Energy Infrastructure Here and Overseas: Where the Experts See the Biggest Needs
There’s an old saw in politics: “Where you stand depends on where you sit.” That saying also applies to energy infrastructure. While there’s no question that there must be substantial investments in new infrastructure in North America and around the world, there are widely varying views about which sectors should be addressed first. Electricity customers in the northeastern U.S. and California would likely say that the top priority should be electricity transmission upgrades and additional generating capacity. Those investments might prevent a recurrence of the blackouts that have hit those regions in recent years. Meanwhile, motorists along the Gulf Coast would probably say the most urgent need is refining capacity to ensure them a continuing supply of motor fuel in case another major hurricane like Katrina or Rita roars ashore.
In addition to refining and electric capacity, there are growing needs for transportation capacity – for pipelines and ocean-going tankers and electric transmission wires – and those needs are evident all over the globe. By 2030, the International Energy Agency projects that some $17 trillion in new energy investment will be needed to meet demand. For comparison, America’s gross domestic product in 2005 was $12.4 trillion.
So where are the biggest infrastructure needs, in North America and worldwide? Rather than try to answer that question ourselves, we turned to our Rolodex and asked some of the smartest people inside and outside the industry. Here are their responses.
Guy Caruso, Administrator, Energy Information Administration, Washington, D.C.
In the U.S., in the upstream, it’s access to acreage offshore. That legislation now seems to be stalled in Congress. That’s part of the infrastructure. Clearly, refining capacity [also needs to be looked at]. The investment cycle and the low return on capital invested, beginning in the 1980s, brought us to where we are now. We’ve had a long-term eating-up of our capital infrastructure in the energy industry. And now we have to turn that around and get back to some balance between supply and demand. The lack of redundant, or spare, capacity, all along the chain, has contributed to the problems we’ve had. It’s not just refining, it’s ports and to a lesser extent, pipelines, with shifting of production to the areas away from traditional offshore. There’s Rocky Mountain gas, the Barnett Shale. That requires a lot of investment in pipeline capacity. It continues to be a regional problem. The northeastern U.S. has very little energy infrastructure. There’s always going to be tension when there are disasters like the hurricanes or industrial accidents. When you are at the end of the pipelines, you are going to suffer. If we are going to develop Alaska, we need a huge investment in a large natural gas pipeline. If Canadian oil sands growing from 1 million barrels per day to 3.5 million barrels per day, then most of that production is going to come south. We need huge new infrastructure to accept that into our refineries. You have to look at where the supply is going to be coming from and that will tell you where you need infrastructure.
Globally, the number-one infrastructure issue is crude oil productive capacity. And refineries. On the gas side, it’s more LNG. If we are going to have a global gas trade, we will need a lot more liquefaction capacity over the next 10 to 20 years.
Forrest Hoglund, President, Hoglund Interests, Dallas, Texas
For North American infrastructure, it’s the Mackenzie Delta gas pipeline. Somehow, the U.S. government, Canada, and Alaska should get together and have a study of what’s the best way, the most economical way, to bring the gas out of Alaska and the Beaufort Sea. We have to get both countries to get behind it. If ever common sense would win, that’s what would happen. The pipeline should be built to Edmonton, where it can connect to the existing pipeline infrastructure. We should build it onshore and do it as a way to strengthen our national security. The cost would probably be about $12 billion.
On the global infrastructure issue, it’s distribution of natural gas. We’ve had a very successful 35-year history with LNG. It’s time for new innovation. But the biggest infrastructure thing is to get rid of the Islamic terrorists. It’s just like the Communist threat. It’s an idea that won’t work. Until the moderate Islamic people stand up and fight their own battle then we’re going to have problems.
A.F. Alhajji, Economics Professor, Ohio Northern University, Ada, Ohio
The biggest problem in North America is aging infrastructure. Everything from refineries, to transmission lines, to pipelines is getting old and we have no mechanism to replace them. It’s all deteriorating and it’s all going to be expensive to replace.
Worldwide, the infrastructure question is directly connected to the issue of the energy gap, that is, the disparity in energy consumption between the rich countries and the rest of the world. In the analysis of the energy security situation, people forget about the social dimension. The energy gap leads to instability and vulnerability and it may lead the oil exporters to cut off exports to the West. Look at Nigeria. The oil exports from that country are being disrupted because the people in the Niger Delta are so poor. We are paying the price for the energy gap. Until that problem is solved, there is going to be continuing energy insecurity for the foreseeable future.
