Energy Production, Consumption, and Consequences (1990) / Chapter Skim
Currently Skimming:
3. Evolving Vulnerbilities and Opportunities
3. Evolving Vulnerbilities and Opportunities
Pages 143-202
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Bang ~lner~11hies and Opportunities
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Energy: Production, Consumption, and Consequences.
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46 4.0 il 3.0 on |
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MANAGING VOLATILITY IN THE OIL INDUSTRY TABLE 1 Effect of Futures Trading on Pace Volatility Commodity itlih~ Trig Die ~ Metals Gems Aluminum Copper Id Fidel Tin ~7 Zinc Rice Sorghum Wheat Other edibles Uses BE Cocoa Coffee Sugar Soybeans Meal Oil Agna~ltural raw materials Couon Palm od Rubber Wool Crude on 1965 1974 1965 1969 1965 1965 1859 1981 1965 1859 1965 1925 1955 1941 1936 1951 1970 1981 1975 1965 1965 1983 Nate Now Nan Now 147 oil, there was no more volatility after futures trading began than before, as measured by the variance in quarterly prices. Oil futures markets, like other futures markets, appear to be a response to, rather than a cause of, price volatility (see Bible 1~.
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defined as the volumes of hydrocarbon added to the inventory of proven reserves through discoveries, development drilling, and revisions of the volumes of existing recoverable oil and gas deposits as more is learned about reservoir properties over time. As the figure shows, during the period from 1940 to the late 1960s there was a large backlog of opportunities to add to the country's reserve base, even though there were low prices prevailing at the time.
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In more recent years, particularly in response to the imperatives perceived in the 1970s, advances in three-dimensional seismic imaging, enhanced recovery techniques, and dealing with harsh environmental conditions such as deep water in the Gulf of Mexico and ice packs in the Beaufort Sea, have made available oil and gas resources that were sometimes not even considered feasible 20 years ago. EXPLORATION AND PRODUCTION SECTOR ACTIVITY Figure 3 presents several key indicators of oil industry activity.
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150 cn 3 a)
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MANAGING VOLATILITY IN THE OIL INDUSTRY 45 _ 40 35 30 25 Well Completions per Rig _v ~ 1,,,,1,,,,1,,,,1,,,,1,,,,1,,, 1 960 1 970 1 980 151 400 co Led cr ~ 300 IL o co c, o I 100 Additions per Well 1 !
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MANAGING VOLATILITY IN THE OIL INDUSTRY Reinvestment Patterns 153 Reinvestment includes both those costs that can be expensed, such as dry hole costs, some drilling costs, research, and so forth, as well as the capital expenditures for exploration and production. In the left graph of Figure 6, the total funds reinvested in exploration and production are compared with the operating cash income.
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MANAGING VOLATILITYIN THE OIL INDUSTRY 40 CC ~ 30 Q a, 2'l on V 10 155 A ':~ I ~ I ' ,J ~ .
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If that overall recovery rate could be increased from 35 percent to 45 percent, we would recover another 36 billion barrels from the oil expected to be left in place, in effect doubling our proven reserves. What is encouraging in this regard is the behavior that industry has exhibited in its commitment to research.
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MANAGING VOLATILITY IN THE OIL INDUSTRY 157 such as enhanced oil recovery, deep-water exploration and development, and management of harsh environments. EXPLORATION AND PRODUCTION SECTOR REVENUES AND CASH FLOW The cash position of the oil industry has changed over the years.
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158 JOHN ~ BOOBOOS price environment. At both boundaries it would appear that dividends can continue to flow at historical levels.
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Nearly a million barrels per day of desulfurization capacity has been added in these refineries since 1970. Detailed data on the actual sulfur content of the crude oil being processed in these refineries are available only as far back as 1980.
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160 JOHN ~ BOOBOOS equipment, a refinery will produce only lower-valued heavy fuel oil from a lower-gravity crude oil, if it can process it at all. In the period shown, more than 600,000 barrels per day of capacity has been added to the Gulf Coast refineries to convert this bottom-of-the-barrel crude oil into light products, primarily transportation fuels.
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MANAGING VOLATILITY IN THE OIL INDUSTRY 100 r 200 Full Service - Self-Service Self 75 ~ ~ ~ 175 z 50 _ \ Cal 150 / \ Zen LL / ~ O 25 ~ 125 Full Retail Outlets Nets J - I /Station / Throughpu 1975 1979 1983 1987 1975 1979 1983 1987 FIGURE 12 1tends in U.S. gasoline retailing.
