermal, but that a large majority of the energy that will in the forecast definitely comes from traditional fossil fuel sources such as oil, natural gas, and coal. 

Some of the key demand findings.  Like I said, 50-60 percent growth in 2030, mainly driven by income and population, income, population growth and sort of raising standard of living.  CO2 emissions are closely related with anticipated energy use, which we’ll talk a little bit later about sort of the climate and the environmental implications.  Energy demand is linked to economic performance.  Fossil fuels again are likely to remain part of the mix, and there is a need to identify a role for government to bolster market solutions and set standards. 

There’s a hard truth about supply was that the world is not running out of energy resources, but there’re accumulating risks to continue expansion of oil and natural gas productions from the conventional sources relied upon historically.  These risks create significant challenges to meeting projected total energy demand.  And this slide shows the resource base.  Part of this study was significant outreach to the peak oil community, and this is what Frank was alluding to about earlier.  Basically, one of the main conclusions of the study was that the first question that came up is there enough energy out there to meet the growing demands of society, and this slide shows that, yes, there is, you know, that there is enough oil out there.  It shows both the conventional and unconventional resources that contribute to the energy supply picture, through the year 2000.  That’s currently – (inaudible).

MS.    :  Do you factor access to – (inaudible) – oil into that?

MS. LADISLAW:  I don’t believe that was part of it. 

MR. VERRASTRO:  No.  

MS. LADISLAW:  No.

MR. VERRASTRO:  The supply forecast basically came up – depends on which forecast you were using.  For the basic endowment, it’s in the USGS Space case.  When you look at actually the supply-demand forecast, those were based out of templates and questionnaires that were sent to – well, we got over 100 back from both proprietary sources, non-proprietary sources.  So depending on what they saw in production and technology at a certain point in time to match supply and demand, that’s where the – most of – I’ve got to tell you, though – and this is a point that Cheryl (sp) will probably make.  In a lot of these forecasts, you both save and hurt by the end of your timeline, 2025, 2030, between now and then, if you look at 16 years per technology or 15 years to turn over the automotive – (inaudible) – not a lot can change.  All right? 

So if you implement something new in 2010, you don’t see the full effects of it till 2025, 2026.  So you start seeing and Cheryl will show you this, but you start seeing a divergence on the demand forecast 2015, 2017 and the same on supply.  But when you start getting up to 2025, 2030 and beyond then you really have an issue of how fast technology comes in, what new sources are available, what the impacts of climate, economic and security are.  So when we try to push the – (unintelligible).  We tried to push the consulate one point into the sustainability issue.  And you know, so okay, what about after 2040?  This is, you know, pretty convenient.  It gives you little comfort to 2030.  What about beyond that? 

And the consensus – because this is a consensus document is that the secretary asked for a forecast of 2030 and you put a little flag at the end.  (Laughter.)  And so we can talk about that a little bit more because there was a lot of discussions and then we’d ask Andy to join in as well.  A lot of discussions within the – (unintelligible).  What does this mean?  It’s a sustainable issue.  We’ll be doing something else.  How long does it take to make that change?

 MS. LADISLAW:  The other key messages too that a lot of these forecasts that we found sort of through looking through a lot of people’s forecasts because a lot of them are based on some of the same resource data and some of the same sort of economic assumptions and policy’s static environment.  There’s very few cases out there that try and look at – or forecast out something other than a business-as-usual scenario, which we’re all used to looking at, you know, within the energy information administration in IEA, so –

This map is a map of showing where some of the resources are located, and these are the gas and oil resources.  So thinking back to the slide that just showed about sort of the conventional resources that are available and the contribution of unconventionals, you see that conventional oil resources are located in certain parts of the world.  The size of the barrel is indicative of the amount of resources in that particular area.  When you look at the blue, the blue is the unconventional resources, and so there’s a question of whether or not the reserves – and this gets kind of into the energy security conversation, which Frank will have a little bit more to say about later – if energy demand is growing in sort of OECD parts of the world and non-OECD parts of the world and energy supply is located and they are not co-located in the same place, you end up having sort of major transportation and infrastructure issues. 

One of the other key messages is that all sources of energy will be needed and so this again looks at the IEA reference case and the contribution of different fuels in the business-as-usual forecast of the different resources that will be needed.  And so the message here was, you know, that oil and gas and coal and biomass and nuclear and all of the renewables will be needed to meet future energy demand.  And this again sort of just reiterates what I said is to mitigate these risk, suspension of all economic energy sources will be required including coal and nuclear biomass and other renewables, unconventional oil and natural gas.  These are resources-based significant challenges, including safety, environmental, political, economic hurdles and imposes infrastructure requirement for development and delivery. 

So not all of these resources while they might be available and the resources are out there, each of them requires its own infrastructure, its own transportation infrastructure, its own conversion factors to get them to market.  And the contribution of unconventionals is growing.  This again looks from the EIA 2007 reference case and the growing role for things like biomass, oil sand, extra-heavy oil, coal-to-liquids and gas-to-liquids.  The contribution is significant also when you look at places like the United States, which is also a major focus of the study, when you think about conventional sources of oil and natural gas perhaps declining or at least moderating that developing these unconventional resources will increasingly become more and more of an energy security issue. 

And this again gets back to the point of the massive infrastructure and investment required.  I mean, one of the things, I think, a lot of folks that I talk to or my experiences with the renewable energy industry talking about, you know, scaling up some of these resources that we’re talking about that are going to be increasingly necessary to meet energy demand, one of the things that is important to take into consideration is the massive infrastructure and the scale of the industry: the scale and the size of all of the processes and the massive amounts of investments that have gone into getting the energy that we use on a daily basis to our offices, to our cars.  It really is truly massive.  It takes a long time to develop new infrastructure.  And so we can talk a little bit more about that in Frank’s portion.

One of the other hard truths about energy independence and throughout the study we really felt quite compelled to come up with a point about energy independence, because it’s getting so much attention within the policy discussions especially here in Washington, D.C.  One of the things we wanted to point out was that energy independence shouldn’t be confused with strengthening energy security.  It’s not necessarily foreseeable in the near-term future and U.S. energy security, which is really, I think, what a lot of people are trying to get at when they talk about energy independence, this concept of being independent of foreign sources of energy.  It really can be solved through enhanced moderating demand, expanding diverse – (unintelligible) – domestic energy supplies and strengthening global energy trade and investment.  One of the really important points that came out of the geopolitics portion of the study, that there can be no U.S. energy security without global energy security, and that’s partially because of we’re part of an integrated market.

Some more findings on energy independence.  Domestic production, the United States counts for 70 percent of the energy that we consume.  While reduced consumption and reduced import dependence are desirable, energy independence is more political rhetoric than fact.  Energy independence is neither possible nor desirable, something I said before, and the issues must be redefined in terms of improving energy security and managing the interdependence. 

Finally, the hard truth about the workforce.  A majority of the U.S. energy sector workforce, including skilled scientists and engineers is eligible to retire within the next decade, and the workforce must be replenished and trained.  The reason it came to, well, one of the many reasons we came back to this conclusion, it was one of the hard truths that came up in nearly every aspect of energy that we explored, not only in sort of traditional oil and gas market operations, but also in the technology sector.  In every sort of technology that we were talking about and the development that it would take and the kind of workforce that will be required to fuel the innovation that we were talking about for future energy needs up to 2030 and beyond, workforce requirements came up in nearly every single aspect.

And this graph shows the U.S. human resource challenge.  In the late 1970s, there was sort of a slowdown in the hiring of oil and gas workers and so you can see sort of a blip there where there’s a majority of workers that will retire.  Over 50 percent of the oil and gas industry set to retire and eligible to retire in the next ten years.  There has been a bit of an uptake in the hiring as you can see sort of down in the 25- to 30-year-old age, but there is sort of a deficit of workforce in between there, and so that’s the major concern for the oil and gas industry, especially when you start talking about the production volumes that you do talk about looking out to 2030 and other things that would require folks with oil and gas expertise sort of like the carbon capture and sequestration which is the a lot of the same sort of technologies and expertise that takes for the oil and gas industry. 

This shows sort of the regional imbalance of geoscience graduates.  And the deficit is sort of the brownish color and the surplus is the yellow color.  One of the points made here is not, you know, that geoscientists are located elsewhere, but that there is sort of this global market for these trained experts in these resource that we’re all going to need, and so one of the questions is how do you sort of attract these folks to come and work where you need them, or do you train more of them? 

The last hard truth I believe is that carbon emissions, its policies aimed at curbing carbon dioxide emissions alter the energy mix, increase energy-related cost and require reductions in demand growth.  And one of the reasons we – sorry – one of the reasons we started talking about carbon and carbon-constrained environments was not necessarily because there was a wide consensus within all of the groups that the climate was changing and that something needed to be done about it, but that there was outside in the global community, there’s consensus about the science of climate change, and that people were starting to impose carbon-constrained environments at the state level, at the international level.  And so one of the – looking out over the next, you know, 20 years or so, you need to take into consideration what would you do in those carbon-constrained environments.   

And some of the key points that we came up in the carbon section was that growing concern that climate is warming and CO2 concentrations in the atmosphere could play a role.  The challenge of significantly reducing CO2 emissions is unprecedented and will require global broad actions on multiple fronts, long-time horizons and major additional investments.  And when we looked over the forecast about what you might need to do about carbon constraints – or eliminating greenhouse gas emissions, the changes were pretty major in getting from a position where the world is 85-86 percent reliant on fossil fuels, which are largely the source of CO2 emissions, to something that’s much less carbon-intensive, will take a great deal of investment and will take a great deal of technological innovation and coordination. 

And this slide just shows the division between OECD and non-OECD carbon dioxide emissions.  Back to 2003 and after 2030, the source, the Energy Information Administration’s International Energy Outlook 2007, and the interesting thing about this slide and the next one following it is sort of the division among OECD and non-OECD countries.  Before, I alluded to the fact that OECD countries – non-OECD countries, which is – I’m sorry – the Organization for Economics Cooperation and Development.  It’s a useful sort of division of countries to illustrate sort of developed world as opposed to the developing world.  

Over the forecast period and indeed by, I think, 2010, these non-OECD countries, they’re set out-consume and then also, as you can see on this slide, out-produce the OECD region on CO2 emissions.  And so this has significant sort of implications for who is involved in major global climate agreements and how capable non-OECD countries are indeed being able to try and curb these emissions. 

