Luncheon and Special Address-US Energy and Environmental Policy: What's Next?

• Honorable Edward Markey, Chairman, House Energy and Commerce Subcommittee on Energy and the Environment; Chairman, House Select Committee on Energy Independence and Global Warming, US House of Representatives

CERAWeek Executive Conference Opening Reception

Opening Address

In his Opening Address Tony Hayward, Group Chief Executive, BP, noted the recent dramatic changes in the economic outlook and the "sudden and severe" impact on the energy industry. Nevertheless, over the next ten years household incomes will rise significantly, led by China and India; and in the United States a new administration promises to repair the economy and diversify energy supply.

The International Energy Agency projects global consumption of about 40 percent more energy in 2030 than today, and double today's demand by 2050. Investment of more than $26 trillion will be needed between now and 2030.

Mr. Hayward believes that the natural, human, and financial resources exist to meet this demand, including 42 years of proved oil reserves (and another trillion barrels not yet commercially viable) and 60 years of natural gas. During the downturn, investments in technology for greater energy efficiency and to bring new resources to market must continue. In the past five years BP has invested over $30 billion in the United States in exploration and production, refining, and developing renewables and low-carbon technologies, and over the next decade it will invest a further $6 billion a year to build a balanced, diverse energy portfolio.

Mr. Hayward looks toward the long-term recovery: "The future is not canceled." The limitations are not belowground, but aboveground: "human, not geological." Around 80 percent of global energy supply is from fossil fuels, but an estimated 80 percent of the world's reserves are off limits. Resource nationalism is on the rise. Meeting the energy challenge will require partnerships between national oil companies (NOCs) and international oil companies (IOCs); government and industry; and with academic institutions. Crafting national energy policies that generate government revenues while creating jobs is critical.

Mr. Hayward offered seven suggestions for meeting the world's energy goals: partnership between energy companies and governments, with stable and enduring fiscal and regulatory policies; a free, open, and agile energy market with lower trade barriers and tariffs on all forms of energy; prioritizing energy efficiency and conservation; tackling climate change through carbon pricing and cap-and-trade; supporting development of hydrocarbons worldwide; transitional incentives to make low-carbon energy competitive and to kick-start technologies for large-scale carbon abatement; and a step change in investments in energy technology R&D and deployment. In conclusion Mr. Hayward urged that we "liberate the ingenuity and intelligence of industry, academia, and government" in the quest for a stable energy supply and a sustainable planet. "We have a moment," he said, "and we must seize it."

The question and answer session focused on investing through the downturn, cap-and-trade, biofuels, the viability of electric vehicles, and evolving relations between NOCs and IOCs.

• Tony Hayward, Group Chief Executive, BP

CRITICAL ISSUE FORUMS

Collaboration: Optimally Leveraging Expertise in the New Global Workplace

• Michael Wynne, Associate Director, CERA
• Stein Wolden, Operations Excellence Specialist, ConocoPhilips
• Ali Ferling, Managing Director, Oil & Gas Industry, Microsoft

Mature Assets: Maximizing Resource Potential

• Peter M. Jackson, Senior Director, CERA
• Daniel McFadyen, Chairman, Alberta Energy Resources Conservation Board
• Patrick Pouyanné, Senior Vice President Strategy Business Development R&D, TOTAL SA
• John Barry, Vice President Unconventionals and EOR, Shell International E&P B.V.
• Paul Markwell, Senior Director, CERA (Chair)

Opportunities for the Internal Combustion Engine amid New Competition

Tiffany Groode, CERA Associate Director, opened the discussion on the future of transportation by asking, "What has changed since the last time the world tried to develop alternative vehicles?" As panelists responded to questions from Dr. Groode and from the audience, a broader conversation unfolded regarding energy diversity and efficiency, technological innovation, and the need for mobility in increasingly congested environments.

John Heywood, Sun Jee Professor of Mechanical Engineering and Director of the Sloan Automotive Laboratory at the Massachusetts Institute of Technology, described the opportunities and challenges associated with improving the internal combustion engine. He asserted that the engine-transmission-vehicle system "can and will steadily get better." This resonated with Andreas Lippert, Director, General Energy Systems at General Motors, who said new technology could achieve a 20 percent improvement in fuel economy, but that this would not be a "drop-in" technology and would take five to ten years to reach production. Julius Pretterebner, CERA Director, reminded the audience that "it is consumers who decide what car they want."

Lee Schipper, Senior Research Engineer, Precourt Institute of Energy Efficiency at Stanford University, broadened the conversation by taking note of today's different circumstances: "The world has changed in Asia: there's no room." By reframing the issue around personal mobility, Dr. Shipper highlighted demographic shifts and space constraints in urban environments. The big opportunity is that in much of the developing world, "the infrastructure hasn't been built." A diverse number of other transportation options were also brought up, but most discussion focused on mass transit, ethanol, and electric vehicles.

On ethanol Dr. Lippert described GM's plans to make 50 percent of its fleet flexible-fuel vehicles that can run on E85. He also quantified the number of E85 fueling stations needed in the United States at about 11,000 and reiterated a point made earlier that 20 percent of the US fuel supply can come from ethanol without adversely affecting crops for food production. On electric vehicles there was some difference of opinion. Dr. Pretterebner characterized the thinking that electric vehicles have to be more complex and more expensive than conventional vehicles as a "big myth in the car industry." To sum up the electric vehicle discussion he simply said, "The race is on."

Dr. Lippert concluded by describing energy security and greenhouse gas reduction as strategic objectives, reiterating the importance of constancy of purpose: working through cycles of innovation to reach the "tipping point" where innovative technologies can succeed in the marketplace without subsidy. Dr. Schipper, however, concluded that the problem of vehicles and fuels is small compared to the larger mobility system, which he characterized as "broken." When asked about the potential for technological advances from outside the auto industry, Dr. Heywood responded that "there's always the possibility," but as Dr. Lippert said, "Reality is quite messy."

• John Heywood, Professor of Mechanical Engineering and Director of Sloan Automotive Lab, Massachusetts Institute of Technology
• Lee Schipper, Precourt Energy Efficiency Center, Stanford University
• Andreas M. Lippert, Director, Global Energy Systems, GM
• Tiffany Groode, Director, CERA (Chair)

Middle East: How Political Change and the Financial Crisis Affect the Gulf States in an Interconnected World

• Brad Bourland, Chief Economist, Jadwa Investment
• Douglas Hengel, Deputy Assistant Secretary of State for Energy, Sanctions and Commodities, U.S. Department of State
• Bijan Khajehpour, Chairman, Atieh Group
• James Placke, Senior Associate, CERA (Chair)

New Strategies for a New Investment Paradigm

• Howard Newman, President and Chief Executive Officer, Pine Brook Road Partners, LLC
• William Macaulay, Chairman and Chief Executive Officer, First Reserve Corporation
• Bruce Bilger, Senior Advisor, Lazard
• Clay Seigle, Director, CERAView Institutional Investor Service, CERA (Chair)

Braving the Perfect Storm: The Outlook for Russian Oil

CERA Senior Director Thane Gustafson chaired Tuesday's Critical Issues Forum on the challenges and opportunities facing players in the Russian oil sector.

Peter O'Brien, Chief Financial Officer of Rosneft, reviewed his company's strategy for growth. Rosneft's 10 percent average compound annual growth rate from 2005 through 2008 is expected to decline to about 2 percent this year. Output from the company's major upstream project, Vankor, in East Siberia, scheduled to come onstream in 2009, will help to reduce Rosneft's capital costs per barrel. Though Rosneft has managed to control its operating costs thus far, increasing transportation costs to Black Sea ports are a concern. Mr. O'Brien identified Russian tax reform as a key determinant of the country's future growth and profitability. In fourth quarter 2008 Rosneft's tax and transportation costs soared to 99 percent of the revenue per barrel of oil, though companies and government are cooperating to address tax issues, as the government understands the obstacles that the Russian tax code poses for oil companies operating in the country. The question and answer session covered Rosneft's ability to meet its financial obligations, and the Russian government's role in Rosneft's international relations.

