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Diplomacy in Action

5th World Liquefied Natural Gas (LNG) Series


Remarks
Richard W. Westerdale, II
Director of the Office of Policy Analysis and Public Diplomacy, Bureau of Energy Resources
5th World LNG Series, Asia Pacific Summit
Singapore, Singapore
September 25, 2013

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I would like to thank the organizers and sponsors of the Asia Pacific Summit for the opportunity to be here today. I would also like to thank those of you we work with at the State Department on a continual basis to help ensure global energy security. The topic of liquefied natural gas, which will be discussed at this conference by industry and government experts alike, underscores the importance of energy in the foreign policy of the United States and serves as the focus of my comments here today.

We are living in a time of dramatic change in the global energy sector. The picture of supply and demand that most of us have in our head -- one where OPEC countries produce and developed countries consume -- has been shattered.

Technology, entrepreneurship, good policy and commodity prices have radically reduced U.S. import dependence and have changed the geography of energy. This fundamental change increases geopolitical stability, fosters economic growth globally, and can have a positive impact on global climate change.

The group I lead at the State Department, the Office of Policy Analysis and Public Diplomacy within the Bureau of Energy Resources, was created to analyze the impacts of energy flows on geopolitics and to develop approaches to ensure the United States and our friends around the world have assured access. So what are the geopolitical impacts?

First, some jump to the conclusion that energy self-sufficiency means that the U.S. will become disinterested in global energy issues. People have actually asked, “Is the U.S. going to become disengaged from the question of global energy security?” The answer is no. It is absolutely in our self-interest to remain engaged in discussions and efforts to further global energy security. Oil is a global commodity. Natural gas is increasingly becoming a global commodity. Any supply disruption will increase global prices and the price we pay for energy at home. Disruptions would also undermine the economies and well-being of countries around the world, and thereby have a direct impact on the prosperity of Americans as well. Thus, increased energy self-sufficiency does not change the United States’ commitment to global security, to peace and stability in the Middle East, and to the security of our international transit routes.

Let’s look at some of the facts. Already, non-OECD countries consume more energy than the OECD countries. As developed countries increase energy efficiency and expand use of renewable energy while developing countries expand their energy use as their economies grow and quality of life improves, this trend will accelerate.

Over the next 25 – 30 years, the greatest source of demand for energy throughout the world is going to be the emerging economies. China and others in the region -- as well as India, Brazil, and South Africa -- will be key drivers of demand. They are also some of our major trading partners. They are countries that set the pace for development in their regions. So we have to be concerned with how those countries manage their energy sectors, because doing so transparently and responsibly helps contribute not only to the stability of oil markets, but also of countries and entire regions. We need to change the way we think about energy security and its relationship to our foreign policy and national security. We must recognize that what happens in energy markets in every part of the world is of direct consequence to us at home.

OPEC projects that China will soon surpass the United States to become the world’s leading oil importer. The International Energy Agency estimates that the U.S. may overtake Saudi Arabia as the world’s largest producer of oil by the end of the decade. U.S. oil production is up more than 35% over the last five years. It’s up over a million barrels per day over the past year alone. If you combine that reality with measures to increase efficiency and to reduce consumption, today the U.S. depends on imports for less than 33% of its oil, according to the Energy Information Administration’s Short Term Outlook report released this month. That figure was 60% in 2006.

We have seen the geopolitical impacts of changes in global energy in the relative stability of oil markets over the past year. Despite the imposition of sanctions on Iran, oil markets have remained relatively stable. Over the past year, these sanctions have cut Iranian exports by 1.0 to1.5 million barrels per day. At the same time, we have seen hundreds of thousands of barrels a day of additional supply disruptions, yet oil prices have remained relatively stable. How is this possible? Prices have held steady because countries around the world have begun increasing production -- including the United States -- which has increased oil production by close to one million barrels per day. This increase in supply has been fundamental to maintaining a balance of supply and demand in global markets.

On natural gas, we have increased our production by 25% over the past five years. This is a result of the shale revolution which has shown us that it is possible to have a radical transformation in the way that oil and gas are produced. This transformation has meant that, rather than talking about importing natural gas to help meet U.S. energy needs, experts now report we have sufficient domestic gas supplies to last more than 250 years.

We have also seen dramatic change in global natural gas markets. A number of countries around the world are looking at the revolution that is underway in the United States because of the development of shale and other unconventional gas, and will make their own decisions on if and how to proceed with their own resource development. Regional markets are coming together as trade in liquefied natural gas grows and provides alternatives for point-to-point pipelines. The price of natural gas is influenced by factors other than just the price of crude. As these trends continue, changes in global gas markets will have a fundamental impact on geopolitics and international security.