And this one, we put in there just because of the major focus on China and the U.S.  Two of the largest global emitters deciding which one is the lead right now.  I’m not quite sure.  But it shows sort of the historical emissions issues.  The United States has, as you can see on the right-hand side, much larger historical emissions, but going forward China starts to outpace the United States in emissions over the forecast periods.  So the question, you know, here again is whose responsibility is it?  This is a big burden-sharing issues that folks talk about so much when they talk about climate change issues, share for historical emissions or the emissions going forward. 

Now, I’ll turn it over to Frank, so you can do the geopolitics portion.

MR. VERRASTRO:  Okay. 

MS. LADISLAW:  Thanks.

MR. VERRASTRO:  What a guy.  (Laughter.)  Okay.  So for the geopolitics.  One of the points that Sarah made was on the resource endowment that the resource endowment is indeed enormous, and when you start looking at conventionals, non-conventionals and the ability to convert, you’re talking trillions of barrels that are out there, but then the issue always has been to us this idea of how you can produce and deliver, in the case of oil, 85 million barrels a day.  So this is what the basic geopolitics discussion was about, the “above ground” stuff.

When we talked about the key findings, we came up with this idea of changing world, changing rules.  Clearly, the continued growth and the scale of global energy demands when you go beyond 2030, 2040, it raises questions of sustainability, and for those of you that do forecast out there, whether it’s 3.1 percent per year GDP growth or 3.3, when you extrapolate that over 30 years, those numbers get huge.  And when you talk about delivering 40 million barrels a day of new oil that’s not even produced yet, by 2030, where does it come from, and how do you ensure that its reliability is cost-effective?

This idea of the developing economies and emerging economies, the non-OECD countries increasingly control the natural resources, the conventional resources around the world.  They are also accounting for 60-70 percent of global demand, which in our mind this means that if they control supply and demand, there’s no reason for them to adopt the same rules.  You bring China, Russia into the WTO, I would argue a change in the face of the WTO.  So we ought to have a Plan B for what we need going forward.

Changing map is also something we talked about, and Sarah alluded to this.  When you start plotting on a global map conventional supply sources, it’s basically five areas.  It’s Russia in the Caspian, Africa, the Middle East, and the non-conventionals in Canada and Venezuela largely, but also in the U.S. to the extent where you shale.  When you plot that against the demand centers of North America, the EU and Asia, you find that they’re geopolitically or geographically disparate and it requires longer distance pipelines and longer distance shipments.  And it raises issues of investment, security, infrastructure, and the environmental consequences.       

The resource endowment we talked about, this idea of delivering supplies.  People don’t understand that 85 million barrels a day, you can produce a barrel of oil in Nigeria or Saudi Arabia, have it refined in the East Coast or the Gulf Coast, put it in pipelines, but it shows up everyday at your local retail gasoline station.  A lot of work goes into supplying that on a daily basis.  And then the projected impacts of climate changing carbon constraint.  When you look at the projections for global demand and the fact that they’re going to be 85 percent on a global basis, OECD and non-OECD countries of fossil fuels, if you put a carbon constraint on that, how difficult is that to move the needle from 85 to 80, let alone from 80 to 50?  So we kind of go from there.

One of Sarah’s point was that the projections – the consensus projection showed consumption in the world total, so developing and developed was in the 50-60 percent range by 2030.  This chart shows you the projections for the developing world alone, and that’s a doubling of energy demand.  Fossil fuel in this case is at 90 percent, not 85 percent, and coal is – (inaudible) – rather than oil.  Different fuel sources, different choices, different consequences as a result of those choices.  And this is the reason why.  By 2020, the population of the world’s 100 largest cities will grow by almost 200 million people and 90 percent to that growth is projected to be in the developing world. 

There’s also going to be a flip and it’s occurring now.  Historically, the OECD countries, the developed world was responsible for about 60 percent of global energy demand.  We’re about parity now and when the flip occurs by 2030, it will produce the reverse.  The developing world will count for more of the emissions, and in the case of China, when Sarah talked about the triangle, if you look through the security lens, you have indigenous coal and that’s what you choose to use.  What are the environmental and economic consequences of that?

The economic growth patterns.  Again, this plays into the issue of where the fuel is coming from and where it’s going to?  So longer haul shipments of natural gas and oil, and we would also argue that not only in the Asia-Pacific and in Africa, both their short-term consequences as well, and this is something we put together.  This is the oil market that you’re looking at going forward.  Left-hand side of your screen is historical OECD oil demand.  There’s historically been this trough in the second quarter.  So we’re in the turnaround season.  We’re between the winter eating season.  We’re not quite in the driving season.  This is when refineries do maintenance.  There’s a dip in demand. 

Right-hand side of your screen, five or last six years – I don’t think you see the colors, the yellow especially.  This is non-OECD, no second quarter dip.  As the non-OECD countries proportionally make up a greater proportion of global energy demand in the absence of a surplus market supply, you’re going to be tied all year round.  Any supply disruption, any refinery going down, any shipment that is dislocated, it means you’re going to see a price spike.  So that’s the consequence of short term.

Global oil trade.  This is the distance that’s traveled.  This is for the U.S.  When the president made the statement about the Middle East, the unreliable Middle East and cutting imports, most of the American public that was surveyed thought that we’d get 50 percent of our oil from the Middle East.  In fact, it’s about 12 percent of global – U.S. demand.  When you look at the five biggest suppliers, however, not a big reason for (inaudible) Canadian oil which supplies about 2.2 million barrels a day of U.S. demand.  This is products and crew.  Conventional oil is declining; unconventionals increasing with the oil sands, environmental consequences not sure they get to the four million barrel a day production target by 2012.

Mexico is number two, and Mexico is in decline.  At any given point in time, either Venezuela or Saudi Arabia is third, with the other being fourth.  The situation in Venezuela right is not great.  Nigeria is fifth, and Nigeria is off about 600,000 barrels a day, and it’s chalked to the companies, the on-shore production isn’t coming back any time soon, because the pipelines have been cannibalized and instead they’re looking to increase the offshore production because they can secure those facilities better.

So if you’re looking at 60 percent of our supply being imports and those at the top five importers, your short-term strategy ought to be focused on improving the reliability of the major suppliers.  When you start looking at choke points 85 million barrels a day, half of the world’s oil goes through a handful of choke points.  So these are areas of vulnerability, and this actually is worse if you look at LNG, because the Strait of Melaka, when you project the use of gas in China, gets a much bigger share.  So the pipeline distances, transport distances, and security concerns get even bigger.  And that’s just the map of what the vulnerability – (inaudible).

We, by the way – we will leave these slides with (Mitzi ?) so that – you can’t go through all these material in a short amount of time, so we’ll make them available.  So the political findings on climate change, clearly affects supply and demand because if you change the mix and you change suppliers, you’re going to affect the suppliers.  It will alter the choices of fuels and what’s available, given the technology, the timing and the price.  In the extreme, it raises issues of security when you talk about rising sea levels and displacing areas and also mitigation or migration of entire populations.  New investment and technologies have to be applied on a global scale. 

The implications of a fractured versus a unified response.  The work that MIT and others have done suggest that if the U.S. and China got a handle on carbon constraints, it would do more than waiting for the entire rest of the world.  So you do more sooner with a smaller group of countries.  This concept is sustainable development.  It challenged the traditional view of economic prosperity.  The U.S. economy has been built on low-cost energy.  If that’s not the situation going forward and it’s, you know, it’s no longer the rule, it’s the exception, how do we change that paradigm?  And then this idea that requires long-term global policy solutions and tradeoffs, and we did a lot on tradeoffs when we looked at the study. 

So for investment decisions.  I spent 25 years in the energy industry with the refinery – with TOSCO going and then I was a senior VP with Pennzoil.  Traditionally, when we went into a country, we looked at four or five things.  We looked at geologic risks plus the resource there.  We looked at the commerciality of it.  We looked at the technology.  Do we have what it takes to get it out?  We looked at the environmental consequences, then we looked at political risks.  And the first four were easy.  We could take a higher political risk, and depending on what your portfolio looked like, you got in some fairly unsavory places, but you were pretty sure you can get a return on investment. 

When you look forward though, the world is changing.  You’ve got now new geopolitical alliances.  This idea of price – price predictability and supply reliability.  We’ve seen a convergence since 2003 before the war in Iraq, prices were $28 a barrel.  So while one of the ideas was by securing Iraq, we could increase production, break the back of old tech, increase global energy supply, in fact, we’ve had a tripling of oil prices. 

Increase environmental sensitivity.  One of the reasons that we put the triangle together, traditionally you looked at economic and security and foreign policy issues, we had to add the environmental component because it’s such a big deal going forward.  This idea of the global transformation, I mean, I would argue that we’re transitioning from a bipolar world that briefly may be 94, 95 we’re at the unipolar world, and we’re transitioning to something else.  But the rules of the road are still unwritten and no one’s sure what that alignment looks like.

We’ve seen a power shift to areas with strategic commodities, whether that’s Russia or Venezuela or Kazakhstan, and contracts are being changed and clearly a rise in resource nationalism, because the revenue from those exports is what’s allowing these countries to – (unintelligible).  Human rights, distributed wealth and energy equity issues are becoming bigger issues around the globe.  Terrorism, when we talked about lowest cost energy in the United States when I was with Pennzoil, we didn’t have redundant pipelines systems because we didn’t – (unintelligible).  If you’re going to have longer supply chains with greater chance of disruption, you’ve got to think of other alternatives, whether it’s a difference in stocks or how you handle it, or moving to alternative energy forms.

And then political hostility to American foreign policy.  We were in the Caspian in the mid-1990s and we were welcomed as an American company because the benefit of being an American company offset the power of Russia, allows a lot of these countries to be not only sovereign states, brought up technology, I think greater – (inaudible) – the West that’s not necessarily the case today. 

So the five core strategies that we developed in the study – and recognize too that this study was a consensus document.  There was over 300 people involved, 350 people involved in the study and we probably had outreached over another 1,000 and these words were carefully chosen.  If you see these recommendations in kind of the 50,000-foot level – (laughter) – that is the result of the fact that it was a consensus document and that’s good news.  

So the five core strategies.  Clearly, moderate demand, and we’ve promoted energy efficiency, which for a National Petroleum Council study was kind of a novel approach.  It’s not that isn’t been done before, but the industry should be credit for doing it – given credit for doing it.  One of the thoughts on the sustainability was that unless you got control and demand, you’re constantly chasing this elusive target, and I don’t care what you fill it in with alternative fuels or conventional fuels, you never get them. 