Andrei Gaidamaka, Deputy Vice President of Strategic Development at LUKOIL, reported that the falling ruble was contributing to LUKOIL's cash flow by reducing its capital costs and operating expenses in Russia. Ninety percent of the company's costs are in rubles, so the declining value of the currency has provided LUKOIL (and other Russian companies) with a cushion against falling crude prices. LUKOIL has implemented an anti-crisis program and maintains a degree of flexibility in its capital expenditure budget so that it can take advantage of new opportunities that could arise. In addressing international issues Mr. Gaidamaka said that recent meetings between Russia and OPEC could be an important development in global oil markets given the low price of oil, suggesting that Russia may now be more inclined to cooperate with OPEC. He noted that in the 1990s increasing Russian output was taking market share from OPEC, whereas today OPEC is gaining market share thanks to the marginal decline in Russian crude production. LUKOIL's development strategy does not include a major reduction in capital investments in 2009, as the company expects to be in a solid cash position in any price scenario. Mr. Gaidamaka expects the focal points of LUKOIL's upstream expansion in the next five years to be the oil and gas fields in the North Caspian and gas fields in Uzbekistan. LUKOIL expects the North Caspian offshore fields to begin coming online in 2009-10 and to reach a collective production level of 300,000 barrels per day by 2016, and plans to increase its gas production in Uzbekistan from the current flow of 18 Bcm of gas to around 60 Bcm of gas in five years.

Boris Zilbermints, Vice President of Exploration and Production, Gazprom Neft, gave an overview of the company's operations before focusing on human resources issues. Building a talented workforce and coping with labor shortages will remain one of Gazprom Neft's greatest challenges in the foreseeable future. This problem is particularly acute in Russia, given the negative trends in the country's demographics. Since the breakup of the Soviet Union the Russian university system has grown, but it now trains fewer oil and gas professionals, particularly technical specialists. Gazprom Neft is responding by supporting the revitalization of Russia's technical institutes. Mr. Zilbermints said that Gazprom Neft plans to design new financial incentives to encourage greater employee mobility, and to focus on building a set of corporate values.

Grigory Vygon, Director of Economy and Finance Department, Russian Ministry of Natural Resources, provided a statistical overview of Russia's oil and gas industry and the country's role in global energy markets and discussed the fiscal and regulatory reforms the ministry plans to carry out in the near and medium term. Mr. Vygon acknowledged that 90 percent of oil and gas investment in Russia comes from companies and that the ministry was alarmed to see gross investment in the country decline in 2008. He agreed with his fellow panelists that the current tax system is not optimal because it fails to stimulate the private exploration and development needed to increase national production. Mr. Vygon outlined a serious of ministry initiatives designed to address this problem, including deductions of exploration expenses from the mineral extraction tax; provisions allowing Russian regions to collect auction revenues for licenses in unexplored areas; a process for compensating and rewarding companies in the event that they discover a field that is subsequently designated as a "strategic reserve" and returned to the state; and adjustment of the Russian reserves classification system to better align it with international standards. Mr. Vygon concluded by expressing his general interest in recalibrating ministry policies to facilitate private investment in Russian oil and gas and restore growth in Russian hydrocarbons.

• Boris Zilbermints, Deputy Chairman of the Management Board, Deputy CEO for Exploration and Production, Gazprom Neft
• Peter O'Brien, Vice President, Finance and Investments, Rosneft Oil Company OJSC
• Grigory Vygon, Head of Department, Ministry of Natural Resources of the Russian Federation
• Thane Gustafson, Senior Director, CERA (Chair)

Break

Break

Keynote Address

CERA Chairman and IHS Executive Vice President Daniel Yergin welcomed again to CERAWeek Nobuo Tanaka, Executive Director, International Energy Agency (IEA), and CERAWeek 2009 Keynote Plenary speaker. Mr. Tanaka shared the IEA's view on the global energy outlook for the medium and long term, with an emphasis on two critical investment challenges: to ensure adequate investment in supplies to meet demand and replace declining oil production, and to ensure that the investments lead to a "sustainable energy future for all of us by addressing climate change."

Recent economic events may be "overshadowing our focus on longer-term concerns," he pointed out. The risk is that the weaker demand and lower prices now will cause the industry to lose sight of the longer-term outlook that indicates energy demand growth, supply-side challenges, and a "compelling need to address climate change." The current financial crisis can be viewed as an opportunity to create a "new clean energy New Deal," he said, by placing energy investment strategies at the heart of every economic stimulus package, both in the United States and around the world.

Mr. Tanaka then summarized the changes in economic and energy demand forecasts over the past six months. As recently as August 2008, major institutions forecast global economic growth of 4 percent for 2009. Now forecasters are estimating growth at 1 percent or less. Energy demand growth forecasts have also declined, with oil demand in 2009 now expected to average 85.3 million barrels per day (mbd), down from 87.5 mbd just a few months ago.

This first challenge, investing to meet the expected longer-term demand, becomes clear, according to Mr. Tanaka, when assessing how quickly currently producing fields are being depleted. "By 2030 two thirds of world production will come from new fields awaiting development today or yet to be found." Although investment in all forms of energy infrastructure is required--an estimated $26.3 trillion between 2007 and 2030--oil and gas investments alone will account for one half of that.

The second challenge is to invest in a way that begins to shift the world to lower carbon technologies. "Energy production and use are at the very heart of the climate change challenge," he said. At current estimated growth rates, the long-term concentration of greenhouse gases in the atmosphere would exceed 750 parts per million (ppm) of CO2. Mr. Tanaka stated that "this is clearly unsustainable economically, socially, and environmentally." Energy investment decisions today will dictate future emissions. To reduce the concentration to 450 ppm requires a focused effort. He emphasized the critical roles of energy efficiency and carbon capture and shortage. He expressed concern that the financial crisis will affect investments in the lower carbon technologies of nuclear and renewable energy even more than for conventional oil.

In answering questions, Mr. Tanaka commented that a move to 450 ppm was possible while maintaining a global gross domestic product growth rate of 3 to 3.5 percent. He also argued that reducing greenhouse gas emissions would require placing a price on carbon--perhaps as high as $180 per ton of CO2. In conclusion, Mr. Tanaka argued for an "energy revolution" to ensure a cleaner, more secure energy future.

• Nobuo Tanaka, Executive Director, International Energy Agency (IEA)

Keynote Dinner

H.E. Ali Ibrahim Al-Naimi, Minister of Petroleum and Mineral Resources, Kingdom of Saudi Arabia, was the distinguished Keynote Dinner speaker on Tuesday evening, reflecting on the topic of "Achieving Energy Stability in Uncertain Times."

Daniel Yergin, CERA Chairman and Executive Vice President, IHS, first introduced Hernán Martínez Torres, Minister of Mines and Energy, Colombia, and thanked ANH and the government of Colombia for being this year's CERAWeek Premier Partner. In his toast, Mr. Martínez Torres highlighted the country's modern license system and flexible contract framework that would help "position Colombia as one of the most attractive destinations for oil exploration." Yet he also contended that the future greatly depends on how oil markets would develop--a topic to which he, and the audience, looked for insights from Mr. Al-Naimi's address.

Mr. Al-Naimi characterized 2008 as a "year of unprecedented turmoil and volatility, the likes of which have not been seen since the Great Depression of the 1930s," and identified market stability as a shared interest among consumers, producers, and the industry that is critical to economic success. In this context Mr. Al-Naimi contended that "whereas the recent past was all about risk and high returns, the present focus is on stability and survival." Governments have a role to play in this effort, yet intervention should be carefully balanced to preserve the dynamic potential of globally integrated markets, as protectionism would be "devastating for the global economy." Focusing on the price of oil, Mr. Al-Naimi outlined the conditions essential to enhancing market stability: prices should be low enough to stimulate economic growth, yet high enough to provide adequate returns and encourage investments; and they should also be sufficient to provide incentives for efficiency in oil use and to encourage production from unconventional sources, marginal fields, and renewables.

Yet, looking ahead, Mr. Al-Naimi highlighted three "newly emerging challenges" that could prolong volatility in energy markets: globalized capital markets, the emergence of energy as an asset class, and climate change. While the first two factors played an important role in recent market volatility, he believes that climate change will have an even more profound impact on shaping the role of government intervention in energy markets. Addressing climate change requires a robust and flexible framework that separates "what is theoretically possible from what is realistic," including a thorough assessment of the real costs and benefits. The massive scale of the existing global energy systems requires a prudent approach, as rapid changes would be "costly and impractical." In a "nightmare scenario," alternative energy supplies would fail to meet overly optimistic expectations after investments for traditional energy sources have been scaled back due to expectations of declining demand in this area. Therefore he recommends an inclusive energy strategy in which renewables, energy efficiency, nuclear power, and fossil fuels all play a part. Government policies should emphasize cost-effective solutions and avoid picking technology winners.