Some of the first geopolitical impacts of the gas boom in the U.S. have emerged in Europe. We are not importing the quantities of LNG that we anticipated importing from countries like Qatar and Trinidad and Tobago. Those quantities have instead been redirected to other markets, including Europe.

European imports of LNG have tripled in the last decade – tripled.

If you combine increased LNG trade with measures that the EU has taken to implement anti-monopoly measures that ensure third party access and to require that pipelines can move from west to east and from north to south, what has emerged is a competitive market that has allowed utilities in Western Europe to renegotiate their supply contracts to reduce prices and improve fiscal terms. This development has had a fundamental impact on the region. Europe has greater energy security today than it did just ten years ago.

The near future will bring even more profound changes in global gas markets. Increases in gas supply will not just come from the U.S. Large new fields in Australia will come on line in 2014-15. Israel’s offshore gas is coming on line and will increase rapidly, reversing Israel’s historic dependence on imported fuel. The biggest natural gas finds of last year were in Mozambique and Tanzania. Norway discovered its biggest field in decades and Russia has announced that it seeks to produce one trillion cubic meters of gas by 2030.

Along with increased natural gas production, we are seeing increased LNG trade. Worldwide gas markets are growing by 3% per year. The LNG market is growing three times faster, increasing the potential for global trade in natural gas and reducing the importance of the point to point monopolistic markets represented by pipelines. International gas trade is becoming more liquid.

How can we connect the rapid demand growth in the emerging economies of Asia with the rapid supply growth in natural gas? From the experience of Europe, we can see the importance of investment in the hardware and software of international trade. It takes investment in infrastructure, including LNG terminals and interconnected pipelines. It also takes the development of what I refer to as “software” of trade such as a business climate that fosters investment, strong anti-monopoly measures and third party access requirements that promote competition.

This surge in energy demand in Asia -- and globally -- will also require rapid expansion in the power sector. The region remains plagued by imposing barriers, including: a segmented gas market that inflicts high prices and volatility; inefficient generation systems, grids, and power markets; widespread energy poverty; and insufficient renewable energy penetration. These issues can be remedied through carefully crafted policy prescriptions that will foster the necessary investment climates, regulatory regimes, and incentive-laden development. Though these issues present a complex challenge, the demand growth also provides a unique opportunity to shape the region’s energy mix towards more secure and sustainable sources.

To this end, President Obama -- in concert with the President of the Republic of Indonesia and the Sultan of Brunei -- announced in 2012 the formation of the U.S.-Asia-Pacific Comprehensive Energy Partnership. This Presidential initiative is using a multi-faceted approach through existing regional and multilateral fora to drive investment and facilitate progress through four key regional priorities. These priorities include: renewables and cleaner energy; power markets and interconnectivity; the emerging role of natural gas; and sustainable development to address electrification issues and energy efficiency. In support of these efforts, the U.S. government has provided $6 billion in financing and leveraged its extensive technical expertise through venues such as a recent gas workshop held in Jakarta to explore unconventional resource potential and regional market development.

With the right policies we can change the way that gas is used in the future. We can enhance the stability and depth of gas markets in a way that subjects those markets to fair and transparent competition that we have not always seen in the past. When markets work well, free of distortions, monopolies and subsidies, supply will find demand and the world’s energy resources will flow to the most economical use. Moreover, if we see the growing economies of Asia move from coal and expensive imported oil to natural gas -- which burns cleaner and with lower greenhouse gas emissions -- the benefits will be enormous economically and environmentally.

In the United States, the abundance of shale gas has led many power generators to switch from coal to gas, which has helped reduce our carbon dioxide emissions to the lowest levels in fifteen years. In developing our shale gas resources, we in the U.S. have seen the importance of openly discussing the environmental impacts of development, including air and water quality, seismic impacts and methane emissions. These lessons learned have positioned the U.S. not just for today, but also for the future.

We are truly at a unique juncture today, what I refer to as a once in a generation opportunity. Due to the rapid development of hydrocarbon resources in the U.S., we have the opportunity to support economic development, foster greater competition in the global marketplace, and strengthen political stability in both producing and consuming countries while still addressing environmental concerns and transitioning to cleaner fuels. If we manage this opportunity wisely, we will be able to grow our economies and to have a positive impact on the global environment.



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