Expand and diversify U.S. energy supply.  This is security piece.  The thought was if the U.S. loses its ability to produce domestically and we lose five or six million barrels a day just because we decide not to go hunting after it, that’s the equivalent of replacing another Saudi Arabia in the export – (inaudible).  So that you’d be well-advised to keep those numbers up, keep them level and then build the wedges on top of it. 

Strength in the global and energy security, and this is kind of managing the geopolitics.  And there are certain things that you can do, and I’ll talk about those in specifics.  Reinforce the capabilities, and this is not only the people, but it’s also infrastructure.  When you look at biofuels or ethanol or even new nuclear deep water, this is new infrastructure.  You know, the hookups that we used to do in the Gulf of Mexico, when you start stepping out a lot deeper, this requires new pipelines, new construction.  So it’s not as easy as turning on the valve anymore.  And then addressing the carbon constraints. 

There is also a consensus that there’s no single easy solution and these have to been done in tandem.  The propensity on the Hill, when we brief several members of Congress on this, is that you look at any one of these five and say, oh, yeah, I’ve taken out efficiency and it’s checklist style.  Oh, yeah, I like alternative productions and so I’ve done what I need to do.  Unless you do them all, you never quite get there. 

I’m going to blow through this specific recommendations because this will be available and we’ll probably address them in Qs&As, but then I’ll just get you through the summer.  On the light truck and car economy standards, our technology group – and there’s 38 separate technology or 30 separate papers that were done in the back of the NPC study.  The technology group and the demand group looked at automotive technology and determined that with current technology, currently available technology, you could double fuel efficiency today – doesn’t take a lot to do it.  This is one of the smart things that you probably just ought to do it.     

Reduce the decline in U.S. conventional oil and gas and an increased access for new development.  This is kind of a self-prophecy on diversifying U.S. supply.  It also does for the global supply.  We need to diversify suppliers and diversify supplies, fuel choices.  Accelerate the development of forms from biomass, enable the long-term and viability of coal, because 50 percent of our power generation comes from coal and in a carbon-constrained world, you’d better figure out how to deal with that, because there’s no ready-made substitute.   And then expand domestic nuclear capabilities.

On the global and energy security, we came up with actually four loosely worded recommendations, one was to integrate energy policy into our trade economic environmental, security and foreign policy discussions.  Because for the longest time, it’s energy crisis have been predictable and low, we think that energy policy is kind of insubordinate some of these others and it needs to be elevated. 

To continue and expand the dialogue with the major producers, the consuming nations.  A transition is occurring, but it’s a long transition, and we need to manage the geopolitics of that as we go forward.  To intensify efforts to encourage the global adoption of transparent market-based approaches, and this is kind of the offset to the resource nationalism, the changing rules.  In so far as you can, this is the way the most efficient market operates.  May not be the way going forward, but this is the way we recommend. 

Assist and encourage the global adoption of energy efficiency technologies through tech transfer, and this is the way that you can cooperate and prove the geopolitics and also have a better world for everyone because some of these technologies are available.  Intellectual property rights are a big issue, but you could probably get over them with joined development ventures. 

On the capabilities and challenges, Sarah said rebuild U.S. science and engineering capability.  A lot of this happened after World War II and the Vietnam War.  Create, research and development opportunities, because we may be at the point that you need to throw a lot of technologies out there, see what works and then work on accelerated deployment.  Improve the quality of energy data and information.  You know, this study was different.  It didn’t look at a new supply-demand forecast.  It basically looked at the assumptions of existing forecast, and what we found on the resource endowment was save one study by a major international almost all of the other studies and forecasts on the resource base have their home in the 2000 USGS Global Energy estimate.  So if that’s wrong, they’re all wrong.

And then develop a comprehensive forecast of U.S. infrastructure requirements.  If, in fact, you have to move this stuff around, figure out how to do it, figure out where you want to be and then back yourself into it.  On carbon constraints, as Sarah indicated we didn’t go into this with climate change.  We didn’t think we have the expertise and the counsel to look at the science of climate change.  We did realize that the world was changing on the rural front, and what we needed to do was look at a future that was carbon constrained, because it was happening in 26 states.  It’s 188 cities.  It’s the EU.  It’s happening in a lot of different places.  Prepare for that.  

So develop the legal and regulatory framework to enable capture and sequestration, and capture and sequestration for the EOR portion.  The industry knows how to do that.  We’ve been doing that for 50 years, but that alone doesn’t solve the problem.  Business-as-usual with CCS is a band aid.  It preserves your options, allows you to look for technology breakthroughs somewhere else.  There is this kind of myth out there that if we had large-scale sequestration of carbon, will allow us to do everything we’re doing now.  The equivalent just for the U.S. is like putting 50 million barrels a day of supercritical CO2 in the ground, 50 million barrels a day.

And the good news is the United States has a lot of hole in the ground, so we probably have a lot of reservoirs where you can put this stuff in.  No one’s ever mapped China and no one has ever done this at scale.  Takes a while to get this done. 

MR.    :  Did you look at using the CO2 – (inaudible) – capture – (inaudible) – underground, using it as a industrial commodity?

MR. VERRASTRO:  Yeah, actually one of the incentives that people talk about is instead of penalizing people for CO2, what if you incentivize its use?  So how do you use it?  Can you recombine it, you know, it’s a carbon and oxygen and make other compounds with it?  Can you do it more than just food preservatives?  What other things – what beneficial use can you find for it? 

A lot of the background papers – I have a copy of the study here that – it’s 400 and somewhat pages – thank you very much, Andy.  Andy can tell you why it has a stopwatch that’s 30 seconds and why it’s on seven seconds.  I don’t know the reason for that.  (Laughter.)  There’s a 1,600-page compendium is what really is done.  There’s 38 other reports that back this up and there’ll be a disc so you can actually look into this.  So this is just basically the major chapters.  It’s been downloaded almost a million times.  So we’re expecting a gold record to come out of this.  (Laughter.)

Establish transparent predictable economy-wide cost for CO2.  If you do that, you need a global framework because you can’t do it for the United States alone. 

Okay, so the summary.  Our point is that all five strategies have to be addressed together, that it’s a global problem, not an individual problem and that you have to begin now because when you look at the timeframes we’re introducing from concept to commercialization, from major new technologies and making a change in behavior patterns, it takes you 15-20 years.  So it’s long-haul exercise. 

And then this is the way we redefine energy security.  Instead of looking at energy dependence – independence, we thought that if you maintained the conventional base in the United States, that if you limit demand by putting efficiency standards – and it’s not only auto-efficiency, it’s industrial and residential as well.  You can reduce – you can reverse and reduce this trend on reliance on increased imports, and then you manage the geopolitics, but now you’ve got maybe a seven or eight million barrel a day reduction in your import base by the time you get to 2030, and that improves your security.  So it doesn’t make you independent, and I would actually argue that given our global trade and treaty obligations that independence is probably something that is not really desirable at this point, but managing it and improving the situation just makes commonsense. 

Ah, yes, and this is the NPC disclaimer.  So any of you that have comments on this study, you should write to comments@npc.org, and if you have questions, you can send questions to the NPC as well.  And Andy will sit at the computer and will answer individually all of those questions.  (Laughter.) 

So with that, let me end here and we’ll take some questions, but thank you.  (Applause.)

MR. WEHRENBERG:  We have mikes set up.  Plenty of time. 

Q:  Quick question.  Do you address the need for U.S. government investment in order to achieve the technology (inaudible)?

MR. VERRASTRO:  Yeah.  It’s done two ways.  It’s done cooperatively.  We think that there has to be a better partnership between the government – more basic research, to start with – but then cooperatively between the private sector and the government sector.

Q:  Do you estimate how much money?

MR. VERRASTRO:  I don’t think we estimated how much money.  The technology group actually broke out individual technologies over a ten-year period or 20-year period to 30-year period.  What they thought was reasonable to come on.  So if you wanted to look at where the money could be spent to give you bang for the buck, that it will help you in that regard.  The IEA has estimated that it will take $20 trillion between now and 2030 – about half of that is electricity – but about $20 trillion to the projected demand with infrastructure, new technology, and conventional production.

Q:   Did you estimate when worldwide peak oil production might occur?  (Laughter.)
 
MR. VERRASTRO:  (Unintelligible) – estimate, it’s September of – no.  (Laughter.)

MR.    :  (Off mike, laughter.)

MR. VERRASTRO:  Exactly.  We looked at that couple of different ways.  Matt Simmons was actually on the Council – is on the Council, still is on the Council.  There’s a lot been written about the peak oil.  When you actually look at the estimates, two points come across, that given today’s technology, and the price of oil, that it’s almost irrelevant to talk about conventional production, number one, because there’s a lot more out there.  If the resource endowment, if you measure it as molecules in the ground, okay, coal-to-liquids, gas-to-liquids, oil shale, oil sand, conventional production, there seems to be between eight and 12 trillion barrels that are out there. 

The question to us has always been regardless of what’s in the ground, if you can’t get it out and can’t deliver it, then it doesn’t make a lot of sense.  So that’s one of the reasons that we focus on these above-the-ground issues.  So while the study comes out and says that the endowment is enormous, it’s not going away anytime soon, we’re not already in peak.  And I’ve got to tell you, I mean, having looked at the geology of some of this, this idea of, you know, the bell-shaped curve, when you look at the application, both the history and the application, right, clearly when you get to 55 percent of the production that’s in the ground, you start to decline and you can’t offset that decline. 

What you do is you add different increments so you extend that tail, and with the amount of oil, even the conventional stuff that you know that’s in the world – in Saudi Arabia, if you increase the rate of production, a rate of recovery by 2 percent, it supplies the United States for a couple of years.  These are enormous numbers, but the issue still is how do you produce it?  Can you convert it with existing technology, and how do you deliver that much?  You know, this is a point that we go back and forth with at CSIS.  When the world grew from 40 to 80 million barrels a day, okay, it’s like a doubling.  Eighty billion barrels a day is pretty significant when you try to move it around the globe.  Going from 80 to 120, 50 percent increase, about 120 everyday is just an enormous challenge. 

So you ought to be transitioning to something else and ten years ago, we sat here, you know, this idea that 5 percent or 8 percent or 15 percent of your fuel needs would be mixed with – met by alternative fuels.  It wasn’t even on the table.  A transition is starting.  I would just argue it’s a longer transition.  It’s kind of a long goodbye.  It’s not happening tomorrow. 