Mr. Al-Naimi said that Saudi Arabia has an important role in advancing stability in world oil markets: the country is making great efforts to keep markets well supplied, while maintaining adequate spare capacity to cushion unforeseen supply disruptions. Looking ahead, the Kingdom is investing in science and technology development to ensure a more sustainable energy future and aims to become one day the world's largest exporter of its most abundant resource--solar energy.

• Ali Ibrahim Al-Naimi, Minister of Petroleum and Mineral Resources, Kingdom of Saudi Arabia
• Toast by Hernán Martínez Torres, Minister of Mines and Energy, Colombia

Opening Address

Jonathan Gear, CERA President and Chief Operating Officer, welcomed guests and the CERAWeek Online audience to Gas Day and discussions ranging from global gas markets to the changing landscape for carbon policy. He thanked Chevron, a Strategic Sponsor, and the China National Petroleum Corporation, a Strategy Breakfast Sponsor.

Daniel Yergin, CERA Chairman and Executive Vice President, IHS, expressed great pleasure in welcoming Gerhard Schröder, former Chancellor of Germany (1998-2005), "a great statesman and economic modernizer." Chancellor Schröder began by emphasizing the strategic importance to the global economy of reliable energy supplies and transmission, "a cornerstone of economic growth."

Climate change, however, is "a huge threat" with the potential to disrupt geopolitical stability. It will require an understanding on reducing greenhouse gases and slowing down global climate change. The economies of China and India must catch up, but their progress must be managed so as not to contribute to the crisis. Industrialized nations must encourage the careful use of available resources, become less dependent on fossil fuels, and look to greater energy efficiency and renewable sources. Germany is a leader in energy productivity and renewables, which cover more than 10 percent of total electric consumption; by 2030 about half the country's electricity could come from renewables.

He urged fossil fuel diversity in all aspects, using as many suppliers, transport routes, and energy sources as possible. That diversity he called a positive global economic development, including funds invested in transportation and grids, and to develop fields in difficult environments. Europe is expected to increase gas imports by 50 percent in the next decade, requiring transport from Russia, the Near and Middle East, Central Asia, and northern Africa. Gas from Algeria, Libya, Norway, and the Middle East can cover 60 percent of that need; liquefied natural gas will have to cover the remaining 40 percent. The Nord Stream pipeline, with which he is involved, expects to supply gas to Europe from Russia by 2011 to help meet that need. He urged a multilevel approach to energy transport for global energy security. "We must not allow energy to become the currency of power in international relations," he said.

The former Chancellor concluded with remarks on geopolitics. Regarding the need for stability in Middle East countries, "Direct talks with the United States and Iran, and with Syria and with Hamas are very important," he said, to solve the region's problems. Further, a "close relationship with Russia is important for Germany, for Europe, and also for the United States" to these strategic energy issues. "The cold war is over for good." He was encouraged by the new US Administration of President Barack Obama, who spoke in Berlin last year, linking his emphasis on dialogue to this major theme of the former Chancellor's CERAWeek address. A partnership with Russia, for example, is vital to sharing the country's vast energy reserves, he said.

In the question session with Dr. Yergin, Chancellor Schröder elaborated on his themes, noting that Russian gas supplies represent 25 percent of Russian GDP, "and that means Russia is every bit as interdependent as we Europeans needing supply." He suggested that if Europeans engaged in distribution in the Russian market (as is only fair) and Russia engaged in European distribution and marketing, Russian companies would have a vested interest in stability. He repeated that all transport options are needed; cautioned that the transit problems with Ukraine would stem in the future from technical infrastructure problems; and said although pricing was key in the recent Russia-Ukraine gas issue, Russia may have underestimated the effect on its image of its decisions. He emphasized Nord Stream pipeline's environmental awareness and suggested that there might be economic reasons behind efforts to change the route. Personally he is not in favor of nuclear power, believing investments are better spent on renewables. They are still subsidized, but those subsidies are decreasing, "it is going in the right direction," and right now in Germany renewables employ more people than the automotive industry.

• H.E. Gerhard Schröder, Former Chancellor of the Federal Republic of Germany; Chairman of the Shareholders Committee, Nord Stream

CRITICAL ISSUE FORUMS

The New Math: Spending and Cost

At Wednesday's Critical Issues Forum on upstream capital costs, "The New Math: Spending and Cost," CERA Director Pritesh Patel opened the discussion with a brief overview of the IHS/CERA Upstream Capital Costs Index (UCCI) methodology and recent trends. From third to fourth quarter 2008, the UCCI declined for the first time since first quarter 2000, by 4 percent, Mr. Patel said. He then asked the panel, "How does the current downturn in oil prices compare to downturns in the past? How fast and to what extent will capital costs respond to oil price declines?"

The four panelists agreed that the current downturn is a cycle, but a very different one from past cycles. Luc J. Messier, Senior Vice President, Project Development and Procurement, ConocoPhillips, mentioned the economic recession and financial crisis, spot prices being lower than future prices, and the stimulus plans around the world. He said the spending plans of the 50 companies ConocoPhillips surveyed suggested high spending activity in 2009, which will "make a difference in the cycle". Robert E. Estill, Vice President, Strategic Planning and Portfolio Management, Marathon Oil Corporation, added three more differences: the current oil price drops' being driven by demand rather than supply, the pressure of carbon abatement on the industry, and the fact that the industry can act quickly in cutting capital, selling assets, and using "financial maneuvers" to strengthen balance sheets. Jack B. Hartung Jr., Manager, Project Assurance, Chevron, reminded the audience of that the demand increase could exceed supply when the economy recovers, as happened in 2004. There will be significant competition in the industry, he warned.

The panel also agreed that project costs are unlikely to drop to levels that would support a $30 per barrel oil price, simply because of the supply-demand fundamentals. "New supplies are more expensive today," said Mr. Messier. W. D. (Dave) Bozeman, Vice President Project Support Office, Devon, said companies without "deep pockets" will have to be "very selective" with the types of projects they develop, and asserted that "the current natural gas price is at a level where growth won't happen."

On the lag between oil price declines and capital cost responses, Mr. Hartung believes that the industry has been "significantly consolidated," and that companies with heavy backlogs will wait for at least another six to eight months to decide whether to drop prices. Mr. Estill said that many contracts had been in place and designed to shield from risks, but he acknowledged the possibility of contract renegotiation.

Mr. Patel asked, "How are declining oil prices affecting companies' views on nontraditional suppliers, outsourcing, and standardized design?"

The panel agreed that standardized design is great for cost reduction, but it does not work for diversified project portfolio and may cause underoptimization. The panel also agreed that they are not seeing significant new waves of outsourcing. Mr. Bozeman noted that supply chain issues, rather than cost, drove Devon to look for nontraditional suppliers. Mr. Messier mentioned that "widening the supply base" is important to competition. He reminded the audience of the recent drastic drop in transportation costs and changing currency exchange rates, which will "change the way we look at nontraditional suppliers." Thanks to lessons from the past, the industry is now working harder to increase efficiency and capital spending discipline, rather than letting go of talent.

• Luc J. Messier, Senior Vice President, Project Development and Procurement, ConocoPhillips
• W.D (Dave) Bozeman, Vice President Project Support Office, Devon
• Jack B. Hartung Jr., Manager, Project Assurance, Chevron
• Robert E. Estill, Vice President, Strategic Planning and Portfolio Management, Marathon Oil Corporation
• Pritesh Patel, Director, CERA (Chair)

Unconventional Gas Outside North America

CERA Vice President Gardner Walkup opened the session by highlighting the ability of the natural gas exploration and production sector to innovate and break technology barriers. The development of unconventional gas reserves in North America represents a prime example of the benefits of technology breakthroughs, as the recovery of these reserves has grown dramatically since the beginning of this decade and currently constitutes the lowest-cost source of natural gas in North America. Mr. Walkup then posed the following question to the panelists: Can the successes seen in the development of coalbed methane and shale gas in North America be repeated in other parts of the world?

