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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Ann M Schmidt X-To: Steven J Kean X-cc: X-bcc: X-Folder: \Steven_Kean_Dec2000_1\Notes Folders\Calendar\Untitled X-Origin: KEAN-S X-FileName: skean.nsf Steve, This article came out last week while I was gone and I wanted to be sure you saw it. Thanks, Ann US AND CANADA: US administration faces crisis over energy policy: Whoever gets to inhabit the White House must face up to the fact that he will have to address problems not just in oil but in the natural gas sectors, compounded by the cut-off of Iraqi crude oil, reports Hillary Durgin: Financial Times, Dec 6, 2000 The alarm in world energy markets triggered by the halt in Iraqi crude oil exports at the weekend is the latest sign that the new administration - whoever leads it - will have to make US energy policy a top priority. Even as the outcome of the presidential election has hung in the balance over the last few weeks, energy industry officials have argued that the new president will have to address problems not just in oil, but in the natural gas and power sectors that reached crisis levels over the past year. The cut-off of Iraqi crude could have serious repercussions for the US, the world's largest oil consumer, particularly at a time of exceptionally low inventories in the world oil markets and shortage in spare production capacity within the Organisation of Petroleum Exporting Countries. That situation could easily reach crisis proportions for the US if other circumstances, ranging from unrest among Nigerian oil workers to cold winter weather across the country, affect supplies. "For the new administration, this whole event is going to raise the question of energy security and US energy policy to the very top of the docket," said Amy Jaffe, senior energy analyst with the James A. Baker III Institute of Public Policy at Rice University in Houston. The Baker institute is working with the Council on Foreign Relations, a New York-based think tank, to form a taskforce on US energy policy. "Whenever the new president takes office, he is going to have to cope with whatever the economic fallout is of this and the economic fallout is going to be huge," Ms Jaffe predicted. Opec has only between 1m to 2m barrels per day of spare production capacity - far less than it has had during previous oil crises. Put in perspective, in the winter of 1989, colder than normal weather boosted US oil demand by 1.5m barrels per day. For the first time in more than two decades, energy has become a focus of public debate. As energy shortages and high prices stunned the public following a long period of adequate supplies and cheap prices, these issues became a political rallying point and figured prominently in theelections. "There is a direct correlation between interest in energy policy and prices, and energy prices are high, so interest in energy policy is high," said Robin West, chairman of the Petroleum Finance Company, a Washington DC-based energy consultant. The position of energy secretary has generally been regarded as weak and has often been occupied by someone with little knowledge of the industry. Whoever becomes the next secretary must have a good understanding of the industry and be able to explain the complexities of the regulatory structures and markets to Congress, Mr West said. Over the past two years, power shortages and skyrocketing prices have become more commonplace. The underlying problem, industry executives say, is the lack of a uniform, national policy to provide competitive, open access to the nation's electricity power grid. Current regulations, for example, tend to favour regional power authorities and utilities in certain regions so that competitors have a harder time getting power onto the grid and transmitting it. In 1998 that problem triggered, for example, prices of Dollars 7,500 per megawatt-hour in Ohio compared with neighbouring states where they were one-fortieth of that level. Another problem is the difficulty of obtaining permits to site and build plants in certain states. In California, for example, where shortages have become a serious problem and the state imports 25 per cent of its power on days of peak demand, 11,000 megawatts of new power has been proposed but can't get sited. "The biggest energy policy issue we have is electricity," said Steven Kean, executive vice-president and chief of staff at Houston-based Enron, the country's largest merchant of natural gas and power. "Natural gas is not even close. Oil is not even close." Enron is pushing for legislation to ensure open, competitive access on the power grid and initiatives that would enable new power generation capacity to be developed faster and easier. Closely tied to the problem of power is that of natural gas, which is the feedstock for virtually all new power generation capacity in the US. Prices, which are now above Dollars 6 per thousand cubic feet, hit a record high this week - three times the price of a year ago - as the energy industry has been unable to keep pace with demand. Many in the industry are concerned about how the US will be able to meet future power demands unless more gas is developed. Yet while companies are busy drilling, they have been hard pressed to increase production. Companies such as UK-based BP Amoco and Calgary-based Nexen, which have gas reserves in Alaska and Canada, are hoping that the high prices will make development and transport of those reserves profitable, but such projects are probably five years away. At the top of the energy industry's agenda in accessing more oil and gas are efforts to reopen more federal lands to drilling. In addition, they would like to have equal access to oil reserves overseas in places such as Iran and Libya where sanctions prevent US companies from doing business. The industry knows that forging a new energy policy will not be easy. But it realises it must push it to the top of the new administration's agenda. "It will be a priority," said Chuck Watson, chairman and chief executive officer of Houston-based Dynegy, a leading energy merchant with large holdings in the natural gas and power sectors. "It has to happen, if they don't want Dollars 5 natural gas and Dollars 40 crude and Dollars 50 power." Copyright , The Financial Times Limited
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