MS. LADISLAW:  And the other benefit of looking through the triangle is when you do sort of the carbon overlay and if you do accept sort of the conventional wisdom of a 450, 550 parts per million atmospheric concentration of greenhouse gases, you need to be ramping up low carbon energy technologies and fuels pretty rapidly as well.  So at the end of the day, it kind of gets you to the same recommendations with or without peak oil.

MR. VERRASTRO:  Right.  Yeah, just on the carbon side, just extend that.  I mean, you basically only have three options.  You can change demand, right?  Change carbon demand.  You can go to low or no emissions fuel, which you can do, but it’s costly and it takes a long time, or you can use these midterm remedies, you know, like sequestration.  You can capture and sort or capture and do something else with.  Not a lot of other options at least that we know that are out there right now. 

Q:  The neat thing about sequestration, as Frank said, is short-term – (inaudible) – while we’re waiting – (inaudible) – and moving what we have to move is equivalent to moving all the natural gases – (inaudible) – including in the new infrastructure – (inaudible).

Q:  (Off mike.)

Q:  That is a question, certainly. 

MR. VERRASTRO:  Well, there’s two separate piece.  The enhanced recovery piece – I mean, the industry has had experience with putting gas back in the ground.  Putting it in deep aquifers or in sailing deep ocean injection and some other structure, I mean, that’s an issue, right?  So who has the liability for that, if you wanted to stay in the ground 1,000 years, you’re not sure the company is going to be there, and Sarah’s comment is that we ought to make the church responsible because that’s the only thing that seems to survive anymore.  (Laughter.) 

MS. LADISLAW:  Not my comment.  (Laughter.)  Not my comment.   

MR. VERRASTRO:  It’s not my comment.

MR.    :  Which church?

MR. VERRASTRO:  Yeah, okay.  Whole separate issue.

MS. LADISLAW:  Yeah.

MR. WEHRENBERG:  (Unintelligible) – when you ask your questions, can you please identify yourself, just so we’d all have a sense – (inaudible).

Q:  My name is Dennis Brandon with Marriott.  I’ve kind of a comment on the last one and a question, and that is if you look at the EIA and IEA statistics, global production of oil peaked in late 2005, it’s been flat ever since.  But my question is more the curve seems to project the demand is going to continue to grow.  Did anybody even consider what happens if supply can’t keep up?

MR. VERRASTRO:  Yeah.

Q:  And I’ve not heard any discussion of that part of your study.  Can you comment on that a little bit?

MR. VERRASTRO:  Well, there’s two separate pieces.  If you look at now people talk about liquids demand, by the way, and this is the conversion capability, and it’s based on demand forecast.  There’s actually a chart that we didn’t include in here because it’s more provocative and, I think, somewhat misleading.  When you look at the range of forecasts on demand, there’s a piece that shows, you know, the EIA or IEA forecast.  Then it has – and it’s in the study.  It’s a chart that’s in the study, and it has the IOC’s estimate, kind of in the middle.  It would lead you to believe, if you just read the chart that maybe they have a more conservative view on the production side.  In fact, where that number was derived from was when folks did the questionnaire, fill out the questionnaire form and did an estimate of what they expected global demand to be.  That’s where the number came up for conventional fuel.  So it wasn’t constraint on the supply side.  It was supply to meet demand, and it took so much explanation that it probably wasn’t worth being in it. 

I mean, I take your point, legitimate point.  If you look at conversion capability, this is kind of the liquids argument.  It doesn’t matter where it’s conventional oil.  The problem is, I think – and Sarah pointed out – when you look at a carbon constraint, if it’s oil shale, or tar sands or heavy oil or coal-to-liquids, you’re starting to go to a bigger environmental footprint to get your carbon fuels that would lead you to believe that that’s really the game changer in the – (inaudible).  Now, in terms of if supply – supply always meets demand, right, at some price.  I mean, that’s – (laughter) – I mean, that’s what the economists will tell you, right? 

There’re two separate problems and we brought this up on the energy equity issue, that typically people say was that the price is too high, demand falls off and it’s the less developed world where the demand falls off, but that makes more available for the rest of us and so then the price goes down.  Well, there are implications to that.  The implications of that are that, you know, Ethiopia or Senegal looks to some other energy source, and if it’s biofuels or cutting down rainforest of burning woodchips, probably not a good outcome. 

So there are – the traditional economic, supply-demand arguments don’t hold, I would argue as you go forward, and if you believe these projections have increased demand.  And you can ague about, you know, what the real number is in 2030, but the trends are there.  And if you got 1.3 billion people in China, demand is going to go up, right?  So you’ve got to figure how to manage that.

Q:  And that’s the problem.  What happens if that demand can’t be met every – (inaudible) – the price – nobody seems to be discussing that.

MR. VERRASTO:  Well, the – what they will tell you –

Q:  In public – let me rephrase that – in public, the issue is being ignored –

MR. VERRASTRO:  – massive economic recession followed by military action.
   
    Q:  Exactly.

MR. VERRASTO:  I mean, that – yeah.

Q:  Wasn’t that one in the DOE version – (inaudible)?

MR. VERRASTRO:  I think yeah.

MR. WEHRENBERG:  We have a questioner back here.

MR. VERRASTRO:  I’m sorry.  Go ahead.

Q:  Yes, my name is Pete LaPuma with – probably too close – (laughter) – retired Air Force as of a week ago with Booz Allen Energy Group now.  Curious if the study looked at the commodities to try to build low in structure to try to build new infrastructure.   I guess one of the things you observe is, you know, copper and steel and concrete and everything else is on the rise, tracking almost with oil directly.  As those prices go up, wouldn’t the ability to build that infrastructure for the future, also start to get out of rich?   

MR. VERRASTRO:  Yeah.  And that’s actually what’s happening now, and when you look at some of these gas projects, clearly if you were going to take MacKenzie Valley gas and Alaska gas, you could not build two pipelines simultaneously.  You don’t have the skilled labor, you don’t have enough steel, it’s going to cost you a huge amount of money.  When you start talking about pipeline projects around the world – I mean, some of these pipelines that folks are talking about are $15 or $20 billion infrastructure projects.  When we used to do projects, we spent the money in the field and the infrastructure was an incidental cost to get it to our currency market.  $20 billion for any company is real money at this point.  (Laughter.)  So I mean, that’s the constraint.  These are – this is another one of those above-the-ground constraints when you start looking at what you can do in a timeframe that makes sense, right?

MS. LADISLAW:  Both the geopolitics and the demand teams looked at, you know, say, China, for example, and everyone’s concerned about their coal use.  And one of the things we looked at was with their existing resource base and what they have access to, not what they would have to build infrastructure to get to.  They could actually probably blow through in 35-40 years or so, but the issue is how much does it then cost with the skill that they need to make the railroads to be able to get it places. 

And I mean, the Energy Information Administration, you know, to their credit does do a pretty good job, especially in their Annual Energy Outlook of looking at some of these cost-related issues for basic supplies for infrastructure, and it does have – I mean, it either has a factor in driving up the cost of energy, or sort of prolonging the amount of time it takes to actually get these projects up and running.  It’s one of the things we’re seeing in a lot of nuclear projections these days, is sort of the cost and timing of the actual materials that you’d need to make it possible. 

Q:  Hi, Nick Testad (ph), 20/20 Institute.  I realize that – first of all, I’ve got about three comments and you can make remarks.  I realize you guys are getting paid to get up here and talk to us about this, but my opinion is this has been abomination, and unfortunately, one remark sort of set my tone for the whole evening that energy independence is not desirable.  They can’t be here tonight, but if you go down to the Walter Reed and look at these guys trying to learn how to walk and feed themselves without limbs, you ask them if energy independence is desirable, I think you’re going to get a different response.

Second of all, the fact that we don’t import most of our oil from the Middle East is a canard, is a fungible asset has nothing to do with where we get it.  It’s prices and transportation.  Third of all, I think that if you gave me the $500-$700 billion that we spend on this war trying to get this people to accept democracy and so forth, I think we’d be a lot further along with energy independence.  I see in a lot of commercials on the Sunday morning talk shows about the oil companies looking for new alternatives, but I think your industry sponsors need to kick it into higher gear than what they’ve been doing.

MR. VERRASTRO:  Let me – I appreciate your comments.  Let me make a couple of things.  The comment on energy independence is that when you look at the timing of it, it’s not impossible to do, but it comes at a really high cost and it takes a long period of time to switch to something else.  So for the foreseeable future, we’re looking at fossil fuels, and if we don’t produce enough, unless we change our demand, they come from imports.  And if you switch from oil to gas, for example, if you did electric power cars – take electric power cars, unless you decide that you want more nuclear in this country – we haven’t built a new nuclear plant, 25 years at least – or more.  Natural gas – and I would argue once you get by Trinidad and Tobago, Canada, and maybe Australia, your gas suppliers are exactly the same as your oil suppliers.  So you’re just switching your import dependence, right?  And if you go to coal and you use indigenous sources of coal, you have these environmental consequences.  So this idea that it’s political rhetoric and it’s good fodder for the campaigns, but you have to have a different plan than just, say, energy independence.

I would also say on the Iraq piece that we would probably, given the demographic changes of Africa and the Middle East, I can’t imagine our military wouldn’t be involved in the straits or around Melaka, regardless of the oil – and I won’t get into the argument of, you know, why we invaded Iraq?  But there’s a lot of other benefits by having a global, you know, Blue Sea Navy to do stuff.  So people will talk about it always in terms of energy that’s not necessarily the case.  So that’s just one piece. 

The maybe – the second point, the maybe sooner.  I think things can actually happen, but it takes a commitment to do that, and this is kind of the “high price, low price” scenario that when prices were low and consistently low, we built our economy on the back of low energy prices, and I do think that paradigm is shifting, and the good news of that is that we’re seeing for now, for the first time since this – the early 1980s, a discussion of higher fuel efficiency standards, incentives for alternative fuels that are serious.  I mean, people are undertaking – doing a lot of different technology changes.  Looking at wind, looking at hydro, looking at biofuels, looking at new nuclear again.  This hasn’t been on the board for a long, long time.  So there’s some advantage to higher prices that it brings incentives to the market place and send signals that a change is occurring.  So I understand the economic consequences of that, but there’s some benefits as well, and we’re not paid to be here.  (Laughter.)  I can definitely make – (inaudible).

MR. WEHRENBERG:  Nor am I. 