Christopher Hopkins, President of Data and Consulting Services at Schlumberger, highlighted the key role of technology in enabling the unconventional gas revolution. Technological advancements in horizontal drilling greatly increased reservoir contact, which drove the growth of shale gas in the United States. In Mr. Hopkins view it will be the availability of equipment that can lower production unit costs, such as horizontal drilling rigs and hydraulic fractures, which will determine the growth of unconventional gas production outside North America.

Jack Lewnard, Vice President and Chief Technology Officer at the Gas Technology Institute (GTI), emphasized the importance of the coordinated effort in the United States among governments, universities, the energy industry, and independent research organizations such as GTI that led to key advancements in drilling technology. He highlighted the ability to drill many shallow wells at low cost as a key contributing factor in the commercialization of unconventional gas reserves. Mr. Lewnard said that similar partnerships going forward are crucial for cost reduction and to address environmental issues facing the industry. He believes that technology developments applied in the North America can also be implemented overseas.

Leta Smith, CERA Director, said that there is clearly a future for unconventional gas development outside North America based on the enormous resource base. Current estimates of shale gas, for instance, range from 5,000 trillion cubic feet (Tcf) to 16,000 Tcf. However, large-scale developments like those seen in North America are at least a decade away. Dr. Smith pointed to more data availability as a key challenge to reduce risk for producers and investors. In Dr. Smith's view the future of unconventional gas outside North America is not a question of "if" but of "when."

• Charles Sheppard, Vice President of Unconventional Resources and Global Basins, Hess
• Christopher Hopkins, President, Data & Consulting Services, Schlumberger
• Jack Lewnard, Vice President and Chief Technology Officer, Gas Technology Institute
• Leta Smith, Director, CERA

Eurasian Gas Supply: A Window for New Players?

• Matthew Sagers, Senior Director, CERA
• Mark Gyetvay, Chief Financial Officer, Member of the Board of Directors, Novatek
• Mitrova Tatiana, Head of Center for International Energy Market Studies, Energy Research Institute, Russian Academy of Sciences
• Sergei Glazer, Project Manager, Vostok Nafta Investment
• Katherine Hardin, Senior Director, CERA (Chair)

Outlook for US Carbon Policy and Implications for North American Gas

• Mark Brownstein, Managing Director, Environmental Defense Fund
• Skip Horvath, President and Chief Executive Officer, Natural Gas Supply Association
• Melanie A. Kenderdine, Executive Director, MIT Energy Initiative
• Peter Rosenthal, Vice President, Constellation Energy
• Robert LaCount, Senior Director, CERA (Chair)

Financing the Transition: A Bridge to the New Energy Future

• Peter Gaw, Managing Director, Global Head Oil & Gas, Standard Chartered Bank
• Chansoo Joung, Managing Director, Warburg Pincus
• Darryl T. Sagel, Managing Director, Co-Head of North American Power/Energy, Lazard
• Jonathan Gear, President and Chief Operating Officer, CERA (Chair)

LNG Trading and Global Gas Pricing

• Robert Fraser, Director, CERA
• Daniel Muthmann, Vice-President Global LNG Supply, E.ON Ruhrgas AG
• Steven R. Miles, Partner, Baker Botts
• Frederic Barnaud, President and Managing Director, Gazprom Global LNG
• Greg La Doe, Vice President, Supply and Commercial, Shell North American LNG, LLC
• Shankari Srinivasan, Managing Director, CERA (Chair)

INDUSTRY PLENARIES

North American Gas: The New Realities

CERA Senior Director Robert Ineson opened the plenary on "North American Gas: The New Realities" by noting the 20 percent decline in US industrial production in the past five months, the consequent loss of industrial gas demand, and the 31 percent decline in rig activity. He then posed the central question of this plenary session, "How can investment go forward in this economic environment?"

William Garner of Parkman Whaling, a Houston investment company, remarked that recessions are short-lived, but that it can take two to four years for the industry to work off excess capacity and for demand to come back. In the present downturn, declines in oil and gas prices have reduced the value of reserves. When these reductions are reported to the Securities and Exchange Commission by March 31, credit lines are likely to be reduced. Companies whose outstanding debt exceeds the lowered credit limits will have to repay some of their loans. For companies with cash, "buying reserves will be cheaper on Wall Street than drilling for them," and merger and acquisition activity should increase later this year.

Gregory Harper, Senior Vice President and Group President, CenterPoint Energy, pointed to the opportunities presented by surging shale gas supplies. In particular, gathering, processing, and pipeline companies may capture new markets at lower cost. Nevertheless, as credit markets get tighter, the industry will consolidate. Pipelines are already scaling back their expansion plans. This will eventually lead to a slowdown in contracting, declining equipment prices, and lower labor costs.

Ron Hyden, Strategic Business Manager--Production Enhancement at Halliburton, also compared the current downturn to previous declines and pointed out that horizontal drilling, with its higher productivity and lower unit cost, has improved the economics of the service industry. In addition, because today's plays have higher initial production with steeper decline curves, industry can respond more quickly to sudden economic reversals. He emphasized the importance of technological advances, and the associated importance of intellectual property protection, in the economic success of the industry.

Mark Costello, Executive Vice President of URS Corporation, an engineering, procurement and construction company, spoke on "Managing the Boom/Bust Cycle" and asked, "What do we do when the market comes back?" He stressed the importance of maintaining a skilled workforce, using downtimes for training, focusing on fundamentals and base-load work, and emphasizing a disciplined approach to risk management in order to withstand financial stress and prepare for a return to a strong market.

The audience was particularly interested in the sudden change in the North American gas market outlook. As recently as two years ago, it was believed that significant volumes of LNG imports would be required to replace declining conventional gas production. Now it appears that little LNG will be required, as unconventional gas supplies are on track to make North America self-sufficient in natural gas. The speakers agreed that the sudden success of unconventional gas technology had surprised everyone and was a testament to the speed at which technology could change a market environment.

• Mark Costello, Executive Vice President, URS Corporation
• William Garner, Parkman Whaling
• Gregory Harper, Senior Vice-President and Group President, CenterPoint Energy
• Ron Hyden, Strategic Business Manager-Production Enhancement, Haliburton
• Robert Ineson, Senior Director, CERA (Chair)

LNG: The Long View

Michael Stoppard, CERA Managing Director, Global Gas Group, chaired a panel taking a long-term view on the challenges and opportunities facing the global liquefied natural gas (LNG) industry and the impact of the current economic crisis and low commodities prices on long-term decisions.

Ahmed Al-Khulaifi, Chief Operating Officer, Qatargas Operating Company Ltd., reminded the audience of the significant liquefaction capacity coming online over the next three years. In 2009 three of the six new mega-trains in Qatar will be commissioned, with a total Qatari liquefaction capacity of 77 million tons by 2012. Even with current near-term uncertainties around price and demand developments, Qatar will produce all available LNG and deliver it to market. Flexibility across the full value chain will allow Qatargas to react to changes in regional demand, with delivery into some 15 countries. Liquefaction projects are long-term investments and have to take into account periods of low-prices and demand fluctuations. Market risks are managed through diversity in markets with a mix of long-term sales and the availability of flexible volumes.

Patrick J. Blough, Vice President, Gas Commercialization, Chevron Global Gas, emphasized the "very long view" necessary for LNG investments and detailed the main issues the industry faces. Liquefaction projects require around five years lead time between final investment decision (FID) and first production, as well as a 20 year plus project life. Long-term developments of the global gas demand point to significant growth and to necessary replacement of declining current production capacity. Chevron still faces the majority of its investment decisions for liquefaction projects and looks closely at the development of the cost structure to build liquefaction. Costs reached unsustainable levels and need to decrease further to allow FIDs to happen. The long-term character of liquefaction projects have to take the regional nature of global gas markets into account with different pricing environments and varying LNG dependence.