Jim Walzel, Chairman, HNG Storage, Houston, Texas
Conservation is the most important single thing we can do. We can make huge progress on energy conservation if people concentrate on it. Everything else is slow. We need to be drilling where we are not drilling. We ought to get the Alaskan oil and gas going. We ought to quit doing goofy stuff like ethanol. Part of the conservation is probably getting new government mandates on mileage. We did a good job in the 70s and then quickly forgot about it.
Stephen Morisseau, Vice President for Corporate Affairs, Globeleq, Houston, Texas
Safe, clean, reliable, and affordable supplies of electricity are a vital component of economic and human development. Today, according to the International Energy Agency (IEA) there are 1.6 billion people without access to electricity; building the infrastructure to connect them will cost, just for the emerging markets, over $200 billion per year for the next 20 to 25 years. To meet that need we must draw on all possible resources – government investment, international public and private financing, local investment, and private foreign investment.
Peter Wells, Chairman, Neftex Petroleum Consultants Ltd., U.K.
Russia’s oil and gas export capacity and the monopoly control of transport (Transneft for oil and Gazprom for gas) make for slow and politicized decisions. New infrastructure will take at least five years to put into place. Sakhalin projects are delayed by political interference, and opening up eastern Siberia is similarly a political issue. In both cases, Western oil firms will have to yield rent and equity to Russian state entities. Russia also controls gas exports from Uzbekistan and Turkmenistan. Russian infrastructure for gas is vital to European supplies and Russian oil is vital for Japan and the U.S., as well as for tempering world markets.
There are three other key issues: resources, maintenance, and Middle East OPEC capacity. With regard to resources, the entire energy industry is short of skilled people and key supply-chain components, like drilling rigs. The workforce is aging, as the oil companies did not replace/train new staff in the 1987 to 2005 period. Infrastructure capacity and its rate of expansion is determined by the availability of skilled people and key components. This is probably one of the biggest brakes to expanding infrastructure.
Maintenance: much of the oil and gas transmission and processing infrastructure is old and has been poorly maintained during the last 20 years of aggressive cost-cutting to raise profitability by the private oil companies. Refurbishment is hampered by the resources issue. New builds in Europe and the U.S. are being stymied by environmental and local-interest groups. It seems the affluent West wants all of the goodies of high levels of energy consumption without paying the price of permitting the infrastructure needed to deliver it.
Middle East OPEC oil supply: the Persian Gulf producers are reluctant to invest in new capacity as they fear a repeat of the capacity glut of the late 1980s. In the current political climate projected by the U.S., there is political resistance to bailing out the West. The only ameliorating factor is the vast sums they have invested in the U.S. economy, although this is slowly shifting to Europe. The fortunes of the elite are tied to the fortunes of the U.S.
Don Evans, CEO of Civil Infrastructure, CH2MHill, Denver, Colorado
In North America, we see the natural gas infrastructure as a key need. And in particular, it’s Alaskan gas. There’s no magic technology to bring Alaskan gas to the U.S. – it’s either LNG or pipeline. We need to have that gas someday, so we need to start. I think the pipeline is the better choice. If gas prices are high and stay high, then it’s a good project. But if gas prices fall, and stay low, then it probably doesn’t make economic sense. Given the price risks and because it’s going to take so long to get the pipeline built, there has to be some quasi-governmental guarantee. The public sector has to be involved. And the private sector needs to step up to the plate. It has to be a balance on how we get gas into the U.S. Further, with regard to oil, we need as many options as we can find. We can’t afford to shut off the Arctic National Wildlife Refuge. In short, anything that reduces our ability to store and transmit energy works against us.
Globally, Asia is the boom area. Everyone is trying to figure out what will happen in China and India. If they start using substantially more energy, then there will be supply bottlenecks. As Asia develops, there will be short-term spikes in demand, and therefore, of price. But Asia seems to be addressing it.
David Pursell, Research Principal, Pickering Energy Partners Inc., Houston, Texas
In North American infrastructure, a key issue is that more maintenance is needed. I don’t know how you assess that. Bad things happen when pipe gets old. If the economy continues to grow and we use more energy in general, then the needs are across the board. For instance, refineries. There have been a lot of upgrades. But I’m not seeing a lot of capacity increases. So we need more manufacturing plants that can convert crude into refined product. Over the next decade, globally, there is going to be a shortage of refining capacity.