Q:  Yeah.  I’m –

MR. WEHRENBERG:  You’re taller than the mike.

Q:  I’m taller than the mike.  Anyway, I’m Jack Shilling with the Millennium Institute.  I’ve got three questions and one comment.  In discussing the unconventional energy, these tar sands and shale and stuff, are your estimates of the amount available, the number of molecules in the ground or the net amount of energy that would be available as oil, because it takes a huge – much larger amount of energy to extract that?

Second, you’ve mentioned several times that many of these things will drive up energy costs, but we really need to look at the cost of the whole economy, because while it costs more the produce cleaner energy, that has a lot of other benefits for the rest of the society.  It’s not just the oil companies’ profits we’re concerned about, but the whole social benefit.

And the third issue, you’re looking at China’s CO2 emissions going up much more rapidly than the U.S., and I wonder if you would look at now that involves consumption rather than production since most of our steel production has shifted to China so they’re producing huge amounts of CO2 so they can send us the – (unintelligible) – steel back here.  In terms of their consumption, I suspect they’re consuming a lot less CO2 emission equivalents than we are here, because we’re importing it after we’ve outsourced the carbon emissions.

And the one comment I’d like to make is just to let you know that the Millennium Institute has developed and integrated energy model of the United States extended to North America that is even more integrated than yours in terms of looking at economic, social, and environmental factors, and it goes out to 2050. 

MR. VERRASTRO:  Yeah, you’ve got – (inaudible).  (Laughter.)

Q:  So you can see that some of these things that you see going up start to have a little bit of a problem when you get that far out.  I’d be happy to talk to you about that later.  It’s quite interesting. 

MR. VERRASTRO:  I’d appreciate that. 

MR.    :  We didn’t have a model. 

Q:  Yeah, well, we do now.  So we’d be glad to help you.

MR.    :  (Off mike, laughter.)

Q:  I accept that.

MR. VERRASTRO:  Let me start with the resource thing.  It was molecules on the grounds.  It’s –

Q:  The amount available for use – (inaudible).

MR. VERRASTRO:  Right.  And depending on what fuel source, you know, this is – if you look at tar sands in Canada, they’re talking about using nuclear as the power source to generate the heat to get the oil sand out. 

Q:  And use amounts of water – (inaudible).

MR. VERRASTRO:  Right.  Well, and water is the resource that we talked about.  We didn’t try to measure it, because in certain areas, there’s not enough to go around, whether it’s ethanol production or farm production, or what you need for oil, shale or tar sands.  So that may be the constraining factor.  There’s – as you start developing these technologies, you hit a different constraint for almost every one of them.  So while there’re opportunities, there’s also challenges. 

What was the measure on coal? 

MS. LADISLAW:  The economy – (unintelligible).

MR. VERRASTRO:  Oh, the economic costs, yes.  No.  When we looked at the triangle, we think that a lot of these discussions talked about the environment and security and environment and they don’t factor in economic costs.  And they have to factor in economic costs.  When you start looking out over a 30-year period, you can annualize almost anything, you know, and say that it will reduce GDP by 0.5.  Well, can you absorb that?  Well, if the alternative is that life as we know it go away – goes away – (laughter) – then 5 percent, you know, five tenths of a percent reduction in GDP, acceptable risk. 

So we didn’t try to quantify it.  We are a macroeconomic group and there’s a couple of macroeconomic papers in there, but it was – when you look at the consensus document and the size of the group, the good news and the bad news about the study, this kind of high-level, 50,000-foot view gets you enough consensus when you try to put on specificity of recommendations and get this kind of group to – a group this size and this diverse to agree on it, almost impossible.  So we chose the path of less resistance – I won’t say least resistance, unless – (laughter) – (inaudible) consider it that way.

MS. LADISLAW:  Kind of – (inaudible).  (Laughter.)

MR. VERRASTRO:  And why don’t you take China?

MS. LADISLAW:  Yeah, I think your point on China is exactly correct, and this is sort of where we had to cut some boundaries in the study because it was an oil and gas study, and we could take things only so far.  But we did have, in the discussions about CO2 emissions, per capita, different ways to divide responsibility for emissions going forward versus historical emissions, and it really is a question of how do you start to create the framework where these processes for generating energy and economic growth and increased standard of living which kind of what’s our mantra for, you know, try and understand where we’re all headed. 

How do you start developing the framework within which CO2 costs can be calculated into those processes, resource costs?  Can these externalities that so long – for so long have been sort of these niceties that you sort of try and consider important and your corporate social responsibility report?  But actually give them some sort of economic costs so that you understand, you know, if you – what actually your capping and what kind of effects it has on the economy.  We’re actually doing some further work on that with some partners looking at energy security, climate change and competitiveness.

Q:  People are blaming China – (inaudible).

MS. LADISLAW:  Well, you know, and the real question is, you know, what would you ask them to do?  So you ask them to get rid of those industries, they move somewhere else.  They go to Southeast Asia, they go to Latin America, they go to Africa.

Q:  (Inaudible) – they’re not maybe causing that much.

MS. LADISLAW:  And what are their capabilities for dealing with those issues.  So they’re all very good, good issues.

MR. VERRASTRO:  That’s a separate issue though.  If, in fact, as you industrialize and you push the less desirable industries somewhere else, to Africa or Latin America, you just – bless you – you’re just pushing the problem off.  So at some point, you’ve got to come to grips with it.

Q:  My name is Homes Holmo (ph), and I’m a congressional science fellow.  I smile at the remark that, you know, if the USGS data assessment in 2000 is off, then a lot of these studies are off.  So is the case with the EIA and IEA reference case scenarios.  I wanted to flag a disconnect between the first half of this evening’s presentation and the second half.

MS. LADISLAW:  Uh-oh.  (Laughs.)

Q:  The first half had, you know, titles that said, you know, in such and such a date, we will have such and such a fraction from such and such a resource, as if it’s “will” as opposed to “would be” if – and the big if – so two big ifs, one is if the past looks like the present and the future and the conditions that persist are the present policy framework and a relatively nonvolatile price of crude oil.  Well, I think that there’s very few people here who would bet poker chips that in 2025, there – you know, there really has been no discernible response to climate impacts around the world, and the oil markets have maintained some sort of mild price trajectory for us. 

So given that – those two, you know, assumptions are so risky, in my opinion.  I would like to know if the NPCS considered actually writing a report called “Facing Hard Truths about Climate,” and looking at the implications for the energy sector of actually some of the targets that the governors and international bodies have been discussing, because I think the picture looks really radically different.

MS. LADISLAW:  Mm-hmm.

MR. VERRASTRO:  Yeah.  I agree.  On the EIA data, I mean, even Guy Caruso will tell you that the numbers in the forecast, it’s the trends you’re looking at, not to pick an individual number.  We use the EIA or the IEA reference case because they’re the two biggest publicly available global estimates.  You’d be surprised when you start looking at some of the estimates that people put together.  Financial houses do it.  You know, banks do it.  Private companies do it.  They have a comfort zone, comfort zone between – coming in between EIA, IEA, and say, Exxon.  And if they fall in there, not a lot of level of extra thought that goes into that, you know, I mean, it’s really kind of surprising.  So yeah, and I agree with that. 

I think the point on the fuel mixes, two things.  One is that in the transition period – and that’s why 2050 versus 2030, big, big difference.  If you look at 16 years on technology or 15 years on turning over the car fleet, absent of big policy change and EIA can only make its forecast based on existing policy, unless they expect Congress to do something different.  

Q:  (Agreed ?).

MR. VERRASTRO:  Your numbers look a lot similar in 2025 than they look today.  And they would even acknowledge this, probably not correct, but that’s the reference case that we had to use on that. 

In terms of the volume of –

Q:  I would simply say that there’s a lot of this presentation that could inform a strategic approach from military agencies, policy-based corporate investors that’s based on essentially a fundamental projection of the future that most people know who are in this business.

MR. VERRASTRO:  It’s not, you’re correct.  

Q:  It’s not strategically relevant.

MR. VERRASTRO:  Right.  

MS. LADISLAW:  Right.  And even the questions that did – even the forecast that did attempt to look at things that, you know, alternative policy scenarios, it wasn’t to any particular end.  There was, like – I think there was very few sort of carbon constraint scenarios that tried to do in particular.  Even the IEA’s alternative policy scenario’s just sort of 1,400 – you know, policies that had been put in place in time.  And it really is, you know, and this is my opinion, not necessarily something that came out of the study, it really is quite amazing to see how much the work done out there does take these business-as-usual forecasts or any other forecasts for that matter, and how much we, as sort of a policy discussion community, extrapolate from those things without really questioning what the assumptions are. 

It’s – to the extent that, you know, the first part of the presentation I said a lot of “wills.”  Andy should be mad at me because that should have been beaten out of me through the NPC process – (laughter) – because we weren’t – we really tried hard to say “the forecasts indicate that”, and because one of the key points coming out of this is the forecasts only get you so far, and if you’re really looking at doing something about the trends and the issues that we kind of highlighted, it’s not going to get you there.  And we’re not on track to do those things in a policy static environment.

MR. VERRASTRO:  But having said that, when you look at the scale – not to belabor the point – if you look at this scale, if you switch any of those numbers by 4 percent, 5 percent, that’s a lot.

MS. LADISLAW:  It’s huge.

MR. VERRASTRO:  Yeah.  So I mean, to think you’re going to get a 20 percent swing one way or another in that timeframe, it’s almost impossible to do.

MS. LADISLAW:  Yeah, and just – and another point a lot of, you know, some of the comments coming up.  It’s not that we’re saying that these things aren’t possible.  I think one of the things – and keeping in mind that this is an oil and gas industry-based study, that what they’re coming to is, yeah, this isn’t going to work for us either.  You know, and so – which is an important point.  I mean, they didn’t go into it, trying to solve a climate problem.  They didn’t go into it trying to solve a foreign policy problem.  They said can we do our job over the next 25 years?  And this is the answer that it came to.  So it’s actually a pretty helpful thing.

MR. WEHRENBERG:  We should check that all out.

MR.    :  Yeah.

MR. WEHRENBERG:  That’s a good thing.  (Laughter.)

MR. VERRASTRO:  That side of the box.

MR.    :  Right.