Robin Baker, Head of Project and Reserve Based Financing, Société Générale, painted a grim but cautiously optimistic picture of the potential for project financing. Most liquefaction projects use varying degrees of leverage, relieving the stress on the balance sheets of the project sponsors. Mr. Baker emphasized that the constraint of credit in the current capital market is unique in his lifetime. Especially large projects will face severe difficulties in finding loans for more than $1 billion, and projects will have to draw on a variety of sources of capital. It is still too early to predict the timing of a loosening of the credit market. Banks still face the potential of asset writedowns if the economic crisis deepens in severity and duration. There is not enough credit for all good projects, but liquefaction projects with long-term contracted offtake are in a beneficial risk bracket and very competitive for project financing.

John C. Harris, CERA Director, Global Gas Group, pointed out that the economic crisis could have a positive effect on the sanctioning of future liquefaction projects, if it results in a lower cost environment. The hiatus of final investment decisions precedes the current economic turmoil and is mainly the effect of high costs and the scarcity of qualified EPC (engineering, procurement, and construction) contractors. Early indicators point to decrease in costs based on lower raw material and commodities prices. With different pricing structures in place, projects in the Pacific Basin might be better placed to take advantage of long-term offtake contracts, but lower overall breakeven costs make several Atlantic projects competitive in the liquid markets of North America and Western Europe.

• Robin Baker, Managing Director, Société Générale
• Ahmed Al-Khulaifi, Chief Operating Officer, Qatar Liquefied Gas Company Ltd.
• Patrick J. Blough, Vice President Gas Commercialization, Chevron Global Gas
• John Harris, Director, CERA
• Michael Stoppard, Managing Director, CERA (Chair)

European and Eurasian Gas: The Price of Security

On Wednesday, CERA Senior Associate Simon Blakey chaired an Industry Plenary on European and Eurasian gas, "The Price of Security."

Didier Holleaux, Senior Vice President for Exploration and Production, GDF SUEZ, explained GDF SUEZ's upstream strategy, including its exploration and production efforts in Europe, Russia, and Africa. According to Mr. Holleaux, GDF SUEZ plans to help diversify European gas supply by delivering additional gas to Europe via new pipelines and LNG terminals. Mr. Holleaux mentioned that his company's energy security strategy enabled it to export additional gas volumes to the countries in Central Europe that experienced a decline in supply during the January 2009 Russia-Ukraine gas crisis. He also commented that EU competition policy makes it difficult for major energy companies to work together to establish a new gas supply corridor from the Caspian and to diversify European supplies.

Wingas Chairman Rainer Seele picked up on the theme of supply security. He cited uncertainty over European demand as one of the greatest issues facing the European gas industry as producers contemplate the impact of the recession on demand. Mr. Seele defined energy security as a complex set of interrelationships between producers, consumers, and transit countries and identified transit countries as the weakest links in the European energy security system. According to Mr. Seele, the Russia-Ukraine gas crisis highlighted Germany's strong energy security position. Mr. Seele identified the Russia-Europe gas relationship as a cornerstone of the European gas mix, now and in the future. He cautioned that in any plausible European supply diversification scenario, Russian supplies would be a vital source of gas supply over the long term. Mr. Seele concluded by imploring the audience to make energy cooperation with Russia, not conflict, a common European goal.

Laszlo Varro, Strategy Director of Hungary's MOL, explained the dynamics and implications of the Russia-Ukraine gas crisis from a Central European perspective. Mr. Varro pointed out that Europe still has two gas grids: an interconnected Western European grid supplied by multiple sources and a less sophisticated infrastructure system in central and southeastern Europe that depends heavily upon Russian supplies. According to Mr. Varro, the Russia-Ukraine gas crisis shattered Europe's complacency over energy security and has compelled some countries, notably Slovakia, to reconsider their positions toward regional cooperation and gas integration. He argued that the peak transit capacity of the European gas system constrains its ability to respond to supply crises because the system cannot transport enough additional supply to compensate for a prolonged breakdown in Russian-Ukrainian relations. Mr. Varro also pointed out that there are limits to switching from gas to oil for emergency power generation because Russian gas is essential to refining high-quality fuel oil such as jet kerosene.

CERA Global Gas Managing Director Shankari Srinivasan outlined the conventional wisdom that European gas demand and imports will continue to grow due to widespread demand for gas-fired power generation and declining indigenous supply. She then challenged those assumptions by explaining recent CERA research on potential European energy conservation, possible European unconventional gas production, and the forecasted influx in LNG deliveries to Europe. Overall, Ms. Srinivasan raised the prospect that the emphasis on security of supply has been replaced by concerns of oversecurity of demand, particularly for producers.

• Didier Holleaux, Senior Vice President E&P, GDF SUEZ
• Reiner Seele, Chairman, Wingas
• Laszlo Varro, Strategy Director, MOL
• Shankari Srinivasan, Managing Director, CERA

Reception

Opening Address: The Environmental Case for Coal

In his introduction to Thursday's Opening Address, Daniel Yergin, CERA President and Executive Vice President, IHS, commented that the large turnout spoke to the importance of the upcoming presentation. Speaker Fred Krupp, President, Environmental Defense Fund (EDF), a self-described "nonideological environmentalist," is the author of Earth: The Sequel.

Seeking to find market-based solutions to environmental questions, Mr. Krupp helped to form the US Climate Action Partnership (USCAP) on January 2, 2007, a cooperative group of businesses and environmental organizations. USCAP's aim, outlined in its climate report A Call for Action, is to urge the US government to enact legislation mandating significant reductions in greenhouse gas (GHG) emissions. The group's approach is pragmatic and collaborative: "Finding things that work."

Inspired by Charlie Walker, a Texas engineering professor who said, "If we lower our voices, these problems are solvable," Mr. Krupp dedicated himself to finding common-sense solutions to climate change. Since his appointment as president of EDF, the organization's strategy has shifted from initiating lawsuits to fostering dialogue.

Central to USCAP's efforts is the design of a cap-and-trade system to mitigate pollution while supporting business goals. All USCAP proposals have to withstand the test of being workable from wide-ranging perspectives. In the two years since its inception, USCAP has concluded that it is possible to "move forward in a way that's good for business" and has produced a consensus report, A Blueprint for Legislative Action.

Mr. Krupp said that the new challenge of electricity production is to reduce GHGs while supporting economic growth. He acknowledged that of the grave environmental challenges associated with the use of coal, the consequences of burning coal are the most serious. However, because coal fuels more than 50 percent of US power generation and will maintain a large share of this market for the foreseeable future, the key question is how to burn coal while reducing or eliminating carbon dioxide (CO2) emissions. There is a pressing need for investment in research on carbon capture and storage (CCS) development and deployment, particularly on underground storage solutions. Mr. Krupp said that in the two years it took to research and write the book, he became convinced that "until there's money to be made by keeping CO2 out of the atmosphere, no one will build CCS."

Carbon cap-and-trade legislation, with proper transparency, oversight, and enforcement, is the best option, he said. He cited USCAP's Blueprint, with its targets and timetables, allowance allocations, and guidance on energy efficiency, as a way to proceed. USCAP is "a center of gravity" in moving forward with cap-and-trade, a strategy that President Obama has embraced as a way to "kick-start the US economy back to health."

The Blueprint recommends stepped carbon reductions and a broad range of other strategies, including use of forest carbon tons (related to emissions from burning rain forests). Mr. Krupp said it has been generally well received in Washington and believes that Congress will pass climate legislation this year. He recalled a USCAP gathering in which Ken Salazar, of the US Department of Interior, asked a group of CEOs why they were recommending carbon cap-and-trade in the middle of the worst economy since the Great Depression. All the CEOs concurred that a regulatory regime is coming, but they don't know what it is and so don't know how capital should be spent--"We are frozen because we can't calculate the ROI [return on investment]." Mr. Salazar responded, "Wow--this issue is in a completely different place from where it was two years ago."

Mr. Krupp said that economic and job growth will flow from climate regulations and the development and deployment of new technologies, and that the United States must negotiate with China and other nations on commitment to carbon reduction. He concluded, "The key is developing a market system that unleashes you, the entrepreneur, to make it happen."

Before the question and answer session, which covered, among other issues, the Copenhagen agreements and the case against a carbon tax, Daniel Yergin thanked the Massachusetts Institute of Technology, the CERAWeek University Collaborator; and The Wall Street Journal, the CERAWeek Print and Online Media Sponsor.