The U.S. is now importing twice as much refined product as it was five years ago. And there’s a group of people in the U.S. who don’t want those refineries in their backyard.
Structurally, when I think about the world, I see supply and demand getting farther apart. The locations with supply are getting farther away from the places with big demand. That means more tankers, more pipelines, and more storage will need to be built. I think that’s dumb iron. It’s not hard to build.
The bottlenecks are in the more complex components of the system. That means refineries, GTL plants that produce clean diesel, and in LNG. LNG is not simple – liquefaction, regasification, LNG tankers, all those things are more complicated than typical gas-handling equipment.
The last area in the global arena is in human capital. The last time oil and gas prices were at this level, enrollment in petroleum engineering schools soared. Not this time. The new energy development projects we are seeing today are more technically challenging and thus require more intellectual capital, and there’s a global shortage of experienced personnel. It’s what I call the “technical intensity.” These new projects have more need for highly skilled technical people and in many cases, there just aren’t enough of those people.
Neal Elliott, Industry Program Director, American Council for an Energy-Efficient Economy, Washington, D.C.
In North America, there are a few key areas. First is electricity transmission infrastructure. Everyone agrees we need to build more transmission capacity. The second is natural gas infrastructure. More transmission pipeline and storage infrastructure is needed. This is emerging as one of the major problems and challenges in the gas market. Third is the question of import infrastructure with respect to LNG. We have the capability to import LNG. But realistically, there may not be enough gas to fill the regasification facilities. I think we will find that global gas liquefaction capacity is not keeping up with demand. We are already short of liquefaction capacity on a global basis and that’s going to get more acute as Europe looks to use more LNG. For instance, 20 percent of Qatar’s new capacity will be used just to fill demand coming from Japan.
The other big challenge in the U.S. is rail infrastructure needed to meet coal demand from electric utilities. We saw the petition to open the northern tier rail line [the Dakota, Minnesota and Eastern Railroad]. That’s going to be a critical factor. Rail capacity is also important for biofuels. One of the issues with ethanol is that it needs to be shipped by rail or by truck. But we are also identifying DDGS [dry distiller grain with solids] as a big issue. It’s a superb animal feed. The problem is that when you produce ethanol, you also produce a lot of DDGS. As we shift to larger and larger facilities, we’ll see an aggregation of distiller grains. It’s symptomatic of underinvestment in rail infrastructure.
Globally, the major issue is the need for additional refining capacity to deal with the heavy sour crude. A trend that’s important to note is that while we see additional capacity being built in refining, a lot of these new capacities are rated on sweet light crude. And yet the global basket is shifting from sweet light to heavy sour. As the crude gets heavier, you lose some of that capacity.
Michael Economides, Editor-in-Chief, Energy Tribune, Houston, Texas
North America has by far the world’s most developed infrastructure and is a model for all others to emulate, a classic case of competition and free markets working well for both quality of goods and services, and price. A fully drilled and completed well in West Texas may cost $500,000, whereas the same well may cost $15 million in Saudi Arabia and even more elsewhere.
Deregulation and private ownership work wonders. On the other hand, ostensibly desirable environmental regulations and permitting have often the opposite effect, and in some cases, they hinder oil and gas production. (Witness the problem of offshore California and Florida where infrastructure is non-existent, despite demonstrable potential for oil and gas.) Even more pervasive is the critical situation with refineries. They are old and obsolete. Some are disasters waiting to happen, like the explosion that hit BP’s refinery in Texas City. It takes some 800 permits to build a new refinery – a fact that helps explain why a new refinery hasn’t been built in the U.S. in three decades.
Globally, infrastructure needs are most critical in the emerging new suppliers and new markets. Natural gas exporting facilities, mainly LNG, lead the way. Qatar, Sakhalin, Egypt, and Nigeria are some of the places with major new activities. Russian pipelines both eastwards and westwards are now planned or under construction. This task is massive and has technical, economic, and geopolitical implications. The building of infrastructure in undeveloped eastern Siberia – Russia’s next oil and gas frontier – is also pressing. China is in a class by itself, with major needs in every area of importing and handling hydrocarbons of all shapes and forms. Environmental projects to remedy existing grotesque energy-related deficiencies and emerging ones should be considered some of the largest challenges, not just for China but for the entire world energy business.