Q:  I’m Jerry Barney.  I’m chair of a nonprofit organization based here in Arlington called Our Task.  It is an international network of young people who feel that the studies that are being done by their parents’ and grandparents’ generations do not consider their point of view and needs nearly as much as they would like it.  And I have to say that from this presentation the thing that gets the attention of the young people that I brought here is the comment about stopping at 2030, and putting up a flag and saying our mandate doesn’t allow us to go further.

MR.    :  What color was the flag?  (Laughter.)

Q:  Yeah.  Now, the young people that I’m working with are preparing what they call the Youth Earth plan.  It’s a study that is a very substantive piece of work.  It’s based on our network of young people and a dozen countries, in a growing number of countries, and it has a lot of (new ?) material in it that you’re looking at.  But what these young people are doing is questioning a whole lot of the assumptions that are in these general scenarios that you’ve been talking about and are raising questions and putting forth alternatives with it, because they fully agree with you that a 4 percent change in one place or another is not going to do it.  For them to get safely through the 21st century is going to require massive changes.  And these young people are bringing themselves together and saying we need to get our thoughts together, we need to find a way to have a forum where we can participate and be taken seriously. 

And I guess two questions that came from our group here for you – (unintelligible) – is: To what degree was there an effort on your part to include young people among the 350 or 1,000 participants in this study, and will there be a follow-up study perhaps focusing on climate, as what Jack suggested just a moment ago, in which young people could have a greater role in it? 

Thank you.

MR. VERRASTRO:  As the young person, do you want to – (laughter).

MS. LADISLAW:  I’m the resident young person.  No.  I can’t give you sort of quantitative data on how many young people participated in the study.  There’s a lot of young people getting into energy and climate right now just because they too share your interest and your organization’s interest in making sure that, you know, young people are part of the solution. 

With regard to the follow-up study, I don’t know if Andy wants to speak to that at all, but essentially the National Petroleum Council study responds to request from the secretary.  To the extent that this interest has – this study has driven interest in follow-up work, I know that we’re doing work on climate change, other folks are doing it as well – just it probably won’t be through the NPC unless they’re requested to do a study by the secretary.  That’s the nature of a federal advisory group. 

But I know through the stuff that I’m involved in, and Frank is probably one of the greatest folks for bringing young people into this industry is that there are a lot of folks out there that are interested in getting involved, a lot of campus groups.  I don’t know if any of you have been following university activity on energy and climate issues.  We’re building a new building at CSIS and one of the most active groups in our building project is those folks focusing on green building initiatives.  So there’s a movement going on and it’s a really interesting one – just probably won’t be another NPC study unless the NPC is asked otherwise.  

MR. VERRASTRO:  To the point, though, we always thought that the more interesting study would have been where you want to be in 2050 and how do you get there. 

MS. LADISLAW:  Right.  This is not the question.

MR. VERRASTRO:  Because I think you need to back stuff up.  You need to figure out from the parameters what you think you want the world to look like in some ways and then back it up, and that’s just a really difficult thing to do.  When I was in corporate planning, I used to do six-month and 18-month forecasts.  Five years I thought was a stretch.  Thirty years was laughable.  So while I appreciate people that can think out 50 years, it’s just a difficult planning tool, but when you start looking at transition and technological change that’s where the bulk of the stuff comes.  In doesn’t come in the 20, 25-year time frame, so it’s beyond that, so you really need to be thinking beyond that and kind of working your way backward.

Q:  I’m (curious?).  The thoughts of these young people were available to us somewhere?  The study is about 80 percent (in graph?) at this point, and I think it will have something to share about it within another couple of months. 

MR. WEHRENBERG (?): Well, please let us know.  We’d be very interested in making that information widely available.

MR. VERRASTRO (?):  We’d be interested as well, please. 

Q:  My name is Michael Champ, ATRP Corporation.  I think you’ve done a fine job at wading through a large problem.   I think there might be two assumptions that could be better documented if you did cover them.  If they were not covered, you’d want to consider them.  One is you showed a significant increase to heavier crude oils and oil sands in the next 20 years.  That’s going to require a lot of hydrogen.  Right now, that hydrogen is reformatted natural gas that we buy from somewhere else foreign.  So if you kick that price up, your cost estimates are way off because you can’t use (foreign ?) natural gas to make oil (by twice ?). 

But there’s a real kicker in the mix nobody’s talking about and that’s fresh water.  As you know, the refinery industry has a real problem that nobody is addressing.  Gallveston is – and Baytown have subsided seriously quite some distances in Texas because of the refinery at Baytown.  The refinery is – it was in the ‘70s, 14, 15 feet.  Subsidence was an issue.  Now that subsidence has crept all the way to Houston, it probably is a 30-feet window. 

Water is the defining crisis of the 21st century, not oil, not energy, not security.  I think water is part of security, and I would say that we have two problems in this country with water rights: one, we have a system where the end-user gets what’s left and if the guys upstream don’t diminish it, he can get it and use it.  Guess what?  All refineries that are in the coastal zone: they’re at the bottom at the heap.  Now, if we want to route our sewage waste discharges through the refineries to keep them supplied with fresh water, they’re not going to have a vote because the public informers are going to have a big vote.  So there’s a serious problem with water, and water will change the whole equation because of the amount of water used in the refinery process.  If you could add some twist in it at the end, I’d think you’d make a really serious contribution.  Thank you. 

MR. VERRASTRO (?):  Thank you. 

MS. LADISLAW:  Yes.  It’s not part of the formal presentation, but there were numerous discussions on water issues and how they’re changing policy with – (unintelligible) – liquids in China, power generation in the United States, biofuels.  I think you’re right.  I think it’s –

MR. VERRASTRO (?):  Migration patterns.

MS. LADISLAW:  Yes.  Migration patterns.  We actually – at CSIS there was an energy and water study done not too long ago trying to look at these issues into the future. 

MR. WEHRENBERG (?):  We had a (harsh ?) meeting where the technology people presented papers and not one of them occurred without someone saying, have you considered the water?  And apparently it’s not a – but it is obvious that it’s a huge interest.  We take your point.

Q:  One of the most promising technologies that my colleague on the left here has been working with is (O-Tech ?) because it produces a large supply of water, and it could be the savior for the oil industry because it can also produce salt water, hydrogen, and fresh water from salt water.  So essentially we’ve got to think outside the box.  If we could use hydrogen to replace petroleum, the box goes away, so who knows what the future will be but there isn’t enough of either one to sustain oil production as we know it today.

MR. WEHRENBERG (?):  I certainly agree with who knows what it will be.  (Laughter.) 

Q:  Hi.  I’m Lisa Wright with Congressman Roscoe Bartlett’s office, who you’re familiar with his views on the report.  I have just have two quick comments that you can choose to respond to or not.  One, in looking through the report, the fundamental conclusion that the experts had for my boss and that ring true to me is why was there so much focus on unconventional sources, unconventional oil, heavy oils, colloidal liquids, the gamut in the report.  And the answer was, because we will need them.  So I think that’s a very important takeaway point.  We do not expect to be able to produce the conventional oil to meet projected demand.

And then the second thing picking up, Frank, you said that all the estimates are all built upon the USGS.  And I want to bring to the attention of everyone how fragile those estimates are.  My boss has had the USGS people in his office and gone through them in great detail and their 2000 report that looked at resource estimates was based on a lot of computer projections of what might be the median of what those estimates might be.  They are not firm numbers, and somehow when EIA took that resource base, they converted the mean of their computer projections into probabilities and suggested that future discoveries would most likely follow a 50 percent mean as if that was a probability, but discoveries have followed the 95th percentile probability, which is significantly less.  And so to the extent that people are basing all of their work upon the fragile foundation of EIA’s interpretation of USGS, there is a very, very rosy scenario which is not justified out there.

MR. VERRASTRO:  Yes.  I think that there’s two kind of points of clarification.  The 2000 USGS used technology and data kind of mid-1990s, so it’s already 10, 12 years out of date.  The technology has improved historically, recovery rates have improved, and the difference and Don Paul, the Chevron – (unintelligible) – the difference between the pure peak oil people, and what we saw was that the peak oil community kind of was divided.  There was – and I’ll use these percentages roughly – there were roughly 20 percent that still believed were kind of were running out of oil, it’s already happened, steep decline, coming tomorrow.  There’s another 75 or 80 percent that said almost what you said, we acknowledge that there’s unconventionals out there.  The unconventional resource basis of the molecules in the ground argument.  It may be limited by access, because of resource nationalism, technology, prices, deep water, security, any number of things.  We don’t dispute that the numbers there, but if you can’t get to them, it’s the same point.  So it’s a slightly different. 

The reason that unconventionals were looked at, and the study does, because we believe the same thing that when you look at the demand forecast, there’s insatiable demand just kind of increasing going out further.  You can’t possibly keep up with that, so the contribution and higher prices of unconventionals is in part due to the technology in secure areas – North America – that you think you can get to, but for carbon and water, okay.  But you think that you can get to some of the above-ground risks and manage them. 

When you look at the resource accumulation and the inability to access them, whether it’s the Middle East or Africa or Russia, that drives you to the unconventional, so don’t read it to say that the conventional is small, because the conventional estimate in the study at least is still large, but there’s a belief that at higher prices people – they’re not going to go to Venezuela if Chavez keeps changing the rules.  If they can’t get in Russia or you can’t invest in the Middle East, you’re going to start looking for more reliable supplies close to home and the good news is that if you look at oil shale and oil sands in the Western hemisphere, pretty big endowment, and coal – it’s massive, but it comes at some environmental consequence, and water may be a limiting factor, skilled personnel, infrastructure, a bunch of things, and you need to figure out how to manage those to bring them on. 

Yes.  We’re not disagreeing with that.  It’s just that there’s a different perception of the world and there’s gradients in the perception.  USGS every year comes out with a – or every other year comes out with a new kind of refined estimate of either like the Arctic resources or deep water or whatever.  The next time – and Andy, help me out here.  I don’t the next time that they do a full blown is probably 2009.  It’s sequential that they do it.  So they build these new little pieces and then they come out with a new global endowment.  So the endowment we’re working off of the last real study was the 2000 study.  That’s all the means.  So don’t read more into it or less into it.    

