SPEAKERS
Jed Bailey CERA Managing Director, Applied Research	James Burkhard CERA Managing Director
Thane Gustafson CERA Senior Director	Vera de Ladoucette CERA Senior Associate
Lawrence J. Makovich CERA Vice President and Senior Advisor	Michael Stoppard CERA Managing Director
Daniel Yergin CERA Chairman (Chair)

Philippe Joubert, Executive Vice President of Alstom, offered a toast to open Wednesday’s Global Energy Insights, chaired by CERA Chairman Daniel Yergin. CERA experts Jed Bailey, CERA Managing Director, Emerging Markets Group; James Burkhard, CERA Managing Director, Global Oil Group; Thane Gustafson, CERA Senior Director of Russian and Caspian Energy; Vera de Ladoucette, CERA Senior Vice President, Senior Director, Middle East Research; Lawrence J. Makovich, CERA Managing Director, Global Power Group; Michael Stoppard, CERA Senior Director, Global Gas; and Chi Zhang, CERA Director, China Energy, offered concise views on regional and global energy developments and pressing industry issues.

CERA Chairman Daniel Yergin thanked CERAWeek Strategic Sponsors Chevron and BP; and Alstom, the Global Energy Partner for CERAWeek. He also acknowledged the efforts of CERAWeek managers Lauren Laidlaw, Kathleen Doherty, and Ross Kiener.

In a discussion on carbon pricing, Dr. Makovich recognized the enormity of this issue for the power business, because of its share of emissions. Demand and supply will determine the carbon price. On the demand side there will be a politically tolerable and a politically intolerable price. From a supply standpoint the cost of abatement, which is “all about technology,” will determine costs. It is an open question on whether current technology is sufficient to provide a suitable cost structure; if not, “the push will be toward more R&D.” Setting targets without understanding this dynamic may yield “unpleasant surprises” and backlash. He and Dr. Yergin agreed that the United States will move toward a system for carbon policy in 2009–10. Mr. Makovich said that in the industry slowing economic growth is “front and center,” next to the climate change issue, and that the US economy is working off imbalances. Regarding CO₂ cap-and-trade versus a carbon tax, he said that economically the carbon tax “is the simplest and most efficient way to solve the problem,” but that from a political standpoint “tax proposals are dead on arrival.” He also warned that CO₂ trade could lead to tariffs that trip up the global economy—a signpost to watch.

In his comments, Dr. Gustafson referred to Dmitry Medvedev as Russia’s “president-in-waiting.” Although Medvedev is “untested in a leadership role,” current President Vladimir Putin’s “constitutional experiment,” whereby he will move into the prime minister slot after the election, is being viewed as a “change without a change.” Dr. Gustafson said that the Putin years have been characterized by exceptional stability and wealth under a very popular president, and called the era since Putin’s days as prime minister “the best decade that Russia has ever had.” Looking ahead, Dr. Gustafson cautioned that several periods are coming to an end: the strong gas assets of the past 15 years, the damaged but repaired oil sector with enormous underground potential, and the country’s “serviceable” power sector. These conditions imply that tremendous new investment is needed, along with an environment where that investment can take place; this will be “the biggest challenge that the new team will face in the next decade,” he concluded.

Dr. Yergin asked Mrs. de Ladoucette whether the release of the US national intelligence report that Iran had halted its nuclear weapons program has eased market anxiety and reduced the chances for sanctions. She replied that although this is “not a clean bill of health for Iran,” it has eased the sense of urgency and “made a preemptive strike politically almost impossible.” Although the report has weakened the chances for tough UN sanctions, weaker sanctions cannot be ruled out; and an “accidental escalation is always possible.” It is likely, she said, that nothing will happen this year, though 2009 may be another story, with a new US administration in place. A Democrat in the White House may open the dialogue; but parliamentary and president elections in Iran lie ahead. It always “takes two to tango,” she said, “and the devil is in the details.” Regarding Iraq, she said that 2007 was a better year than 2008: casualties were down, and oil production increased by 500,000 barrels per day. She noted that increased security is due partly to the surge in US troops and to the arming of the Sunni tribes; but a decrease in troops and a change in tribal conflict would have unknown consequences. The big story for oil is the new fields, but development requires security and a stable legal environment, which does not currently exist. She noted that companies are likely to wait before committing people and huge investments to Iraq.

Dr. Yergin moved the discussion of a stable legal environment to Venezuela. Mr. Bailey explained the significance of the recent defeat of President Hugo Chávez’s referendum, which aimed to cement Chávez’s push toward twenty-first century socialism and provide for the indefinite reelection of the president. Significantly, this was the first referendum Chávez put before the public that was soundly defeated. Mr. Bailey compared government-driven programs that are good at wealth distribution, but are ultimately economically unsustainable, with market-led programs that are good at wealth creation but politically unsustainable. Countries that are most successful find a balance between those extremes. For those at one extreme, like Venezuela, there is eventually a push to move the pendulum back the other way. People are no longer seeing the benefits of Chávez’s policies and are rising up against them. Regarding the conflict between ExxonMobil and PDVSA, Mr. Bailey said that the ultimate question is how it will affect global investors’ view of the country.

Mr. Zhang fielded questions on China’s economic prospects. He conceded that the US economy did have an impact on China but said the more interesting question was the degree of linkage. The government has realized that its function is not industrialization, but to provide social services, and as a result fiscal policies have changed focus, which will encourage domestic consumption. The government has US$1.5 trillion in foreign reserves, which can subsidize consumption, bail out business, and provide jobs, so a US recession may have less impact on China than people fear. The government is focused on preventing high unemployment from rising, among other issues. The risk is that its policy tools are “very blunt, and can miss the target.”

Mr. Burkhard commented on the outlook for oil prices in the near term and on disentangling the risk premium, which he called “a tricky business.” On hedging, he said that it “might be a good time” to hedge oil at $93 a barrel, but that this was not investment advice. He projects prices this year at $85 for WTI; this might seem bearish, he said, but the price last year was $72. As other panelists had commented, some heat in the Middle East has abated, Russia is “prosperous and stable,” Chinese consumers are willing to step up and offset some of the US slowdown; but he said that geopolitics will remain a top concern. There is “no magic [oil] price at which there is a uniform [economic] response around the world,” given the variety of taxes and subsidies in place; but he could see negative repercussions from sustained prices at $110 per barrel for six months or more and said we were currently in a “gray area.”

Mr. Stoppard’s remarks focused on the outlook for LNG globally and in North America specifically. He noted the difference in sentiment between the short- and long-term views. In the short term, to 2012, the investments of previous years will come through, dramatically changing the global and North American markets. The coming surge in LNG “will change business and business models in the Atlantic Basin and the Pacific.” LNG will grow by one third over the next 24 months and add greater flexibility to the market. In North America development in unconventional gas has turned production around, but he viewed this as a temporary phenomenon. North American gas prices will stay over $7 per MMBtu in 2008, followed by some downward pressure in 2009–11. Of the three-way competition for supply among Asia, Europe, and North America, he asserted that North America will have sufficient supply but that it will be seasonal, fluctuating, and volatile.

The session concluded with questions concerning biological alternatives to fossil fuels, with panelists agreeing that challenges of lead time and scale would be immense, and that this would be a very long-term prospect.