Omowumi O. Iledare, Professor of Petroleum Economics and Research Policy, Louisiana State University, Baton Rouge, Louisiana
In North America the area of major concern is the transportation infrastructure. If we are going to use alternative transportation fuels, then we will need more ways to move that fuel and we need to consider the need for investments in service stations that can handle alternative fuels. Further, there is a need for more transmission lines, so that we can assure power reliability. But when compared to the rest of the world, the U.S. can’t complain at all.
In Africa, it’s a completely different ballgame. Less than 50 percent of the 800 million people in Africa have access to electricity. And when they do have access, the electricity is not reliable. In nearly all areas of energy in Africa, the continent is completely underdeveloped. Africa accounts for just 7 percent of the world’s primary energy production. And in terms of consumption, it accounts for just 3 percent of the world’s primary energy use. The problems are particularly bad in sub-Saharan Africa. In 2005 in sub-Saharan Africa, energy infrastructure investment was just $789 million. And from 1990 to 2005 it was just $7 billion. By comparison, in 2005 alone in sub-Saharan Africa, telecommunications investment was $4.5 billion. And the majority of that was in mobile telephones. Can you imagine if those numbers were reversed? If energy infrastructure had that kind of investment, I think the economic effects would be huge. Africa needs $5 to $12 billion per year in new energy infrastructure investment. But the main issue is financing. And the options for attracting all the foreign investment that’s needed are very limited.
Peter C. Fusaro, CEO, Energy & Environment Capital Management, New York, New York
For North America, the most important energy infrastructure needs are in the area of electric power generation and transportation fuels. Such investment will be made in an increasingly carbon-constrained world, so it is important to look at both energy efficiency as well as emissions reductions for the rebuilding of the U.S. electric power grid. The so-called “smart grid” will require information technology to work effectively. More important, there is a need to move up the energy value chain in how we use fossil fuels to make electricity. Because coal is part of that equation, there is a need for the rapid deployment of IGCC technology to do two things: reduce emissions and increase coal-burn efficiency. The stumbling block in the past has been cost. That is now changing due to higher fuel costs for coal and higher prices for SO2 emissions (currently $550 per ton). A U.S. carbon regime – which is a question of when, not if – will make that investment imperative. Moreover, the burning of coal in gasifiers will create a CO2 stream that can be used for carbon injection for enhanced oil recovery. In this way, production of oil and gas from existing reservoirs can be used to sequester carbon. Investment in the U.S. power industry has been estimated at $1 trillion to replace older infrastructure with more efficient and environmentally benign technology.
Globally, the needs are greater, with the need for more refining capacity, generation capacity, and pipeline and transmission capacity. Once again, a carbon-constrained world due to implementation of the Kyoto protocol will direct investment to alternative fuels, hybrid vehicles, and next-generation electric power through distributed generation and a smarter grid. The leap-frogging of technology will electrify parts of the world not previously connected. So far, Kyoto-related projects have been on a small scale. The needs of the developing world are growing so fast that pent-up demand will require a build-out of both traditional capital intensive projects for refining, IGCC, [and] GTL, and also small-scale hydropower and biomass projects. The fuels will still be gasoline and diesel despite all the hype about biofuels. The name of the game is infrastructure and the world works on a fossil-fuel basis, not biofuels.
Michelle Foss, Head, Center for Energy Economics, University of Texas, Houston, Texas
Many projects that can satisfy or exceed regulatory/permitting requirements, and pose no major controversies with respect to site suitability, are rejected because of resistance or opposition not based on merit and without reasonable alternatives. This issue cuts across all types of energy infrastructure systems, including facilities that would be expected to garner strong public enthusiasm. A distinct problem is that local concerns and impacts are out of sync with distribution of benefits across larger geographies (states, regions, nations). The problem of building public support is worldwide. But outside of the developed world, literally everything is needed. Basic energy infrastructure is lacking or has deteriorated or been damaged because of economic dislocations, mismanagement, war, and other conflicts. Without basic energy infrastructure, these economies simply cannot grow and develop. Providing the right conditions – rules, laws, access to capital – is a huge and ongoing struggle.