Q:  Scott Pew (ph) with Homeland Security Science and Technology.  Thanks for your brief, but I’m still – in my own mind, I have a hard time explaining to people – you know, we’re at 85 million barrels a day right now, we’re going to go to 120 and we get about 10 million barrels a day I think from Saudi Arabia, so we’re talking about 3.5 times what we currently get from Saudi Arabia between now and 2030, and that’s not the whole story because the 85 million that we’re producing today is depleting all the time.  I forget what rate you use, but if you use 4 percent, the real impact of that is we really have to add about – I don’t know, what, five or six times somehow in total liquids what we currently get from Saudi Arabia between now and 2030.   And if you tell me we’re going to find that much oil, the comeback is: how do you reconcile that with the fact that global discoveries peaked in ’63 and they’ve been declining for over 40 years?  In 2030 will be 70 years past the peak in discovery unless we can reverse that trend somehow, right?

MR. VERRASTRO:  Right. 

Q:  So how does that – it just doesn’t add up to – doesn’t pass the common sense test.

MR. VERRASTRO:  I agree with you on the number.  When you start looking at 35 million barrels of new production that doesn’t exist today being available to the market, you can figure out where it comes from.  That’s Saudi Arabia going to 17.  That’s Iraq doubling.  That’s Iran doubling.  That’s Russia increasing to probably 15 and then a healthy contribution from unconventionals.  That’s a huge number.  That’s why I don’t think that number is a sustainable number to start with. 

When you start looking at some of the technology changes, though, if you believe the resource base number, this is – this is kind of a bone of contention in the community.  If Saudi Arabia may have as many as 400 billion barrels, not 262, but they don’t want to go through the process of revising the quota.  But if you still can get to it, I don’t care if they have 600 billion, right?  So you’re in a transition period and in terms of the production, if you look at the rate of growth of production in the world – take the Caspian.  The Caspian was the last new basin that opened up and everyone flocked to it.  And the original estimate was “well, the Caspian could contain 200 billion barrels of oil.”  That was like Saudi Arabia, right.  So there’s been some big finds and some little finds.  Kashgan is probably 17 billion barrels.  AIOC is probably five billion barrels.  They’re not Guar, but they’re still substantial and after recovery rates increase to 40 percent or 50 percent for some of these fields, you extend the life of these fields because you’re dealing with such a big number.  But I take your point. 

When you start looking about where this production comes from, this is – someone made a comment earlier about the EIA and IEA projections.  One of the differences: EIA holds Saudi Arabia I think to 17.  I want to say 17, but it’s less than 20.  So they wind up getting in a higher price environment, a bigger contribution from non-conventionals, and a bigger contribution from Russia and not OPEC.  The IEA is down on the European side on the Russian ability to produce over the long period or desire to produce over the long period.  So they have their demand and then they just plug in supply.  So you get a lot more from the Middle East.  Now, none of these forecasts will probably pan out the way they’re projected.  They’re just reference cases.  But it’s a huge challenge.  I don’t – personally I don’t see we can get another 15 million barrels a day. 

MR.    :  I see people waiting, but just quickly on Saudi Arabia, did you give them credit for the full 260 in spite of the fact that they’ve been saying since 1980 they have 260 billion barrels, produced several billion per year and never goes down.  How does that work.  Why do you give them credit for that? 

MR. VERRASTRO:  There’re other fields that are coming on.  I just – I’d just stay on this a second, for as much as people talk about Iraq and the potential on Iraq, Northwest Saudi Arabia, same trend line, the size of the state of California, has 17 wells through.  Do they have more oil there?  Probably so.  I don’t know what is going to cost, how soon they’re going they’re going to develop it, but I think the numbers are large.

Q:  Thank you for the presentation.  Jerry Brown from the DOD.  You referenced earlier in the discussion the tripling of oil prices since the beginning of the war and I guess the question is, if you look at that and look at current demand, there’re probably some assumptions in these studies about the price elasticity of demand, which doesn’t seem to have happened in that tripling and the models you work with previously probably would predict that.  Is this – we haven’t seen that, the impact of the price elasticity or have things fundamentally changed and basically we now are in an environment which is totally price inelastic?

MR. VERRASTRO:  I’d say yes and yes.  (Laughter.)  If you looked at any forecast pre-2005 – the world changed in 2004.  Demand in 2004 was twice the average of the previous 10 years.  And part of it was China, but it wasn’t all China.  That’s been pointed out.  But the projection was look, China grows at this rate, million barrels a day, what happens to the rest of the world?  The predictions before at $55 – most economic forecasts said that at $55 demand craters, and it didn’t.  And it didn’t crater at $65.  And last year briefly we saw $75 before it receded, and the feeling is that you haven’t seen – short-term inelasticity in the transportation sector in this country doesn’t seem to exist.  Now, over the longer term, if you change efficiency standards, give – incentivize people to go to alternative fuels, have flex-fuel cars, due mass transit, maybe you could do something with that.  But in the short term, the way we live doesn’t allow you to have a lot of elasticity in short-term liquid fuels demand.  Now, over 30 years, you could play with that, but right now you can’t.  And the fact that we already have pretty efficient – a lot more efficient than we were in the ‘70s, that the economy’s a lot more efficient, so that the oil price increase doesn’t have the same impact that it had before.  Every time we had a spike like this in the past, we’ve had a recession.  When we – when we tripled prices from three to 12, or quadrupled prices, it was nothing like going from 25 to 75, and if you sustained $75 or $80, which is OPEC’s concern, eventually demand is going to fall, but it’s going to fall in different places and it will be uneven.

Q:  Hi, my name’s Frank Fisher.  I’m from IDA, Institute for Defense Analysis, and I just want to pull on the thread of the unconventionals just a little bit more and just hear your comments on the idea that I’ve seen around and the energy profit ratios in general and how they’re trending and in particular what impact that might have on, again, going back to this uncertainty of the estimates and – anything you might have to comment on that.  Just – in particular, for instance, just the fact that it requires a lot more energy to get – (unintelligible). 

MR. VERRASTRO:  I think generally in terms of profitability that these are – they’re longer-lived assets, so people are willing to make the investment.  They’re hoping for a technology improvement and economic improvement in extraction.  If you look at an individual company’s portfolio, you can spend a lot more time looking at research and developing unconventionals if you have a conventional base where production costs haven’t increased that much and the price has tripled.  If you look at any of these companies, a lot of them haven’t replaced their reserves over time, right, especially in the last four years.  Probably because their don’t have access or probably because there’s security concerns or maybe environmental concerns, but the issue to them is for Wall Street a tripling of price has bailed them out.  So they look good quarter to quarter.  Now, there’s a separate issue of what the long-term future looks like for some of these companies that are invested in conventional fuels, because I don’t think it looks particularly bright. 

Q:  I just want to just clarify a little bit because I don’t know that I was completely clear.  What I’m kind of just want to know as well is the idea of how much energy it takes for you to actually produce a unit of energy and you can do it on the first law or second law basis, and I know that it’s only one part of the equation, but it kind of – it seems to me to be one of many things that you might have considered.  You’ve obviously considered all the strategic issues, et cetera, but if it costs me a joule to get a joule out of the ground, there’s no way that – any dollar amount is going to –

MR. VERRASTRO:  Yes, and I think that’s exacerbated by the fact that people are now looking at the environmental footprint.  Why in God’s name would you convert coal to liquids if it’s worse environmentally and it takes as much energy to get it out, and then take the CO2, solidify it and put it back in the ground?

Q:  What impact would that make – short question is have you all considered that in – and all in the study – any comments, any –

MR. VERRASTRO:  Oh, I see.  I see, okay.

Q:  – and what were the impacts to the –

MR. VERRASTRO:  No, actually the place that I would refer you to is probably the Alliance to Save Energy or World Resources Institute.  They’ve actually done a chart of energy inputs and energy outputs.  By definition in the NPC study, we weren’t allowed to look at price because it would look like collusion within the industry if a bunch of people sat around and said, “well, the price of coal to liquid should be X.”  So none of – that’s – it’s embedded in some of the forecasts.  That issue is addressed in the technology piece, but not on the guts of the study.  But there’s other people that have done that energy inputs in and out.

MS. LADISLAW:  Yes, the technology section did do a good amount of work, especially in biofuels, coal to liquids, those sorts of issues, on what you’re talking about.  But we also did talk about – about that to a certain extent within the geopolitics group, just look at how trends in sustainable development are impacting the resource choices that people are making and beginning to look at these sorts of life cycle costs and energy inputs per derived energy output.  And it does make for a really interesting sight. 

Q:  First I’d like to thank you.  You’re extremely articulate at explaining a lot of this to us.  I am glad to hear that you’ve at least considered water and looking at what Mike said earlier, I believe that water is a real – is the rabbit down the hole here.  And I realize that this was a petroleum study and that for the most part we’re looking at carbon to carry the hydrogen in a petroleum based economy.  Has the study looked at the possibility of using ammonia to carry or nitrogen to carry the hydrogen?  And I didn’t see any of that in your slides and I’m wondering if that issue was considered.

MR. VERRASTRO:  I think in two ways in the technology group part of that is an alternative fuel and a hydrogen carrier.  Everyone recognizes the role of hydrogen.  This kind of goes back to the timeframe issue.  There was kind of a general feeling that a major component of the energy mix would not be hydrogen by 2025.  So, again, if you took this study out, that you might have gotten a different impact, but in the timeframe we’re looking, given the infrastructure constraints, the ability to generate – unless you had a lot more nuclear – how you would deliver it, and then have cars in sufficient number to use the hydrogen, that it was kind of on the margins of this, but in a longer term study, it would be a bigger component. 

Q:  We’re using hydrogen to produce electricity and we – we really haven’t looked at that as to what the tradeoff s between the transportation issue and the power generation issue in this evening’s presentation.  What I’m looking at is – and what concerns me is the use of carbon as the carrier as opposed to nitrogen as the carrier in all of the considerations that we talked about with the carbon problem. 

MR. VERRASTRO:  No, I absolutely agree, but this was – it was a, if you want, a fossil fuel study, so it was built around carbon.  That’s the good news and the bad news of it.  And in the timeframe, I think the assumption was that if you changed to something other than that, it’s a longer switch, new infrastructure, and probably not enough time. 

MS. LADISLAW:  And there is the timeframe issue, but also I guess to their credit, the NPC didn’t want to get too far into an area where there are other groups that focus particularly on nuclear – particularly on a specific area.  We wanted to just point out that from an oil and gas industry perspective, these are the barriers that they see.  And the interesting thing is it leads you to all of these other resource options and all of these other thoughts about what the infrastructure looks like and how you leap beyond that and what technologies are needed.  It sort of stayed out of making recommendations on those.  And I do – for those of you who’re really interested in the technology discussion, there are some great technology papers included in there.  We just didn’t – didn’t go through – didn’t go through them, so – 

MR.    :  (Off mike) last couple of questions here.  If you want to pop one of them out of the way, get up and – (off mike, laughter.)