• Fred Krupp, President, Environmental Defense Fund

CRITICAL ISSUE FORUMS

Opportunity amid Turmoil: Financing the Power Sector in a Turbulent Economy

• Jeffrey R. Holzschuh, Vice Chairman, Morgan Stanley
• George Bilicic, Managing Director, Chairman of Power, Utilities and Infrastructure, Lazard
• Peter N. Rigby, Director, Standard & Poor's
• Jim McGinnis, Managing Director, Harbinger Capital Partners
• Marie Fagan, Senior Director, CERA (Chair)

Managing Through the Global Power Construction Cycle

Jone-Lin Wang, CERA Managing Director, opened Thursday's Critical Issues Forum on "Managing Through the Global Power Construction Cycle" by outlining the capital-intensive nature of the electric power industry. She noted that it takes a $3 investment to generate $1 of revenue, and that capital expense recovery constitutes around 50 percent of an electric bill. "To be able to see where costs are going is very vital" for developers, financiers, engineering and design firms, and equipment manufacturers, she said. Ms. Wang and the audience then asked the panelist questions on the impact of recession, the future direction for capital costs, managing contract risk, choice of fuel technology for new power development, and knowledge transfer to the next generation.

Dean Oskvig, President and CEO, B&V Energy, Black & Veatch Corporation, said that hesitancy in committing capital is leading to project delays, but not necessarily cancellations. James N. Suciu, Global Vice President, Marketing and Sales, GE Energy, said that financing issues are not ending projects but only tying them to committed financial support. He also noted that projects in developing nations have identified needs, are well funded, and are continuing.

"Lead times for equipment delivery are coming down, and that is an early indicator of cost decline," said Gregory M. Vesey, President, Chevron Global Power. Whether costs come down or not, waiting can do no harm, he felt. This resonated with Candida Scott, CERA Senior Director, who sees the emergence of a wait-and-see attitude. Mr. Suciu views 2009 as well settled, as capital expenses toward equipment have already been committed. All the speakers also expect a convergence of nonlabor costs across the globe. Wages will continue to be driven by local variables and to trend upward with continued shortage of skilled labor.

The speakers also agreed on the mantra, "Share the pain and share the gain." Black and Veatch will continue to try to share the risks with its clients, Mr. Oskvig said. He observed that the risk of a contract increases with the contract's duration. Mr. Suciu responded that GE Energy is willing to enter into fixed-price contracts for costs that they can control but would otherwise prefer a flexible-fee contract.

All the panelists believe that natural gas will be the default fuel choice for new power plant development in the near term. Energy efficiency and conservation have historically not met expectations and would, in combination with wind and solar, put pressure on development of short response resources (read: natural gas), according to Mr. Suciu. Mr. Vesey observed that with its recent price plunge, natural gas makes the most economic sense, with relatively less environmental impact. "LNG has made natural gas more fungible," he said.

• Candida Scott, Senior Director, CERA
• Dean Oskvig, President and Chief Executive Officer, Energy, Black & Veatch Corporation
• Gregory M. Vesey, President, Chevron Global Power Generation
• Jim Suciu, Global Vice President, Marketing and Sales, GE Energy
• Jone-Lin Wang, Managing Director, CERA (Chair)

From Concept to Reality: Are We Ready for Electric Cars?

• Robert Fraser, Director, CERA
• Peter L. Corsell, Chief Executive Officer, GridPoint
• Andrew Tang, Senior Director, Smart Energy Web, PG&E
• Mark Perry, Director, Product Planning, Nissan North America, Inc.
• Patricia DiOrio, Director, CERA (Chair)

Solar Energy: Crossing the Divide in Cost and Performance?

Roger Kranenburg, CERA Director, opened Thursday's Critical Issues Forum on "Solar Energy: Crossing the Divide in Cost and Performance?" by introducing the panel of distinguished speakers from a diverse array of solar companies. Charles Gay, President of Applied Solar, described how increased deployment has been critical in reducing the costs of solar panels and named feed-in tariffs in Germany as a key driver. Mr. Gay described solar photovoltaic (PV) technologies as a great tool for peak-shaving and demand-side management. Recently, PV has been gaining traction based on the job creation aspects equal to between 25 and 35 jobs per megawatt after taking into account the total value chain effect. Lastly, he said that the benefit of no fuel costs associated with solar could have saved $250 million of unanticipated fuel costs over the past six years.

Robert Fishman, President and CEO of Ausra Inc., discussed his "sunlight direct to steam" solar thermal technology and the near-term applications at existing power stations to take advantage of existing generators and maximize emissions reductions. He also discussed how steel and glass are the biggest determinants of Ausra's technology cost. Mr. Fishman differentiated the Ausra thermal technology as having little to no supply chain issues and as the most land-efficient with its ability to get 200 megawatts (MW) of capacity within 1 square mile.

Richard Gruber, Vice President, Project Development, of First Solar, shared his company's strategy to "create a pull market" by reducing the cost of its thin-film technology to the $1 per watt "holy grail." Mr. Gruber also discussed how First Solar's simpler manufacturing process--glass in and less than 2.5 hours later thin-film out--has synergies with the auto and glass industries. Also, the modularity of solar facilitates a model that allows all stakeholders to share the risk. Mr. Gruber mentioned that the 250 MW roof distributed rate-based project announced in 2008 with Southern California Edison is an important development for the industry to watch.

"Installing solar panels is like prepaying fuel costs for 50 years," said Steven Chan, President, Global Sales and Marketing, and Chief Strategy Officer with SunTech. Though, the current financial crisis is likely to "cleanse the industry" by "weeding out the weaker players," SunTech is confident that the magnitude of the market is large enough for both SunTech's polycrystalline and First Solar's thin film technologies. In his cost outlook Mr. Chan predicted a decline from $3 per watt last year to a little more than $2, as silicon costs, which make up 75 percent of overall module costs, come down.

Answering questions about solar in the northeastern United States and on the roofs of "big box retailers," the panel responded with optimism, citing favorable tax-credit policy drivers, solar's peak-load resource availability, and the green-marketing potential that keep demand up amid cloudy economic times.

• Robert Fishman, President and Chief Executive Officer, Ausra
• Steven Chan, President, Global Sales and Marketing, Chief Strategy Officer, Suntech
• Charles Gay, President, Applied Solar, Applied Materials
• Richard Gruber, Vice President, Project Development, First Solar
• Roger Kranenburg, Director, CERA (Chair)

INDUSTRY PLENARIES

Smart Grids: Big Bang or Incremental?

Patricia DiOrio, CERA Director, opened CERAWeek's Thursday concurrent Power Industry Plenary "Smart Grids: Big Bang or Incremental?" by juxtaposing the market-altering implications of smarter grids with the inherent challenges of accelerated adoption. As panelists responded to questions from Ms. DiOrio and from the audience, a wide-ranging conversation developed covering the rationale for investing in smart grids, the implications of the economic downturn, the scope of its environmental benefits, and whether the current level of interest in smart grids is leading to a gap between perception and reality. The Hon. Barry Smitherman, Chairman of the Public Utilities Commission of Texas, discussed the desire to give customers the ability to control their electricity consumption as an initial driver in the advancement of smart grid policies in Texas. Laurent Demortier, Senior Vice President at Alstom Power, emphasized that smart grid benefits accrue to supply as well as demand. David Mohler, Chief Technology Officer at Duke Energy, elaborated further by highlighting his company's interest in using the technology to help decarbonize its fleet by unleashing the so-called fifth fuel, energy efficiency. Sharon Allen, President of Elster Integrated Solutions, added that in fact some states with energy efficiency resource standards, such as Virginia, were allowing utilities to receive an additional 200 basis points on their rate of return in smart grid investments.

While there is some evidence that the economic crisis could delay smart grid investments, the consensus among the panelists was that in fact the push for smart grid deployment is probably just as strong, if not stronger today. Ms. Allen noted that while she has seen some project delays and cancellations in the United States, there does not appear to be significant impact in other regions of the world. Mr. Demortier pointed out that "economics is just one driver" and that many projects will continue moving forward, many of which are driven by the need to retrofit the existing infrastructure and to meet the new constraints placed on power producers when integrating intermittent renewables. Mr. Mohler said that the current environment made it even more imperative to roll out smart meters and that the investment might even help in addressing the "screaming need for job creation" across many of Duke Energy's service areas.