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162 2.0 1.5 1.0 3 o.5 0.0 JOHN ~ BOOKS By Fuel _ ....~.....
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As the industry continued to develop its own technology internally, it adopted innovations from other disciplinescomputer science, engineering, and so on. The industry employed financial technology in the form of futures trading as it sensed the need to externalize some of the financial risks.
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164 JOHN ~ BOOBOOS NOTES 1. The real (inflation adjusted)
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Those key criteria are the size of the recoverable resource, the economics of both extraction and use, and public acceptance with respect to environmental, safety, and siting matters. This chapter discusses each of these points separately and then summarizes the future contribution of natural gas in the U.S.
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gas reserves, there are an additional approximately 650 Tcf of potential U.S. gas resources (see Table 1~; that is, gas that is in place but not recoverable at current prices.
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Category Resources (Tcf) Proven reservesa Reserve appreciation Undiscovered new fields New technology increments Total 158.9 149.5 265.0 227.6 801.0 aU.S.
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In fact, Canadian reserves and resources of natural gas amount to about 500 Tcf and would almost double the resource base available to the United States. Given the new free-market approach of the Canadian government toward gas exports, and the likelihood of ratification of the Canadian/United States Free Made Agreement, it is increasingly clear that Canadian natural gas resources will be an important supplement to U.S.
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These developments include natural gas vehicles, gas cofiring in boilers with coal, and combined-cycle gas power generation. Table 3 shows the current relative economics between natural gas and gasoline for vehicle use.
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extend significantly the reserves of environmentally acceptable coals that can be burned by the utilities while meeting proposed acid rain legislation at one-third the cost of using scrubbers. Another important advantage of gas cofiring is to complement coal in conventional and advanced clean coal technologies for pollution control.
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The answer is that new gas turbine technology used in the combined-cycle mode with improved steam turbines has allowed 90 percent plant availability and 43 percent plant efficiency for combined-cycle gas plants compared with 80 percent availability and 36 percent efficiency for modern coal plants. This in conjunction with a 40 percent lower capital cost for a gas-fueled electric plant versus a coal plant (in part because of the absence of certain environmental costs)
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Because gas plants can be built faster and less expensively than either nuclear or coal plants and are relatively clean, this represents an advantage for natural gas. CONCLUSION In summary, although the future for natural gas in the national energy mix is by no means certain, it does offer some attractive advantages.
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are the gas resources in the Soviet Union, Algeria, Norway, and the Netherlands. It was the large gas reserves discovered in the Netherlands in the early 1960s that initiated the Western European gas development.
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WESTERN EUROPEAN GAS CONSUMPTION Western European gas consumption has increased substantially during the past 20 years (Figure 2~. Of a total energy consumption of 810 x 106 tons of oil equivalent (toe)
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An explicit policy against using gas to generate electricity was laid down by the European Commission in 1982. This policy is now under review in the light of delays in the nuclear program, opposition to coal burning because of the fears of acid rain and the greenhouse effect, and the possibility that the Norwegian Continental Shelf as well as the USSR may offer much greater volumes of gas at competitive prices than has been assumed in the past.
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E~~ ^~ ~S salt ~ ~~ ~7 ~ %:: :::::::::::: :::e::::::::: :e:::: :e::: :::::: :e: :e:: ~ ^ : ~ ~ ~ ~ l? [ ~ ~ Tonal Energy Consumphon (mace)
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The system will be extended as shown by the dashed lines. WESTERN EUROPEAN GAS SUPPLY The main gas transmission system in Western Europe is shown in Figure 4.
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This line will have a terminus in Zeebrugge, Belgium. Although the Norwegian gas reserves have the advantage of being closer to the market than the gas resources in USSR and Algeria, the disadvantage is their high cost of development.
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market around the turn of the century. The key to viable and successful exploitation of the large Norwegian gas resource base is the ongoing research and development to reduce the unit cost of production.
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Frigg ~ \ Heimdal Sleipner ~ / _ _ "r ~r St. Fergus D 0_ _ _W _~ _~ ~_ _r _ _ r RQII_ ~ ~ _ ~_ _ = ~ _55_ _ _ _ _ _ _ _ = _~ ~ :& \_Tyra ~ %_ _ ~—Y _ _ ~Stockholm ~ ~ r ~ FIGURE 7 Possible additions to the existing gas transmission system in Western Europe to service the emerging Scandinavian gas market.