MR. VERRASTRO:  Nice.  (Laughter.)

MS. LADISLAW:  (Unintelligible, laughter.)

Q:  My name’s Martin Ogell (ph) and I’ve been attending these – eight or 10 of them – as a just a citizen, a private citizen, but I’ve been very involved with energy issues in Arlington County and through my work.  And as I’ve come to them they’re all extremely informative as this one has been, and I’ve enjoyed all of them, but they sometimes remind me also of my pilot experience.  I’m not a licensed pilot, but I landed a plane three times now.  And the first time I almost killed everyone on board and the pilot who was trying to teach me – and he will remain nameless, because I don’t think this is legal – (laughter) – he said well, what in world are you doing?  You’re not looking at the horizon.  You look like you’re making calculations in your head as you.  And that’s why I almost crashed the first time.  The second time I just looked at the horizon and lo and behold, with no effort on my part, the plane landed perfectly, and then it happened again.  I was amazed.  (Laughter.)  When I’ve been at these –

MR. WEHRENBERG:  Don’t push your luck.  (Laughter.)

Q:  Yes.  That was 20 years ago and it won’t happen again.  But it does feel this way; that is, we’re trying to land the plane in a away, but we’re not really knowing that we’re doing that.  And, two, once we even think about landing it, we’re looking at all these details, and all these little projections in separate ways: different studies here, different studies there.  And so we’re not looking at the horizon beam.  We’ve got to take this human endeavor of ours that is hugely dependant on huge massive energy inputs and get it to a day where we can do the same thing with much lower energy input. 

And I’m just afraid unless we keep that as our horizon, we will, hopefully not crash, but we’re going to have a hard time of it.  And so, with that as an open analogy, I wanted to get your comment on a hard truth that I wanted to lay out, and that is the hard truth is our demand is going to go down one way or the other.  It’s going to go down, and so is it going to go down in a managed way or is it going to go down in an unmanaged way or in a workable way – those kinds of things.  You may not even agree with the initial assessment.  That’s just my own, but your own thoughts on that. 

MR. VERRASTRO:  I think on a global basis, and I’ll let Sarah point – I think you’re right on the global basis.  It may be that if the U.S. is willing to pay more, and their consequence of doing this, that for some period of time U.S. demand can keep growing, but it grows at the expense of someone else.  And at this point if you look at China, if you look at India and if you look at where the resource is coming from, that’s not a real good strategy, because you’re right.  I mean, the point earlier about supply always equals demand.  Well, at some price, that may be the case, but there’s a lot of haves and have-nots and moderating demand just struck us as one of the smart things that you need to do, but you need to start it now.  So I’ve worked – (off mike). 

MS. LADISLAW:  And I think, sort of – taking your horizon theme, one of the things that doing a study like this quickly leads you to is that you’re not really just dealing with an energy resource issue here, as we’ve talked about with water.  You’re dealing with the consequences of a planet with the potential of 9 billion people on it, and the same number of natural resources that have always sort of been involved in our national system.  And so what do we, as folks who inhabit this planet, have to do to think about the way in which we produce and use those energy resources.  And so it is sort of this larger question. 

 And I think, one thing that we consistently brought up, but weren’t entirely sure how to get beyond, I guess we did it by saying we need lots of really good leadership is the processes with which we have to make decisions these days do not operate on the timeframe that we’re talking about when you talk about climate change, when you talk about energy issues.  I think that’s one of the – talking about the energy independence idea – if it was couched as a long-term goal, as this thing that we’re going after in a quest, as this long-term thing that we all need to sort of be considering and not something that we’re being realistic about, which is you might be paying more for this energy.  There might be some sort of sacrifice out there for having these trade-offs that you’re trying to – from the gains that you’re trying to come to. 

There’s a mismatch there and I’m not sure we’re having the political discourse that sort of matches that timeframe.  I mean, there’s a lot of analogies we had.  I heard one the other day about how we’re all engaged in a scrum.  It was a rugby analogy.  It’s very strange.  But I always sort of thought of it like rock climbing.  You have a place where you want to get to and you have to develop the skills to get yourself there, but you aren’t going to be sure of the terrain.  So the best you can do is kind of get the right tool set, get the right skill set to be able to try and get yourself there.  So that’s my analogy. 

Q:  Okay.  I think you might have just answered my question – my first question.  It was kind of – I wanted you to elaborate on –

MS.    :  Who are you?

Q:  I’m Angeline (ph).  (Laughs.)  I’m Angeline from the nonprofit (Art Task ?).  I wanted you to elaborate on your strategies for dealing with this demand because you mentioned the demand is projected to increase like 50 to 60 percent.  And the only strategy you mentioned was improving efficiency, but we’d have to improve efficiency by 50 to 60 percent just to maintain where we are right now to deal with the demand.  But if you bring in carbon emissions and that issue, we really want to decrease our emissions by like 80 percent.   So we would need to increase efficiency by – I’m not good at simple math – by a lot. (Laughter.)

MS. LADISLAW:  No, you’re right.  I mean, I think that the – and again this gets back to the combination of strategies that were in there, so it’s demand moderation and then there’s the increasing of all sources of supply.  One of the things I don’t think the study looked at particularly well was possibilities for distributed generation and what your – (unintelligible) – base becomes when you incorporate those kinds of ideas.  We just didn’t – we talked about it, we just didn’t quite go that far. 

So in there – we were trying again to balance this economic security and environmental need.  So it wasn’t just reaching the climate goals.  And it wasn’t just meeting demand and.  And it wasn’t just making sure it was cost effective.  It was trying to hit most of that.  And so you get the demand moderation and you get the increasing the supply from a diverse source – diverse resource base, so like the unconventionals, yes, maybe.  As someone who’s worried about climate, I’m not really psyched about them, but they might be pretty necessary over the next 10-20 years just to make sure people have enough energy, so they’ll put up with your climate policy. 

Q:  So do you have kind of a negative outlook like in terms of you don’t really think we can actually meet some of these carbon restrictions that we need to, to adjust climate change in the next few years? 

MS. LADISLAW:  Just try to disclaimer, the NPC didn’t say anything about that.  Me, I think it’s possible.  It’s challenging.  It’s huge.  And I think that’s part of the – (unintelligible) – discourse though for that.  And I think that’s part f how you get passed that bar of what kind of attention you need to pay to infrastructure, what kind of R&D development you need to be doing?  What kind of seriousness with which do you need to come up with your carbon mechanisms and your market mechanisms for dealing with these things? 

I mean I think it is a big challenge.  I don’t think it’s one that necessarily the government can manage all on its own and I don’t think it’s one the market can do all by itself, but I think it is something that is manageable.  But over the time horizon we were given it is necessary to look at what are all the different components that go into making sure that you’ve got enough energy to meet demand for people, but then also moderating the level of demand that you have plus incorporating these new sources of energy so that you have a hope of being able to meet your carbon emissions. 

Q:  Okay.  And one quick last question.  You mentioned, if you could do the study on your own, you would say, well, where do we want to be and how do we get there?  Could you briefly tell me what you would say in that – (inaudible)?  (Laughter.)

MR. VERRASTRO:  We’re out of time. 

Q:  Wait a second.  No, two more minutes. 

MR. VERRASTRO:  No, I always thought that that would be the better study to do.  It’s just – again, if you kind of look at this little triangle, if you look at – that you need economic sustainability, because people need to eat and they need to work and they need to travel a certain amount, and you look at foreign policy and security, and you look at the environment.  Depending on your timeframe – and this is one of the interesting things – that if you take that triangle with maybe the exception of efficiency, there’s nothing that’s right in the center.  There’s foreign policy solutions that drive you one way or there’s environmental solutions that drive you another way and there’s economic solutions that drive you a third way. 

You need to at least understand that there’s trade-offs and we’ve just started the discourse.  If you think of the NPC study as a baseline study, there is – especially in the political sphere.  If you look at the amount of misinformation, whether it’s on ethanol or it’s on how easy it is to do oil shale or tar sands, that you need to kind of raise the bar and get everyone educated to the level to half the discourse because – we actually talked about putting a “Myth Busters” section in the study just because there’re certain things you have to disabuse yourself of you keep coming back to and falling all over.  So once you get by that, if you think of this as a base load or a baseline, then you’re ready to go to the next level, and that’s why I think the next level it’s got to be a balance. 

And then the question of – we’ve had this discussion internally – is the time horizon on climate change.  If you look at it to 2100, you’re going to do this.  There’s going to be kind of bell curve or an arc and then you may be able to settle in.  There’s certain technologies that you can accelerate in deployment or bring in the technology on sooner.  There’s a different mix that gives you a different result earlier versus later.  If you’re looking at 2012 or 2015, then I’m pessimistic because I don’t see, short of kind of an economic shutdown, what you can do in that time period.  So we have to agree on what we’re looking to do. 

And then this is the succession we have internally all the time: at one point that when you develop the technologies, you move forward on the policies nothing that you do between now and 2030 affects climate change, so a certain portion of GDP goes to mitigation and adaptation.  It just is a political matter.  If I’m Congressman X and there’s flooding in my district, well, renewable fuels is great, but it’s not coming in the next 24 hours, so I’m looking for something else.  And this is the kind of discourse, but five years ago we weren’t having these discussions. 

So if it’s one thing I could urge you to do is look at it as baby steps.  We’ve kind of advanced the ball a little bit.  This is not the be all, end all.  And it’s not the greatest study since life spread.  It’s good in what it did.  There are some huge holes and there is some further work.  And I think in a lot of ways it pointed out what some of the issues are and where the further work needs to be done.  I would argue, maybe the Petroleum Council’s not the group to do that next stage of work, and Andy would probably argue that, too – (laughter) – but I think you go to the point where you’ve identified some of the issues and there’s some common sense things that we ought to be doing now, and we ought not to wait any longer to do them.  And if nothing else happens but those common sense things get advanced while we’re looking at other solutions then I think it made a possible contribution. 

MR. WEHRENBERG:  Well, certainly, Frank.  I want to thank both of you very much.  (Applause.) 

(Off mike) – our next evening is November, 19th – (inaudible) – transportation.  Drop your nametags in the basket that you’re going to trip over on the way out the door.  (Laughter.)  We recycle those.  We’re good citizens too.  Put you’re money where your mouth is on your name tags.  (Off mike.)

(END)

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