After painting an optimistic outlook, the panelists conceded that certain important challenges and concerns still remain. Mr. Mohler addressed the issue of equipment obsolescence and the need for flexible technology that is capable of evolving over time. Mr. Smitherman explained that in Texas, so long as companies met a preset list of minimum requirements, they would be guaranteed full cost recovery. According to Ms. Allen, there is a misconception that the industry needs to agree on a single set of standards. Rather, the smart grid community simply needs to agree on a common interface for interoperability. Mr. Demortier added that he foresaw a future need for true real time information, as opposed to today's more limited 15 minute interval. Lastly, all panelists agreed that the current level of hype around smart grids may very well lead to a gap between perception and reality.

• Barry Smitherman, Chairman, Texas Public Utility Commission
• Laurent Demortier, Senior Vice President, Energy Management, Alstom
• Sharon Allan, President, Elster Integrated Solutions
• David Mohler, Senior Vice President & Chief Technology Officer, Duke Energy Corp
• Patricia DiOrio, Director, CERA (Chair)

Changing Face of Global Electric Power

CERAWeek's Thursday concurrent Power Industry Plenary "The Changing Face of Global Electric Power," opened with a summary by CERA Senior Director Douglas Howe of the demand and carbon dioxide (CO₂) abatement pressures facing the global electric power industry today. The panel discussed how participants in the global power industry are dealing with the growing complexity in the trilemma of increasing power demand, concerns about carbon emissions, and desire for both competition and energy security.

Eicke R. Weber, Professor and Director of Fraunhofer-Institute for Solar Energy Systems, exhorted the world to directly use solar energy since it is both clean and can help nations achieve energy security. While acknowledging the challenges facing solar energy today, he found the billion dollar investment level required to make solar energy commercially competitive is minuscule compared with the trillion dollar level to be spent to solve today's financial crisis. He said that photovoltaics will take the lead and "easily supply a substantial part of the world energy needs." He regarded the feed-in tariff as the most effective mechanism in pushing renewable energy forward and recognized the importance of smart grid technology. "Electric-mobility will start with plug-in hybrids," and "solar energy is the only kind of energy that can solve the earth's energy problems!" he claimed.

Jacques Besnainou, President of AREVA Inc., and President and Chief Executive Officer of AREVA NP, Inc., declared that "nuclear is not a solution, but there is no solution without nuclear. None!" The world will need 300 new nuclear reactors by 2030. AREVA has provided over 80 pressurized water reactors for nuclear plants in France and Germany and will build more plants in Finland, France, China, and possibly the United States. He described AREVA's "Bridging the Gap" program and emphasized that AREVA's "most important asset is our people." He was disappointed that the US lawmakers stripped a $50 billion pro-nuclear loan guarantee program from the stimulus package, calling it "a mistake." "Nuclear needs loan guarantees," he said, and support for such a step will bring AREVA to the United States. "We are not building plants. We are building an industry."

Takayuki Ueda, Director General, Energy and Environment Policy, Ministry of Economy, Trade and Industry of Japan, said that energy security, environmental protection, and economic growth are all important, but to achieve them simultaneously is very difficult. Before 2020 the focus should be on "disseminating existing energy efficiency technologies," to be followed by developing and disseminating "innovative energy technology." Energy efficiency is effective in reducing CO₂ emissions and can increase competition. Japan's continuing "Top Runner Program" has achieved "remarkable" efficiency improvement. Coal usage is "inevitable" in the foreseeable future, he said, and carbon capture and storage is "essential to achieving dramatic reductions of CO₂ from coal." Nuclear power has increased from zero in 1965 to a 30.8 percent share today in Japan's total generation and will continue to grow. He concluded by noting the similarity between President Barack Obama's and Japan's energy policy and the future opportunities for governmental and industrial cooperation.

Johannes Kindler, Vice President of the Federal Network Agency, Germany, and a Vice President of the European Regulators Group for Electricity and Gas, said that the US and EU's energy policies have started to converge for the first time. He described Europe's strategic objectives for energy and the major players in the Continent's electricity and gas markets, and noted that the energy/climate package sets mandatory national targets for shares of renewables in 2020. "My advice for the United States is: before setting an emissions trading scheme, set clear targets for every activity, to avoid disappointment," he said. The European Union's 65 GW of installed wind capacity so far, combined with future growth suggested by the renewables targets, demands more sophisticated transmission systems to avoid blackouts. Yet grid expansion faces obstacles in investment, permitting, siting, and technology. He described the next steps for completion of the EU Internal Energy Market and the newly proposed safeguards against market abuse in the energy trading space.

• Takayuki Ueda, Director General Energy and Environment Policy, Ministry of Economy, Trade and Industry, Japan
• Johannes Kindler, Vice-Chairman, Federal Network Agency for Electricity, Gas, Telecommunications, Post, and Railway
• Prof. Eicke R. Weber, Director, Fraunhofer, Institute for Solar Energy Systems
• Jacques Besnainou, President, AREVA Inc., President & CEO, AREVA NC, Inc.
• Douglas Howe, Senior Associate, CERA (Chair)

Reception

Opening Address: The Carbon Conundrum

At CERAWeek Power Day 2, Daniel Yergin, CERA Chairman and Executive Vice President, IHS, thanked CERAWeek 2009 sponsors ANH, the Premier Partner; Alstom, the Global Energy Partner; and Lazard, the Global Financial Partner. Robert LaCount, CERA Senior Director, introduced the panel for the Opening Address on "The Carbon Conundrum."

Lawrence J. Makovich, CERA Vice President and Senior Advisor, explained why the argument for "negative" costs in energy efficiency--that benefits compensate for any spending--is too good to be true. Actual costs weigh efficiency changes against costs of environmental impacts and targets and timetables; and weigh options on both demand and supply sides to get to the lowest-cost mix. Distributing the cost burden of carbon dioxide (CO2) reduction fairly means acknowledging economic differences, noting, for example, that electricity represents more of low-income household budgets. Research and development (R&D) spending on new technology is not included. Without a consensus on the costs of lower carbon emissions and a debate on the "right mix" to use (the zero-balance argument assumes that all available solutions are mandated), options are missed. Market dynamics answer the underlying question, If these things pay for themselves, why haven't we done them already? The issue is up-front capital costs to make the changes and marketplace valuations that distinguish between investments. "Conventional wisdom is that there are big, massive efficiency gains that will clean up our problem," he said. But markets limit up-front capital--"We do some things, but not everything"--so the cost of shifting capital, to do more efficiently than society in the past has chosen to do, becomes a positive cost, the opportunity cost. Consumers must be accurately informed of costs or these efforts risk a catastrophic loss of support.

For Philippe Joubert, Executive Vice President, Alstom; President, Power Systems Sector, Alstom, conundrum is inaccurate. "The carbon problem is not an enigma," he said. The answers are available. He focused on carbon capture and storage (CCS). To meet growing electrical use--which in Asia means mostly coal--the solution is not the "negawatt" of less generation, but a low-calorie society: "negacalorie." Cars are already trending toward lower emissions; as more transport converts to electricity, with CCS "you reach no emissions." Since 60 percent of emissions in 2030 will come from existing plant, ultimately CCS "is not an option, it is a must," he said. Fortunately, an increasing percentage of the installed generation base is reaching its 40-year life cycle, ripe for replacement. He predicted that CCS will become commercial by 2015 and will meet the technical challenges of transportation and storage. He mentioned Alstom's 10 major demonstration projects with several partners and concluded, "Please forgets the easy one-size-fits-all--the old solution [of] saying yes to renewables and gas." Sharing national strategies in the technology and policy arenas globally is essential to address the world's climate change crisis, he concluded, as well as ensuring a strong and agreed and stable price for carbon and public acceptance.

James E. Rogers, Chairman, President, and CEO, Duke Energy Corporation, tackled the "continuously evolving and revolving politics" on making the shift to less carbon--the current environment, the economics, and policy measures on technology and costs distribution. The cap-and-trade proposal in Congress requires trust in markets--just when markets are suspect. "We must be optimists about technology," he said, but invest more, even in these times. The United States must open doors "to the best and brightest around the world," to become a technology leader. A defined carbon price and a clear road map out 20 to 30 years is required, without using one program or state as a model or letting ideology stifle strategies. The way forward must include analyses of prices, consumption, energy intensity, and the economic drivers in each region and state. US Climate Action Partnership, a consortium of environmental and industry groups in which Duke participates, took two years to work out its compromises and presented its Blueprint for Legislative Action to Congress in January. He asked how Congress could decide in six months on the best course of action for $40 billion in green programs, and urged consideration of all options, and changes in the state-federal relationship on, for example, renewable portfolio standards and transmission issues. The money raised through carbon auctions should go to solving the problems, locally and nationally.