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CONCLUSIONS Considering the availability of a relatively large resource base for gas in Western Europe and the presence of external suppliers with large gas resources competing for import market shares, it is likely that gas will remain competitive with other fuels and provide the basis for increased gas consumption. The scope for increased gas consumption is further enhanced by the lack of public acceptance for nuclear power in many Western European countries, and stringent and costly regulatory requirements on coal-fired power stations.
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In summary, the technical and economic prospects for increasing Western European gas consumption are good. Western Europe can further develop this increased reliance on gas in its energy balance without becoming overly dependent on nonindigenous gas supplies with the inherent negative political implications.
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Future Consequences of Nuclear Nonpolicy RICHARD E BALZHISER Despite continuing concerns about the urban environment and growing concerns about global environmental issues arising in part from carbon dioxide (CO2)
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Considerable progress has been made at the Electric Power Research Institute (EPRI) in the past 15 years of studying and improving on various alternative methods of electric power generation.
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in 26 countries (International Atomic Energy Agency [IAEA]
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At the same time, nuclear plant availability is rising. In 1977 the average availability of the 137 units operating around the world was 64.7 percent, comparable if not superior to the existing track record of fossil fueled plants.
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steam electric plants with lowest variable costs (fuel and operating expenses) , from 1982 to 1986, were nuclear plants.
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from coal plants, or 2,500, and 0.4 per GWe from nuclear plants, or 35 (Gotchy, 1983~. But concern about the safety of nuclear plants remains high if a severe accident occurs.
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The first failure was the accident at Three Mile Island. Not only did this accident increase public apprehension about the risks inherent in nuclear power, it also reduced the confidence of utility management and the financial community because of the nearly catastrophic financial consequences of the accident for General Public Utilities, the owner of the plant, and for all other nuclear utilities whose credit ratings dropped in the aftermath.
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This decision thus set the stage for major regulatory change and significant delay in nuclear plant construction. The problem was not helped by the unprecedented high rate of introduction of this new energy technology into a competitive environment with multiple owners and suppliers.
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Such quantification, necessarily at the upper limit, added to the apprehension concerning nuclear power safety; and the need to provide a technically competent, independent regulatory agency to oversee these complex matters became apparent. The Nuclear Regulatory Commission has evolved from this need into its present staff of thousands.
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Formation of the Nuclear Utility Management and Human Resources Council to conduct an integrated review and development of management and people-related issues of nuclear power plant operation in consultation with the commissioners and staff of the Nuclear Regulatory Commission; 2. Formation of the Institute of Nuclear Power Operations (INPO)
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Unique data are being obtained on the course of a core-melt accident, providing the single most important benchmark of our analytical ability to evaluate severe accidents and their risk to the public. The industry has benefited from the participation and funding of both the Department of Energy and the Nuclear Regulatory Commission in obtaining some of
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In light of the Chernobyl and TMI experiences, an improved international understanding and consensus on nuclear power safety must be achieved, because a nuclear plant accident anywhere in the world affects public acceptance of nuclear plants everywhere. Encouraging steps have been taken.
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It must offer predictable construction costs and schedules, assured licensability, predictable operating and maintenance costs, and a near-zero risk of a severe accident. In short, the investor must have high confidence that the large capital investment in the nuclear plant is warranted, and that the investment will sustain its economic superiority throughout the life of the plant.
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The seemingly irreconcilable positions of these protagonists come from arrogance an attitude that characterized the industry in the heyday of its unquestioning support, an attitude that has become increasingly apparent in the opposition groups as political and public opinion has shifted in support of them. The players must include the nuclear industry, environmental interests, the ratepayers represented by the financial analysts, nuclear opposition groups, media leaders, and the public as represented by elected officials at both the federal and the state levels.
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We risk exacerbating global environmental problems; increasing U.S. electricity rates; increasing dependence on foreign oil; · continued loss of influence in international nuclear policy; · loss of the human and capital infrastructure necessary to design, deploy, and use the nuclear options; loss of the opportunity to export reactors, fuels, and engineering services; and loss of the ability to influence how other nations acquire and use nuclear technology.
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Although little attention has been given to this issue by other industries, in several instances emergency response to industrial accidents in the United States has been substantially aided by the organization and preparation provided in emergency planning for nuclear plants. Another continuing problem for the nuclear power industry has been the assessment of the potential increase in cancer incidence from very low levels of radiation.
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1987. Address to International Atomic Energy Agency Conference on Nuclear Power Performance and Safety, September 28, 1987.
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Nuclear Regulatory Commission, Office of Analysis and Evaluation of Operational Data.
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