The questions included finding a balance that provides the price signal for the new technologies; distributing costs; managing the fleet and distributing CCS more widely; balancing cost and performance options in efficiency measures; how to support investments and win the public will with realistic goal and cost figures; and finding not just a national, but also the global solution.

• Lawrence Makovich, Vice President & Senior Advisor, CERA
• Philippe Joubert, Executive Vice President, Alstom; President, Alstom Power,
• James E. Rogers, Chairman, President and CEO, Duke Energy Corporation
• Robert LaCount, Senior Director, CERA (Chair)

INDUSTRY PLENARIES

The Renewable Energy Future: The Promise and the Peril

CERA Senior Advisor James Rosenfield and CERA Senior Director Robert LaCount chaired a panel about the promise and peril for renewable sources of energy in today's environment.

Takayuki Ueda, Director General, Energy and Environment Policy, Ministry of Economy, Trade, and Industry of Japan, opened the session with a discussion of Japan's goals for renewable energy. Japanese policy is particularly focused on lowering the cost of photovoltaic panels and fuel cells for residential use. Encouraging efficient vehicle technology is also a priority. The Japanese government recently eliminated taxes on hybrid and plug-in hybrid vehicles to help vehicle manufacturers and reduce the cost to the consumer of clean technology.

Dick Williams, President, Shell Wind Energy, described four critical factors for expanding wind energy. First, safety is crucial. "The wind industry is where oil and gas was in the 1960s" with respect to safety, he said. Second, reliability in operations must improve. Mr. Williams said that reliability benchmarking for the wind industry does not yet exist. Third, the wind industry needs to attract a highly trained workforce. "For every five wind turbines installed, you need one core wind worker" to maintain the turbines. Fourth, transmission improvements are vital to the expansion of wind. Wind in North America blows primarily in the Central Plains, while the population centers are mostly on the coasts. Transmission is needed to transport wind power to the people.

Dita Bronicki, CEO of Ormat, described why geothermal energy is different from other renewable sources. "Geothermal is the renewable energy of choice for utilities," she said, "but the potential is smaller than for wind and solar." Geothermal energy provides the constant base-load power that utilities want; has a smaller footprint than other renewables; and is adaptable to air cooling, resulting in lower water use. However, geothermal energy is more site-specific than other renewables, requiring steam or hot water close to the ground surface. The US West Coast and the "ring of fire" in the Pacific are good places for geothermal energy production.

Clay Sell, President of Hunt Energy Horizons, focused on the pluses and minuses of today's environment for renewables. His examples of promising developments for renewables included growing long-term energy demand, the boost that renewable technologies are likely to receive from the economic stimulus bill, the influx of research and development and venture capital financing, and public concern about climate change. Perils for the industry included near-term demand destruction caused by the economic downturn, low natural gas prices, and the challenge of scaling new technologies.

Frank De Rosa, Chief Executive Officer of NextLight described selling renewable technologies to the utility sector as "like silicon valley meeting infrastructure." He said that utility willingness to pay for renewables and renewables' decreasing cost were bringing the parties buying and selling renewable energy closer together. Unfortunately, the financial crisis has brought this convergence to a temporary halt because of the high cost of capital. The process will continue in the future, however, especially since renewable energy provides a hedging value for utilities' fuel cost. "You can't hedge the value of natural gas for more than five years," he said, but renewables provide a much longer hedge.

• Dita Bronicki, CEO, ORMAT Technologies Inc.
• Frank De Rosa, Chief Executive Officer, NextLight
• Dick Williams, President, Shell Wind Energy
• Clay Sell, President, Hunt Energy Horizons
• Takayuki Ueda, Director General Energy and Environment Policy, Ministry of Economy, Trade and Industry, Japan
• Robert LaCount, Senior Director, CERA (Chair)
• James Rosenfield, Senior Vice President, IHS; Co-Founder, CERA (Chair)

Coal in a Carbon-constrained World

At Friday's Power Industry Plenary "Coal in a Carbon-constrained World," Gerard McCloskey, CERA Vice President and Global Advisor, Coal, responded to the general perception of coal as a dirty fuel: "It's too soon for the funeral." Coal mining and burning pose significant threats to the environment and to miners' safety, yet coal's enormous and widely distributed reserves and low costs have established its enduring role in energy security, competition, current and future power supply, and job creation. The world should learn from the harsh lessons of Phase One of the European carbon cap-and-trade system and be careful in choosing the path to a low-carbon world, he cautioned. Modernizing the existing coal fleet with off-the-shelf advanced coal technologies will cut carbon emissions significantly. Carbon capture and storage (CCS) may come to the rescue eventually.

Jone-Lin Wang, CERA Managing Director, cited Fred Krupp's Opening Address on Thursday: "We are going to burn coal for many years to come." She said the existing coal fleet will remain resilient and a carbon dioxide (CO2) price of $20 per ton will not trigger massive coal retirement or fuel switching. New coal builds are impeded by construction cost escalation and concerns about CO2, yet new proposals and permit applications have emerged in the past 12 months. While construction costs will ease somewhat in 2009, the current momentum in CO2 legislation indicates that concerns about CO2 will intensify. CERA expects a difficult time ahead for new coal builds in the United States in the next ten years, yet some plants with specific and localized benefits, especially those that mitigate CO2 emissions, will come through.

Anna Belova, Vice-Chief Executive Officer, Strategy and Corporate Development of SUEK, moved the discussion to Russia, with its huge and unique coal reserves. She expects coal to gain favor over gas, and "massive" new coal builds close to SUEK's coal reserves in Ural and Siberia, as gas prices in Russia are liberalized and projected to increase by 28 percent from 2008 to 2011. However, coal faces challenges in near-term demand, financing, coal-fired plant construction costs, competitive gas prices, coal mining costs, environmental concerns, and increasing coal price volatility. The solutions include developing clean coal technologies and searching for new markets for coal, which requires regulatory, financial, and technical incentives. CCS is the future, yet it is important to "know the answer for the short-term." She assured the audience that "coal is still in the game".

Steven Leer, Chairman and Chief Executive Officer of Arch Coal, Inc., noted that the developing world is seeking electrification, which creates growing demand for low-cost coal. "Coal will grow faster than other fuels," he said, and "if we are serious about stabilizing CO2 emissions, the only way is to develop CCS." He argued against the view that there is no such thing as clean coal technology, saying that it has a "proven track record" in controlling particulates, sulfur dioxide, nitrogen oxides, and mercury. Addressing climate change requires both developing and developed nations to work together, and switching to natural gas "does not get us out of the carbon issue." "Coal will be a dominating fuel moving forward," he concluded. "If we don't develop CCS, we are just kidding ourselves."

Howard Herzog, Principal Research Engineer, Massachusetts Institute of Technology (MIT), noted the increasing difficulty in building new coal-fired power plants in the United States due to political oppositions and costs. Yet coal will survive and thrive "just like a cockroach in a nuclear war," he said. He explained how an MIT modeling process shows that "CCS plays a role only in a strong carbon policy environment," and said, "We cannot solve the climate change challenge without dealing with coal.(...) We need to make CCS work, not to save coal, but to address the climate change challenge in a realistic manner." He added, "CCS is not a silver bullet, but it is almost a keystone technology" for significant carbon abatement. "In any case, we will almost surely be burning more coal in 2050 than we do today, no matter what."

• Jone-Lin Wang, Managing Director, CERA
• Anna Belova, Vice-CEO, Strategy and Corporate Development, SUEK
• Howard Herzog, Head, Carbon Capture and Sequestration Technologies Program, MIT
• Steven Leer, Chairman and Chief Executive Officer, Arch Coal, Inc.
• Gerard McCloskey, Vice President and Global Advisor, Coal; Chairman and Founder of The McCloskey Group, CERA (Chair)